Sunday, Feb 08, 2009
Great explanation of why the pessimists are right
Naked Capitalism blog: Why Ben's helicopter will fail
The article this blog entry references is by a reputable source - Steve Keen - who writes very clear explanations of flaws in conventional economic models. This article has (finally) made me come off the fence as to whether inflation or deflation is coming our way - he explains that it is the latter and that only truly Zimbabwe-style policies could possibly create the former. The piece explains why we're not, in fact, in a world of true Fractional Reserve Banking but that the credit creation tail now wags the FRB dog. We are doomed to repeat the great depression as a result. I am glad he refuses to indulge any of the stupid conspiracy theorists in explaining bankers' behaviour - they simply have incentives to lend lend lend in the current system and we'll all pay for that.
5 Comments
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1. denzil said...
Deflation has looked the most likely direction for sometime..
Could quantitative easing be used to repel deflation and if so is this the next piece in the puzzle. If enough money is created this has the potential to stop falling house prices in their tracks and potentially lift Labour in the polls.
Part of the problem is that the huge amounts of money that were believed to be in circulations was not actually real. Banks were lending more money of the back of imaginary money. The result is that we still have very high asset values because the banks imagined the cupboards were full of money when in fact it was a mirage built on the most shoddy accounting practices possible. The position we now find ourselves in is potentially a deflationary spiral because the massive amounts of money used to create asset bubbles is not real, there is a huge deficit. The money we imagined was there is not. Why not used quantitative easing to plug that deficit? The result is that we inflate ourselves out of a recession and also away from deflation.
Note: I don't advocate QE but I think it will be a tool/weapon that Labour will brandish before too long.
2. amjidk said...
very interesting read..
3. amjidk said...
one of my favourite comments on the article
"
The Credit-Money explanation also suggests that the current scope of government bailouts is inadequate to stop the economy contraction. As this contraction progresses, the trusted agents will suffer further losses, putting pressure on government to undertake ever more heroic support measures. Undoubtedly, the government will respond to whatever degree is needed to support its patrons. The danger is that at some moment, clarity may set in and the population at large may realize that neither the banks or the government reman trustworthy. At that point, both financial and political events will tend to veer off established paths into unforeseeable directions. Yikes!"
sit back and enjoy the ride..
4. stillthinking said...
very good article. basically balance sheet banking, which is why "capital" and "fractional reserves" as mentioned in the media are total rubbish.
5. Damiedownunder said...
I have been reading Steve Keen's blog for about 1 year at http://www.debtdeflation.com/blogs/. His analysis of the explosion in Australian and US debt appears to be well structured and thought through, and his economic models do seem to produce outcomes that are in the ball park of what is currently being experienced in the US, UK etc in terms of asset prices. In Australia, we are perhaps a little behind the curve in terms of house price deflation although we have experienced a larger stock market reversal than the US or UK.