Quantcast

deflation?

Toshi

Harbinger of Doom
Oct 23, 2001
29,225
2,899
may be more possible than you think

http://www.nakedcapitalism.com/2009/02/steve-keen-roving-cavaliers-of-credit.html

my cliffs notes/crude reading of this as posted on my own blog:

over dinner i like to argue economics in a very-partially-educated way with my father. he's firmly of the belief that current policies will eventually lead to a hyperinflationary spiral. i've been more skeptical, noting that the vast sums of money "created" in the last year have not made it out into the economy, and indeed the supply of money circulating in the economy seems to be lower as credit lines and general activity is scaled back as everyone deleverages.

i'm glad to see that my unsophisticated argument has some supporters, namely steve keen, who takes it much, much farther than i would be able to. he makes the argument that we don't have a fiat money system in which the government's original increase in base money allows banks working under the fractional reserve system to increase the money supply ten-fold over the base money increase, but rather have a credit money system with a increasingly inconsequential fiat money system tacked on.

what does this mean? this means that credit is extended by banks prior to the government increasing the base money, and, furthermore, that the expansion of credit is and cannot be limited by the government slowing down the rate of expansion of base money. in practical terms one can think of the fact that banks are not required to have any reserves for corporate lines of credit that they extend, in comparison to the 10% reserve they must maintain for private deposits.

note that private debt has grown exponentially even though M0, base money (ie, what Bernanke can control and has been increasing), has not shown a similar pattern.



what does this mean? as we have seen with the TARP program neither infusions of money nor exhortations from capitol hill have caused the banks to resume lending. and steve keen argues that the banks control the money supply (as per above, credit money vs. fiat money). model the economy as he has done under the credit money assumption and plug in a 68% reduction in the rate of circulation of unlent reserves and the prediction is 25% unemployment and deflation.

we saw deflation in the great depression. we may see it again.
 

Silver

find me a tampon
Jul 20, 2002
10,846
0
Orange County, CA
Oh, it's possible.

Which is also a reason why a stimulus package needs to be huge, and sooner rather than later. We're going to have to inflate to ease our debt obligations anyways.
 

Toshi

Harbinger of Doom
Oct 23, 2001
29,225
2,899
Oh, it's possible.

Which is also a reason why a stimulus package needs to be huge, and sooner rather than later. We're going to have to inflate to ease our debt obligations anyways.
more than simply being possible, the article i linked to above makes the argument that the fed really isn't in control of the supply of circulating money, an argument that is amply backed up by recent events.