[palmer]

The article is basically correct. Creating money to fight deflation is like pouring gasoline on a fire in the hope that it will spread up and not out. By not allowing it to happen, the inevitable contraction is only made worse and worse. In the end the only two remedies are depression and hyper-inflation and we all know which one will be chosen by the spineless politicians and their appointed money-monkey.

[palmer]

Upon further reflection, what we arguing about here is the tail and not the dog. The real problem in the 1920's and today is overproduction of goods. There are always ways to encourage or discourage production through manipulation of the money supply but the real cause of overproduction is psychological. If everyone believes they can sell more widgets and start producing them all at once, there will be an oversupply followed by a reduction of production followed by a ripple through the rest of the economy. Many times overproduction in different parts of the economy is not synchoronized so there is no overall expansion and contraction.

But money supply tinkering is an especially good (or bad) way to synchoronize the entire economy which is what happened in the early 20's after the contraction of 1921 which was caused by the post WWI boom. The current overproduction is mostly abroad with China's non-capitalist economy contributing far too much production to the world market. There is unfortunately every incentive for communist businessmen in China to overproduce widgets of every type for both internal and export markets. The inevitable contraction to correct this would be so devastating to the Chinese economy and society that the central government refuses to do anything about it (such as floating the currency).

The bottom line is the current world overproduction will lead to a world contraction irregardless of money supply increases. The money will sit in banks unloaned which will prompt Bernanke to do his helicopter thing which will bring on hyperinflation and economic disaster.