nice read, but alot of BS in there
if the numbers given in that article are correct, then that means the USD is already broken, and any attempt to fix it is a waste of time and effort
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Funny ET members can't agree on whether there will be inflation or deflation ...
- Thread starter allaboutmoney
- Start date
nice read, but alot of BS in there
if the numbers given in that article are correct, then that means the USD is already broken, and any attempt to fix it is a waste of time and effort
Quote from sobemark:
http://www.nakedcapitalism.com/2009/02/steve-keen-roving-cavaliers-of-credit.html
supports the deflation theory which i believe
very long ... but required reading ...
Interesting read but he doesn't really give a solution. Is the only solution to a deleveraging economy to let it run course in this view? Or, do you just bypass the deleveraging banks and produce new banks that will create new credit? The federal reserve might as well just open the discount window to everyone. Maybe that's what the stimulus plan is doing. Get a 1 trillion package and lever it up 10 times, could create 10 trillion of new credit in the system. That could be why the fed doesn't care what they spend it on. It's just the mere act of the helicopter drop of money that will create new credit since it is financed by credit in treasuries.
Quote from ammo:
printing money and dumping it in the system so far has only resulted in banks hoardig it and tighteing credit,i know i'm not that smart but it sure looks like we are making a deposit for work,where the contractor runs off with the cash and never does the work
maybe because printed money has to go through the banks to get to the people, but the banks are holding on to it
Quote from RiceRocket:
Debt-deflation theory of Irving Fisher:
Assuming, accordingly, that, at some point of time, a state of over-indebtedness exists, this will tend to lead to liquidation, through the alarm either of debtors or creditors or both. Then we may deduce the following chain of consequences in nine links: (1) Debt liquidation leads to distress selling and to (2) Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes (3) A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be (4) A still greater fall in the net worths of business, precipitating bankruptcies and (5) A like fall in profits, which in a âcapitalistic,â that is, a private-profit society, leads the concerns which are running at a loss to make (6) A reduction in output, in trade and in employment of labor. These losses, bankruptcies and unemployment, lead to (7) Pessimism and loss of confidence, which in turn leads to (8) Hoarding and slowing down still more the velocity of circulation. The above eight changes cause (9) Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.
This creates a cycle where the more debtors pay down debt, the more they owe.
In the end, the economy has been tipped too far and will not recover to equilibrium which will result in a collapse of all debt in the economy or universal bankruptcy of businesses and the government. The only way to stop this process is to re-introduce inflation, to stop the cycle.
The reason the great depression lasted so long with fits and starts lies in the fed taking away stimulus too soon. From May to September 1932, there was a recovery, due to the fed open market purchases. Due to many circumstances the efforts were not kept up, and the economy went back into the downward spiral.
This makes sense to me...
Except the part where "the more debtors pay down debt, the more they owe"
Can you explain what Irving meant?
Quote from dividend:
This makes sense to me...
Except the part where "the more debtors pay down debt, the more they owe"
Can you explain what Irving meant?
This is a quote from: The debt-deflation theory of great depressions.
"Each dollar of debt still unpaid becomes a bigger dollar, and if the over-indebtedness with which we started was great enough, the liquidation of debts cannot keep up with the fall of prices which it causes. In that case, the liquidation defeats itself. While it diminishes the number of dollars owed, it may not do so as fast as it increases the value of each dollar owed. Then, the very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate in swelling each dollar owed. Then we have not the great paradox which, I submit, is the chief secret of most, if not all, great depressions: The more the debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip. It is not tending to right itself, but is capsizing."
Basically in a deflationary environment real interest rates are rising because the principal stays the same, but the value of the asset falls. Even if interest rates come down, they may not fall as fast as the asset deflation.
You can see this happening in the housing market. More people are being pushed over the edge the longer the crisis lasts because their house price is falling, but their principal is still the same, in effect raising the real interest rate on their mortgage.
Reading what Irving Fisher said reminded me why I never enjoyed reading my economics textbook, or any textbook written by academics.
If Mr. X has a loan for a house at $50,000
and the value of that houee is now $25,000
I understand that if he liquidates this home, he now owes -$25,000.
If twenty of his neighbors also sell at the same time, I understand that the value of that house may drop to $10,000. Therefore if Mr. X sells his house, he owes -$40,000.
Therefore, the more others pay off their debt by selling their own assets, the more Mr. X will suffer when it is his turn.
I think this is what Irving Fisher meant when he said "The more the debtors pay, the more they owe."
He really should have said "the more that debtors sell, the more that other debtors will owe".
If Mr. X has a loan for a house at $50,000
and the value of that houee is now $25,000
I understand that if he liquidates this home, he now owes -$25,000.
If twenty of his neighbors also sell at the same time, I understand that the value of that house may drop to $10,000. Therefore if Mr. X sells his house, he owes -$40,000.
Therefore, the more others pay off their debt by selling their own assets, the more Mr. X will suffer when it is his turn.
I think this is what Irving Fisher meant when he said "The more the debtors pay, the more they owe."
He really should have said "the more that debtors sell, the more that other debtors will owe".