Feb 152016
 
 February 15, 2016  Posted by at 2:57 pm Finance Tagged with: , , , , , , , ,
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Dorothea Lange We’ll be in California yet. We’re not going back to Arkansas 1938

Financial bubbles blown on the back of massive amounts of debt, of necessity lead to debt deflation (it’s just entropy, really). Fighting this is futile, and grossly costly to boot. The only sensible thing to do is to guide the process as best you can and try to minimize the damage, especially at the bottom rungs of society, because that’s where the deflation first takes hold, and where it spreads out from.

Attempting to boost inflation, or boost demand, before letting the debt deflation run its course through restructuring and defaults (perhaps even a -partial- jubilee) leads only to -further- distortion, and -further- impoverishes society’s poorer (at some point to a large extent the former middle classes). Whose lower spending, as nary a soul seems to comprehend, is the origin of the deflation to begin with.

All the attempts by central bankers to boost inflation that we’ve seen so far squarely ignore this, and operate on the false assumption that if only prices for financial assets and real estate can be raised even higher -artificially-, deflation can be warded off.

Thing is, deflation starts not at the top, it starts at the bottom. It’s not the banks or the bankers or the well-off who are maxed out and stop spending, but the people in the street.

They are responsible for most of the spending in an economy, and therefore for the velocity with which money moves in a society. And if the velocity of money falls below a critical point, no increase in the other side of the inflation/deflation equation -the money/credit supply- can make up for the difference. There is a point where all of the King’s horses and all of the King’s central bankers can’t put Humpty Dumpty together again.

The people in the street are not just maxed out in the sense that they have no money, they have less than no money, since they’re deep in debt. An increasing part of whatever they do still have, and what they make in their ever lower paying jobs, goes toward debt payments. Yeah, that’s the giant sucking sound.

QE and other ‘plans’ like it don’t address this even in the slightest, and are necessarily failures before they even start.

Central bank stimulus measures are all exclusively targeted at the upper rungs, and therefore miss their aim entirely. Or perhaps we should say ‘alleged’ aim, since it takes quite a leap of faith to presume that all the world’s central bankers fail to understand their own field so thoroughly that all they can all come up with is failures.

However, given that they all studied the same faulty economics textbooks, we can’t rule out this possibility. It is certainly strongly suggested -once again- by Steve Keen in Our Dysfunctional Monetary System.

Rather than effective remedies, we’ve had inane policies like QE, which purport to solve the crisis by inflating asset prices when inflated asset prices were one of the symptoms of the bubble that caused the crisis. We’ve seen Central Banks pump up private bank reserves in the belief that this will encourage more bank lending when (a) there’s too much bank debt already and (b) banks physically can’t lend out reserves.

What may also play a role is that the upper rungs tend to be blind to anything outside of their own circles, that because they 1) have their hands on a nation’s wallets and 2) they see themselves as the most important segment of any given society, they elect to try and solve the problem inside their own circles -and truly believe this is feasible-.

This can of course not possibly work. Because they’re hugely outnumbered. They don’t have nearly enough influence on money flows in their societies. If they can’t sell the bottom, let’s take a number, 80%, of society sufficient produce or gasoline or homes or trinkets, the entire society seizes up the way an engine does that runs out of oil.

The top makes its fortune for a while getting the bottom ever deeper into debt, only to inevitably find that this kills off the entire economy. Then they do some more of the same, and find ever more of their own kind becoming part of the bottom.

The problem for the rich is simple: there’s not enough of them. Well, that and they don’t understand how societies function. Let alone economies. Scraps off the table won’t do the trick. Next stop pitchforks.

Any deflationary period would have been hard no matter what. Still, none would have had to lead to what we’re facing now.

But look out there at what’s happening in politics, at who’s popular in various places. It’s all geared towards more inequality, not less, like some tooth and claw Darwin version were the world’s economics teacher, wherever you look it’s all the well-off making ever surer they will remain well-off or better.

And even if you look for instance at Bernie Sanders in the US, he wants more for the bottom of society, but that seems more for sentimental or ideological reasons than a sign he actually understands why it would raise the odds of the States being a going concern going forward.

The actual Darwin could have taught us all a lesson or two three about the role of balances in ecosystems, and in human societies. But then he actually studied them. Economists, politicians and central bankers have not.

Home Forums Where Deflation Comes From

This topic contains 12 replies, has 9 voices, and was last updated by  TheTrivium4TW 7 months, 1 week ago.

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February 15, 2016 at 2:57 pm #26824

Raúl Ilargi Meijer

Dorothea Lange We’ll be in California yet. We’re not going back to Arkansas 1938 Financial bubbles blown on the back of massive amounts of debt, of ne
[See the full post at: Where Deflation Comes From]

February 15, 2016 at 4:22 pm #26826

Professorlocknload

That being what it ultimately comes down to,,,the Darwinian solution.

When the pretentiously strong and fit must eventually yield to those honestly worthy of survival.

And yes, pitchforks would certainly expedite the process. How bad does it need to get to finally warrant the sacrifices necessary to break the chains of tyranny?

Guess all one can do for now is get real and stay tuned.

Also, it might pay to closely follow events in Venezuala, as a micro example, of what may develop here in future. One could ponder whether those holding the Bolivar Fuerte made out better or worse than those who set aside a Silver coin here and there?

February 15, 2016 at 6:39 pm #26834

Raúl Ilargi Meijer

Venezuela is just another US produced failed state, like Lybia, Iraq, Ukraine, Syria. It’s a policy. They think it makes it easier to take over power. Never works. Those days are gone.

February 15, 2016 at 10:31 pm #26860

regionswork

It seems to me that the purpose of any enterprise is the production of value. In a tribal community that was survival – perpetuation of the tribe. Life is an unfunded mandate. Babies show up; something must be done to take care of them, as well as those already here.

When there are relations with others that can’t be balanced internally with debits and credits, then some form of money is required. From David Graeber’s account in “Debt: The first 5,000 years”, money appeared when there were armies of conquest. My simple summary, credit is for friends, money is for strangers.

When money is part of the game, it can be debt based from banks, or sovereign money issued by states, along with private credit. In the case of money/debt – it seems there must be some correlation with the value of what the enterprise has created, say the sum value the franchise of a city, state, nation has created over time, using also the wise investments of ancestors – noting that the Mediterranean and European nations still use Roman infrastructure and the rights-of-way secured long ago.

These are high maintenance, as is anything of high value. Dumb gold requires lots of maintenance. The ability of credit/debt to bring forward consumption is not a new thought, but certainly not used in any meaningful way a a brake on over-consumption. The mental environment of the “wealth effect”, trading today’s high against a deniable future low, is behavioral economics at its worst.

When I first began reading TAE – perhaps about 2008 when my search for understanding began, you pointed out that the debts exceeded the existing assets. At age 62, that was a difficult to grasp truth, though I came to understand it quickly through the housing market. As a planner, I’d seen housing pass from affordability of 2.5 times income to “whatever payment can be financed” some time in the 1990’s. Incomes did not keep up with housing prices. People drove to cheaper markets; thus the long – insane U.S. commutes. Close in jurisdictions were taking on debt to meet the service requirements of new schools, libraries, parks, fire and rescue services for new housing. The jobs for the new residents [the needed population growth] were in another taxing jurisdiction – which needed the employment based taxes for its own provision of services.

Refinancing is not repayment, the renewal as well of credit worthiness, but that has been the game. That can kicked down the road is now a dumpster. This is something the modern world seems incapable of seeing. I’ve read that the grads with $100,000 in debt see that as their value. When faced with the reality of repayment they may change their minds, but how will they come to understand how the easy credit environment inflated values and created a trap?

TAE, Michael Hudson, Steve Keen, Max Keiser – the realists – thank you.

Having been a regional planning executive, I wrote a piece for the World Future Society in 1986 about the need for cooperation at the regional level for local and state governments. There would be “deficit-sharing” rather than revenue-sharing.

A fix was put in; perhaps it was the plunge protection team after the 1987 crash. Republicans and Democrats agreed it seems, to borrow for each of their own priorities and therby avoid tax increases or reduction of services. I recall the notion that, relative to the national debt, we just owed it tou ourselves – it didn’t matter how big it was.

The advent of personal/e.g. cheap computing did give a business boost and keeping the southern border open brought in competitive labor, followed by the flood of workers due to the collapse of the Soviet Union. Boosts in value creation by the entrepreneurial organizations, governmental and non-governmental occurred, but grossly inflated by dot.com market valuations and more credit – optimized optimism plus fraud. Max explained that part. More faking than making, and an increased acceptance of risk without understanding the down side. Three ship syndication – that’s all Shylock needed. Restraint, prudence, true conservatism, all diminished by MBA spreadsheets, perfectly hedged.

What kind of Kondratiev waves are in store? Great waves caused by sinkholes?

Theft is a moral problem, legal or not. So, I signed a contract that allows you to steal from me when necessary, and neither I nor my team of lawyers caught it. Fine. Economic formulas can not solve a moral problem. They even deny that markets can be manipulated for an extended period of time. So the challenge is really one of spirituality. Graeber says thoughout history, religious authorities were on the side of the poor – opposing usury as it was used to control people. The business world has gotten past that with the debt industry. Extending credit [trust that they can repay] to people who statistically won’t, creates higher rates of loss that are then used to justify higher legal rates of interest. So – as you say – credit is maxed out for people on the street.

TAE – you’ve done a great job – but where is the audience? The pews are nearly empty; buttons in the collection plate. Too many temples of money-changers.

  • This reply was modified 7 months, 2 weeks ago by  regionswork. Reason: correct html
February 15, 2016 at 11:08 pm #26862

regionswork

Correction of html was not correct. Sorry.

February 16, 2016 at 2:53 am #26864

Chris M

Regionswork,

I am glad you brought up the moral aspect of this economic mess.

If you search the Bible you’ll see Jesus talking about lending to people without expecting to get paid back, storing up treasure in heaven instead of on earth, trusting in God’s provision and not worrying about what we will eat or wear.

Cheating another person of his/her goods, or wealth, is still not moral. It is a devaluing of that person. It is not love.

February 16, 2016 at 3:00 am #26865

John Day

Good comments, Regionswork. I have also been “in the pews” since spring of 2008.
We have our work to do, too. No excuses. We know.

Chris M, “Forgive us our debts, as we forgive our debtors.” 🙂

February 16, 2016 at 4:21 am #26866

seychelles

Michael Hudson (in “Killing the Host”):

Debts that can’t be paid, won’t be paid. But trying to pay such debts will plunge economies into prolonged depression.

The title of Adam Smith’s chair at the University of Edinburgh was Moral Philosophy.

February 16, 2016 at 5:24 am #26868

Nassim

Try this:

There would be “deficit-sharing” rather than revenue-sharing.

A fix was put in; perhaps it was the plunge protection team after the 1987 crash. Republicans and Democrats agreed it seems, to borrow for each of their own priorities and therby avoid tax increases or reduction of services. I recall the notion that, relative to the national debt, we just owed it tou ourselves – it didn’t matter how big it was.

The advent of personal/e.g. cheap computing did give a business boost and keeping the southern border open brought in competitive labor, followed by the flood of workers due to the collapse of the Soviet Union. Boosts in value creation by the entrepreneurial organizations, governmental and non-governmental occurred, but grossly inflated by dot.com market valuations and more credit – optimized optimism plus fraud. Max explained that part. More faking than making, and an increased acceptance of risk without understanding the down side. Three ship syndication – that’s all Shylock needed. Restraint, prudence, true conservatism, all diminished by MBA spreadsheets, perfectly hedged.

What kind of Kondratiev waves are in store? Great waves caused by sinkholes?

Theft is a moral problem, legal or not. So, I signed a contract that allows you to steal from me when necessary, and neither I nor my team of lawyers caught it. Fine. Economic formulas can not solve a moral problem. They even deny that markets can be manipulated for an extended period of time. So the challenge is really one of spirituality. Graeber says thoughout history, religious authorities were on the side of the poor – opposing usury as it was used to control people. The business world has gotten past that with the debt industry. Extending credit [trust that they can repay] to people who statistically won’t, creates higher rates of loss that are then used to justify higher legal rates of interest. So – as you say – credit is maxed out for people on the street.

TAE – you’ve done a great job – but where is the audience? The pews are nearly empty; buttons in the collection plate. Too many temples of money-changers.

February 16, 2016 at 5:31 am #26869

Nassim

Turkey is the Source, Not Solution to ISIS and the Syrian Crisis”

Everyone agrees that ISIS and its clones are being supplied through Turkey, and yet the media is pretending that Turkey and Saudi Arabia should invade that country to “stop ISIS”.

The standard of journalism in the West is reaching what were unimaginable lows.

February 16, 2016 at 4:27 pm #26877

composer

Thank you Raul your blog is at times intensely saddening the list of dead fleeing I need to say the list of unnamed dead.

February 16, 2016 at 4:27 pm #26878

composer

Let say more then I read your work after every daily meditation you have heart.

  • This reply was modified 7 months, 2 weeks ago by  composer.
February 18, 2016 at 1:48 am #26915

TheTrivium4TW

Hi Ilargi, check your premise that the claimed reason for Fed action is the real reason for Fed action. It is not. They lie to the general public. The aren’t stupid as they are raking in ever more money, hard assets, power and control for the Debt-Money Monopolist class that instituted the Fed and currently control it. They offloaded trillions of their debt onto those they call Muppets.

“The secret of life is honesty and fair dealing. If you can fake that, you’ve got it made.”
Groucho Marx

They are faking that and because so many people fall for it they’ve got it made.

The road Hell is paved by those with good intentions that have been dupes by the Great Deceiver. Be WISE as serpent, not an echo chamber participant.

“The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks.”
~Lord Acton

“This Act establishes the most gigantic trust on earth.…When the President signs this Act, the invisible government by the Money Power, proven to exist by the Money Trust Investigation, will be legalized.…The money power overawes the legislative and executive forces of the Nation and of the States. I have seen these forces exerted during the different stages of this bill.…” (Congressman Charles A. Lindbergh, referring to the act which established the Federal Reserve. Congressional Record, Vol. 51, p. 1446. December 22, 1913.)

“The new law will create inflation whenever the trusts want inflation. From now on depressions will be scientifically created.” (Congressman Charles A. Lindbergh, after the passage of the Federal Reserve act 1913.)

“The new law will create inflation whenever the trusts want inflation. It may not do so immediately, but the trusts want a period of inflation, because all the stocks they hold have gone down… Now, if the trusts can get another period of inflation, they figure they can unload the stocks on the people at high prices during the excitement and then bring on a panic and but them back at low prices.…The people may not know it immediately, but the day of reckoning is only a few years removed.” (Congressman Charles A. Lindbergh, referring to the Federal Reserve act, Congressman Lindbergh stated this a few years prior to the stock market crash in 1929 which ushered in the Great Depression Congressional Record, Vol. 51, p. 1446. December 22, 1913.)

“Under the Federal Reserve Act, panics are scientifically created. The present panic is the first scientific one, worked out as we figure a mathematical equation.” (Congressman Charles A. Lindbergh, The Economic Pinch, 1921.)

“When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.”
― Napoléon Bonaparte

“The bank, Mr. van Buren, is trying to kill me, but I will kill it!”
~President Andrew Jackson and the face depicted on the bank’s $20 bill (mocking the immonetarate – those withing monetary illiteracy)

“We have, in this country, one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board. This evil institution has impoverished the people of the United States and has practically bankrupted our government. It has done this through the corrupt practices of the moneyed vultures who control it.” — Congressman Louis T. McFadden in 1932 (Rep. Pa)

“The Federal Reserve banks are one of the most corrupt institutions the world has ever seen. There is not a man within the sound of my voice who does not know that this nation is run by the International bankers (Debt-Money Monopolists is a more complete and accurate description).” — Congressman Louis T. McFadden (Rep. Pa)

“If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.”
by: Robert Hemphill, Credit Manager of Federal Reserve Bank, Atlanta, Ga.
Source: In the foreword to a book by Irving Fisher, entitled 100% Money (1935)

“The one aim of these financiers is world control by the creation of inextinguishable debt.”
― Henry Ford

“Money [, especially debt-money,] is a new form of slavery, and distinguishable from the old simply by the fact that it is impersonal – that there is no human relation between master and slave.” Leo Tolstoy

“The youth who can solve the money question will do more for the world than all the professional soldiers of history.”
~Henry Ford, Sr.

People need the root cause to the myriad of problems ordinary humans face… not good wishes that work to effectively conceal the root cause so that it can go on deceiving, pillaging, and mass murdering humanity by the 10s of millions.

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