From Fillmore:
Steve Saville chimed in on the inflation/deflation debate this morning. I cannot quote because of copyright restrictions. But he comes down firmly on the inflation side. He argues (correctly I think) that no matter how large the debt burden, the Fed will monetize enough of it to prevent any deflationary collapse even at the price of a full scale dollar route.
Mish Reply:
Saville thinks the the US can defeat deflation by printing enough money huh? Well isn't that is what they have been trying to do for 3 years. It did not produce any jobs or rising wages and all it did was add to the debt problem that needs to somehow get wiped out. That additional debt in the face of lower jobs and wages is enormously deflationary.
How does printing more US dollars solve anyhing? If easy credit did not produce jobs and rising wages exactly how is this debt of individuals and states to be paid back? That is where people like Saville miss the big picture. Where saville an other totally lose it is the means to pay off the debt. How does printing more money, help pay off debt? It takes GROWTH to do that, and growth in INCOME and WAGES not hedonically adjusted an otherwise BS GDP numbers that are meaningless.
OK let's go one step further and assume the govt gives everyone enough money to pay off all debts and only the federal govt has any debt left. Then the Federal govt defaults. Would that cause inflation? Of course it would but at what cost?
Who loses? Banks, credit card companies, bond holders, pension funds, etc. In other words debts are wiped out (paid back with totally worthless $) and the WEALTHY suffer at the hands of the poor. Perhaps political upheaval will FORCE that issue at some point but not in the near term future. UNLESS and UNTIL the govt GIVES money away as opposed to making access cheap, debts can not or will not be paid off. This is what the inflationists fail to see. If the govt gave everyone enough money to kill off enough debt it would wipe out the wealthy. It would be a transfer of wealth from the wealthy to the poor on an immediate massive scale. Not gonna happen. Not yet.
What if the govt prints all the money it wants (but does not give it away just makes access to it easy)? That is the curent scenario and it is not working. Debts are piling up with no means to pay it back.
What if they print it and no one wants it? I think that indeed will happen. That is the BIG LIQUIDITY TRAP! It is coming your way. At some point credit will be given only to those that have little use for it. We are probably not too far off from where credit will NOT be extended to people out of jobs, and those living off of assets (houses and stocks) will have taken all the home equity out they possibly can, and without a job, and the shit will just hit the fan VIA bankruptcies and foreclosures.
Credit WILL NOT be exteneded indefinately no matter how much money the US govt prints if credit risks get too high. Jobs and home equity loans/refinancings are the tipping point. Once that money is taken out and spent it is gone. Unless home prices continue skyrocketing up those miracles of survival are OVER. What's next? Saville and others NEVER answer that question and NEVER bother to figure out who the winners and losers would be if money was actually given away in enough quantity to reduce the debt burden. They never address the liquidity trap, nor do they address the credit issues, nor do they address the issue and ramifications of "free money". In sort, they have an over simplified version of things that fails to take into consideration real world actions and consequences.
Japan did not solve deflation by printing money and neither will the US. If it was so so easy to solve deflation by printing money, why did Japan fail so badly for 15 years?
Saville and others like him are WRONG.
They can not work thru the complex ramifications of who wins and who loses if enough money is printed to really cause inflation, and they ignore the huge burden of debt in an environment of job losses, falling wages, and rising energy costs. If printing more money SOLVES those problems every nation on earth would be doing it.
I WIN
Mish |
