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View Full Version : debt defaults ARE NOT DEFLATIONARY!!!!!



grapejelly
01-21-08, 07:14 PM
Mish is wonderful and I love to read his stuff. But as usual today he discusses (http://globaleconomicanalysis.blogspot.com/2008/01/global-bloodbath.html) things with his "deflation is here" bias:


Look closely at that list. There is not an inflationary thing in it. Think the Fed can stop this? Think again.
Okay I agree the Fed can't stop this. But it is inflationary, you betcha.

Borrow money = new money brought into existence courtesy of fractional reserve banking. Inflationary.

Pay back money = new money extinguished so it is deflationary.

But borrow money and default = the money is borrowed (inflationary) and spent. It is NOT paid back. There is NO DEFLATION here. The money is ALREADY SPENT. It already contributed to inflation. It is not being paid back. So there is NO monetary deflation.

There is asset deflation but not monetary deflation.

Asset deflation is often used to mean the same thing as monetary deflation. That is a mistake.

Asset prices fall when credit is hard to get. Real estate prices fall because loans are hard to get.

But asset deflation can happen AT THE SAME TIME as monetary inflation. And we shall see it now...

The credit defaults themselves are NOT deflationary. When asset values fall, the governments and central banks will try to restore the patient via the helicoptors as they are already mobilizing...and this will be inflationary. The money will be used to depreciate the currency in an effort to somehow "jump start" the economy and it will make things even worse.

I know this deflation/inflation thing is a tired argument but still I thought it should be made once again...

metalman
01-21-08, 07:24 PM
Mish is wonderful and I love to read his stuff. But as usual today he discusses (http://itulip.com/2008/01/global-bloodbath.html) things with his "deflation is here" bias:

Look closely at that list. There is not an inflationary thing in it. Think the Fed can stop this? Think again.
Okay I agree the Fed can't stop this. But it is inflationary, you betcha.

Borrow money = new money brought into existence courtesy of fractional reserve banking. Inflationary.

Pay back money = new money extinguished so it is deflationary.

But borrow money and default = the money is borrowed (inflationary) and spent. It is NOT paid back. There is NO DEFLATION here. The money is ALREADY SPENT. It already contributed to inflation. It is not being paid back. So there is NO monetary deflation.

There is asset deflation but not monetary deflation.

Asset deflation is often used to mean the same thing as monetary deflation. That is a mistake.

Asset prices fall when credit is hard to get. Real estate prices fall because loans are hard to get.

But asset deflation can happen AT THE SAME TIME as monetary inflation. And we shall see it now...

The credit defaults themselves are NOT deflationary. When asset values fall, the governments and central banks will try to restore the patient via the helicoptors as they are already mobilizing...and this will be inflationary. The money will be used to depreciate the currency in an effort to somehow "jump start" the economy and it will make things even worse.

I know this deflation/inflation thing is a tired argument but still I thought it should be made once again...

here he is identifying "deflation is here" (http://www.safehaven.com/article-3010.htm) again in 2005.

meanwhile, inflation has gone through the roof. he's like a bear jim cramer. people just like him, don't care if he's completely 100% wrong all the time. he's entertaining. 99.999% of the population lost the ability to see the diff between information and entertainment a looong time ago. in the future, mish runs the fed.

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Rajiv
01-21-08, 07:27 PM
Grapejelly,

You are not framing the argument correctly.

The story goes as follows -

Pay back loan to Bank
Bank loans the money again
Money in system - original loan PLUS new loan

Therefore it is inflationary

Second story

Asset falls in value
you default -- Bank takes a charge on it -- and cannot loan that money again

Money in the system - only the original loan

Therefore not inflationary

net result no monetary inflation - only asset deflation