

Why credit deflation is more likely than mass inflation - dpatru
http://libertarianpapers.org/2010/43-boyapati-why-credit-deflation-is-more-likely-than-mass-inflation/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+LibertarianPapers+%28Libertarian+Papers%29

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iwwr
The banks are momentarily paralyzed because their solvency is uncertain and
their underlying capital is frozen. The liquidation of bad debt will happen
eventually, but the Fed just wants to inflate at all costs. When liquidation
starts to happen, all this money will flood into the real economy, with the
multiplier at full throttle.

Instead, the US Government and Fed should have allowed the liquidation to
happen, preferably sooner than later. In our timeline, we get both frozen
credit (and collapse) and inflation. In a better scenario, we would have
gotten just a sudden collapse, with faster recovery.

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chipsy
Some of the key points of the paper:

Money multiplier theory, as implemented through fractional reserve banking,
has been broken in the U.S. through alternative instruments(e.g. money market
accounts), and has not controlled bank lending policy in the last 20 years.

The Fed persists in trying to make banks lend more, and has settled on taking
on mortgage debt as the best means of doing so. Avoidance of the complete
collapse causes homeowners to stay put, reducing labor mobility and increasing
unemployment.

Fed policy and bank policy are determined by their "class" in society - the
Fed is politically motivated and will pursue inflation even if it ruins the
economy. Bankers will accept deflation so as not to cause a collapse. Japan is
alluded to; it has a strong banker class that fought against pressure to
inflate. The Fed is a stronger entity than the equivalents in Japan, but
bankers are still largely unresponsive to its actions.

The paper concludes that a slow, deflationary economy will persist until the
Fed releases the mortgage debt.

(I don't really agree, but don't have specific thoughts yet.)

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dpatru
My take-away:

1\. Fractional reserve banking always leads to mal-investments which must
either be liquidated or papered over with money (inflation). If the
malinvestments are large, inflating the currency can cause the currency to
collapse in hyperinflation.

2\. Liquidation (bankruptcies and transfer of wealth from debtors to
creditors) is unpopular so politicians tend to avoid it. Politicians will
naturally pursue an inflationary policy to avoid the wrath of the voters.

3\. Bankers who profit enormously from fractional banking want to avoid
currency collapse at all costs.

4\. The bankers who control the federal reserve will seek to slowly liquidate
to avoid becoming politically unpopular. Their biggest danger is that Congress
will seize control of the Fed and force it to overinflate and thus destroy the
currency and the Fed with it.

