You’re absolutely correct - because conventional economists simply refuse to:
1. Use the word “deflation.” I’ve consistently been telling people here on FR that we’re in a debt deflation. We’ve built up a huge bubble of debt in the US (everywhere in the world, practically) and now a large and economically significant sector of this debt can no longer be serviced. The debt will be defaulted upon, the amount of “effective money” in the economy will contract until such time as the amount of debt comes down to a level that can be serviced by the creation of real income and wealth in the country.
The trouble is, Keynesian economists are all for prolonging this pain - they’re trading a sharp, short, severe contraction for a prolonged, dawn-out discomfort, with huge transfers of private sector defaults onto the government’s balance sheet. This means we’re following Japan’s model from their RE collapse in 1990.
2. Accept that the work of Hyman Minsky and Irving Fisher (post-1933) has something to tell us today. Today’s economists are largely disconnected from reality; they don’t look at the real couplings in the economy by talking to businesses and people, they’re relying on reams of various statistical abstracts churned out by the government and private sector data collectors, then applying their goofy statistical models to these. And they’re failing.
When one goes back and reads Hyman Minsky’s papers about “unsustainable towers of debt,” - he’s not using partial differential equations or other highbrow mathematics that are in vogue in economics today. Minsky lays out his case in practical observations of how the credit markets work, how banks work, how there is a circular pattern of reliance upon everyone paying their debts in the larger economic world - and when enough people default on their debt, the circle is broken and the pyramids of debt in the banking sector come crumbling down. No math, just a dogged pursuit of how things really hang together.
Today’s economic landscape would not tolerate a Minsky or Fisher.
I didn’t get my call on the housing market from being an economist. I got it by being a skeptical investor and visiting some housing developments north of Reno, NV, getting out of my pickup and talking to people. When I learned that the people I was talking to were self-styled “real estate investors” - getting IO loans to buy two or three houses on either side of them, and that the development of hundreds of houses was largely sold out to a scant number of people who were actually *living* in the development.... that’s when I had my Bernard Baruch “shoeshine boy” moment.
Amateurs playing at being RE investors with IO mortgages that required a bit of fraud (ie, that they were going to occupy the property when it was nothing but a price appreciation flip) .... that’s a case of shoeshine boys and stocks writ most large.
Ok, and I agree with most of this. But what happens if, say, the Chinese say, "You know, we have a bigger problem than the Americans. We cannot CALL their debt---it would kill us. So we'll just subsidize their buying to keep our economy afloat." This was pretty much what the Japanese did in the 1980s, and then paid for it big time in the 1990s.
Minsky and others did not account for an outside (major) force being willing to engage in self-sacrifice for what it perceives as a much longer-term favorable goal. I'm not saying it will, or won't work. I'm saying I don't think many models account for this, even now (thus waiting for the inflation that may not come any time soon.)
[Amateurs playing at being RE investors with IO mortgages that required a bit of fraud]
Bingo.
But those were just the Useful Idiots who primed the A$$Paper/Derivative Sewer Pipe - for the benefit of the likes of Geithner and his GS/Fed pals...
And none of that happened overnight... or without a little help:
"We didn't truly know the dangers of the market, because it was a dark market," says Brooksley Born, the head of an obscure federal regulatory agency -- the Commodity Futures Trading Commission [CFTC] -- who not only warned of the potential for economic meltdown in the late 1990s, but also tried to convince the country's key economic powerbrokers to take actions that could have helped avert the crisis. "They were totally opposed to it," Born says. "That puzzled me. What was it that was in this market that had to be hidden?"
