Why Mish is wrong about deflation.
The one word answer: politics.
Mish’s argument (if I understand it correctly) starts off accurately. Housing and other bubbles sooner or later are going to pop, causing debt associated with them to disappear. Because we live in a fractional reserve banking system, disappearance of debt means subtraction of money out of the system, a consequence by definition deflationary.
So far so good. I think all of this is possible, even inevitable.
What happens next, however is where I diverge. Deflation is an abyss that can be looked into. One glimpse of it by the middle class will concentrate their minds. With their minds concentrated, they will demand that something be done. But what? Not a whole lot CAN be done by FED (& government) except the buying up of assets in quantities needed to prevent deflation.
But no, says Mish, large scale monetization will not happen, because the FED, were it to resort to this alternative, would destroy the currency, and to destroy the currency would be to destroy its power, its raison d’etre, and the class of people that it roughly represents.
Mish’s argument here seems to be that the FED doesn’t mind debauching the currency as long as the process is orderly, somewhat predictable, and can be taken advantage of by certain people and interests --- but the FED does very much mind driving a stake through the heart of the currency. That is to say, the FED does not want to flat out, once and for all KILL the currency, because to do so would be to put itself out of business.
Yes. Once again I agree. Certainly the FED doesn’t want to render itself irrelevant --- but Mish here is not making an argument. What he is doing is offering a description of reality AS argument.
By this I mean: the FED in its cosmic brilliance has managed to do something rather extraordinary. It has managed to make a hash out of the economic situation in this particular way: it has worked things so that we are heading towards a zero sum game. The essential problem is this: if the FED wants to save the debtors, it is going to have to destroy the lenders --- or of course vice versa. If the FED wants to save the lenders, it will have to stand aside while borrowers get sucked into increasingly oppressive circumstances. No need to pause and congratulate the FED for a job well done. There will be plenty of time for that. What is important is to recognize the implication of this state of affairs.
When the place is reached where one or the other --- the borrowers or the lenders --- have to go, we are no longer in a world properly and accurately described by the word “economics.” Rather we are dealing with “who, whom,” as Lenin would say. Who is going to do what to whom?
That place, folks, as I say, isn’t about economics, but rather about force and violence, i.e., politics, however disguised and however circumscribed.
My opinion is that who wins the political battle ---- the MARKER of which will be either inflation or deflation --- cannot be predicted. Borrowers have on their side the advantage of numbers and also the advantage of a frayed but still viable democratic tradition. Lenders on the other hand have money, institutional control, and the power to bend and seriously manipulate the system. I would tend to give the nod to borrowers, because I think our democratic traditions will hold for at least a few more rounds. If so, the many, i.e. borrowers, will be able to vote into power a new crop of politicians. This new crop will of course be the usual collection of knaves, innocents, narcissists, charlatans, and occasional (very occasional) honest and competent man (e.g. Ron Paul). The new arrivals on the political scene will set in motion a lot of harebrained schemes, the outcome of which will be a currency killed off through the mechanism of hyperinflation.
That’s my guess.
Once the process runs its course the world will be operating under a different set of rules. To make guesses now about what the new rules will look like isn’t useful --- it’d be like trying to predict the laws of physics in a parallel universe. |
