Monday, October 12, 2009

Inflation/Deflation duopoly

The Sound of One Hand Clapping

Article with great comments about the conflict inherent with real economy deflation, but financial market inflation. Asks the question; if a central bank purchases bad debts but never clears them, to what extent can the bad debts be said to exist and to what extent do they contribute to a deflationary destruction of credit? Mish discusses this article at http://globaleconomicanalysis.blogspot.com/2009/10/one-hand-clapping-theory-analyzed.html .

Posted by stillthinking @ 11:13 AM (876 views)
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3 thoughts on “Inflation/Deflation duopoly

  • stillthinking says:

    I think that given p/e for stocks is currently at a really high level ~25, similar to the tech. bubble, there is a lot of truth in the simultaneous inflation/deflation argument.
    But particularly commodities are pinned against the real economy, so how they can be inflated without a subsequent collapse I don’t see. Looking at when oil jumped up eventually the inflated price cut away real demand, and ultimately prices are going to rely on real demand so inflated financial markets are just traders playing a game of chicken with each other.

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  • mark wadsworth says:

    “if a central bank purchases bad debts but never clears them, to what extent can the bad debts be said to exist and to what extent do they contribute to a deflationary destruction of credit?”

    Actually that increases overall indebtedness. Assume borrower is in Nequity of £100,000 and can’t possibly repay it out of income. In practice, that debt no longer exists. The borrower is released (via bankruptcy) and the bank writes off £100,000 debt. If the government buys up the debt for face value £100,000, then the taxpayers’ total liability to repay is £100,000 (they stand in the shoes of the insolvent borrower) and the bank now has £100,000 in cash (guaranteed by the government i.e. the taxpayer) where before it had nothing.

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  • Off topic:

    Crunchy, missed Friday’s post, “this is a one off kid” – got a link?

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