Quote from Ed Breen:
Zdreg - with regard to historical examples, understand that I expressly stated that the context is post Bretton Woods application of quantity theory principles where there is a credit contraction. Historically, the only other similar situation is Japan's long deflation that was caused by a credit collapse and banking crises and has not yet ended. Other recessions that have occurred since 1971 have not been the result of a credit collapse and private credit did not contract in any other recessions. we came close to that scenario in the 1981-82 deflation but the Reagan Tax cuts and the Volker easing after the Mexicon Peso collapse avoided a credit collapse and contraction. The Great Depression was somewhat similar in that it was the result of a credit collapse, but we were on a gold standard and the banking credit structure was different. So, your historical comp is only Japan as far as I can figure.
Its interesting that Japan's experience has been that all attempts to ease and reflate have failed and they merely created profound excess reserves that now fuel the carry trade...but Japan remains in a deflation of asset prices. Japan is different in its savings rate, with is related to its demographics...if it did not have such a high domestic savings rate it would be starting to have sovereign debt issues...after all they have a greater debt/gdp ration than Greece does...but this gets into another subject....the relationship between types and levels of soveriegn debt and prospects for growth.
Morganist - You asked if I meant that the increase in the amount of base money was not inflationary becuase it was offset by private credit contraction? The questions shows me that you really don't understand what I am trying to say...and I appologize for that. I am trying to say that old notions of base money supply need to be understood as of one piece with private credit formation. In a fractional reserve banking system you really can't seperate the two. Traditionally understood base money operates as predicate for credit formation in the modern system. Regulation of banks capital requirements and liability reserve requirements involves a threshold degree of traditional base money (really a minimum amount of shareholder's equity in the banking system). I say that base money is required in the banking system as a predicate becuase without minimum required base money a bank cannot lend, it cannot continue in business. However, if we are concerned about inflation, inflation in the real economy that manifests itself by a rising price of assets, that inflation occurs only when base money is leveraged in the private sector through the expansion of credit. In a fractional reserve banking system this is what the money multiplier actually is...its the leveraging of base money with the addition of credit to purchase assets. The greater the leverage the greater the expansion of the money supply is and the greater potential for inflation there is. This process is one of leveraging base money to purchase assets...the limit of the velocity is in the leverage ratio and not in the interest rate. Do you see how this can only be understood as of one piece...not through some duelism where part A is offset by part B? Where there is reduced leverage and no appettite for credit, where credit is contracting, any expansion of money supply A will have no place to go...Fed gives new money to banks by purchasing bad assets of banks and banks put new money back in Fed as excess reserves. This new money must be loaned back to the government as is not being leveraged out into the private economy...it does not result in too much money chasing too few assets.
Of course deleveraging in the sense that I am explaining means less money in people's pockets...it also means less credit. Consider what it was like in the 1950's when people had to save before they purchased a home....had to put 40% down...had to pay cash for a TV....you are right there will be less transactions and the price of things that used to be leveraged will decline. We really are, through this crises, and the sovereign debt crises that is now beginning, to transition from the greatest era of leverage in history, to an era of profoundly reduced leverage. I do not think you can manage this transition well with old models of inflation that will not function during the transition.
Finally, morganist, you last paragraph reads as nonsense to me, maybe you can express your thought differently.
Canmo - Can you see from above that 'helecoptering' in money would not make it different so long as the private sector was already contracting; it would not promote private credit expansion that is required for inflation to manifest in increased asset prices?
Aggregate private credit formation is based upon long term expectations about the future. Government deficit spending does not replace private sector credit expansion becuase the Government spending is not leveraged, so the money has less power and creates no productivity increase. Unless we become comfortable with sovereign default as an everyday occurance we must acknowledge that deficit spending by sovereigns must imply the use of future government revenue to pay the accrued debt of the 'stimulus' spending. The private sector understands that this implies higher future taxes. So, the private sector is less inclined to risk capital and is more uncertain about future after tax profit from risk...So, both present growth and future growth is dampened by Government sitmulus spending.
This is a dangerous cycle of mistakes becuase debt can only be sustained if the cost of debt is lower than the rate of growth. If government revenues are collapsing, as they are, and government persists in increasing deficit spending, as they are, then the process will prevent the growth that is required to keep the government from defaulting on the debt. You can only pay debt with income. You can only get income from growth. The question is only how long it will take before the treasury auctions start to fail. Understand that Japan has not reached this point because of its powerful domestic savings rate over years and during the Great Depression this was not an important issue becuase there was no significant federal debt at the beginning and federal revenues continued to increase throughout the depression so that solvency was never at issue.
Daal - as above, spending has no lasting power without an expanding private credit market. Where the private sector contracts as the publich sector continues to borrow and increase accrued debt, despite decreased revenues...and where deflation persists, making the real cost of debt increase...the risk is not inflaiton but it is 'hyperinflation.' Hyperinflation is a misnomer becuase it does not result from accelerating inflation, it results instead from a currency collapse that occurs when insolvency makes it impossible to continue to service existing debt or to roll it over. Continued money creation in a condition of credit market insolvency will lead to a currency collapse. In contrast, inflation requires an expanding private credit context...otherwise there will not be too much money chasing too few goods. Its a completely different process from 'hyperinflaiton.
M22au - I respect the writing of Mish Shedlock and have read some of it. I don't agree with everything but he has unusual insight in understanding much of what is really happening, not trapped in an obsolete paradigm. I don't know where he says that we can't get to 'hyperinflation' because the Fed can't deflate. Maybe you can send me a link. If he said that I have to disagree strongly as it is deflation that lays the trap for a sequence of keynesian mistakes that can lead to 'hyperinflation.' As above, I think I explained how Hyperinflaiton is a risk of deflation; not inflation. It is a result of insolvency casued by increased debt and decreased growth, made worse by a deflation that increases the real cost of debt. Where a governemnt tries to protect entitlements at the expense of insolvency and has destroyed growth through high taxes, then it is on the path to a deflationary induced 'hyperinflation' collapse of its currency.
Intradaybill - Can't you see that I am trying to offer you a new economic paradigm?
