Sorry for the off topic response to this thread, rather than to credit bubble,
Subject 54034
but my friend austrie chooses to have what I consider excellent exchanges with me via PM, and doesn't post at Credit Bubble, and I wish to share what I wrote back to him.
Simply put, monetary policy is effective for fighting inflation, a la Paul Volker, but easy money is no cure for the deflation WHEN A CREDIT BUBBLE BURSTS. To think otherwise is like believing that consuming more alcohol is the cure for drunkenness. Alcohol (money creation) makes the drunk feel good for a few hours, but rots his liver even more. Unlimited expansion of the money supply will end in the death of the currency involved. You cure alcoholism and hangovers by purging the unnatural toxins that over-stimulated the nervous system during the binge. The binge was caused by too much liquidity to begin with. More liquidity is not the treatment.
The flaw in monetarism as a cure for deflation and credit collapse is that it incorrectly assumes that somehow "extra money" would find it's way into "people's pockets". However, in a post-bubble economy (Japan being a prime example) there are few profitable real economy investment opportunities to exploit. About the only one I can see at present is energy. The global credit bubble has already permitted over consumption, overinvestment, excess capacity and asset bubbles. What would you propose, still more of that?
To understand where the fallout will be the strongest look to areas that need cheap, very available, no ties credit to stay barely above water. I'd say the entire financial and consumer sector especially in the US, which I am now heavily short, versus short dabbling in April and May. |
