contraxism

Risk of Long Term Deflation Is Low but Growing

very well explained jlounsbury59

In this case, is the inflationary consequence of printing too much money resulting in a loss of faith in the US dollar relative to its debt more than the result of looser bank lending?

Leverage has a profound impact on inflation in such a short time when the masses of investors sell dollars to buy commodities and vice-versa as we have seen.

I wonder how effective regulating leverage to regulate inflation would really be?






On Nov 26 01:23 AM jlounsbury59 wrote:

> ktchnsnk - - -
>
> You are correct in the long run if "money is printed like crazy"
> in enough quantity. However, in the short run money may not be printed
> fast enough to prevent deflation.
>
> Over the past decade, a lot of money has been printed. It was not
> printed by the U.S. Treasury but in the form of debt instruments
> by investment banks and others. These debt instruments (which were
> not subject to any regulation or oversight) became currency which
> was spent on commodities, stocks, bonds and real estate, including
> houses. Because this new currency was so plentiful, all of these
> things had their prices inflated to bubble levels. When a few of
> the debt instruments became subject to default, a wide range of debt
> came into doubt and the liquidity of this manufactured currency dried
> up - financial institutions became reluctant to recognize that it
> had the value that had been previously assumed. The fact that the
> new currency was not working the way it had been caused demand for
> the inflated items (commodities, houses, etc) to fall. When demand
> falls, and the supply remains constant (or increasing), prices fall.
> Falling prices produces additional default and we end up in a deflationary
> spiral.
>
> The magnitude of the debt pyramid is in the tens of trillions of
> dollars. With the deflationary spiral, the notional value of the
> debt instruments is still at the high level, but the exchange value
> is falling as the underlying assets decline in value. The result
> is that, based on the exchange value, balance sheets of financial
> institutions go negative. They are forced to raise more capital
> or go bankrupt. Only a national government is able to continue in
> business with a negative net worth, although many will question for
> how long.
>
> So the action that national governments take (with the aid of their
> central banks) is to take on more sovereign debt and print additional
> currency to provide liquidity to the otherwise bankrupt financial
> institutions. To do otherwise would put the entire financial system
> out of business via bankruptcy. The effect of the newly minted money
> is initially to supply capital to the reserve assets of the otherwise
> failing institutions. This money replaces the assets formerly on
> the books which have been diminished as described above. The money
> does not go into general circulation; it simply replaces money already
> spent on the inflated bubble assets. Since these assets are now
> worth less than before, the new money simply disappears into a "black
> hole" - it replaces the money represented by the lost value.

>
>
> Through lack of regulation, people were allowed to spend money that
> didn't really exist. Now we are printing that money and it can not
> be spent again.
>
> If not enough money is printed to replace the trillions of lost value
> in the debt instrument "currency" that was used to create the bubble
> valuations, the deflationary spiral continues. If more money is
> printed than is necessary, inflation will result from the excess
> money. Big problem: No one has a clue how much money will be enough.

>
>
> I keep suggesting that the tipping point between not enough new money
> and too much new money is like a knife edge, rather than a balance
> beam or some other broader platform. A major challenge is to keep
> from falling off the knife edge. It may not be possible.
>
>
>
>
> On Nov 25 08:13 PM ktchnsnk wrote: