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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: porcupine --''''> who wrote (1522)	4/5/1999 1:30:00 PM
From: Freedom Fighter	Respond to of 1722

Porc, >> Minnesota Public Radio's "edutaining" history of US deflation: news.mpr.org << I believe a distinction must be made as to the cause of the deflation. There is a difference between a fall in prices that is related to fractional reserve lending practices that are going bad (and the resultant credit contraction) and a deflation in prices that results from productivity increases. It is the former that is the case in Japan now and was the case in the U.S. in all the sharp business contractions we have experienced. So I don't think I am going to learn anything about deflation in a steady money supply situation by studying the weaknesses of fractional reserve banking and attempts at correcting it. Under a steady money supply without fractional reserves the former wouldn't happen. There wouldn't be large scale bank runs. Every dollar deposited would be backed. The issue of whether aggregate productivity gains are passed to workers and result in steady nominal wages (higher real wages) and make everything AOK despite general price decreases is an issue I am researching. But it is likely that a deflation of asset prices would not occur if nominal wages held steady. And if nominal aggregate wages held steady then negative nominal interest rates would also be highly unlikely. If however you are correct that nominal wages would fall it seems to me that there could be problems. I spoke to the Mises Institute on the wages, interest rate structure, loan balance issue from their perspective in a steady money supply situation. They have promised to get back to me. Perhaps the premise for the concern and discussion is faulty. I do not know. I just know that it wasn't productivity driven deflation that caused our busts or Japan's current mess. It was credit deflation. Wayne