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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: valueminded who wrote (69433)	10/23/1999 10:53:00 AM
From: Mike M2	Read Replies (1) \| Respond to of 132070

Chris, first let me define deflation as a contraction in credit this will result in falling prices for stocks and real estate. In the 30s credit spreads widened so low quality bonds fell in value but high quality rose. If this scenario plays out the severe economic contraction would likely cause a fall in the general price level. In todays credit bubble about half the credit creation comes from non bank sources at some point when defaults and delinquencies rise and risk is reassesed interests rate spreads will widen. The financial credit markets ( nonbank) are beyond the control of the Fed. The Fed can expand the bank's ability to make loans but there is no assurance than it will result in an expansion of loans. During the 30s the banking system was not fully loaned up to the limit of their reserves due to lack of demand. In Japan's post bubble days we see the pushing on a string phenomena once again loan demand is weak . In Japan ,loans to individuals have fallen for seven consecutive years. When our bubble finallly bursts I do expect the Fed will try to inflate I just don't expect it to work. It hasn't in the past. history shows that the risk of inflation turning to hyper inflation is more of a threat to governments than deflation. Weimar Germany comes to mind but there are many other governments that have been toppled due to hyper- inflation. I suppose there are three schools of thought the Austrians would see deflation as inevitable outcome of an inflationary credit boom which Mises said must end either voluntarily or as a total catastrophe of the currency sytem involved. The Monetarists who think if you print enough money you can avoid deflation. The third group I don't know what to call but they think you can choose your poison. The Monetary Control Act of 1980 allows the banking system to monetize bad debt creating the potential for runaway inflation. I recall one of the Clintonistas floating a trial balloon about monetizing bad corporate debt ( can anyone elaborate ?) . The way I see it cannot make malinvestments profitable all they can do is socialize the losses. In spite of what the political economists say history is on the side of the deflationists- they tell us they can stop it but they have yet to succeeed. The Austrians predicted the Soviets Centrally planned economy would fail due to the lack of discipline imposed by the pricing mechanism ( tough love ho ho ho) . In the US today we have the gov't trying to mitigate losses for many groups- the money center banks, the hedge funds, stock market speculators, real estate et. al. I simply say that gov't cannot make a bad investments good all they can do is socialize the losses and delay the day of reckoning. Whatever the outcome I remain convinced that there will be tough love and economic violence for all. you can quote me on that Mythman ho ho ho Mike