You'll perhaps be surprised that I am in nearly 100 percent agreement with your last post. And I agree with your points on leverage and its role. Our entire banking system is dependent on leverage, after all. I also agree with the current deflationary forces you have detailed. Where we disagree significantly is essentially limited to two points. Apparently you believe, and correct me if i'm wrong, that there is currently deflation in the overall US economy, whereas I believe the Shadowstat figures to be more reliable than the Government numbers (which also show a little bit of inflation, don't they?). And it also seems we disagree on the Feds ability to create inflation almost no matter what. I say they can, and I guess you think they will not be able to pull it off. . On that I guess we will just have to disagree and wait until the jury is in. I think we could also agree that there are tremendous incentives to monetize and inflate in the US and that deflation would be a real disaster for a debtor nation like the US. I would think how much we can get by with is going to depend on what our creditors will allow before they demand higher interest, and how big a stick they can wield should depend on their economic strength or weakness compared to the US.
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Bernanke Admits Printing $1.3 Trillion Out Of Thin Air
- Thread starter bearice
- Start date
Yes, we have some common ground...I guess I am not so outa here...its good to be short so I have time to write.
I look at words 'deflation' and 'inflation' to really mean a monetary effect following the direction of Milton Friedman with argeeing with his whole theory. As monetary effects you can see that, particularly with inflation the index measures, which are just politicised baskets of goods and services, are poor measures of the monetary effect of price change. Understand that prices are always changing due to supply and not driven by monetary balance. The price idexes capture a lot of supply demand change along with monetary change.
This is the real reason the Fed looks at Core, without food and energy, becuase food and energy have the most supply/demand distortion that is not the proper inflation information. It has noting to do with the price people pay in their everyday lives like that is supposed to be inflation. The whole idea of looking at the price of indivdual goods and services to determine 'inflation' driven by monetary effect is stupid on its face.
Inflation itself is a human process of renegotiating contracts of various terms to allow for price increases. Such negotiation in aggregate determines inflation and the economy absorbs the inflation according the average term of its key contracts...labor agreements, supply agreements, service contracts etc....Emerging countries typically do not have as long term a contract structure so they absorb inflation more directly. Developed economies with relative stability of currency value absorb inflation over a much longer term...this is why there is a lag...but the lag is not linear...first a threshold of future expectation has to build up to a consensus tipping point...this is what inflation expectation is..then individual actors will begin to renegotiate the contracts and raise prices in self reinforcing behavior.
Where price increase is driven by supply demand imbablance...say the world starts to grow faster becuase Asia and Eastern Europe adopt growth economic policies...after a period where dollar deflation has starved energy and strategic materials from capital investment...there would be a noticable increase in the price of energy and materials as demand would exceed immediate supply...this is not inflation, its is a symptom of growth...the proper reseponse is make it easy to apply capital to investment in expanded production and distribution until the supply increases...but if the central bank looking at index measures interprets this growth as inflation it will try to tighten money...when you fight growth with tight money you get contraction and increased inflation..that is what happened in the middle of last decade.
Deflation can also be monetary in that the growth is calling for expanded base money and expansion of credit to increase supply, failure to increase supply in that context, as stated above can cause a contraction. This is what occured to trigger the Asian Finincail crise as dollar linked currencies were collapsed as the U.S. CB conducted a deflationary monetary policy at the end of the 1990's....this is also what cause the under investment in long term energy and strategic materials production and distribution...that we are still playing catch up from.
Monetary deflation can be cured before it translated into individual private behavior by expanding the money supply before the credit markets collapse...before the credit markets collaps is key...you have to have aggregate private sector credit expansion functioning for base money expansion to work.
Volker did that in response to tax cut driven dollar demand in 1981 (albiet only after he cause the Peso to collapse)..and so ended the monetary deflation of 1980-82. Greenspan also reversed the deflation that was harming dollar linked global currencies after 2000 avoiding any translation into the U.S. economy beyond the manufacturing and commodity sector which as above was decimated.
You can see that these deflationary and inflationary monetary mistakes do not have to play our over an epoch...or even 20 years..they can be reversed and counteracted.
The problem becuase chronic howeve when the mistake precipitates a credit collapse. This is why I refer to Japan, the First Great Contraction (Great Depression) and the Second Great Contraction (Now post Lehman). When credit collapses for whaterve reason the deflation that results from deleveragind becomes a fiscal event that the monetary policy cannot address. It has be addresse fiscally...you have to change behavior so that priveat people want and are able to borrow money, you have to increase leverage as counterintuitive that my be.
So, do you think the CB;s of the world will get behind increasing private leverage at this time...that is what it will take to get inflation back.
I look at words 'deflation' and 'inflation' to really mean a monetary effect following the direction of Milton Friedman with argeeing with his whole theory. As monetary effects you can see that, particularly with inflation the index measures, which are just politicised baskets of goods and services, are poor measures of the monetary effect of price change. Understand that prices are always changing due to supply and not driven by monetary balance. The price idexes capture a lot of supply demand change along with monetary change.
This is the real reason the Fed looks at Core, without food and energy, becuase food and energy have the most supply/demand distortion that is not the proper inflation information. It has noting to do with the price people pay in their everyday lives like that is supposed to be inflation. The whole idea of looking at the price of indivdual goods and services to determine 'inflation' driven by monetary effect is stupid on its face.
Inflation itself is a human process of renegotiating contracts of various terms to allow for price increases. Such negotiation in aggregate determines inflation and the economy absorbs the inflation according the average term of its key contracts...labor agreements, supply agreements, service contracts etc....Emerging countries typically do not have as long term a contract structure so they absorb inflation more directly. Developed economies with relative stability of currency value absorb inflation over a much longer term...this is why there is a lag...but the lag is not linear...first a threshold of future expectation has to build up to a consensus tipping point...this is what inflation expectation is..then individual actors will begin to renegotiate the contracts and raise prices in self reinforcing behavior.
Where price increase is driven by supply demand imbablance...say the world starts to grow faster becuase Asia and Eastern Europe adopt growth economic policies...after a period where dollar deflation has starved energy and strategic materials from capital investment...there would be a noticable increase in the price of energy and materials as demand would exceed immediate supply...this is not inflation, its is a symptom of growth...the proper reseponse is make it easy to apply capital to investment in expanded production and distribution until the supply increases...but if the central bank looking at index measures interprets this growth as inflation it will try to tighten money...when you fight growth with tight money you get contraction and increased inflation..that is what happened in the middle of last decade.
Deflation can also be monetary in that the growth is calling for expanded base money and expansion of credit to increase supply, failure to increase supply in that context, as stated above can cause a contraction. This is what occured to trigger the Asian Finincail crise as dollar linked currencies were collapsed as the U.S. CB conducted a deflationary monetary policy at the end of the 1990's....this is also what cause the under investment in long term energy and strategic materials production and distribution...that we are still playing catch up from.
Monetary deflation can be cured before it translated into individual private behavior by expanding the money supply before the credit markets collapse...before the credit markets collaps is key...you have to have aggregate private sector credit expansion functioning for base money expansion to work.
Volker did that in response to tax cut driven dollar demand in 1981 (albiet only after he cause the Peso to collapse)..and so ended the monetary deflation of 1980-82. Greenspan also reversed the deflation that was harming dollar linked global currencies after 2000 avoiding any translation into the U.S. economy beyond the manufacturing and commodity sector which as above was decimated.
You can see that these deflationary and inflationary monetary mistakes do not have to play our over an epoch...or even 20 years..they can be reversed and counteracted.
The problem becuase chronic howeve when the mistake precipitates a credit collapse. This is why I refer to Japan, the First Great Contraction (Great Depression) and the Second Great Contraction (Now post Lehman). When credit collapses for whaterve reason the deflation that results from deleveragind becomes a fiscal event that the monetary policy cannot address. It has be addresse fiscally...you have to change behavior so that priveat people want and are able to borrow money, you have to increase leverage as counterintuitive that my be.
So, do you think the CB;s of the world will get behind increasing private leverage at this time...that is what it will take to get inflation back.