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Pastimes : Clown-Free Zone... sorry, no clowns allowed
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To: Ilaine who wrote (106841)6/6/2001 12:32:34 PM
From: Mark Adams  Read Replies (4) of 436258
 
I present this to you as I've seen you have an ability to find errors in reasoning. Unfortunately the thinking is still disorganized and somewhat muddled, lacking in clear real world examples.

This is the thinking:

In light of the traditional thinking that the Federal Reserve can cause inflation by creating excess credit and solve deflation by printing dollars, I struggled through some thought based on what I was taught in econ 101. I found much wanting in those lines of thought, taught to much of the US leaders. It would appear that demographics and the flow of savings vs consumption would have a much larger influence on the ultimate outcome. It really is just a very chaotic mass psychology equation. I think the Fed cannot fix it, rather, they can only aggravate it by making the wrong choices.

We think we can stop inflation by raising interest rates, in effect slowing production and throwing people out of work. Since people are either broke or afraid, they save instead of spend. The collapse in demand destroys profit and reduces apparent inflation.

Collapsing production to reduce apparent inflation reduces the size of the economic pie for all. Better would be to increase efficiency of production or use of those goods rising in price.

We think we can stop deflation by making more credit available.

Creating additional credit may work to stave off deflation if forgone demand has built up. When is it that people postpone meeting needs or desires? During times of uncertainty? During a recession? When confronting an impending retirement?

Creating additional credit when few unmet needs or desires exist may just flow into savings. Or remain untapped. Pushing on a string. Creating additional credit or money will not forstall all cases of deflation.

Monetary policy would appear to be ineffective at managing both inflation and deflation execpt under certain circumstances- those being that the fed can fix only what it previously broke.

Mild Deflation, disinflation, is a normal process resulting from increasing productivity which increases real wealth of society. More severe deflation results from poor investment choices (severe excess capacity) and more importantly, the lack of productive uses of available labor and capital.

It has been proposed that only war has cured past Deflation- via destruction of productive capacity. I would hope that we could use some imagination and find new uses for available capital and labor.
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