Who is afraid of the big, bad wolf of deflation? Not I – nor are people who pay attention worried about deflation…though there is a worry about what the pinheads in government and high finance might do about it:
Deflation is not a threat because deflation is here by any practical measurement. Deflation is also here by impractical measurements such as falling prices. See Humpty Dumpty On Inflation and Daniel Amerman vs. Mish: Reflections on the Great Inflation/Deflation Debate for a further discussion of a practical definition of deflation, a contraction of money supply and credit marked to market, not falling prices.
Moreover, deflation is not a threat in a second sense. Deflation is needed to purge the excesses of the last credit cycle. Attempts to defeat deflation by force will only prolong the agony while accumulating government debt, just as happened in Japan’s two lost decades.
Finally, deflation is not a threat in a third sense. Falling prices are a natural state of affairs because of rising productivity over time. Inflation is a direct (and unnatural) state of affairs caused by the Fed and fractional reserve lending…
…The Real Threat
We are already in uncharted territory, and the risk is what the Fed, Congress, the Treasury department, the Administration, and central bankers globally do to prevent something that needs to happen: the liquidation of malinvestments and debt.
Thus the “real threat” (and risk) is not deflation, but rather the foolish attempts by Keynesian clowns to circumvent what needs happen.
Japan is proof that such efforts are futile. Note that Japan is once again back in deflation, and all the government has to show for its efforts is debt equaling 150% of GDP. Falling prices, lower wages, lower asset prices, and especially debt liquidation are not to be feared, they are a necessary part of the healing process, lest the country stagnate for years.
We borrowed ourselves in to oblivion – over a 75 year period, though at times real wealth creation was enough for us to carry the debt, for a while. But the debt is now overwhelming – the $12 trillion of Uncle Sam’s debt is just a fraction of the debt we’ve built up. Estimates of the total amount owed – including private debt and the un-funded mandates of SS and Medicare/Medicaid – are in ranges of $70 to $100 trillion dollars. The bottom is out of the tub – we can’t borrow enough, now, to fuel enough growth to even service the debt, let alone pay it off…only a massive de-leveraging of the economy will do. In other words, we’re going to have to go through a sort of national bankruptcy.
A lot of banks are going to have to fail; a lot of assumptions about government spending will have to be changed; the manner in which we invest money will have to be corrected; our international trade relations will have to be adjusted to be morally sustainable…and we, the people, are going to have to admit the fact that the wealth we thought we had never really existed…it was all just paper, backed by nothing…we’ll have to get back to work, creating wealth and hunkering down while we do, because we still have to pay off our bond holders (which, fortunately, include a very large number of Joe Average Americans…especially of late, when a lot of us have bought bonds like no tomorrow – yours, truly, included – the bad news is that we’re going to have to pay off the Chinese, too…).
Balanced budgets, low taxes, no new indebtedness save for house purchases (and then only with good credit qualifications; and restrictions on the way home loans can be used so that our homes no longer become speculative chips in a game of financial roulette – no more, to put it bluntly, thinking of our houses as piggy banks to be drawn on for consumption). We’ll also have to start making, mining and growing much more of our own stuff – keep the money in the family, as it were. We can do this – if we genuinely work together…unfortunately, we’ve got a government which continues to have faith in fiat money, usury and class warfare…we’ll have to get rid of that, in the by and by.
Blogs For Victory 