Weakness of Deflationist Arguments?

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SteveR's picture
SteveR
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Weakness of Deflationist Arguments?

I have a lot of respect for Mish Shedlock.  He thinks inflation is not even on the radar, because:

1. Consumer debt is destructing, reducing the money supply.

2. Due to unemployment, demand for goods and services is low and will continue to be so.

3. The Fed can print and print, but banks won't lend it.

4. Etc.

So he asks, "Do you see inflation anywhere in that?  I don't."

But...

Isn't the real threat of inflation in the monetization of gov't debt?  Regardless of what the consumer does, can't the Treasury issue Treasuries which the Fed buys until the cows come home?  This can all happen independent of the entire private sector, and regardless of whether the banks want to lend, regardless of whether foreigners want to buy Treasuries - and it's highly inflationary.  Isn't that the true danger of inflation?

gyrogearloose's picture
gyrogearloose
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Posts: 538
Re: Weakness of Deflationist Arguments?

Somewhere Chris M posted graphs showing

1:- money creation and inflation over time

2:-government deficit spending and inflation over time.

Visually graph 1 had no clear link between them ( lines did not track same pattern )

Visually graph 2 looked like the two went in lockstep, with a slight lag.

Implication, Government deficit spending is an inflation causer, printing money isn'.

However, when the government is in deficit spending, where does it get money from?

At first it borrows, and if it can't borrow it prints....... ( all in crude terms... )

 

Cheers Hamish

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Davos
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Re: Weakness of Deflationist Arguments?
SteveR wrote:

I have a lot of respect for Mish Shedlock. 

Isn't the real threat of inflation in the monetization of gov't debt?  Regardless of what the consumer does, can't the Treasury issue Treasuries which the Fed buys until the cows come home?  This can all happen independent of the entire private sector, and regardless of whether the banks want to lend, regardless of whether foreigners want to buy Treasuries - and it's highly inflationary.  Isn't that the true danger of inflation?

I have a lot of admiration and respect for Mish.

And I totally agree with the above. There is all this talk about velocity but we take in 2 trillion and blow 4 trillion and no longer can we borrow the difference, Bernanke is counterfeiting it now. That money IS out there!

I'm not sure Mish is looking at the entire horizon, just the 120 degrees in front of him. It's always the other 240 degrees that bight me.

Take care

scepticus's picture
scepticus
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Posts: 129
Re: Weakness of Deflationist Arguments?

Bank reserves (that is the hockey stick in M0)  are increasing because:

1) gov debt is getting monetised. Actually the debt being monetised is private sector debt that the government has been taking on to bail out the private sector.

2) loans are being repaid at a rate faster than they are leant out again, by quite some margin. When a loan is repaid, the principal is not destroyed, it is simply credited to the banks reserve account at the central bank.

3) the central banks in most countries including the US are now paying interest on reserves.

Now, the question is what proportion of the increase is due to each factor above. When one knows the answer to this question, one can get a view as to the overall balance of power between inflation and deflation. Also bear in mind, as Mish points out, that those excess reserves are mostly going be eaten up by loan losses on RE and CRE that are still coming down the pike.

 

 

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Doug
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Re: Weakness of Deflationist Arguments?

scepticus

Quote:

Also bear in mind, as Mish points out, that those exces reserves are mostly going be eaten up by loan losses on RE and CRE that are still coming down the pike.

I think this is the key.  The notion that deficit spending is inflationary presupposes that that money is actually in circulation.  As I understand it, most of that freshly printed money is going to bail outs that just destroy private debt.  It is, in effect, zeroed out.  At least that's how I currently conceptualize it.  I think this discussion is important.  All feedback welcome.

SteveR's picture
SteveR
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Joined: Dec 4 2008
Posts: 71
Re: Weakness of Deflationist Arguments?

Here's what I'm saying: forget all the bank stuff.  Can we have inflation or even hyperinflation solely from the monetization of debt?  I think the answer is yes.  It could go like this:

1. Foreigners don' t keep up with our borrowing - i.e. they don't buy all the Treasuries that are offered.

2. The Fed begins to buy more and more Treasuries.

3. As this continues, confidence in the dollar drops, causing it to lose value.

4. The Fed buys even more Treasuries, to compensate for the devalued dollars.

5. As tax revenues decrease and interest payments increase, the government gets further and further behind and issues more and more debt.

6. Repeat and rinse.

Can't this lead to massive inflation, whether or not the consumer is spending and whether or not banks are lending?

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