Wednesday, September 22, 2010

Hang on you cant have deflation in a fiat system… er can you?

Deflation or Inflation: Will Helicopter Bernanke Come Flying to the Rescue?

"Countless people say that deflation is impossible because the Federal Reserve Bank can just print money to stave off deflation. If the Fed’s main jobs were simply establishing new checking accounts and grinding out banknotes, that’s what it might do. But in terms of volume, that has not been the Fed’s primary function, which for 89 years has been in fact to foster the expansion of credit. Printed fiat currency depends almost entirely upon the whims of the issuer, but credit is another matter entirely. "

Posted by techieman @ 09:44 AM (1088 views)
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5 thoughts on “Hang on you cant have deflation in a fiat system… er can you?

  • It’s all just pumping air into a punctured balloon or pushing on a piece of string.

    99.8% of all “money” is just numbers on bits of paper and 0.2% is actually coins and notes.

    If you were short of cash last time you popped out to buy fags and milk at your regular corner shop and scribbled out an IOU, that is to all intents and purposes “money” in exactly the same way as “buying” a house and signing a form telliing the lending bank that you will faithfully repay hundreds of pounds a month for the next twenty-five years is “money”

    As to the coins and notes, these are just small denomination, non-interesting bearing government bonds.

    So if they printed £10,000 in bank notes and gave them to everybody in the UK, two thirds of people (those with debts) would just use them to pay off their credit card debts or mortgages, and others would use them to pay off their next tax bill.

    So the credit card companies and banks would be sitting on huge great piles of paper (and their creditors in turn would indirectly own these pieces of paper, instead of indirectly owning bits of paper called “mortgages”), and real tax revenues would fall (so future government debts would go up – people would just give back to the government what the government had previously helicoptered).

    Real credit creation is done by commercial banks, but they in turn would use all these bits of paper – but not for lending to people (who are mad keen to pay off their debts – see previous stpe) but to repay their own creditors.

    And so on.

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  • “in exactly the same way as “buying” a house and signing a form telliing the lending bank that you will faithfully repay hundreds of pounds a month for the next twenty-five years is “money”

    Mark,

    Only if the IOU was made directly between the buyer and seller of the house. But the seller has his/her account credited with money which can be withdrawn in physical cash or converted to gold.

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  • Estrader, you might be the guru on speculating in shares and so on, but think about the basic bookkeeping:

    Factual situation: I sell my house for £400k.

    I could accept a bit of paper from the purchaser whereby he promises to repay me the sum over 25 years with interest. But that’s a bit risky for me personally.

    So what happens is, the purchaser signs a bit a of paper telling the bank he will repay £400,000 with interest over 25 years. The bank in turn gives me a bit of paper telling me it owes me £400,000 (on which is will pay me interest).

    The bank is just a middleman between the two of us. The purchaser has the reassurance that the loan won’t be called in early, and I have the reassurance that even if my purchaser defaults, that default will be averaged out with all other people who have borrowed from that bank.

    And of course, I have changed a long term asset to a short term one, as I could, in theory, withdraw all my money on day two and spend it on day three, but on day four, the Ferrari dealer will just deposit that same £400,000 back with the bank.

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  • Hang on you cant have deflation in a fiat system…

    That’s right; but you may get it after currency collapse and that seems to be where we are going.

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  • general congreve says:

    Deflation is happening right now, if the currency you hold is gold that is.

    £700/ounce Jan ’10
    £827/ounce Sept ’10

    = 18% deflation on average in all goods and services this year so far, if paid for in gold (obviously you sell it and convert it to toilet paper first).

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