Saturday, Apr 28, 2007
Inflation v deflation:
marketoracle: Asset Price Deflation: The New Rules of Real Estate
Near the end of the article:
"Gold and silver bugs write in to say that the Fed will opt for hyperinflation over deflation, and that the precious metals will soar (and I've learned to never argue with metals bugs). I offer another opinion: That the United States Federal Reserve will elect to protect the dollar first (its primary legal responsibility), and take the same path it chose in the 1930's when it raised interest rates to prop up the dollar in the face of a deflationary depression. I also say that the real estate collapse and change in psychology will be too unwieldy to prevent a massive credit contraction, and that that contraction will render the Fed impotent."
Posted by sold 2 rent 1 @ 06:50 AM (324 views) Add Comment
2 Comments
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1. confused76 said...
A good article. My favourite quote below:
"Near the end of a major expansion, few creditors expect default, which is why they lend freely to weak borrowers. Few borrowers expect their fortunes to change, which is why they borrow freely. Deflation involves a substantial amount of involuntary debt liquidation because almost no one expects deflation before it starts...
The expansion of credit ends when the desire or ability to sustain the trend can no longer be maintained. As confidence and productivity decrease, the supply of credit contracts.
The psychological aspect of deflation and depression cannot be overstated. When the social mood trend changes from optimism to pessimism, creditors, debtors, producers and consumers change their primary orientation from expansion to conservation . As creditors become more conservative, they slow their lending. As debtors and potential debtors become more conservative, they borrow less or not at all. As producers become more conservative, they reduce expansion plans. As consumers become more conservative, they save more and spend less. These behaviors reduce the "velocity of money," i.e., the speed with which (money) circulates to make purchases, thus putting downside pressure on prices. These forces reverse the former trend... "
2. sold 2 rent 1 said...
the key point
"almost no one expects deflation before it starts"