[quote=Arraya]The system does not work well going in reverse. It’s kind of a grow or die thing. Like sharks have to keep moving to live, the monetary system as to keep growing. After decades of inflation-dependent financial ‘innovations’, balance sheets would implode with deflation. Trillions of virtual wealth gone in the blink of an eye. Banks still have only recognized a fraction of their loses with the first round of deflation. A second would do them in. We lost 90% of the banks in the US during the first depression. Also, a self-reinforcing collective psychology comes along with it. People pull their money out of markets, don’t take on debt, etc… -exacerbating the negative effects. They treat deflation like a national security issue for a reason, because it kind of is.
Not that we can perpetually grow our debt loads ad infinitum, obviously. Because, that, at some point, has an endgame as well. But, I think, TPTB may believe it so. It’s hard to tell the degrees of delusion, economic-anosognosia and professional lying within officialdom, but you can be sure, they are all present.[/quote]
To be sure, deflation would wipe out a lot of inflation-induced “wealth,” but is that the end of the world?
I would like to see the govt make direct loans during the deflationary period, and agreed with their moves to backstop higher FDIC limits on deposits, etc. Govt work programs would also be useful during the deflationary period.
IMHO, deflation can be painful, but quick (as long as there is no/little intervention), and the process of healing can beging quickly. Again, things would not go to zero, and people would not stop buying necessities just because the price of stocks or houses is going down. There are plenty of people who would love to jump in at lower prices, which would form a *natural* bottom, as opposed to this tenuous, artificial “bottom” the govt is trying to form.
We need to hit the reset button every once in awhile in order to maintain a healthy economy. It keeps things in check, too (fewer bubbles and misallocation of capital), as people won’t expect the govt to bail them out of their foolish “investments” every time they make a mistake.
