[Rich Toscano]

Thanks Arraya. I agree with much of what you say. Some of it comes down to speculation; eg you think that there is a line the Fed won’t cross, whereas I speculate that the Fed WOULD cross that line if the alternative were a multi-year deflationary spiral. But I can respect that people will naturally have different opinions of how far the Fed and govt will push things… I just happen to be on the side of the spectrum that thinks that they will fight deflation at all costs by any means necessary.

One thing I will note though is that while wages are down, if you include government handouts in the picture, personal income has actually grown all along. Consider this chart from the excellent clearonmoney.com site:

Might the government handouts slow down? Sure, maybe (though I personally speculate that they will not do so as long as there is a perceived deflation threat). And are people less willing to spend that money? Yes, for as long as they consider cash a safe haven. So I’m not saying this is the only factor, by any means. However, it does demonstrate the reality that stimulative government policy can, and has succeeded in, growing personal incomes and putting money into people’s hands.

That said, I agree that there are deflationary forces at work right now and the timing of outcomes is as inscrutable as ever.

I will state though that at this point, I think the most likely “inciting incident” for turning things overtly inflationary will be a US govt funding crisis in which our foreign debtors finally realize they’re not geting paid back in real terms. Of course, that is a speculation as well.

[Rich Toscano]

Thanks Arraya. I agree with much of what you say. Some of it comes down to speculation; eg you think that there is a line the Fed won’t cross, whereas I speculate that the Fed WOULD cross that line if the alternative were a multi-year deflationary spiral. But I can respect that people will naturally have different opinions of how far the Fed and govt will push things… I just happen to be on the side of the spectrum that thinks that they will fight deflation at all costs by any means necessary.

One thing I will note though is that while wages are down, if you include government handouts in the picture, personal income has actually grown all along. Consider this chart from the excellent clearonmoney.com site:

Might the government handouts slow down? Sure, maybe (though I personally speculate that they will not do so as long as there is a perceived deflation threat). And are people less willing to spend that money? Yes, for as long as they consider cash a safe haven. So I’m not saying this is the only factor, by any means. However, it does demonstrate the reality that stimulative government policy can, and has succeeded in, growing personal incomes and putting money into people’s hands.

That said, I agree that there are deflationary forces at work right now and the timing of outcomes is as inscrutable as ever.

I will state though that at this point, I think the most likely “inciting incident” for turning things overtly inflationary will be a US govt funding crisis in which our foreign debtors finally realize they’re not geting paid back in real terms. Of course, that is a speculation as well.

[Rich Toscano]

Thanks Arraya. I agree with much of what you say. Some of it comes down to speculation; eg you think that there is a line the Fed won’t cross, whereas I speculate that the Fed WOULD cross that line if the alternative were a multi-year deflationary spiral. But I can respect that people will naturally have different opinions of how far the Fed and govt will push things… I just happen to be on the side of the spectrum that thinks that they will fight deflation at all costs by any means necessary.

One thing I will note though is that while wages are down, if you include government handouts in the picture, personal income has actually grown all along. Consider this chart from the excellent clearonmoney.com site:

Might the government handouts slow down? Sure, maybe (though I personally speculate that they will not do so as long as there is a perceived deflation threat). And are people less willing to spend that money? Yes, for as long as they consider cash a safe haven. So I’m not saying this is the only factor, by any means. However, it does demonstrate the reality that stimulative government policy can, and has succeeded in, growing personal incomes and putting money into people’s hands.

That said, I agree that there are deflationary forces at work right now and the timing of outcomes is as inscrutable as ever.

I will state though that at this point, I think the most likely “inciting incident” for turning things overtly inflationary will be a US govt funding crisis in which our foreign debtors finally realize they’re not geting paid back in real terms. Of course, that is a speculation as well.

[Rich Toscano]

Thanks Arraya. I agree with much of what you say. Some of it comes down to speculation; eg you think that there is a line the Fed won’t cross, whereas I speculate that the Fed WOULD cross that line if the alternative were a multi-year deflationary spiral. But I can respect that people will naturally have different opinions of how far the Fed and govt will push things… I just happen to be on the side of the spectrum that thinks that they will fight deflation at all costs by any means necessary.

One thing I will note though is that while wages are down, if you include government handouts in the picture, personal income has actually grown all along. Consider this chart from the excellent clearonmoney.com site:

Might the government handouts slow down? Sure, maybe (though I personally speculate that they will not do so as long as there is a perceived deflation threat). And are people less willing to spend that money? Yes, for as long as they consider cash a safe haven. So I’m not saying this is the only factor, by any means. However, it does demonstrate the reality that stimulative government policy can, and has succeeded in, growing personal incomes and putting money into people’s hands.

That said, I agree that there are deflationary forces at work right now and the timing of outcomes is as inscrutable as ever.

I will state though that at this point, I think the most likely “inciting incident” for turning things overtly inflationary will be a US govt funding crisis in which our foreign debtors finally realize they’re not geting paid back in real terms. Of course, that is a speculation as well.

[Rich Toscano]

I’m with DWCAP. Consumer confidence tends to just follow whatever the stock market is doing. Here’s a good illustration: http://www.icmarc.org/ImageCache/rc/content/marketview/chart/2010/20100305consumerconfidencevsstocks_2ectt/v1/image_5b_40id_3d_22chart_22_5d/1/20100305consumeconfidence.gif

[Rich Toscano]

I’m with DWCAP. Consumer confidence tends to just follow whatever the stock market is doing. Here’s a good illustration: http://www.icmarc.org/ImageCache/rc/content/marketview/chart/2010/20100305consumerconfidencevsstocks_2ectt/v1/image_5b_40id_3d_22chart_22_5d/1/20100305consumeconfidence.gif

[Rich Toscano]

I’m with DWCAP. Consumer confidence tends to just follow whatever the stock market is doing. Here’s a good illustration: http://www.icmarc.org/ImageCache/rc/content/marketview/chart/2010/20100305consumerconfidencevsstocks_2ectt/v1/image_5b_40id_3d_22chart_22_5d/1/20100305consumeconfidence.gif

[Rich Toscano]

I’m with DWCAP. Consumer confidence tends to just follow whatever the stock market is doing. Here’s a good illustration: http://www.icmarc.org/ImageCache/rc/content/marketview/chart/2010/20100305consumerconfidencevsstocks_2ectt/v1/image_5b_40id_3d_22chart_22_5d/1/20100305consumeconfidence.gif

[Rich Toscano]

I’m with DWCAP. Consumer confidence tends to just follow whatever the stock market is doing. Here’s a good illustration: http://www.icmarc.org/ImageCache/rc/content/marketview/chart/2010/20100305consumerconfidencevsstocks_2ectt/v1/image_5b_40id_3d_22chart_22_5d/1/20100305consumeconfidence.gif

[Rich Toscano]

[quote=Arraya]Consumer credit has contracted 15 of the last 16 months. Bernake was just out telling lenders to make it easier for small businesses to get credit.

Credit is a money “equivalent” but not measured in M2. Some say credit is the vast majority of “money” supply. Depending on definitions.

Here’s Mish, from 2008;

”Although Japan was rapidly printing money, a destruction of credit was happening at a far greater pace. There was an overall contraction of credit in Japan for close to 5 consecutive years. Property values plunged for 18 consecutive years. The stock market plunged from 40,000 to 7,000. Cash was hoarded and the velocity of money collapsed.

These are classic symptoms of deflation that a proper definition incorporating both money supply and credit would readily catch. Those looking at consumer prices or monetary injections by the bank of Japan were far off the mark. Yes, there was deflation in Japan. Furthermore, if deflation can happen in Japan, then there is no reason why it cannot happen in the US as well.”[/quote]

Credit is not the same thing as money and the two cannot be “summed” as if they are the same thing. Quoting once again from the article I ALREADY LINKED TO in this thread:

Some people argue that the “credit deflation” — the reduction in lending and borrowing — will overwhelm any money-printing the government can undertake.

We’ll begin by once again pointing out that the government can create as much new money as is needed to stoke inflation.

Additionally, this argument blurs the distinction between money and credit. Credit and money are not the same thing. Imagine a desert island where the money supply consists of a single $10 bill. There is, to put it another way, $10 worth of ability to purchase. The $10 belongs to Alice, but she lends it to Bob. Bob turns around and lends it to Charlie, who lends it to Dave. There is now $30 worth of credit in the economy, consisting of three separate $10 loans. But there is still only that one $10 bill. All the lending has moved the $10 around, but it hasn’t created any new ability to purchase.

Outside the fractional reserve banking system, lending does not create purchasing power. For every borrower who gains purchasing ability, as in our example on the island, there is a lender who had to forfeit that purchasing ability.

It’s different for banks. They can actually lend money into existence — but in so doing, they are creating credit and money at the same time. The money they create will become part of the money supply.

So it’s really money, not credit, that is the proper measure of society’s aggregate ability to purchase.

With that said, there are some ways in which a credit contraction can put downward pressure on both prices and new money creation.
Credit doesn’t increase aggregate purchasing power, unless it also leads to the creation of new money, but it does tend to move that purchasing power from “strong hands” to “weak hands.” The money is being lent by someone who doesn’t want to spend it to someone who does. So credit is an accelerant to monetary velocity, and a credit contraction can accordingly induce a price-deflationary effect.

Reduced willingness to lend on the part of fractional reserve bank could also slow the rate at which new money is lent into existence. Money supply could theoretically deflate if old loans were called in and not replaced by new money growth — but the money supply charts above show that this is clearly not happening.

So as with asset price declines, credit contractions exert price-deflationary pressures via decreases in velocity and banking-sector money creation. But while credit contractions have deflationary elements, it is simply not valid to compare the amount of money being created by the government to the amount of credit being destroyed.

As far as Japan, that’s a strawman because they just didn’t print that much money. I’ve documented before that their money creation was extremely muted throughout the first decade of their deflation, and stark contrast to our own.

Sorry for the impatient tone on this guys, I just get frustrated with the constant going in circles on this topic. I wrote the above articles a year and a half ago, and have revisited the topic many times since, and yet people still keep trying to draw me into the same arguments I have addressed many times. (It adds to my frustration that all I did was correct a simple misapprehension about money supply and that once again launched all the same old tired questions).

If anyone wants to discuss the inflation/deflation topic with me, I would request that you first read both articles linked to in this post:

No Deflationary Spiral Forthcoming

…as well as all the comments in the post, as I think the vast majority of the topic has already been covered in the articles or those comments.

Thanks.

[Rich Toscano]

[quote=Arraya]Consumer credit has contracted 15 of the last 16 months. Bernake was just out telling lenders to make it easier for small businesses to get credit.

Credit is a money “equivalent” but not measured in M2. Some say credit is the vast majority of “money” supply. Depending on definitions.

Here’s Mish, from 2008;

”Although Japan was rapidly printing money, a destruction of credit was happening at a far greater pace. There was an overall contraction of credit in Japan for close to 5 consecutive years. Property values plunged for 18 consecutive years. The stock market plunged from 40,000 to 7,000. Cash was hoarded and the velocity of money collapsed.

These are classic symptoms of deflation that a proper definition incorporating both money supply and credit would readily catch. Those looking at consumer prices or monetary injections by the bank of Japan were far off the mark. Yes, there was deflation in Japan. Furthermore, if deflation can happen in Japan, then there is no reason why it cannot happen in the US as well.”[/quote]

Credit is not the same thing as money and the two cannot be “summed” as if they are the same thing. Quoting once again from the article I ALREADY LINKED TO in this thread:

Some people argue that the “credit deflation” — the reduction in lending and borrowing — will overwhelm any money-printing the government can undertake.

We’ll begin by once again pointing out that the government can create as much new money as is needed to stoke inflation.

Additionally, this argument blurs the distinction between money and credit. Credit and money are not the same thing. Imagine a desert island where the money supply consists of a single $10 bill. There is, to put it another way, $10 worth of ability to purchase. The $10 belongs to Alice, but she lends it to Bob. Bob turns around and lends it to Charlie, who lends it to Dave. There is now $30 worth of credit in the economy, consisting of three separate $10 loans. But there is still only that one $10 bill. All the lending has moved the $10 around, but it hasn’t created any new ability to purchase.

Outside the fractional reserve banking system, lending does not create purchasing power. For every borrower who gains purchasing ability, as in our example on the island, there is a lender who had to forfeit that purchasing ability.

It’s different for banks. They can actually lend money into existence — but in so doing, they are creating credit and money at the same time. The money they create will become part of the money supply.

So it’s really money, not credit, that is the proper measure of society’s aggregate ability to purchase.

With that said, there are some ways in which a credit contraction can put downward pressure on both prices and new money creation.
Credit doesn’t increase aggregate purchasing power, unless it also leads to the creation of new money, but it does tend to move that purchasing power from “strong hands” to “weak hands.” The money is being lent by someone who doesn’t want to spend it to someone who does. So credit is an accelerant to monetary velocity, and a credit contraction can accordingly induce a price-deflationary effect.

Reduced willingness to lend on the part of fractional reserve bank could also slow the rate at which new money is lent into existence. Money supply could theoretically deflate if old loans were called in and not replaced by new money growth — but the money supply charts above show that this is clearly not happening.

So as with asset price declines, credit contractions exert price-deflationary pressures via decreases in velocity and banking-sector money creation. But while credit contractions have deflationary elements, it is simply not valid to compare the amount of money being created by the government to the amount of credit being destroyed.

As far as Japan, that’s a strawman because they just didn’t print that much money. I’ve documented before that their money creation was extremely muted throughout the first decade of their deflation, and stark contrast to our own.

Sorry for the impatient tone on this guys, I just get frustrated with the constant going in circles on this topic. I wrote the above articles a year and a half ago, and have revisited the topic many times since, and yet people still keep trying to draw me into the same arguments I have addressed many times. (It adds to my frustration that all I did was correct a simple misapprehension about money supply and that once again launched all the same old tired questions).

If anyone wants to discuss the inflation/deflation topic with me, I would request that you first read both articles linked to in this post:

No Deflationary Spiral Forthcoming

…as well as all the comments in the post, as I think the vast majority of the topic has already been covered in the articles or those comments.

Thanks.

[Rich Toscano]

[quote=Arraya]Consumer credit has contracted 15 of the last 16 months. Bernake was just out telling lenders to make it easier for small businesses to get credit.

Credit is a money “equivalent” but not measured in M2. Some say credit is the vast majority of “money” supply. Depending on definitions.

Here’s Mish, from 2008;

”Although Japan was rapidly printing money, a destruction of credit was happening at a far greater pace. There was an overall contraction of credit in Japan for close to 5 consecutive years. Property values plunged for 18 consecutive years. The stock market plunged from 40,000 to 7,000. Cash was hoarded and the velocity of money collapsed.

These are classic symptoms of deflation that a proper definition incorporating both money supply and credit would readily catch. Those looking at consumer prices or monetary injections by the bank of Japan were far off the mark. Yes, there was deflation in Japan. Furthermore, if deflation can happen in Japan, then there is no reason why it cannot happen in the US as well.”[/quote]

Credit is not the same thing as money and the two cannot be “summed” as if they are the same thing. Quoting once again from the article I ALREADY LINKED TO in this thread:

Some people argue that the “credit deflation” — the reduction in lending and borrowing — will overwhelm any money-printing the government can undertake.

We’ll begin by once again pointing out that the government can create as much new money as is needed to stoke inflation.

Additionally, this argument blurs the distinction between money and credit. Credit and money are not the same thing. Imagine a desert island where the money supply consists of a single $10 bill. There is, to put it another way, $10 worth of ability to purchase. The $10 belongs to Alice, but she lends it to Bob. Bob turns around and lends it to Charlie, who lends it to Dave. There is now $30 worth of credit in the economy, consisting of three separate $10 loans. But there is still only that one $10 bill. All the lending has moved the $10 around, but it hasn’t created any new ability to purchase.

Outside the fractional reserve banking system, lending does not create purchasing power. For every borrower who gains purchasing ability, as in our example on the island, there is a lender who had to forfeit that purchasing ability.

It’s different for banks. They can actually lend money into existence — but in so doing, they are creating credit and money at the same time. The money they create will become part of the money supply.

So it’s really money, not credit, that is the proper measure of society’s aggregate ability to purchase.

With that said, there are some ways in which a credit contraction can put downward pressure on both prices and new money creation.
Credit doesn’t increase aggregate purchasing power, unless it also leads to the creation of new money, but it does tend to move that purchasing power from “strong hands” to “weak hands.” The money is being lent by someone who doesn’t want to spend it to someone who does. So credit is an accelerant to monetary velocity, and a credit contraction can accordingly induce a price-deflationary effect.

Reduced willingness to lend on the part of fractional reserve bank could also slow the rate at which new money is lent into existence. Money supply could theoretically deflate if old loans were called in and not replaced by new money growth — but the money supply charts above show that this is clearly not happening.

So as with asset price declines, credit contractions exert price-deflationary pressures via decreases in velocity and banking-sector money creation. But while credit contractions have deflationary elements, it is simply not valid to compare the amount of money being created by the government to the amount of credit being destroyed.

As far as Japan, that’s a strawman because they just didn’t print that much money. I’ve documented before that their money creation was extremely muted throughout the first decade of their deflation, and stark contrast to our own.

Sorry for the impatient tone on this guys, I just get frustrated with the constant going in circles on this topic. I wrote the above articles a year and a half ago, and have revisited the topic many times since, and yet people still keep trying to draw me into the same arguments I have addressed many times. (It adds to my frustration that all I did was correct a simple misapprehension about money supply and that once again launched all the same old tired questions).

If anyone wants to discuss the inflation/deflation topic with me, I would request that you first read both articles linked to in this post:

No Deflationary Spiral Forthcoming

…as well as all the comments in the post, as I think the vast majority of the topic has already been covered in the articles or those comments.

Thanks.

[Rich Toscano]

[quote=Arraya]Consumer credit has contracted 15 of the last 16 months. Bernake was just out telling lenders to make it easier for small businesses to get credit.

Credit is a money “equivalent” but not measured in M2. Some say credit is the vast majority of “money” supply. Depending on definitions.

Here’s Mish, from 2008;

”Although Japan was rapidly printing money, a destruction of credit was happening at a far greater pace. There was an overall contraction of credit in Japan for close to 5 consecutive years. Property values plunged for 18 consecutive years. The stock market plunged from 40,000 to 7,000. Cash was hoarded and the velocity of money collapsed.

These are classic symptoms of deflation that a proper definition incorporating both money supply and credit would readily catch. Those looking at consumer prices or monetary injections by the bank of Japan were far off the mark. Yes, there was deflation in Japan. Furthermore, if deflation can happen in Japan, then there is no reason why it cannot happen in the US as well.”[/quote]

Credit is not the same thing as money and the two cannot be “summed” as if they are the same thing. Quoting once again from the article I ALREADY LINKED TO in this thread:

Some people argue that the “credit deflation” — the reduction in lending and borrowing — will overwhelm any money-printing the government can undertake.

We’ll begin by once again pointing out that the government can create as much new money as is needed to stoke inflation.

Additionally, this argument blurs the distinction between money and credit. Credit and money are not the same thing. Imagine a desert island where the money supply consists of a single $10 bill. There is, to put it another way, $10 worth of ability to purchase. The $10 belongs to Alice, but she lends it to Bob. Bob turns around and lends it to Charlie, who lends it to Dave. There is now $30 worth of credit in the economy, consisting of three separate $10 loans. But there is still only that one $10 bill. All the lending has moved the $10 around, but it hasn’t created any new ability to purchase.

Outside the fractional reserve banking system, lending does not create purchasing power. For every borrower who gains purchasing ability, as in our example on the island, there is a lender who had to forfeit that purchasing ability.

It’s different for banks. They can actually lend money into existence — but in so doing, they are creating credit and money at the same time. The money they create will become part of the money supply.

So it’s really money, not credit, that is the proper measure of society’s aggregate ability to purchase.

With that said, there are some ways in which a credit contraction can put downward pressure on both prices and new money creation.
Credit doesn’t increase aggregate purchasing power, unless it also leads to the creation of new money, but it does tend to move that purchasing power from “strong hands” to “weak hands.” The money is being lent by someone who doesn’t want to spend it to someone who does. So credit is an accelerant to monetary velocity, and a credit contraction can accordingly induce a price-deflationary effect.

Reduced willingness to lend on the part of fractional reserve bank could also slow the rate at which new money is lent into existence. Money supply could theoretically deflate if old loans were called in and not replaced by new money growth — but the money supply charts above show that this is clearly not happening.

So as with asset price declines, credit contractions exert price-deflationary pressures via decreases in velocity and banking-sector money creation. But while credit contractions have deflationary elements, it is simply not valid to compare the amount of money being created by the government to the amount of credit being destroyed.

As far as Japan, that’s a strawman because they just didn’t print that much money. I’ve documented before that their money creation was extremely muted throughout the first decade of their deflation, and stark contrast to our own.

Sorry for the impatient tone on this guys, I just get frustrated with the constant going in circles on this topic. I wrote the above articles a year and a half ago, and have revisited the topic many times since, and yet people still keep trying to draw me into the same arguments I have addressed many times. (It adds to my frustration that all I did was correct a simple misapprehension about money supply and that once again launched all the same old tired questions).

If anyone wants to discuss the inflation/deflation topic with me, I would request that you first read both articles linked to in this post:

No Deflationary Spiral Forthcoming

…as well as all the comments in the post, as I think the vast majority of the topic has already been covered in the articles or those comments.

Thanks.

[Rich Toscano]

[quote=Arraya]Consumer credit has contracted 15 of the last 16 months. Bernake was just out telling lenders to make it easier for small businesses to get credit.

Credit is a money “equivalent” but not measured in M2. Some say credit is the vast majority of “money” supply. Depending on definitions.

Here’s Mish, from 2008;

”Although Japan was rapidly printing money, a destruction of credit was happening at a far greater pace. There was an overall contraction of credit in Japan for close to 5 consecutive years. Property values plunged for 18 consecutive years. The stock market plunged from 40,000 to 7,000. Cash was hoarded and the velocity of money collapsed.

These are classic symptoms of deflation that a proper definition incorporating both money supply and credit would readily catch. Those looking at consumer prices or monetary injections by the bank of Japan were far off the mark. Yes, there was deflation in Japan. Furthermore, if deflation can happen in Japan, then there is no reason why it cannot happen in the US as well.”[/quote]

Credit is not the same thing as money and the two cannot be “summed” as if they are the same thing. Quoting once again from the article I ALREADY LINKED TO in this thread:

Some people argue that the “credit deflation” — the reduction in lending and borrowing — will overwhelm any money-printing the government can undertake.

We’ll begin by once again pointing out that the government can create as much new money as is needed to stoke inflation.

Additionally, this argument blurs the distinction between money and credit. Credit and money are not the same thing. Imagine a desert island where the money supply consists of a single $10 bill. There is, to put it another way, $10 worth of ability to purchase. The $10 belongs to Alice, but she lends it to Bob. Bob turns around and lends it to Charlie, who lends it to Dave. There is now $30 worth of credit in the economy, consisting of three separate $10 loans. But there is still only that one $10 bill. All the lending has moved the $10 around, but it hasn’t created any new ability to purchase.

Outside the fractional reserve banking system, lending does not create purchasing power. For every borrower who gains purchasing ability, as in our example on the island, there is a lender who had to forfeit that purchasing ability.

It’s different for banks. They can actually lend money into existence — but in so doing, they are creating credit and money at the same time. The money they create will become part of the money supply.

So it’s really money, not credit, that is the proper measure of society’s aggregate ability to purchase.

With that said, there are some ways in which a credit contraction can put downward pressure on both prices and new money creation.
Credit doesn’t increase aggregate purchasing power, unless it also leads to the creation of new money, but it does tend to move that purchasing power from “strong hands” to “weak hands.” The money is being lent by someone who doesn’t want to spend it to someone who does. So credit is an accelerant to monetary velocity, and a credit contraction can accordingly induce a price-deflationary effect.

Reduced willingness to lend on the part of fractional reserve bank could also slow the rate at which new money is lent into existence. Money supply could theoretically deflate if old loans were called in and not replaced by new money growth — but the money supply charts above show that this is clearly not happening.

So as with asset price declines, credit contractions exert price-deflationary pressures via decreases in velocity and banking-sector money creation. But while credit contractions have deflationary elements, it is simply not valid to compare the amount of money being created by the government to the amount of credit being destroyed.

As far as Japan, that’s a strawman because they just didn’t print that much money. I’ve documented before that their money creation was extremely muted throughout the first decade of their deflation, and stark contrast to our own.

Sorry for the impatient tone on this guys, I just get frustrated with the constant going in circles on this topic. I wrote the above articles a year and a half ago, and have revisited the topic many times since, and yet people still keep trying to draw me into the same arguments I have addressed many times. (It adds to my frustration that all I did was correct a simple misapprehension about money supply and that once again launched all the same old tired questions).

If anyone wants to discuss the inflation/deflation topic with me, I would request that you first read both articles linked to in this post:

No Deflationary Spiral Forthcoming

…as well as all the comments in the post, as I think the vast majority of the topic has already been covered in the articles or those comments.

Thanks.

[Rich Toscano]

[quote=jpinpb]Rich – didn’t the money disappear in a sense when housing prices went down in the form of circulation, only b/c the money was being extracted in the form of HELOCs and being spent. They certainly weren’t saving it. (savings lowest in history)

So if the price goes down, wouldn’t you consequently lose your equity extraction and money circulation? People were taking great advantage of that. Not just new, recent bubble buyers. I can’t count how many NODs I’ve come across on properties that were purchased long before our bubble. A few that should have had loans paid off in full. [/quote]

You are confusing the existing stock of money with future money growth. Yes, a mechanism for new money creation (one of many such mechanisms) disappears in your scenario. But that does not affect the existing stock of money.

It seems that perhaps you are also alluding to home loans not just as a mechanism of creating new money, but as a means of “spreading it around” to more people. Absolutely correct and this is a valid point. But it’s not a point I ever denied. I was talking about effects on the existing money supply, and specifically about the mistaken assertion that reduced home values destroy money. You can see my post to capeman to understand why I think this distinction is important.

[quote=jpinpb]
While the government is printing a great amount of money, I don’t think it’s being all circulated. Maybe people are buying gold w/it or paying off credit cards or hoarding it in mattresses. I don’t know. Printing money is different than actually getting it circulated. They can print 24/7, but if people don’t have it in their hands and spend it, then how is printing going to help?

For instance, giving the few thousand in tax credits as stimulus would probably get people to spend. But contrast people were spending tens of thousand, hundreds of thousands extracted from their house during the bubble.

Yes, the government is taking on projects. I think this is just going to be less money to the people as they’ll have to pay for the projects through eventual taxation. But that’s another issue for another day.

Maybe we are in that lag period you mention. How long does lag time normally last? Months? Years? True that people *need* to spend money to live, but it is quite different than splurging on unnnecessary *wants*. That’s what was happening during the bubble. And frankly, during the depression, people still needed to live and money wasn’t there to spend. But different economic policies then, I guess.

I understand the money is there – somewhere. Where it went is like a mystery to me. Banks just holding it? Because few are lending the credit on real estate purchases. It’s mostly government FHA.

As being discussed on another thread, consumer index collapsed. It can’t be for lack of government printing.

While I understand the decrease of an item does not destroy the ability to purchase, wouldn’t it change the quantity/volume of money circulated (wealth?)

So maybe money supply isn’t the issue. Maybe it’s the distribution and spending?

I admit rudimentary knowledge on this topic. Just
my observations of what’s happening. I would love to understand all this and make sense of it. I always seem to have a difficult time grasping the dynamics of it all and I appreciate your tolerance w/my questions.

Thanks for your patience on this topic. I will go back and re-read your links again to see if it sinks in.[/quote]

You are absolutely right that money supply isn’t the only issue. I completely agree and never said otherwise; what I’m trying to do here is to be rigorous about the mechanisms of inflation and deflation and to not lump everything together.

As for why there is not a lot of consumer price inflation right now, I think that all the things you cite are an important factor. Money in the economy is just one issue. I think it’s a very important one because *over the long haul* prices changes tend to be dictated by changes in the money supply. But in the short term many other things have an effect. Right now, as you note, the money is more concentrated in the hands of those who are less liable to spend it on consumer goods (but apparently more liable to spend it on assets). Also, everyone across the board is much more cautious and not as liable to save. There are deflationary forces at work and they are battling out with inflationary forces. I don’t pretend to know what will happen in the short term but I’ve made no secret of my belief that the inflationary forces will prevail in the end (that is to say, if we look at a timeframe of multiple years).

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