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Pastimes : Austrian Economics, a lens on everyday reality -- Ignore unavailable to you. Want to Upgrade?

To: NOW who wrote (107)	1/14/2002 8:18:24 PM
From: Don Lloyd	Read Replies (1) \| Respond to of 445

David - Any comments on this: trendmacro.com There's some truth and some misperception to what he says. Deflation has a range of possible definitions, but the one that probably best applies is "a significant contraction in the effective money supply", usually tending to lead to lower prices in general and an increased difficulty in repaying fixed loans, as well as lower corporate revenues and profits. Since the production process takes time, a period of falling prices means that a corporation first buys its factors of production relatively dear, but is later forced to sell its finished goods relatively cheap. Everything that was priced in the past, including labor, now costs too much, and corporations see profits turn into losses and can no longer meet their now heavier debt payments. Normally deflation is rare, because neither people in general, nor the treasury in particular tend to burn up or lose money. However, the money supply includes the highly leveraged bank loans that are the result of fractional reserve banking and which have been encouraged by the FED in the economic boom phase. When these loans start to go into default for any reason, but primarily because the boom phase is unsustainable, and many mal-investments were made in response to an artificially depressed interest rate, the banks rapidly de-leverage and undo the previous credit expansion, beginning the bust phase and collapsing the effective money supply. This is exacerbated by an increasing urgency for consumers to build up cash balances as they foresee tough times ahead. Both the effective fall in the money supply and the increased demand for cash balances increase the subjective value of money, and therefore, the money prices of goods and services fall. This is a strong regenerative process that cannot be stopped simply by having the FED or the Treasury print more money. Regards, Don