< How do you figure something like that.>
When Investment exceeds savings we eventually get inflation. The excess investment means that the banking system has created new credit. Deflation reverses the situation. A crisis, such as Y2K occurs, and credit and money will contract, banks will foreclose, gold will soar, investment will halt, pessimism will be rife, cash holdings will increase ( somewhat questionable in the year 2000 due to the extent of the damage of Y2K); thus savings will now exceed investment. It is monetary disturbances that basically cause discrepancies between savings and investment. To be sure, a sudden and significant demand for cash reserves due to Y2K will have a great deflationary effect.
It is the general uncertainty of the market that creates the demand for cash balances. We are now in the initial stages of this uncertainty.
Illusions have been created that one can create wealth out of bank credit. All that has really happened is that business in the higher stages of production have used the new money to bid away factors from other lines of production. As the monetary or investment boom accelerates, factor prices increase and the new investments become unprofitable as rising costs squeeze profits. Increased factor incomes are spent on consumer goods. Factor incomes raise the prices of consumer goods and thus the rate of return in the lower stages of production which leads to factors being attracted away from the higher stages, adding to their cost pressures. We now get the situation of rising prices, idle capacity and rising unemployment. That is, Stagflation.
Y2K will accelerate this process very quickly. It is beginning to happen now. I see $40 oil ( at the very least ) due to Y2K induced massive shortages.
|
