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To: DrC
the reason falling prices is bad is what?

You're in good company not knowing why deflation is poison, but I'll tell you how it's gone in the past.

Starting a business means getting labor and capital, and before the labor can be hired the capital has to be rented --as a 'loan' (OK sure we got religious nuts on these threads that want to cut off bankers' hands but they're crazy).   This means business activity starts with a loan based what's known at the time, and if right after the loan's made we get hit with a surprise inflation swing then payments have to be met with slashed earnings.

Last time was in the 1930's with 45% non-farm unemployment.  Really ugly.  Never again.

29 posted on 03/15/2011 8:12:36 AM PDT by expat_panama
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To: expat_panama

“This means business activity starts with a loan based what’s known at the time”

I understand that, but so long as steady deflation is ‘expected’ under a gold standard, I don’t understand the big deal. It merely changes the terms of what constitutes a sensible loan in light of these expectations. It’s much more of a big deal if the central bank intervenes to create unexpected inflation or otherwise screw up economic fundamentals in a way no rational businessman could have predicted.

Put another way, deflation has been an enduring feature of markets for computers and other electronic gadgetry, yet I haven’t seen any evidence that these industries lack for borrowed capital.

What am I missing?


38 posted on 03/15/2011 8:57:25 AM PDT by DrC
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To: expat_panama

Thanks for being one of the few that truly understands banking, finance, and economics.


45 posted on 03/15/2011 10:21:45 AM PDT by RockinRight (I once had my identity stolen. Once they got to know me, they gave it back right away.)
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To: expat_panama

Yes, the deflation of the thirties was bad.

But my understanding of that period was that the FED made it worse and you add in FDR who piled on bad policy and socialism into the mix, and voila, years long with no real recovery.

The problem we have today is that the dollar is only strong because of the reserve currency status. It seems though that that status is declining, which is bound to happen. When we lose that, this country, with exported jobs, uneducated idiots thanks to the teachers unions, a population that is heavy in debt (which was engineered by the FED since Greenspan) and it will be a very tough road.

But even with the deflation that was in the thirties, the deflation kept cash valuable. A nickel was a nickel. Today, a nickel is worth MORE than a nickel, in base metals.

People want value again. A piece of paper that is losing world wide influence (just look at Ozombie and the middle east) why wouldn’t a stronger currency be better?

We are already at or near Depression level unemployment as it is.


60 posted on 03/15/2011 5:56:24 PM PDT by TruthConquers ( Delendae sunt publicae scholae)
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