Moral Hazards Amok

Impending Inflation? The Global 'New Deal' All but Guarantees It

User 270430, thanks for the link that you provided explaining how inflation work itself into a monetary system such as ours. (mises.org/story/2901)...

However, in most ways the article actually argues in favor of deflation. Here are a couple of its more salient quotes:

“The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion.” Ludwig von Mises – 1949

And this one…

“However, banks' limited equity capital wouldn't allow expanding credit and money supply any further, whatever the amount of excess reserves. Perhaps even more important, a contraction of the means of payment, accompanied by a sudden stagnation of credit supply, can be expected to exert downward pressure on money prices, production and employment.”

At this point in the crisis, the government will attempt to rescue the banking system so lending can begin again. The first strategy is injecting peoples' tax money into banks. The second strategy is buying banks' risky assets, and the third is monetizing banks' risky assets.

We are now, or soon will be, doing all three, but here’s the key, credit will still continue to collapse. Even after the Fed’s efforts, banks and finance companies will not be willing to lend so extremely promiscuously again. As previously pointed out, lending standards will be much tighter in the years ahead.

Also, at least for a few years, individuals and business will not wish to borrow nearly as much again as jobs are being lost and prices for everything is in freefall. As JasonC so diplomatically puts it…

“No, prices are not going to trend up after a brief scare.

Earth to inflationary brainstorm clueless people, please write on a blackboard 500 times, "the demand for money is not a constant".”

Impending Inflation? The Global 'New Deal' All but Guarantees It

Very good article overall. You made the deflationary case quite well, but it seems that the inflationary case is somewhat lacking in details. It’s those details that I’m looking for and am not just finding in the arguments of the hyper-inflation proponents.

The US government isn’t going to simply print money and throw it out the windows of helicopters. As you point out in the article, the government expends the money supply by going into debt, but the much larger great credit super-bubble has popped. Will they issue enough bonds to balance the $20 trillion that has been lost? What about the next $20 trillion after that? I’m not saying that this is the end of the world, but I just don’t see hyper-inflation.

Four factors are in motion that will make the next several trillion in losses pretty much baked in.

1. Most asset prices are collapsing, not just real estate. Oil, precious metals, agriculture… all. Count ‘em and stack ‘em, nothing is safe and the tape doesn’t lie.
2. Incomes all over the globe are falling, jobs are being lost, and Joe the plumber is reacting by popping handfuls of Xanax and tightly hording his savings (that he doesn’t have).
3. Credit is much harder to obtain and will stay that way. Yes, the current credit freeze is thawing but still credit standards will be much stricter in the years ahead than they were during the last 15.
4. The world's economy is caught in several deflationary feedback loops due points 1 through 3 above. These dynamics all feed off of each other and they are even accelerating.

Also, will a New Deal necessarily be inflationary? It wasn’t during great depression 1, why would it be now?

Thank you for making both sides of the argument. However I think you made a much better case for deflation rather than inflation because it’s hard to see how government’s efforts can stop the super cyclone of credit and asset destruction.