mises
Joined: 05 Nov 2007
Location: retired
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 Posted: Tue Feb 10, 2009 9:30 pm Post subject: |
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The guy is as obnoxious in video as in writing.
Ok, the idea that printing money = inflation isn't exactly true. What matters is the amount of credit banks put into the system (kinda). For example, BofA is leveraged 130+/1, and is a primary broker. This means that the Fed can dump trillions of new dollars into BofA and not create inflation as the "market" wouldn't see the cash (it is used to shore up their balance sheet). At the point where banks (both normal banks and shadow banks...and hedge funds, PE groups) are at a reasonable leverage rate, the Fed can shut down the party (raise rates) and avoid a serious period of inflation.
What the standard explanation of monetary theory tells us (increase money supply = increase inflation) is insufficient for our situation now, as banks have to pull back their leverage. In fact, it is likely insufficient full stop. If the Fed printed the money and dropped it from a plane ergo inflation. But it has to go through banks, which are insolvent.
Here, this guy (an Aussie economist) puts it better than I:
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1. Banks won�t create more credit money as a result of the injections of Base Money. Instead, inactive reserves will rise;
2. Creating more credit money requires a matching increase in debt�even if the money multiplier model were correct, what would the odds be of the private sector taking on an additional US$7 trillion in debt in addition to the current US$42 trillion it already owes?;
3. Deflation will continue because the motive force behind it will still be there�distress selling by retailers and wholesalers who are desperately trying to avoid going bankrupt; and
4. The macroeconomic process of deleveraging will reduce real demand no matter what is done, as Microsoft CEO Steve Ballmer recently noted: �We�re certainly in the midst of a once-in-a-lifetime set of economic conditions. The perspective I would bring is not one of recession. Rather, the economy is resetting to lower level of business and consumer spending based largely on the reduced leverage in economy�.[9] |
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/#_ftn6
The whole post is great, though very long. |
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