Sunday, May 24, 2009
Deflation
Daily Kos: Inflation From Money Creation Isn't A Problem
Another deflationary article based on collapse in velocity. There is an interesting suggestion at the bottom that bankers are unlikely to extend loans irrespective of how much cash is pumped in, because they could get caught with their pants down when ensuing attempts to drain liquidity back out force them to accept securities in exchange for cash, and suddenly they have a capital problem again. This does credit bankers with acting with much more foresight than usual though...However, it is a good point, if as a bank I have no money, lots of illiquid assets(! ahem), and the gov. ->temporarily
Posted by stillthinking @ 06:12 PM (1125 views) Add Comment
13 Comments
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1. stillthinking said...
...cut off mid-sentence... anyway,
and the gov. temporarily lends me cash in exchange for those assets, I might wonder how many 25 year mortgage loans I want to make, given that the ensuing (caused by me) inflation will cause the government to demand the cash back, leaving me lumped with the illiquid assets and a -worse- capital situation in both size -and- cost than before.
2. stillthinking said...
actually, that is exactly the same as the oft-repeated saying that the banks won't be able to lend again until they are really recapitalised.
but in a slightly different way.
3. enuii said...
Two things struck me today, we have an ageing population and most western countries are trying to inflate themselves out of their economic woes. These inflationary policies governments are not working because of this common approach and there is also downward pressure on prices and remuneration. If remuneration is falling those who have taken on large debts to purchase property/housing will be the big loosersas property deflates alongside per capita income yet their debts do not and may even increase as a proportion to their income.
With regard to our ageing population this will inevitably kill off a large proportion of the demand for new build housing as an increasing supply of quality pre-owned housing inexorably creeps onto the market. It could be argued that immigration could be used to fill that void but I suspect that the UK's huge debts and increasingly punative taxation regime will put paid to that especially as the value of sterling falls or if we enter the lowest common denominator currency know as the euro.
The key is that an ageing population with inadequate pension provision will be reluctant or unable to take on debt from printed money no matter how desperate our government is. Therefore deflation will be king and those who took out large mortgages on property that is falling in value will be burdened by them for a long in what is not a re-run of the 1970's.
Hope the above explains my thoughts as it is quite hard to explain my thinking in a few sentences.
4. crunchy said...
The deflation/inflation arguement still rages on. Banks don't have to lend money to cause inflation. If the extra margin is used by the banks to invest in the markets which wpould be safer than lending and the public follows we could easily have inflation in commodities sparking off interest rate rises.
It could be that simple, and that's my belief.
5. Davethe Rave said...
They will not, i reiterate WILL NOT raise interest rates for anything other than to combat wage inflation.
If you think they will raise interest rates to combat consumer cost inflation, well just look back at the last ten years?
6. bellwether said...
Crunchy the rise in commodity prices is not inflation and in fact increased commodity prices could make the UK a more deflationary environment as we will need to spend more money on imported commodities giving us less to put to productive use.
For there to be the inflation that we HPCrashers fear there needs to be wage inflation and that is not happening and is not going to happen, not in the private sector and not in the public sector which will need to be cut brutally sooner than later to avoid us being recognised as bankrupt.
I guess we could then turn inwards like say Zimababwe and have hyper inflation but then we would be such a weak economy that it wouldn't be worth holding the currency or land within the country ie if we get that kind of inflation the only answer would be to get out.
7. crunchy said...
5. bellwether Let me put a senario together,, Dollar falls/Gold rises(The Chinese are having to buy alot of gold which up untill now they have been able produce) oil rises food production falls for whatever reason.
Inflation can come about in many ways. Wage inflation is very unlikely. Foods for me could be the most likely cause because it is an essential and can be prone to sharp flucuations in price if the supply is hindered..
8. dbc reed said...
Velocity,from never being mentioned (people were/are fixated on the quantity of money)is fast becoming flavour of the month ..and about time too.
@bellwether calls wage inflation the inflation "we HPCrashers fear". Speak for yourself!.We need wage inflation when imported commodities go up.House price inflation can be curbed by a simple tax like the Schedule A or LVT ( a minor amendment to Council Tax).
The Tory Big Lie that the workers caused inflation in the 70's ( yeah right they control the money supply don't they?)is still embedded on this web-site.
N.B. Ludwig von Mises ,once quoted reverently on this site, called any and every increase in the money supply inflationary." Inflation means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check" So if you had somewhere with fantastic untapped resources,as in California in the 1850's, you could n't increase the money supply to realise it,by creating more credit.No wonders the workers made things too hot for him when he had his one government job in Dolfuss's governmnt in Austria in the Great Depression .
9. Chriswov said...
6 crunchy- you are right about food. At the moment relatively younger people spend shedloads of money on property(not always as a necessity) whilst established older people have this cash left over and this is the money that fuels food inflation when there are shortages.This is why govts subsidise food.As there is no tax on these plentiful supplies of food (money is the best fertiliser) this leaves plenty of money left for investment in property and everything else that attracts tax.
10. stillthinking said...
dbc reed, the fear is the -not happening- wage inflation, not the wage inflation itself. hence the reflation plan falls apart.
11. bellwether said...
DBC, commodities prices go up because your currency as a claim on resources is diminished, How would wage inflation which assumes futher currency devaluation work?
My reference to people on site fearing wage inflation is related to the fact that this would reduce mortgage debt and drive up prices making it better for people already owning property and worse for those who don't.
Personally I don't really have a preference I'm just interested in working out what is likely to happen so I can best react to that. Increasingly it looks like a debt deflation trap particularly in the UK
12. bellwether said...
Crunchy without wage inflation the environment will be deflationary and any way I look at it I can't see how wage inflation can take off. This would mean eg property prices and labour costs dropping (which will eventually makes us more competitive) alongside I suspect higher import costs, the currency of a weak country having less of a claim on the worlds resources.
13. crunchy said...
10. bellwether.. Lets see shall we. I have a good memory. I fear your view toward deflation is flawed but we could go on endlessly about the outcome.
I am firmly on the side of Stagflation/Inflation at the end of the day it's the person who is right that get's the financial benefit. Let's just wish each other well and keep our crystal balls well polished.