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Post by jeffolie on Aug 8, 2007 11:05:57 GMT -6
Thanks to Mr. Practical, Kevin Depew, Paul Kasriel, and John Succo for helping explain how a Japanese style deflation could hit the US. The key point is deflation is caused by a massive increase in credit/debt not supported by a commensurate level of income. In simple terms, there is no way to ever pay back what has been borrowed. It's also critical to understand the distinction between a hyperexpansion of credit and a hyperinflationary printing of money. The former is what caused the Great Depression (and is happening again now), while the latter happened in the Weimar republic and is happening right now in Zimbabwe . globaleconomicanalysis.blogspot.com/The above posting is way too long to repost here. Many posters make their cases for deflation. It is well worth reading. I favor deflation first and followed by inflation.
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Post by unlawflcombatnt on Aug 8, 2007 13:35:36 GMT -6
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Post by unlawflcombatnt on Aug 8, 2007 13:45:05 GMT -6
Here's a link to my August 5th post on Fleckenstein's article about "Japanese style inflation", which is referred to in Mish's article.
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Post by unlawflcombatnt on Aug 8, 2007 14:12:49 GMT -6
Here's an especially insightful passage from the article, taken from a quote from Professor John Succo:
"The "strong U.S. economy" has been pushed and pushed along by 25 years of hyper credit expansion fostered by the Federal Reserve. When witnessing the tumultuous results of just a slowing down of the credit expansion, one can only imagine the problems that will surface once credit begins to contract in earnest.
And here lies the crux of the matter: what the Fed has done over the last 25 years is artificially decrease the relative value of real money in the U.S. system while increasing the relative value of debt. It has done so with no concern for the level of income generated to pay that debt back. The Fed, through their hyper expansionary credit policy, and Wall Street through financial engineering, have loaded the system with debt not supported by a commensurate level of future (present) income.
But the Fed has been able to accomplish what it has only because investors, for the above reasons, have lost sight of this hidden risk. The Fed doesn’t really have the power to create more and more of this artificial liquidity called debt; they need investors to cooperate. Here is why.
The Fed really only can do two things....They can lower margin requirements for banks, the amount of capital they have to hold to make loans. That it has already driven to basically zero. So the Fed cannot allow banks any more “leeway” than it already has.
They can also perform open market money operations like REPOS and coupon passes. The Fed calls up big banks and buys their government bonds out of their portfolio. But they don’t buy them with real money; they buy them with credit newly created just for that purpose. The big bank can then lend that credit out in a much greater amount because the Fed only requires them to keep a small fraction of that credit to support whatever the bank wants to lend out. This is our wonderful fractional reserve system. If everyone went to the bank to get their “savings” at once they would find that they could get out less than 1%.
But here is the key. The bank must ultimately be willing to lend it and then find some investor (willing) to borrow it. This has been no problem whatsoever over the last several years. Now most investors realize that they have too much debt, that their level of income cannot support it. Banks realize this too and have increased their lending requirements. The last borrower is always the most aggressive speculator.
So most market participants are now looking for ways to pay back debt (deflation) just when the Fed is desperate to get investors to borrow more (inflation).
The top is only beginning to wobble. When people tell me “there is so much money out there” I tell them that no, there is so much credit out there. This will be a muli-year process of debt reduction and deflation to correct what the Fed has wrought...."
One of my take-home messages from this is that investors must be willing to borrow. If investors are not willing to borrow, neither the Fed nor private lenders can create credit or expand the (pseudo-) money supply.
This is where investor confidence comes in. This is where all of the professional liars and propagandists come in (i.e., Paulson, et al). If their economic distortions are not accepted by the investor community, investors will not borrow money and create more "liquidity." Thus, our Minister of Financial Propaganda, Hank Paulson, puts out frequent misleading statements about the economy, in order to deceive investors (and the public in general).
The U.S. economy has become nothing but a "confidence game," whose main drivers of "growth" are deception, fraud, and wishful thinking.
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Post by blueneck on Aug 18, 2007 5:21:41 GMT -6
Yet another insidious scheme of shifting wealth to the wealthy. Thanks Greedspan
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