Actually SDR, I don’t make that argument at all. We assume on this blog that the free market influences will, mostly, win out. I do agree with this, the question is, what time frame is, “in the end.”
Our illustrious host is an inflationist as well. I believe whole heartedly that the govt will TRY to inflate our way out of this, thats what its doing right now by re-lowering interest rates quickly. I’m just pretty sure it won’t work.
So far the bond market hasn’t told Congress to go fuck itself, but its getting closer. You are right that there are large institutional interests that will do anything to keep the game going, but as the system is currently run, its all credit dependent. That being said, I believe the sh*tty asset crisis thread will give you insight into why I don’t think lowering of interest rates will help even short term.
I’m a deflationist because I think a sea change is occurring. I think there is a critical mass of people (albeit still small) that realizes that the inflation that has already occurred is hugely damaging. Those same people buy the way are the ones with the real hard money who will demand credible collateral to lend against.
What really bothers me about the inflationist argument is that it requires two parts, a willing borrower and a willing lender. There are lots of willing borrowers out there, they are being foreclosed on in droves. There just aren’t willing lenders who will take crap collateral for their money any more and its going to get worse.
The fed can lower rates to zero and the banks aren’t going to be willing to lend at the levels of the last few years.
Sure Congress can fire up the printing presses and start the bailouts in earnest, but would you lend the US govt money if it did that? Already interest in long dated treasuries has slacked off significantly because buyers of said debt realize they are getting corn holed by the borrower. The only path along which the inflationist argument works is the one in which we can say screw you to our creditors, domestic and foreign. Now thats a bet of a steak at Donovan’s I’d take (At least over the next couple of years.) No way will we do that, short of dropping the dollar and creating a new currency.
