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Guest Post: What's So Bad About Deflation?

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Perhaps all the assumptions about inflation being good and deflation being bad miss the key question: cui bono (to whose benefit?)

One of the most widely accepted truisms of our time is that deflation is bad: bad for debtors, bad for the indebted government, and therefore bad for the economy.

What all this overlooks is how wonderful mild deflation is for those who owe no debt but who own the debt and the income streams that flow from debt. What the "deflation is bad" argument ignores is who controls the financial and political systems, and what set of conditions benefits them.

The entire Survival+ critique is based on one simple but revealing question: cui bono--to whose benefit?

The "deflation is bad" view naively assumes the Federal government wants inflation to lower its own debt burden. But since the machinery of governance is directed not at what's good for the government, but at what's good for the financial Elites that influence policy, then the only meaningful question is: what's best for the financial Elites?

Mild inflation won't bother the Elites much as long as their leveraged returns exceed inflation by a substantial measure, but deflation is much more lucrative: why mess around with potentially volatile inflation when deflation works better?

As knowledgeable correspondent James B. recently explained, the financial Elites' are skimming their take regardless of inflation or deflation. (for more on this, see James B.'s commentary in Do the Parasitic Elite Pay Any Taxes? June 13, 2012.)

Deflation makes cash and income streams more valuable as time marches on. At a 1% rate of deflation, our cash buys more goods and services every month. As a result, a 3% yield plus the 1% deflation = 4% real return.

The reason why deflation is considered bad is that wages tend to deflate along with everything else, and so the income debtors need to pay their debts declines, making it more difficult to service the debt.

Governments are presumed to want inflation because it erodes government debt over time and boosts the income of taxpayers and thus of the government. At 5% annual inflation, the adjusted value of $100 debt decreases to $77 in five short years. In 10 years, 5% annual inflation drops the purchasing-power value of $100 debt to $60.

As wages increase with inflation, the number of hours of work needed to service the monthly debt declines. Inflation makes debts easier on the debtor and strips value away owners of the debt.

Nice if you're the debtor, extremely annoying if you own the debt. Once again we must separate the Federal government from the financial Elites who control its policies. If government spending must eventually be curtailed to pay the rising interest on exploding Federal debt, that won't bother those who own the Federal debt (bonds).

Another widely accepted truism is that the Federal government (Central State) can "print its way out of debt" by printing enough money to devalue the dollar. Devaluing the dollar and inflation are two descriptions of the same process: expanding the money supply far faster than the real economy is expanding.

But once again this is naive, as the Federal government doesn't "print money" electronically-- that privilege is held by the Federal Reserve. Does anyone seriously believe the Federal Reserve acts on behalf of the Federal government? For propaganda purposes, the stated "cover" of the Fed is to "preserve price stability" and foster full employment.

The Fed's real function, of course, is to manage monetary policy to benefit the nation's financial sector and its wealthy Elites. What happens to Federal spending and interest payments are of little interest to those setting the Fed agenda. For propaganda purposes, the Fed makes noises about "reining in deficit spending" but this is for show. The most important goal is to maintain real returns for those who own the debt of the Federal government, i.e. the mega-wealthy financial Elites and other Status Quo players.

The critical error made by the "inflation is good" camp is their assumption that wages will rise along with everything else in inflation. Alas, wages for the bottom 90% have stagnated for decades in real terms (i.e. purchasing power), and so "mild" inflation has dramatically decreased their earnings.

In a post-industrial, post-bubble economy, labor is in massive surplus, so wages are flat to down for the vast majority of workers. Inflation is actually terrible for the bottom 90%, as their wages are flat while everything else rises in cost. For those workers with modest debt loads or very low interest loans, deflation actually boosts the purchasing power of their stagnant earnings.

Deflation is a wonderful boost for those who own debt and who receive income streams from interest and principal payments. Every dollar of interest and principal buys more than it did when the loan was originated. Every dollar of cash not only buys more goods and services, it also buys more hard assets as assets tumble in deleveraging.

Some steady writedown of debt is acceptable to those who own the debt. Let's say that 1% of all the debt is written off every year due to defaults, short sales of homes, foreclosures, etc. If the yield is 3% plus 1% deflation for a real return of 4%, then a 1% reduction in principal will still leave a real yield of 3%, which can be leveraged into 10% or even 15% (at 5-to-1 leverage).

The "frog in the pot" syndrome applies. If deflation is modest, on the order of 1%-2% annually, that won't spark insurrection. If the water in the pot is heated slowly, the frog doesn't notice much except a gradual reduction in earnings and government benefits as more government revenue is funneled to debt service.

Indeed, by many measures, Japan has been in deflation for over 20 years. The slow erosion of wages has been partially offset by a decline in the cost of goods and services. Meanwhile, those who own the debt have a low-risk increase in their wealth and income, year after year. What's not to like?

Before we assume the Federal government needs inflation, we should ask who sets the policy objectives of the government. Since the super-wealthy have captured the regulatory and legislative processes, why would we think the government's actions don't align with their interests?

Since the Federal government can't "print money," it can only borrow it, then it is incapable of creating inflation, even if it wanted to. The interests of the Federal Reserve are served by propaganda about "inflation targeting," but behind the curtain mild deflation is perfectly fine with the financial Elites.

Consider this. In mild deflation, Treasury bonds increase in value as the income streams of interest gain purchasing power every year. When other assets tank--for example, stocks and real estate--the bonds can be sold and the other assets snapped up for cheap from those who have only debt to deleverage and no cash.

Deflation is only bad for those with crushing debts and no ability to borrow more. Since the Federal government (like the government of Japan) can always borrow more, those buying the debt are assured of a low-risk income stream that can then be used to buy other deflating assets.

Everyone assuming the Federal government has the power to create inflation and that inflation is "good" should examine the interests of those who control the government's policies, i.e. those who own the debt.

Put another way: here's what will be scarce: reliable income streams and liquidity.

 

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Fri, 07/20/2012 - 11:19 | 2636229 SilverTree
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Banksters will loose power.

Fri, 07/20/2012 - 11:39 | 2636314 idea_hamster
idea_hamster's picture

There has long been a small but growing cadre of economists (smart ones) who propose that the currency should deflate at the real risk-free interest rate.

This would allow savers at all levels to realize the natural market return by holding currency, and require equity to meet or exceed the true risk-adjusted expected return levels.

http://www.sjsu.edu/economics/faculty/jeff.hummel.htm

Fri, 07/20/2012 - 12:45 | 2636609 Carl Spackler
Carl Spackler's picture

While deflation would benefit my situation, it is completely unrealistic to think that the governing class in the United States of America would allow deflation to take root...until after a revolution or total economic collapse.  If allowed, deflation would become the cause of a national revolution (following waves of credit default at all levels, subsequent collateral seizure and foreclosure, and most Americans left without materiality and without a dream), something in direct opposition to the needs of the governing class.

One of the modus operandi of this nation is an inflationary environment because one goal of government, in practice, is to benefit the governors while making it look like the governor is benefitting the governed.  But all costs have to come at the expense of the governed, because charity is short term only. 

Now, to get into the governing class, one has to engage in quid pro quo schemes (i.e., election promises of benefits to causes via transfers of values), and actual governing requires a status quo appearance and the ability to -here's the kicker- make it look like nothing is lost when facilitating the transfer of current benefits for pet interests (while skimming for the governors' sakes). 

To carry such out, in the normal course of their work, the governors give away the results of other people's hard work and savings to their pet interests, but balance the payment shortfall in the the benefit-for-cost equation through inflation, which very subtlely spreads the burden to every consumer through a day-to-day, invisible hand of decreased purchase power).  Because decreased purchase power robs slowly and is not perceived by the sheeple being governed, it is not a risk to the governors losing their control.

Going off the gold standard to a fiat currency made it easier for the governors to keep the game going.

Anyhow, this nation has been engaged in this modus operandi for so long that it is a part of the entire fabric, and you cannot take out key threads without destroying that whole fabric.  Moreover, the only people with the power to change this fabric are the ones who benefit from it, and they are not going to shoot themselves in the head.

Fri, 07/20/2012 - 14:29 | 2637116 d edwards
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Hope I'm not just stating the obvious, but the Great Depression was a deflationary event-and we still had our currency backed by gold and silver then.

Now our money is backed by what? Hot air?

Fri, 07/20/2012 - 15:51 | 2637530 Umh
Umh's picture

FWIW. The dollar was pegged to a given amount of gold. The peg was altered during the depression.  In 1933 ( I think) people were forbidden to own gold coins and bullion.

Fri, 07/20/2012 - 11:38 | 2636323 toady
toady's picture

And we definitely don't need any loose power.

Fri, 07/20/2012 - 11:50 | 2636352 TheGardener
TheGardener's picture

Feels like April fool`s day on ZH.

Please have my account deleted or this commie CHS removed from this site. Can`t stand his crap.

Fri, 07/20/2012 - 11:51 | 2636362 francis_sawyer
francis_sawyer's picture

 "What's So Bad About Deflation?"

~~~

No bankster bonuses... aka TEOTWA[they]KI

Fri, 07/20/2012 - 12:17 | 2636489 Buckaroo Banzai
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Deflation is BAD for the lending class (i.e. bankers). Here's why.

FIRST. Understand that bankers are PARASITES. Put yourself in the parasite's shoes: what are they good at? what are their goals? Their goal is to own nothing except your obligation to pay them an income stream (i.e. interest) for doing nothing.

Deflation has an annoying side effect: it causes debtors to default. This means that the lender now has to go to all kinds of trouble: foreclosing the loan, seizing the collateral, and disposing of it. So much annoying work! Parasites don't WORK, they FEED.

Mild inflation, on the other hand, is ideal. Keeps the debtors on the treadmill. Yes the value of the debt you own is inflated away slightly, but that's the price you are willing to pay to DO NOTHING EXCEPT FEED.

This is one of the key reasons the Federal Reserve System was set up: to create and administrate an elastic money supply that will prevent deflation and annoying debt defaults.

 

Fri, 07/20/2012 - 12:59 | 2636681 sickofthepunx
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well put.

Fri, 07/20/2012 - 13:05 | 2636715 0z
0z's picture

Deflation of Legal Tender is bad, because it keep the Legal Tender around for longer, and prevents the emergence of free(d) money.

People's opinion on deflation/inflation of a free monetary system is irrelevant; it simly will be what it will be.

That would have been a lot easier to write than the article.

Fri, 07/20/2012 - 15:40 | 2637400 porrannor
porrannor's picture

deleted...

Fri, 07/20/2012 - 12:09 | 2636442 TheGardener
TheGardener's picture

To be fair, he is not a commie but a youngster trying to sell us out on his readings of Marx. Him actually not so
young and at all the more persistent monger on this site makes him dangerous non the less.

Sat, 07/21/2012 - 02:46 | 2638450 Bananamerican
Bananamerican's picture

I think the Viet Cong must have kept you in that Tiger cage a little too long....

War's over.....one day you learn to write pretty....

Fri, 07/20/2012 - 15:45 | 2637451 TheGardener
TheGardener's picture

Thanks for all those junks, you are appreciated.

I happen to bet against all odds , for this your system
to go up in flames, all you socialists, whether red brown green to burn in hell. I did so before and won .

And this time it is an easy call.

And those who just junked me for my intolerance,
next time welcome back.

Sat, 07/21/2012 - 02:48 | 2638452 Bananamerican
Bananamerican's picture

easy no good to try an read this making colors of a hutch hutch hutch....STARSKYYYYYY!!!!!

Sat, 07/21/2012 - 00:41 | 2637877 HardAssets
HardAssets's picture

My bets are more heavily weighted to inflation - - - or at least high inflation or even hyperinflation followed by a deflationary collapse.

But, personally, I want to hear as many well presented views on this as possible. If youre around a big crowd all in the inflation camp (and in the precious metals), its important to get a counterview.

I have to do some more contemplation on the article, but please keep ones like this coming.

Fri, 07/20/2012 - 12:18 | 2636437 BlandJoe24
BlandJoe24's picture

In a deflation the financial super-elite actually gain enormous power.  This is because:

1.  In a deflation, cash becomes scarce, and he/she with cash is "King".  The elites currently have historically high cash reserves, the real world value of which will grow tremendously in a deflation.  On the other hand the rest of the 99.99% have very low to zero cash reserves, and will be starving for cash in a deflation.   The power imbalance and between the super wealthy and the rest of everyone else will tend to be much, much more than it already is.

 

2.  The banksters/elites are, generally, creditors,  they are owed cash.  As as cash becomes scarcer (deflation) they gain more power over debtors who simply won't have the cash to repay .   The creditor are loan sharks.  What goes on with loan sharks as their "client's" have trouble paying?  Their power will increase tremendously:  power to demand nastier terms, or change the terms, or repossess hard assets, or control the debtors (debt slavery, debtor's prison, etc.). 

 

Most people haven't realized that - from a standpoint of pure greed - the financial elites have a lot to gain (financially and in terms of power) from deflation.  And we all know elites have great sway (total domination?) over global financial policy (including the Fed's)...

 

This hasn't been talked through enough.  I'm thankful to Charles for his clarifying writings.

Fri, 07/20/2012 - 12:28 | 2636505 francis_sawyer
francis_sawyer's picture

No No No ~ Wrong Wrong Wrong

~~~

The 'financial elites', on balance, gain the most when the system which they have established continues on... I do not dispute that they will be 'ALL RIGHT' in a deflationary collapse, but when that happens, their LEVERAGED POWER & CONTROL infrastructure dissipates...

DEFLATION (or INFLATION, for that matter), naturally creates a broader BLACK MARKET for trading of goods & services... That is exactly what 'the elite' don't want... Their whole power remains with the ability to make tax slaves out of people & by creating unnecessary layers to siphon off &/or get their slimy mitts into private transactions... When the slaves have belief in that system (for convenience, or whatever reason), they are WILLING slaves... As that 'faith' dissolves, so does the revenue stream of TPTB (& it actually happens in multiples because of their [the financial elites] ability to LEVER, which the man at the bottom doesn't have)...

Fri, 07/20/2012 - 12:42 | 2636599 BlandJoe24
BlandJoe24's picture

"The 'financial elites', on balance, gain the most when the system which they have established continues on..."

The system they have established cannot go on, it is irreversibly collapsing.  It is a ponzi scheme, and ponzi schemes necessarily, inevitably, end.   The "winning" exit is to have already have the "takings" ie cash, with cash reserves (already done) AND be increasingly owed cash by others (already done) AND have cash become more and more scarce/valuable (accomplished by deflation).

The big mistake in my post is that I didn't say that I think many, many established financial elites will utterly go bankrupt in a collapse and only some will expontentially grow in power/wealth. 

Fri, 07/20/2012 - 14:51 | 2637190 francis_sawyer
francis_sawyer's picture

Look ~ I don't think we're on two completely separate pages here...

YES ~ "The system they have established cannot go on, it is irreversibly collapsing. It is a ponzi scheme, and ponzi schemes necessarily, inevitably, end."

But then... THINK FOR A MOMENT... If one 'creates' a system, isn't it logical to assume that they are most invested in a system that they created (versus the 'hedge' they have if their perverse system collapses)?... Therein lies the rub... They will come out, mostly, unscathed in either sense, but the larger picture is that they want the poinzi to continue...

Nobody (who initiates a PONZI) wishes it to end...

The bottom rung have zero bearing on this matter... I wouldn't exactly label them as 'VICTIMS' (because people are only victims by their own ignorance & sloth)... While I empathize with their plight, if it came down between a fight between me & them, I'd slit their throats... Whereas, the corrupt fucks who use power & influence to apply unnecessary human toil... I'D FUCKING CRUCIFY...

~~~

In any case, the (more minor) premise of the argument ~ vis a vis DEFLATION, & 'who' it penalizes more... is largely irrelevant... & to that end, I'd say that folks who are neither IGNORANT, nor SLOTHS, are capabable of emerging BETTER (based on individual milestones), than any of the nominees on the board...

Fri, 07/20/2012 - 12:21 | 2636513 LawsofPhysics
LawsofPhysics's picture

You better define what you mean by "cash" first.  FYI- the "elites" always have a lot to gain/lose no matter what.   This isn't about money, it's about power and control. What about savers?  What about real consequences for bad behavior?  I call bullshit.

Fri, 07/20/2012 - 12:22 | 2636522 francis_sawyer
francis_sawyer's picture

+1 LOP... I call 'bullshit too...

(read my comment above, as well)...

Fri, 07/20/2012 - 12:48 | 2636634 BlandJoe24
BlandJoe24's picture

I mean "real" cash in hand/in the bank/in US Treasuries not all the rehypothecated empty promises which will evaporate as this thing implodes.  Millions in a severe depression can be richer in real terms than billions in the present.

And yes it's about power and control.

Just look at the great depression.  Whomever had cash, or was owed cash, had power and control.  Whoever didn't, you were a serf (financially speaking).

I'm not saying I want this to happen.  Just pointing out what the logic of greed may drool over.

Fri, 07/20/2012 - 12:25 | 2636535 Herd Redirectio...
Herd Redirection Committee's picture

Deflation is good if you have little debt, and steady earnings.  Cash on hand is also a boon.  But... Here's the thing.  The mega-elites have many cronies.  If the Mega-Elite are the 0.1% then their cronies are the top 1-2%.   Now the thing is... These cronies have been brought on board with the use of future promises (a cushy job down the line, gov't contracts), by being offered a 'club membership' ("You are one of us now")  and....  cheap liquidity. 

 

The top 1-2% (who aren't IMO mega-wealthy) are the most leveraged members of society, due to their connections and 'the deal' they have made.   So on the one hand the mega-elite can benefit from deflation, but they are also 'breaking the promise' to their cronies, who will over the fullness of time, become very upset, if not go straight bankrupt.

So the mega-elite can either decide to plunder their 'allies' and take them for everything, but risk making some powerful enemies, or they can allow copious amounts of inflation, which will empower their allies, at the risk of weakening the mega-elite.

The key here is to understand that much (if not all) of the nouveau-rich (i.e. the lackies, cronies of the mega-elite) are rich because of connections, and because of tremendous leverage.

Fri, 07/20/2012 - 12:54 | 2636659 BlandJoe24
BlandJoe24's picture

Yes, in a continuing collapse of the present financial ponzi/bubble and corresponding deflation, many of the now rich, the top 1-2%, and some of the super-rich, who'se wealth depends on that ponzi, will go utterly bankrupt. 

 

Fri, 07/20/2012 - 11:20 | 2636233 DavidC
DavidC's picture

I've argued this for ages, much to the ridicule of people I've spoken with about it.

DavidC

Fri, 07/20/2012 - 11:21 | 2636237 dwayne elizando
dwayne elizando's picture

Man I wish we'd have deflation!

Fri, 07/20/2012 - 14:22 | 2637088 cynicalskeptic
cynicalskeptic's picture

We're getting deflation - in the prices of things we DON'T need or HAVE to own (cars, big screen TV's and other 'stuff') bit we're seeing inflation in the cost of the basics we DO need - like food and energy.

 

As for housing - it's cheap where there are no jobs, expensive where there ARE jobs and rents are rising faster than the price of owning (but lots of luck trying to get a mortgage now).  And as for the price of 'stuff' - just wait until the $US starts to implode and you'll see the price of all the imported crap shoot up as well.  I'm already seeing the price of high end Japanese camera gear much higher than it was a few years back.

Fri, 07/20/2012 - 11:21 | 2636238 I need more cowbell
I need more cowbell's picture

There is nothing wrong with "mild" deflation, just like "mild" inflation. Too bad it doesn't work that way.

Fri, 07/20/2012 - 11:22 | 2636242 agent default
agent default's picture

There is nothing wrong with deflation as long as you are not in insane debt.  If you are in debt deflation is effectively an increase of the real interest rate of the debt. 

Fri, 07/20/2012 - 12:05 | 2636427 MachoMan
MachoMan's picture

Right...  but isn't one of the perplexing characteristics of modern americans (as well as our government) that we have incredibly large debt levels?  The author says that deflation is good for everyone but those in large amounts of debt, but who isn't? 

Deflation, at this juncture, would basically be the final culling of the "have nots" and "wannabes"...  allowing the fire sale to be paid for with spoils from the run-up...  spoils that often times have questionable origins.

Of course, this process is inevitable...  however I think it's fairly disingenuous to claim that deflation is some magic cure all...  our predicament is vastly more complicated.

Fri, 07/20/2012 - 14:10 | 2637032 Anusocracy
Anusocracy's picture

Government is a high time preference entity run buy those who wish to entrap the sheeple in a high time preference world based on debt.

It works as planned.

 

Fri, 07/20/2012 - 11:26 | 2636255 Snakeeyes
Snakeeyes's picture

Think of Great Depression when Ag Sec Wallace ordered the slaughter of millions of hogs to ... increase prices.

Producers stop producing. That is why.

Fri, 07/20/2012 - 11:26 | 2636257 asteroids
asteroids's picture

There's absolutely nothing wrong with deflation. It happens all the time. The banksters view is unnatural and perverse.

Fri, 07/20/2012 - 12:01 | 2636408 BooMushroom
BooMushroom's picture

And if everyone knew that there would be deflation, and not inflation, it would be fine. Most people have noticed that there has been massive inflation for the last 100 years (FED) and logically discount the future. If we had natural deflation for the last century, then it would be natural to discount the present, work hard, save, build assets, store goods, etc.

"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered...I believe that banking institutions are more dangerous to our liberties than standing armies... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." -Jefferson

Fri, 07/20/2012 - 12:09 | 2636438 MachoMan
MachoMan's picture

First, you need to check our sources for the quote.  http://www.snopes.com/quotes/jefferson/banks.asp

Second, accepting the misquote of Jefferson's logic as true, we've already had the run-up inflation...  now you're actually advocating the second part of "their" plan...  please explain... 

Fri, 07/20/2012 - 12:20 | 2636506 Buckaroo Banzai
Buckaroo Banzai's picture

Snopes? Really? Those lying, left-wing, sacks of shit?

Here's what Snopes is good for: if Snopes "debunks" it, you know it's probably true.

Fri, 07/20/2012 - 12:30 | 2636554 Herd Redirectio...
Herd Redirection Committee's picture

Like amateur 'MythBusters'.  Or like how Julian Assange, the all-knowing gov't critic and 'hacker', who once said people who think there is "more to 9/11 are wasting their time".  LOL, ok there Assange, keep collecting that paycheck you 'useful idiot'.

Sat, 07/21/2012 - 00:55 | 2638381 HardAssets
HardAssets's picture

Well, I'm a great admirer of Jefferson and have read many books on that fine American.

The quote does appear to be bogus (as checked from many sources). The terms 'inflation' and 'deflation' were not used in reference to economic matters in Jeffersons time.

Even so, Jefferson expressed the attitudes given in that statement. One could consider it a kind of paraphrase of how he felt on the subject.

Sat, 07/21/2012 - 02:01 | 2638428 MachoMan
MachoMan's picture

I concur...  as does snopes...

Fri, 07/20/2012 - 18:20 | 2637893 BooMushroom
BooMushroom's picture

Saying that it would be okay if everyone knew about it from past experience, is a far cry from saying it is okay now.

Deflation would be fine if it were not for the past hundred years of intentional inflation.

Fri, 07/20/2012 - 11:27 | 2636260 PoliticalRefuge...
PoliticalRefugeefromCalif.'s picture

At my point in life it is sort of the lesser of evils, but then I am retired and fixed income with only a mortgage payment as debt..

I pity my grandchildren and kids that have to live in diminished expectations for most of their lives.

Fri, 07/20/2012 - 11:27 | 2636264 Canadian Dirtlump
Canadian Dirtlump's picture

Theory seems to be increasingly getting relegated to college round table pontification these days since every scenario has the average joe jumping into the barrel, and the powers that be lining up with a bottle of astroglide.

Fri, 07/20/2012 - 11:28 | 2636269 Hype Alert
Hype Alert's picture

Yes, it's true.  We've been lied to.  Again.

Fri, 07/20/2012 - 11:28 | 2636273 Jason T
Jason T's picture

Deflation would act like a forest fire and clear out all the dead wood and the too many trees that were planted in the credit boom.  Would be a hell of a fire, but good for the long term health of the forest, economy.

 

Fri, 07/20/2012 - 12:11 | 2636450 MachoMan
MachoMan's picture

playing with fire is a dangerous endeavor...

I think the correct answer is that we're in a pickle and there isn't an answer...  however, I do agree with the premise that if you're lucky enough to survive the fire, there is the possibility life will be better for you post charring.

Fri, 07/20/2012 - 12:25 | 2636532 LawsofPhysics
LawsofPhysics's picture

Correct, real consequences for bad behavior - good for savers and those who lived within their means.  I call bullshit on the garbage, but then again none this is about money, it is about power and control.  Daflation means banks and financial houses LOSE,  can't have that now can we?

Fri, 07/20/2012 - 11:29 | 2636276 sschu
sschu's picture

I can barely stand to read CHS anymore.  What level is his audience, 8th graders?

The PTB want whatever keeps the game going.  The do not want "a lot" of inflation as that dilutes their debt holdings, likewise too much deflation insures their debtors will not be able to pay because they are ruined. 

Their problem today is the game as it stands is failing, and the people are waking up to this fact.  The thing that the PTB fear most is a rerun of Paris in the 1790s.

sschu

 

 

Fri, 07/20/2012 - 14:56 | 2637236 bagehot99
bagehot99's picture

And that is what they SHOULD fear most.

I have long believed that the logical outcome here will include large numbers of our 'leaders' and their financiers hanging from lampposts. They have been stealing from us, and people have started to notice. If the average Joe knew about things like HFT and the other scams being perpetrated by these people it would already be happening.

Fri, 07/20/2012 - 11:29 | 2636278 GoingLoonie
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We should have 2-3% deflation every year to maintain and recover the value of our currency.

Fri, 07/20/2012 - 12:58 | 2636677 maximin thrax
maximin thrax's picture

With 3% deflation I can hold my cash and gain 3% in purchase power each year. So why ever lend to a bank for what would likely be a negative interest rate, or invest in anything having risk paying less than a 5-6% spread above the annual deflation rate? Investing would be discouraged, would it not?

A tiny bit of inflation, designed to counter the deflationary pressures of increased productivity, results in both higher wages and stable prices, which increases personal wealth. I believe if the Fed had simply maintained an average annual inflation rate of around 0.2% as a means for accounting for productivity gains, things like houses and dress suits would still cost what they did a century ago. If prices were maintained as ever-fewer man-hours were needed, workers would be paid more per man-hour. Such a minute inflation rate would have maintained our competitive edge over other nations, which the actual average of 3.5% annual inflation of the past century has decimated.

Fri, 07/20/2012 - 14:01 | 2636985 marathonman
marathonman's picture

If the Fed had simply maintained an average annual inflation rate of around 0.2%  You are way too trusting of human nature.  Once the Fed is in control and sanctions Congress that they do indeed have the power to spend to infinity because the Fed will always "buy" the debt then the fuse is lit and eventually the debt bomb/debt trap explodes.  You can't have a worldwide collosus army, pay people to lay around, eat, and make babies (and vote Democrat), and pay for health care and the banks' moral hazard with sound money and low inflation.  Reality intrudes.  Now the Fed has allowed the government to lever its power setting the stage for deflationary collapse or hyperinflationary collapse.  They have picked our poison.  0.2%? - I like organic unicorn steak as much as the next guy.

Fri, 07/20/2012 - 16:00 | 2637566 maximin thrax
maximin thrax's picture

 You can't have a worldwide collosus army, pay people to lay around, eat, and make babies (and vote Democrat), and pay for health care and the banks' moral hazard with sound money and low inflation.

So, you are saying you prefer 3.5% inflation over 0.2% inflation because you are for the above?

And you have no comment on the FACT that if savers and investors can get 3% return annually from deflation by simply sitting on cash then there will be much less savings risked in investing?

If we had 3% annual deflation as proposed (which, btw, is more of a fantasy than 0.2% inflation), a government that "spends to infinity" can simply sell debt at a guaranteed return that will coax those savings into Treasuries, and the result of private savings converted into government deficit spending would be inflationary. Not to mention the malinvestment resulting from a deflationary environment that encourages investment in Treasuries over private investment. If the Fed had committed to stable prices long ago then it would have only allowed about 0.2% annual inflation, to counter production gains. Had it done so it would not have enabled the government's deficit spending, which being the biggest driver of inflation would have made a 0.2% target impossible.

Fri, 07/20/2012 - 11:31 | 2636288 GlomarHabu
GlomarHabu's picture

Hey,hey ... I can tell you at 65 years old there's a dung pile bad about deflation ... I long for the days when I could do all night what it now takes me all night to do..

That said pharmaceuticals are a real boost for the Little Red Rooster...

(geez almighty GH do you think they want to read this? ) (Hell I don't know but I have a date tonight with a 40 year old in her prime and I'm getting pumped up)

OMG, he's totally lost it .... you could say he's out of hand.

Fri, 07/20/2012 - 11:42 | 2636336 Robot Traders Mom
Robot Traders Mom's picture

Despite the confusion, I'm mildly interested in any further random thoughts you may have.

Fri, 07/20/2012 - 12:36 | 2636574 Herd Redirectio...
Herd Redirection Committee's picture

GH has 'gone soft' on us.

Fri, 07/20/2012 - 16:00 | 2637569 GlomarHabu
GlomarHabu's picture

Thanks ... I'll be back citing obscure Greek and Roman playwrites, ancient and medieval philosophers ,etc. soon.

I didn't do very well in the humor catagory ....  but here's one a girl told me at the gym..

Q.   How are sex and rain alike?

A.    You never know how long it will last or how many inches you'll get.

 

Ok, I don't certify these things I just pass'em on to hoi polloi.

 

Fri, 07/20/2012 - 20:35 | 2638105 BigJim
BigJim's picture

 

.

 

Fri, 07/20/2012 - 11:33 | 2636300 DougM
DougM's picture

Most of the folks on here have a very simplisitic view of how the monetary system works.  Their view of hyperinflation is akin to over filling a swimming pool.

Fri, 07/20/2012 - 11:33 | 2636301 Stuck on Zero
Stuck on Zero's picture

What I hate is when prices inflate and my income deflates.  Kinda like the other 99.9%.

 

Fri, 07/20/2012 - 11:36 | 2636311 wcvarones
wcvarones's picture

Yes, but both the politically influential (Wall Street) and the voting masses (homedebtors) are highly leveraged asset holders. 

Meaning there is an unstoppable political force for inflation.

Fri, 07/20/2012 - 12:14 | 2636465 MachoMan
MachoMan's picture

Yes, but what about the net of all assets?  net wealth?  If you had a few billion, would you agree to eat 60% of your net wealth for everyone else to lose 90% of theirs and have the opportunity to be the only guy at the fire sale auction (or bank liquidation)?  Think about it...

Fri, 07/20/2012 - 11:40 | 2636330 Flakmeister
Flakmeister's picture

Great.... generate reasonable cash flows for a 65 y.o. with $300,000 and annual expenses of $30,000 and a life expectancy of 20 years....

Shall I advise them to start stockpiling cat food now or later??

Fri, 07/20/2012 - 12:15 | 2636470 MachoMan
MachoMan's picture

I thought we enacted "panels" to help with that problem?

Fri, 07/20/2012 - 12:24 | 2636533 Flakmeister
Flakmeister's picture

Beg pardon?

Do you just make shit up on the fly?

Fri, 07/20/2012 - 11:43 | 2636333 gdogus erectus
gdogus erectus's picture

Deflation rewards savers. Inflation rewards borrowers. Say, I know: let's push a debt based society and then cause deflation to wipe everyone's savings out. Print money. Give to banks. Buy up assets for cheap then for shits and giggles, blow the currency up with a hyperinflationary collapse and then sell some of our gold hoard into the final frenzy!

So, what do you say guys? Are we in? Oh wait, we'd need 100 years and a few trillion to start this game. Never mind. Someone has probably thought of this already anyway.

Fri, 07/20/2012 - 11:53 | 2636351 PulpCutter
PulpCutter's picture

The only thing that's good about deflation is that people like us who have a lot of dollars saved up get to see the value of them increase, without doing anything. 

What's bad about deflation?  For starters, how about massive youth unemployment?  A whole generation of energetic, trained recent college grads can't find work.  They want to produce, and need to buy things, but instead are living in their folks' basement.  Instead of learning to put their training to work in the real world, and growing skills, they're cooling their heels.    As Henry Ford said 90 years ago, lots of people who want to work, lots of people who need to buy things....but bankers standing in the middle. 

There's a 'correct' amount of monetary liquidity, at which the monetary system acts to maximize the benefit to humanity as a whole.  Lower than that increases the benefit to those who have savings. Above that increases the benefit to those who have debt.  That optimum is NOT a fixed amount of money, it's probably that amount of liquidity which produces a very slightly positive amount of inflation - which is 'coincidently' pretty close where the (here) highly-reviled Bernanke and Fed have put us.

Fri, 07/20/2012 - 12:02 | 2636413 jimmyjames
jimmyjames's picture

There's a 'correct' amount of monetary liquidity, at which the monetary system acts to maximize the benefit to humanity as a whole.  Lower than that increases the benefit to those who have savings. Above that increases the benefit to those who have debt.  That optimum is NOT a fixed amount of money,

******************

A fixed amount of money is the key-but without government/banker interference-

The market will force prices to adjust to the fixed supply-

There is no such thing as too small of a supply of money-

In deflation-savers become eventual buyers and it is those people who will put a floor under the market-

Fri, 07/20/2012 - 12:32 | 2636546 PulpCutter
PulpCutter's picture

Justify your assumptions: "...A fixed amount of money is the key..." & "...there is no such thing as too small a money supply....". 

The founding fathers of America - particularly Franklin - would beg to differ.  Americans have batted the issue back and forth since we were still colonies, and I don't think anyone has advocated (or had) a fixed amount of money system.  Here's are excerpts from Bryant's "Cross of Gold" speech, discussing whether to add more silver to the money supply.  I bolded the 1896 description of "the trickle down theory"; discredited even then.

 

Mr. Jefferson, who was once regarded as good Democratic authority, seems to have a different opinion from the gentleman who has addressed us on the part of the minority. Those who are opposed to this proposition tell us that the issue of paper money is a function of the bank and that the government ought to go out of the banking business. I stand with Jefferson rather than with them, and tell them, as he did, that the issue of money is a function of the government and that the banks should go out of the governing business.

There are two ideas of government. There are those who believe that if you just legislate to make the well-to-do prosperous, that their prosperity will leak through on those below. The Democratic idea has been that if you legislate to make the masses prosperous their prosperity will find its way up and through every class that rests upon it.

You come to us and tell us that the great cities are in favor of the gold standard. I tell you that the great cities rest upon these broad and fertile prairies. Burn down your cities and leave our farms, and your cities will spring up again as if by magic. But destroy our farms and the grass will grow in the streets of every city in the country.

My friends, we shall declare that this nation is able to legislate for its own people on every question without waiting for the aid or consent of any other nation on earth, and upon that issue we expect to carry every single state in the Union.

I shall not slander the fair state of Massachusetts nor the state of New York by saying that when citizens are confronted with the proposition, “Is this nation able to attend to its own business?”—I will not slander either one by saying that the people of those states will declare our helpless impotency as a nation to attend to our own business. It is the issue of 1776 over again. Our ancestors, when but 3 million, had the courage to declare their political independence of every other nation upon earth. Shall we, their descendants, when we have grown to 70 million, declare that we are less independent than our forefathers? No, my friends, it will never be the judgment of this people. Therefore, we care not upon what lines the battle is fought. If they say bimetallism is good but we cannot have it till some nation helps us, we reply that, instead of having a gold standard because England has, we shall restore bimetallism, and then let England have bimetallism because the United States have.

If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.

 

Fri, 07/20/2012 - 12:48 | 2636632 jimmyjames
jimmyjames's picture

Justify your assumptions:

*************

It's not an "assumption"

"We conclude, therefore, that determining the supply of money, like all other goods, is best left to the free market.

What Has Government Done to our money

Murray N. Rothbard

http://mises.org/money/2s8.asp

Fri, 07/20/2012 - 11:49 | 2636356 The Fonz...befo...
The Fonz...before shark jump's picture

not good for the banks and all the garbage mortgages on their balance sheets...thats why the fed (their instrumet) is throwing everything to prevent that remember when that doucher bernake wa on 60 minutes...he said it himself deflation was and is their primary fear...

Fri, 07/20/2012 - 11:51 | 2636360 jimmyjames
jimmyjames's picture

Deflation is great for gold hoarders-just sit back with your finger on the trigger as asset prices fall out from under your stash value-

Fri, 07/20/2012 - 11:54 | 2636382 Cangoroo
Cangoroo's picture

Stupid idea, for every buck saved there is one buck borrowed. Deflation means defaults and no steady stream of income. These are wet dreams. 

Fri, 07/20/2012 - 11:55 | 2636383 pods
pods's picture

Well, first you have to qualify what you mean by deflation.  If you mean prices trending down due to productivity increases, that is great.  Prices falling due to competition and productivity increases benefits the plebes.

If you look at it in terms of pure monetary theory as a contraction of credit/debt, that is terrible.  That is what all the fancy banskers mean by deflation is bad.  Because that will slowly implode the system, as our money supply is debt.

Less debt, more default.  Too man defaults will cause a cascade and the whole system will implode.

The interest on debt has to be paid somehow.

I have gotten to hate these inflation/ deflation debates, because there will be 3 people arguing using 4 different definitions for the term they are arguing.

pods

Fri, 07/20/2012 - 11:55 | 2636385 tony bonn
tony bonn's picture

superb topic and good discussion....the hysterical talk about deflation centers on the fear of the elite that their inflationary schemes will stall the massive transfer of wealth from the poor to the wealthy which the corrupt inflationary policies stealthily permit.

the other point is that deflation signals malinvestment liquidation which MUST occur in order to pave the way for future growth....the wicked inflationary policies of the fed/cia/1% cause booms and the bust - with its deflation - must follow....fear of delation is for those whose piece of crap investments are starting to smell like dead fish....too bad...

Fri, 07/20/2012 - 12:04 | 2636421 PulpCutter
PulpCutter's picture

Except that deflation is better for the "elite" (your phrase).

Fri, 07/20/2012 - 11:56 | 2636387 Vooter
Vooter's picture

"Deflation is only bad for those with crushing debts and no ability to borrow more."

And when those people start saying "Fuck you" and not paying their debts, it won't be bad for them, either...

Fri, 07/20/2012 - 11:56 | 2636392 MarsInScorpio
MarsInScorpio's picture

"The Fed's real function, of course, is to manage monetary policy to benefit the nation's financial sector and its wealthy Elites."

 

The challenge is to get this thought through to the Middle Class.

-30-

Fri, 07/20/2012 - 12:00 | 2636404 narnia
narnia's picture

This ridiculous paper is going to deflate. Then everything around it is going to deflate. Then, the tons of involuntary transactions will go away.

The financial cartel is in partnership with the government & they share the same fate, especially since their power can easily be legislated away.

Fri, 07/20/2012 - 12:02 | 2636411 KidHorn
KidHorn's picture

The Federal reserves primary purpose is to keep the banking system going. They'll do whatever they have to do to maintain the banks. I don't think the FED is in favor of deflation as this is bad for the banks. Asset values are what deflate and the banks are holding a lot of assets. Plus, everything the FED has done recently is inflationary. They're doing everything they can to stop deflation, not encourage it.

I'm as much of a conspiracy theorist as anyone, but there's no secret group of rich people who have a consistent agenda that the FED is following. Gov't is controlled by the wealthy, but they do it via lobbiest and they all have their own separate agenda.

Fri, 07/20/2012 - 12:10 | 2636415 rzero
rzero's picture

"...behind the curtain mild deflation is perfectly fine with the financial elites."

The last 70 years of US financial data suggest either the financial elites have no control over monetary policy, or they are NOT okay with deflation.

Fri, 07/20/2012 - 12:04 | 2636420 Fix It Again Timmy
Fix It Again Timmy's picture

What's So Good About This?:

http://www.youtube.com/watch?v=szwclmmKwLg

 

Fri, 07/20/2012 - 12:14 | 2636466 Snakeeyes
Snakeeyes's picture

The IBEX plunged today too. Can you smell the fear?

 

http://confoundedinterest.wordpress.com/2012/07/20/approaching-the-zero-...

Fri, 07/20/2012 - 12:17 | 2636481 dcb
dcb's picture

I have urged many economists to revisit the subject of deflation for a long time.

Fri, 07/20/2012 - 12:20 | 2636508 dcb
dcb's picture

you should explian that it's all about asset prices and the markets, which means the wealthy. if you have high leverage banking system, deflation drops asset prices, gets margin calls and shows the banks to be bankrupt. much of the inflation policy is to make it easier to maintain and over leveraged state. since the wealthy own the vast amount in the markets it helps them the most

Fri, 07/20/2012 - 12:22 | 2636516 cocoablini
cocoablini's picture

Part of the facade is having MORE money. They inflate supply, dummies feel wealthier even though prices rise accordingly. Diultion is OK if you are a bank or CEO with control over how many shares or dollars you have. The banks print more, get more in the system but most goes to THEM.

Deflation is great if you want to purchase a deflated item. If you are a borrower and lender, and that's who Ben cares about most, then it starts the credit-asset-valuation ponzi bomb. Economists like to fiddle with money supply but in the end they never understand anything about the flow of money and credit-especially in REVERSE.

Fri, 07/20/2012 - 12:27 | 2636542 bugs_
bugs_'s picture

Here in the Deflationists Lounge we've been getting more walk ins asking if we had brochures.  I just checked the printing costs - wow - so expensive to print.

Fri, 07/20/2012 - 12:55 | 2636660 covert
covert's picture

deflation is more like a theroy than reality, wages deflate and nothing else does.

http://expose2.wordpress.com/2011/11/20/a-voice-from-the-dark/

 

Fri, 07/20/2012 - 12:30 | 2636555 TheGardener
TheGardener's picture

"Deflation is a wonderful boost for those who own debt and who receive income streams from interest and principal payments. Every dollar of interest and principal buys more than it did when the loan was originated. Every dollar of cash not only buys more goods and services, it also buys more hard assets as assets tumble in deleveraging."

Loan ? MF contributor, what loan? lifetime savings ?
Five times taxed consolidated?

Diluted to nowhere and payed out in negative interest in
ever more inaccessible non cash-able accounts.

Destitute pensioners can no longer bribe grandchildren
should be your next hanger off... All your newly
registered followers will surly buy the spin...

Fri, 07/20/2012 - 12:30 | 2636557 Handyman
Handyman's picture

Prepare for both.

This is why I'm mostly silver. The eventual supply depletion makes it work in any situation (IMO). I don't mind sitting on it for a decade while I'm reaping the benefits of deflation.

It's not the crisis I'm worried about. I'm ready, regardless of which way it goes. It's the people who aren't worried about it that worry me. There are going to be a lot of desparate, fucked up people (zombies) walking around and they'll be looking for the "selfish horders".

Be prepared to lay low.

Fri, 07/20/2012 - 15:12 | 2637338 TheGardener
TheGardener's picture

V8 SUV to run them over? How else you prepare for zombies?
I prepare for everyone laying low, my dog bitch got trained to do so if I were to shoot. Down!!! She does and than proceeds to pick up our game...:-)

Sat, 07/21/2012 - 01:06 | 2638393 HardAssets
HardAssets's picture

"Prepare for both."

Yep, I agree.  It would be a helluva lot easier if we absolutely knew 100% if its going to be inflation or deflation (or a combination of both one then the other).  Like a lot here, I read as many articles as I can to try to sort out the probablilites.  Unfortunately, despite doing all that - - - I've got no crystal ball and no more certainty.

The disadvantage (financially) of preparing for both, of course, is that your resources must be divided. If one situation occurs rather than the other one, you won't be in the optimum position that you might have been if you knew for sure.

So, we keep reading the articles and comments, hoping to have a little bit more certainty and an 'edge' for making our decisions.  That's life.

Fri, 07/20/2012 - 12:45 | 2636621 blunderdog
blunderdog's picture

A debt-based monetary system collapses during deflationary periods.  The banking system can't survive a significant deflationary bout right now, which is fine, except that most people still depend on banks and think economic collapse is a bad idea.

I don't think there's any *moral* issue here.  It's just business.  Good or bad is dependent on one's point of view.

Fri, 07/20/2012 - 18:13 | 2637882 GoingLoonie
GoingLoonie's picture

So, what is wrong with people living within their means?

If you cannot afford the house, it should be taken away.

You may have chosen to borrow and live short term, 

others of us may have chosen to invest,

live within our means for the long term.

Fri, 07/20/2012 - 20:09 | 2638070 blunderdog
blunderdog's picture

There's nothing wrong with living within one's means.  But who do you think is going to "take away" some asshole's house? 

It's going to be the agents of the same banking system and/or government that's been unable to live within its means.

In other words: when an individual can't afford stuff, it could be sensible to take his stuff.  When a government or banking system can't afford stuff, it is NOT sensible for them to take other people's stuff.

That's what's happening.

Fri, 07/20/2012 - 12:47 | 2636630 PulpCutter
PulpCutter's picture

http://ralphanomics.blogspot.com/2012/05/benjamin-franklins-arguments-fo...

In 1729 Benjamin Franklin wrote a 6,500 word article advocating an increase in America’s money supply. Brief summary from another blogger:

Basically, Franklin argues that a shortage of money leads to a semi-barter economy, which is inefficient. And he argues for money to be created in the form of bills of exchange with land being the collateral that backs such bills. Interestingly, he is aware of the Real Bills doctrine (or the idea behind it) namely that banks will only issue an amount of money or bills that the rest of the private sector actually wants or needs to do business, etc.



Fri, 07/20/2012 - 13:11 | 2636738 jimmyjames
jimmyjames's picture

In 1729 Benjamin Franklin wrote a 6,500 word article advocating an increase in America’s money supply.

************

Increasing money supply beyond the increase or decrease of any trade balance is of no benefit-

I work for $20/hr and buy a beer after work for $5-

I work for $1/hr and buy a beer after work for 25 cents-

How is the velocity of the money any different when the $1 will purchase the same amount of goods and services as the $20 will?

Fri, 07/20/2012 - 14:55 | 2637227 PulpCutter
PulpCutter's picture

"...Increasing money supply beyond the increase or decrease of any trade balance is of no benefit..."

Trade balance is almost completely unrelated to demand.  It is demand that governs inflation/deflation. If there is more demand than supply for a product or employee, the price goes up.  If there's excessive supply, the price goes down.  This is not complicated.

 

 

 

Fri, 07/20/2012 - 16:24 | 2637646 jimmyjames
jimmyjames's picture

Trade balance is almost completely unrelated to demand. 

This is not complicated.

*************

Trade balance has everything to do with demand and yes-it is not complicated-

Instead of running trade deficits and paying for them by "borrowing and printing" ie: inflating to consume-by issuing credit-when instead-interest rates need to be adjusted upwards to slow consumption and to increase the power of savings-which provides real capital to be invested in real growth-which together shifts the trade balance to positive which increases the real money supply flowing into a country-(inflation)

Anything demanded beyond market trade balance is simply furnished with credit expansion- -

Fri, 07/20/2012 - 12:53 | 2636654 Antifaschistische
Antifaschistische's picture

I think this misses the real point....the point shouldn't be deflation/inflation as much as the reason behind the deflation/inflation.

Deflation is good when businesses try to do the same thing for less money, and in doing so can deflate their prices.   This is good.

Inflation is fine if people seek higher productivity jobs and increase their demand for the same number of strawberries.

The point is that the government and the banks should have nothing to do with this.  Deflation or Inflation should not be generated by monetary policy but rather by the free interactions of individuals within a free economy.   Once the Central Planners step in they simply get to choose the winners/losers through misallocation of counterfeited currency.   Fiat Currencies wouldn't be so bad if the Central Planners STOPPED planning and focused on a stable fiat currency and let the market do what it does best...allocating capital, resources and commodities.

Fri, 07/20/2012 - 15:00 | 2637256 PulpCutter
PulpCutter's picture

"The point is that the government and the banks should have nothing to do with this.  Deflation or Inflation should not be generated by monetary policy but rather by the free interactions of individuals within a free economy."

But that is what happens.  The only exceptions the extreme times: when there is deflation after a massive credit bubble leading to massive unemployment (today), or when presistent inflation has set in (Volcker/Carter).

You're making it sound like the Fed always inflates the crap out of things, and as if there's some behind the scenes conspiracy.  That's contrary to the historical record.  I lived through both; inflation is waaaaaay lower today than it was in the late 1970s.

Fri, 07/20/2012 - 13:03 | 2636694 Shizzmoney
Shizzmoney's picture

Everyone in America should read this article, and the great point by Antifaschistische .

Fri, 07/20/2012 - 13:02 | 2636703 Cangoroo
Cangoroo's picture

Money supply reflects total wealth of a society. So what is deflation? Well, it means destruction of wealth and value. It is that simple.

Fri, 07/20/2012 - 13:22 | 2636803 jimmyjames
jimmyjames's picture

Money supply reflects total wealth of a society. So what is deflation? Well, it means destruction of wealth and value. It is that simple.

***********

Our money supply has never been greater and how has that been working as to wealth and value?

It's the quality of money that is important (buying power) not quantity or otherwise Zimbabwe would be the wealthiest country on the planet-

Fri, 07/20/2012 - 13:30 | 2636840 Cangoroo
Cangoroo's picture

Imagine there would be only one USD around the planet, fantastic idea. Yes, if money supply exceeds wealth then you would have an inflation. Thus money supply more or less reflects wealth. Inflation is by no means a good thing thing, but deflation is truly destructive. Money supply should go hand in hand with wealth and value creation.

Fri, 07/20/2012 - 13:37 | 2636882 jimmyjames
jimmyjames's picture

Imagine there would be only one USD around the planet, fantastic idea

Yes, if money supply exceeds wealth then you would have an inflation.

***********

Great example-

Tell me how you determine wealth-

If money supply "increases" that would be inflation-the opposite would be deflation and only a free market can determine the correct direction-

Fri, 07/20/2012 - 13:30 | 2636837 blunderdog
blunderdog's picture

   Money supply reflects total wealth of a society.

You might be able to make that argument discussing "active" money supply, but numbers on bank balance sheets are generally considered part of the "money supply" and yet certainly do NOT reflect anything you'd think of as "wealth."

Closing insolvent banks is not destroying wealth.  "Currency" (and even "money") is not capital.

Fri, 07/20/2012 - 18:08 | 2637870 GoingLoonie
GoingLoonie's picture

Wrong!!!!!!!!!!!!!!!!!!!!!!!!

 

See jimmyjones explanation below.  Good job Jimmy.

Fri, 07/20/2012 - 20:10 | 2638073 blunderdog
blunderdog's picture

Dunno what you're talking about, but I guess you're trying.

Fri, 07/20/2012 - 13:47 | 2636814 socalbeach
socalbeach's picture

The US is being used as the military muscle for the financial elites to help establish world government, so it's in their interest to have the US government as financially strong as possible until that goal is accomplished. That's not compatible with deflation, and Fed money printing to buy Treasuries represents free revenue to the government (seigniorage).  If the Federal Reserve's policy is to allow deflation they aren't doing a very good job at it.

Fri, 07/20/2012 - 13:26 | 2636818 hidingfromhelis
hidingfromhelis's picture

Article was written as if CHS spent his entire life in academia.  In a perfect world...  Meanwhile, here in the real world of crony capitalism, manipulated markets, barriers to entry for virtually everything profitable, and information sharing amongst the favored, inflation is the most profitable course by far.  It allows the ponzi to continue to exist and expand, and that's the way our system is structured.  At every level, inflation is necessary for its existence, from the skimming of fees to the frontrunning of limited, shared information.  Deflation, while theoretically profitable, wouldn't provide nearly as many opportunities to strip wealth from the populace.

Fri, 07/20/2012 - 13:31 | 2636852 notadouche
notadouche's picture

Funny how for my entire life the political elites talk about "affordable housing for all" yet when housing prices tumble that may allow those who once couldn't really afford to buy a home due to high prices, the government does everything in it's power to prevent prices from falling.   Just who is that protecting?  Well present homeowners, homebuilders and bankers.   Wannabe homeowners not so much.   Let the prices fall.  At some point they will fall enough to become naturally attractive as opposed to manipulating the market.   Poor folks and old folks, as long as their income streams aren't disrupted benefit greatly from deflation.  Aren't these the folks that the politcial elites claim to want to help the most?   

Of course asset owners, the haves get hurt as their wealth gets diminished and perhaps that trickles down to hurt the lower income classes but I also assumed these same folks didn't believe in "trickle down" economics.   

In the end this constant lurching between inflationary and deflationary "scares" only serves to cause more dislocation for all accept those "political elites" and the super rich.  I have nothing against the super rich as I would love to be one but the poltical elites on the other hand....not so much. 

 

 

Fri, 07/20/2012 - 14:24 | 2637092 DaveA
DaveA's picture

Never say, "X won't happen because the elites won't allow it." The elites are not gods, just charlatans selling miracle cures until the rubes either wise up or go broke.

The only swindle that still fools anyone is central banks printing money and spreading it around (mostly by "loaning" it to governments) to create the illusion of a recovering economy.

Those same central banks are also quietly accumulating gold, but with no way to create it, gold will never give banks the godlike powers they enjoy today.

Fri, 07/20/2012 - 15:16 | 2637366 Jumbotron
Jumbotron's picture

here's what will be scarce: reliable income streams and liquidity.

 

No gas for the engine....no grease for the wheel.  Put that bitch on blocks !

Fri, 07/20/2012 - 15:53 | 2637536 hazek
hazek's picture

Oh zerohedge, can you please stop taking money for posting articles written by people who are utterly clueless?

Fri, 07/20/2012 - 15:53 | 2637540 robertocarlos
robertocarlos's picture

If you can't service ypur debts due to a reduction in income then you jjst go NK and start over. It's pretty simple. If it happens to a State then they just have to sell assets. The State has plenty odf assets.

Fri, 07/20/2012 - 16:03 | 2637581 robertocarlos
robertocarlos's picture

The rich won't have any cash when their accounts at the bank are closed because the bank is BK.

Fri, 07/20/2012 - 16:08 | 2637596 OneTinSoldier66
OneTinSoldier66's picture

We should be having deflation. It's the reward to workers for increased productivity, even if there's no increase in wages. And we'd be having it if it weren't for the leviathan government and it's gargantuan debt overhang, in order to appease the Debt Master Leverage Loan Sharks at the Federal Reserve.

 

What are we waiting for!? End the phony economy and the debt slavery already! #EndTheFed I just wish that were as easily done as it is said.

 

I keep stacking, I keep waiting.

Fri, 07/20/2012 - 22:54 | 2638273 PatientZero
PatientZero's picture

I agree. Peg the dollar to silver, which will deflate the currency but still leave it to be versatile. No more of this CTRL-P injection shit.

Fri, 07/20/2012 - 16:39 | 2637689 boiltherich
boiltherich's picture

Deflation, like inflation is bad because they are neither price stability.  I think that is simple enough and I could leave it there, but you all know me, I have more to say about it.  Deflation is extra bad because when the prices of the stuff we need to buy drop so does income, that all by itself would not matter so much if your debts also dropped along with income, but those are remarkably sticky and as we have seen from the deflation in residential real estate (for ownership not rental) that deflation does NOT help a market or segment of the economy when debt value remains unchanged.  Take that paradigm and multiply it across all consumer credit, and it gets even worse when applied to corporate and government debt that now has to be repaid by customers/taxpayers earning fewer dollars. 

Fri, 07/20/2012 - 22:52 | 2638270 PatientZero
PatientZero's picture

In my mind, here is the problem: real wages compared to productivity have remained stagnant for what, like decades now? So of course you get less bang for your buck even though you have more of it. You can no longer bring home the bacon with one income. So you put the balance on credit. To me the common sense solution would be to deflate the fuck out of the currency by pegging it to say silver. That would probably force companies to adjust wages to coincide with productivity if they ever want to make sales since such a plan would eliminate this shit with the Fed injecting liquidity and credit into the economy.

So I say deflation by silver.

Mon, 07/30/2012 - 12:38 | 2662542 Remington IV
Remington IV's picture

stay short

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