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February 20, 2012 / 74

Impending Deflation???

So… I’m sitting here waiting for the Second Great Depression to turn around and I had a thought.

What if the hyper inflation (per m-3) we had for a bit goes away/doesn’t happen? (inflation chart)

Since the mega-banks are being absolved of their debt and legal liabilities for the fraudulent MBS’ and everything else they’ve done – what would make them REALLY happy?

Deflation.

Why? Because if the money deflates, then the VALUE of their cash holdings would SKYROCKET!!! These days it is the banker’s clients who owe the debt – the banksters HOLD the debt. During inflation the actual value of debt goes down and debtors can more easily pay inflated debts off.

In an inflationary environment, the main problem is to find an asset that will either hold its value, or that will cause the value to increase (ie profit.).

But underlying/real value of cash increases during deflation. Prices seem to go “down”, wages go “down”… etc.

If you owe $100 and there is 10% inflation, then in terms of real value you only have to pay $90 back to the lender. On the other side of that coin, the lender loses 10% of what he/she loaned… which (if banks are expecting deflation soon) would explain why banks are not lending much these days.

If there is 10% deflation, then you still owe $100, but that $100 will now buy $110 worth of goods, and your nominal wages will go down so the $100 will be harder to earn.

And for lenders/creditors, there’s another benefit to deflation over inflation. While the VALUE of your increase in wealth (held in cash) goes up, since the denominated amount of income does not go up (and may even go down) – you don’t have to pay taxes on it.

Hummmm…. If *I* were a mega-banker, I’d want Santa to put a large lump of deflation in MY stocking this year.

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4 Comments

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  1. carmenalexe / Feb 21 2012 15:29

    There are some thoughts that come through my mind though. First would be that the Great depression of the 1930’s was Deflationary and not Hyperinflationary. We did not have hyperinflation at that time, we had a deflation. Indeed consumer prices have gone up later on and price inflation did eventually occur but the actual depression was definitely deflationary. Reading now Murray Rothbard’s “America’s Great Depression”.

    Anyway, Milton Friedman stated several times the govt didn’t print enough money to fight deflation and that is why the depression lasted so long. Of course, he was wrong. They should have stayed out of the business of creating money and they should have allowed the free market adjust on its own. But what FDR did then, Obama is doing now. History repeats itself. Our politicians don’t’ have a clue how economics work.

    The other thought is that the U.S. government has a humongous debt, $15T or more. They would stand to gain way more via inflation.

    • Michael E Picray / Feb 21 2012 16:41

      Thanks for stopping by!

      “gain way more via inflation”? In terms of “dollars” certainly. But the value of the dollars would be lower, so they’d gain little to nothing in real terms. Unless you’re referring to the advantage gained by those who first become aware of the inflation and the price advantage that gives them in buying assets at non-inflated prices with inflated currency… ?

      As to the national debt – what is that to the bankers? THEY won’t have to pay it in any case. Monetizing the debt is just hyper-inflation by a fancy name that lowers the value of the debt. Default is quicker and cleaner with a shorter recovery period.

      • carmenalexe / Feb 21 2012 21:17

        I am referring to the debt owed to our trading partners;-)

        • Michael E Picray / Feb 22 2012 13:25

          The last time I checked, most of the US Debt is owed to US citizens… and if not most, at least a significant portion of it. That could have changed, since it has been a long time since I checked.

          Keep in mind that the US government HAS NO MONEY that it doesn’t take from the citizens through one means or another. (Taxes or confiscation of value via inflation)

          http://michaelepicray.com/2011/07/25/a-vocabulary-lesson-for-the-us-debt-crisis/

          If the US monetized the debt, we would pay through the nose because “our trading partners” would either stop selling things to us, or they would switch to a barter system when dealing with us. You want oil? Pay in gold – or with bulldozers – or corn/wheat. Trade volume would plummet, and the US internal economy would be destroyed, to say nothing of the fact that the US dollar would no longer be the world’s reserve currency. So I guess I don’t understand how the US would come out better by monetizing the debt?

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