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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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geewiz
To: John Vosilla who wrote (116007)10/3/2014 4:12:45 PM
From: Elroy Jetson1 Recommendation  Read Replies (1) of 116555
 
When debt is destroyed in large quantity after a credit bubble, that is deflation which feeds through the entire economy. Simple economics, so that's why I always agreed with Mish - up to that point.

It's the reverse of the inflation created by the credit bubble initially. Greenspan called this inflation "the new economy" and the "virtuous cycle" but it was inflation all the same creating false demand. Because of massive imports from China, most of the price change was confined to asset values - but that hurt our economy.

A deflationary cycle is the ideal time for government to create demand and money to stabilize prices to avoid price deflation while the bad debt is liquidated.

Japan's problem is they never liquidated their excess debt, resulting in a continuing absence of economic demand from consumers and businesses. When we cleaned up the debt bubble from Reagan's Savings and Loan credit bubble collapse, Japan urged their banks to try to earn their way out of the problem by lending to "tiger economies" in Asia. This wacky scheme created losses at the Japanese banks which were three times larger than their initial problem.

There's never anything as satisfying to some people as making a bad problem worse.

So whether we have deflation which devastates our economy depends on government and central bank response. Republicans and Germany currently support pro-destruction austerity policies, just as Bush created massive stimulus and bail-out plans as his credit bubble collapsed. Hopefully anti-deflationary policies will win out over trying to make the party in power look bad with a deflationary collapse.

Whether Mish's envisioned deflationary spiral takes hold is a simple policy decision.
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