Japan has suffered deflation in most of the last 20 straight years, disinflation in the few others, ever since 1989 when they began Quantitative Easing...printing money 24/7/threesixfive.
They flooded their economy with cash and ZERO% interest rates for the last two decades, non-stop.
And Japan today has 12% deflation.
Japan today has the OPPOSITE of what everyone says that you get when you drop money from helicopters in full volume non-stop every day for 20 years.
Of course, I already told you *why*...and you blew that off...claiming that mortgages couldn’t buy houses...
...well, what you said was that credit didn’t count...that credit wasn’t cash...that credit couldn’t buy anything.
That’s the same as saying that mortgage loans don’t buy houses.
Of course, you aren’t alone. Universities, the news media, and major business organizations say the same thing.
And they all predict inflation or hyper-inflation.
Which is what Japan *doesn’t* have.
And that’s what the U.S. didn’t have back in 1945 when we printed even more money then than today.
So all of these people are mindlessly saying exactly the same thing...saying something that fails to explain the U.S. in 1945...saying something that fails to explain Japan today, last year, last decade, and last 20 years.
To your credit you at least recognize that deflation is the enemy...that deflation could crush the whole system.
Spot on.
Now watch salaries, stocks, and home prices. More to the point, watch shipping, trucking, and air cargo rates (leading indicators for ups and downs in the business cycle).
They’ll let you know in short order if the enemy really is here.
Or not.
Spot on Southack. Good stuff.
To your credit you seem to acknowledge that lots of inflation would be bad. You also have the correct assessment that predictions of hyperinflation are mostly wrong. To have that happen, the government would have to be essentially the only employer and pension plan so they could raise wages and pensions on a daily basis.
Unfortunately you have missed the main lesson of Japan which is that claims by people like Bernanke that they can control deflation by QE or other schemes are a joke. The latest I heard (earlier this year) is he would target a nice cozy 1% price inflation. What he has actually done is create a knife edge in the form of a treasury bubble. As his QE forces long rates down, he has become the last and best greater fool for treasury buyers. Each bout of deflation psychology like the mild one last week drives up demand for the 10 year treasuries. Take a look at Tuesday to Wednesday, a huge gap down in S&P500 with a huge gap up in the 10 year (gap down in the rate of about 50 bp). The pattern repeats every day in one direction or the other.
Essentially what happened Tuesday night is that a (relatively mild) deflation fear psychology took hold which at the root is the same problem as Japan had: insolvent banks with questionable assets (e.g. ABS, CDS, etc) and loads of liabilities (e.g. trillions in deposits) holding a gun to the financial system. The result of this psychology is some fools buy 10 year treasuries knowing that some other fool will buy them because everyone knows that the ultimate perfect fool Bernanke is ready to buy them. Why perfect? Because Bernanke has no limits on what he can spend and no need to make any profit, he can simply buy them and burn them.
If Bernanke had any shred of hope of stopping this crisis last fall he could have followed the MSM propaganda and fixed the whole problem by applying QE in the real estate market: printing money and buying and burning houses. Even a generous estimate of the problem (5m too many houses) would only have required $1T at 200k per house. Why wasn't it solvable then? The complicating factor was securities that were not, or only loosely, based on hard assets and income streams, things like CDS. Essentially instead of relying on payments from a borrower, the big banks relied on financial insurance payments and other exotic payments from other financial players.
So instead of a quick and easy fix we ended up with an endless black hole of bank and insurance company bailouts. You need to understand this underlying problem before you will understand that the treasury bubble solution will not work. The only ways out of a treasury bubble are an inflationary boom or deflation. The higher the treasury bubble goes, the higher the inflationary boom needs to be or the more likely the deflation will end the financial system. Mises was right, there are no other choices, no easy way out.
Good points. Thanks.