The Deflation Myth

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investorzzo's picture
investorzzo
Status: Diamond Member (Offline)
Joined: Nov 7 2008
Posts: 1182
The Deflation Myth

So I’ll be crystal clear. All of this talk of current deflation
is bologna. When you see people writing about deflation, they’re basing
their conclusions on unrevealing data. Those who speak of deflation are
only defining what the banks are doing. The banks are holding their cash not because they have to, but because they can.
The big banks have been given a blank check from the Treasury so they
can make as many loans as they want. The problem is that they want to
avoid nationalization. The more money they “borrow” from the Fed and
U.S. Treasury, the higher the chance they will be nationalized. This
explains why there is deflation, as given ONLY by the money supply
data. In short, it’s not a real deflation. Looking at the money supply
(even if we could trust the numbers) doesn’t tell us much about the
current levels of inflation or deflation because it’s a lagging
indicator. The best way to determine the level of deflation or
inflation is to look at the relative price change of a basket of good,
preferably basic necessities.

http://www.financialsense.com/fsu/editorials/stathis/2009/0325.html

kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Re: The Deflation Myth
investorzzo wrote:

So I’ll be crystal clear. All of this talk of current deflation
is bologna. When you see people writing about deflation, they’re basing
their conclusions on unrevealing data. Those who speak of deflation are
only defining what the banks are doing. The banks are holding their cash not because they have to, but because they can.
The big banks have been given a blank check from the Treasury so they
can make as many loans as they want. The problem is that they want to
avoid nationalization. The more money they “borrow” from the Fed and
U.S. Treasury, the higher the chance they will be nationalized. This
explains why there is deflation, as given ONLY by the money supply
data. In short, it’s not a real deflation. Looking at the money supply
(even if we could trust the numbers) doesn’t tell us much about the
current levels of inflation or deflation because it’s a lagging
indicator. The best way to determine the level of deflation or
inflation is to look at the relative price change of a basket of good,
preferably basic necessities.

http://www.financialsense.com/fsu/editorials/stathis/2009/0325.html

The loss of jobs in our country is a direct result of lost revenues, increasing costs, insolvency, and bankruptcy. The lost revenues are a direct result of a shrinking consumer market. The reduced consumption is a direct result of people hesitant to use up their savings. People still use credit cards, but they are more reluctant to accumulate debt on them than before. The prior consumer spending levels driven by debt accumulation exceeds the present ones driven by savings depletion. However, those same spending levels are the reason why a lot of businesses and individuals became insolvent/bankrupt. The way they paid their spending was through debt, which over a number of years requires a flow of money away from creditors to lenders. The lenders are the ones now waiting for a return on their "toxic assets".

When you pay to the banks interest and principal, the money you had deposited in a bank, by which you paid your debt, remains in the banking system. The notes recieveable (a kind of asset) of the banking system will fall when people pay their debts more responsibly, however, payments to the bank for loans is neutral to the cash assets of the whole banking system (not the individual company banks) provided that you paid with money already in that system. This means that the assets of the banking system fall when people pay for their loans (i.e. cash accounted for does not change yet recievables fall).

Similarly, the assets of the overall banking system rise when they give out a loan because notes recievable will increase without changing the amount of cash in the banking system (provided that cash is not stored under a mattress or what have you).

So in a perverse way, the assets of the banking system (not individual company banks) increase by the act of lending, and by paying for the borrowed money responsibly, creditors reduce the assets of the banking system (same cash, less recievable), hurting the equity of banks (that means investors of the banking system lose). Does it suprise you then that when lending was booming in the 90s that profits from banks increased? It may or may not suprise you, but it suprises me even more to conclude that paying down the notes payable to a bank reduces equity of the banking system - ridiculous as that sounds.... Maybe that is why many executives in the bank system "rely" on the Fed for access to more liquidity. Does anyone still wonder then why we have "greedy bankers" in the first place? I will be the first to say that it is not their fault that they are like that. The inequities (and insatiable greed) are created by ill-concieved "accounting standards" currently in use in the marketplace.

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