Misguided attempts to avert deflation with credit Posted by James Randolph on August 08, 2011
When in the course of human events …
August 08, 2011 – Misinformation abounds
Credit downgrade insignificant
Misguided attempts to avert deflation with credit
“As public sentiment has clearly grown fearful of further debt, the only “card” that our government can play would be to sway public sentiment,” says Avi Gilburt
“The main issue with this premise is that it works on the presumption that all the credit created by our government will be gladly accepted by the public.”
When a society is at a point where it is saying “no more” to credit, and it then begins to deleverage, this is simply what we call deflation.
Ben Bernanke was trying to raise the public confidence in the financial system by directing money into the equity markets. He surmised that if people see the market going up and feel as though they have more value in their pockets/accounts, they would be willing to have more confidence in the system and leverage up again, which would be inflationary.
They were trying to “trick” people into having confidence again so that they would be willing to accept more debt, thereby avoiding a deflationary spiral.
“There is no means of avoiding the final collapse of a boom brought about by such credit expansion” Ludwig Von Mises
Public loses confidence in monetary system [deleverage] They will reduce the credit they have outstanding either by choice or by default.
Lack of credit, assets fall, walk away from credit leveraged assets
Demand plummets, unemployment escalates, asset sales increase – drives asset prices further down
Therefore, during inflationary periods, when our economy is engaged in credit expansion, the relative value of the greenback decreases. Alternatively, when our economy is experiencing credit contraction, the relative value of the greenback increases.
The Fed will probably attempt QE-type of infusions for several years before the public will realize that the Fed is unable to prevent deflation. Ultimately, the public will demand that the Fed be disbanded. This will clearly put a halt on any further actions by the Fed, which will allow deflation to further ravage our economic system while the government is busy managing the Fed “issues.” When it is already too late, the government, which always acts too late, will finally authorize the Treasury to print more greenbacks, which is the other manner in which a government entity under a fiat monetary system can battle deflation. However, by the time the government actually engages the Treasury to print, we will most probably be at the end of the normal course of our deflationary period.
Eventually the government will conclude that the only option left in its futile battle against deflation is to pump huge sums of newly created cash into the economy, when in fact the only sane course of action would be to let the cycle advance on its own – me
As deflation subsides, the system will now have to deal with a significant increase of “money” in the system. This will act like a sling shot in the opposite direction, the result of which will be inflation, and, most probably, hyper-inflation. Since the government will be so battered by the deflationary effects that have ravaged the system for years by this time, they will simply not stop printing until such time that their significantly lagging indicators tell them that we are already in a hyper-inflationary rise.
Senior Staff Writer – Certified Gold Exchange