Economy and Markets
In Reply To:
The Threat of Deflation

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By EddieLuck
September 16, 2002

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From The Economist article:

"But Germany's inflation rate is only 1% and it could well drop over the next year, as weaker growth causes its output gap to widen by more than elsewhere. Even if the European Central Bank's (ECB's) monetary policy is appropriate for the Euro area as a whole, it is too tight for Germany alone.

"As a result, there is a risk that, before the end of 2003, the rich world's three biggest economies�America's, Japan's and Germany's�could all have negative inflation rates."
There seems to be a widespread belief that correct policy by the world's central banks is all that's needed to ensure constant economic nirvana. There is also a much less popular belief that the central banks are the root cause of much of the instability in large economies. I subscribe to the latter opinion.

In a hard-money based economy, the amount of money grows slowly and relatively steadily all the time as companies mine gold and silver wherever they can find them. In this scenario, fluctuations in money supply are so small as to be a non-issue. A major variable is removed from the vast and complex economic equation, or matrix.

In our experimental current paper/electronic debt-based system, this major variable is deliberately and constantly manipulated by small groups of people who think they are smart enough to control the economic matrix.

Funnily enough, though, the rules of thumb that they use to guide their decisions are constantly evolving. This proves that they do not understand enough to actually know what they are doing: they only understand enough to think they know what they are doing at any one particular time. When subsequent events prove that they were in fact wrong back then, why, they just come up with a revised approach, which they are quite sure will do the trick next time.

The fact is, though, that you pretty much can't go wrong with a system of constantly-increasing credit supply, even if you do screw around with it by changing the parameters every now and then. There is a built-in layer of stability when credit is expanding that helps smooth everything along. Live now, pay later. Inflation, deflation, no real problem, while we are all still feeding at the credit trough.

The problem is that of course such a system is a one-way ticket to oblivion. Always has been, always will be. There are no surviving debt-based monetary systems from the past, although you can still spend a doubloon, denarius, tetradrachm, or golden guinea in most any town in the modern world with very little hassle. Furthermore, the tetradrachm will buy you about as much as it would have bought you two thousand years ago around the Mediterranean or anywhere else.

The difference with debt-based systems is that they become less and less stable as they progress. As more and more interest payments flow out of the economy and into the banks, even more and more credit has to flow from the banks into the economy to keep it growing. As the scam progresses, a larger and larger portion of the new credit has to go straight back to the banks as debt payments, so the growth of credit has to keep accelerating until pop! goes the weasel. It's just high school math. The system is only good in its early stages, and there is no escape route provided for later on.

We are now at the "later on" stage, and people don't realize what is hitting them. Record levels of bankruptcy and mortgage delinquencies are coinciding with relatively low interest rates, huge credit expansion, record stock valuations, rising property values, record corporate and Govt. debts, rising unemployment, and abject poverty still with us in most parts of the world. Wealth inequality is as never before except perhaps the Middle Ages.

Political energy is directed at the moral implications of cloning chickens and hiding the monstrous Govt. debts and unfunded obligations in their respective secret "lockboxes" and divining new ways to pander to the voters with new types of expenditures that they will just borrow the money for as usual.

I think that we're in trouble and I don't think that the fed raising or lowering rates by half a point is going to fix it.


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