Gumman - I think that sometimes, the government doesn't get a choice of deflation or inflation, external forces can overwhelm government efforts.
Once either gets started, they can build momentum quickly.
It can also take 2-3 years to stop.
It took Paul Vocker 2+ years and 14% interestr rates on 30 year Treasuries to stop inflation.
It took a lot of printing money for Alan Greenspan to stop deflation.
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If better off consumers start using inflated assets (stock, second homes, precious metals) to pay off debts (margin in brokerage accounts, mortages, credit cards) what can the FED do ? If it prints money, assest prices will go up, and debt reduction can happen faster.
As defalation occurs, business slows, and layoffs occur.
The people who are laid off can't pay their debt, so the debt i sdown graded, or the people go bankrupt, which wipes out the debt, destroying the asset.
So we end up with poorer people who have no debt and can't borrow because they are bad risks, and richer people who have NO debt but no desire to buy anything at all.
Anyone who wants to buy something will wait as long as possile, expecting more price declines.
The government prints money, but no one wants to borrow. This is the "pushing on a a string" outcome. See Japan, 1990s. |
