Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Comment on Major Gap in Deflation

Hmm, no long term deflation!?!  Puh-leazzze..   I like your article as it pertains to money and money supply vs. asset values but other commentators are correct that you missed it on credit and real goods.  Have you looked at housing prices!?  Or oil prices? Or gas?  Or soon commercial real estate?  Or stock prices?  Or bond prices (other than Tbills)??  etc etc etc.  If its not deflation what is a 30-50% drop in home prices??


Since a chunk of consumers really couldn't afford their houses without easy money, they will now demand less housing.  Prices naturally must come down. The supply chain that was filled to meet a level of demand from 2006 has become a string that the Fed is pushing on.  "Please someone loan some money to a poor hapless consumer with all the free dollars we printed for you."  The unemployed consumer doesn't want the loan payments and the bank doesn't want that credit risk.


I love your island analogy but I agree whole heartedly with BxCapricorn where the cars are purchased on credit, not with cash.  Now we have an accurate depiction of the economy.  We are seeing a credit bubble popping.  Not just a change in money supply or velocity. If all the housing bubble had been done in cash that would be your first island scenario. 


You said..."but if you understand that a bank makes money by creating money out of thin air (i.e. being able to create up to 100 times in loan amounts the value of the money they receive in deposits), then you will realize that for banks to survive they must create significant growth in monetary supply in the imminent future if they do not wish to collapse."


The banks hold assets that represent a stream of future repayments.  If the repayments don't come the asset is worthless.  The banks assets go lower.  The bank's stock and bonds go lower.  Yes the bank's create assets by making loans but that doesn't imply it will happen just because thats how it must happen.  It isn't happening!  Why do you think bailouts are NOT working.  Pushing on a string!  The consumer demands the purchase less than not having the repayment obligation.  When the consumer / homeowner becomes Mr. Newly Minted Tightwad, because of the real and possible loss of jobs and income he demands less.  Lower cash and fear => demand destruction => lower prices.  Producers are trying to find the "willing buyer-willing seller" magic number.


The company I work for mfg 53' semi trailers is most definitely experiencing deflation.   How do you think all the materials for all that housing was delieved?  Since I don't see any headlines about mass starvation, I have to think we are still transporting food.  But our business is down 80-90%. Seriously, depression, not recession.  10 shut down weeks planned so far.  10% cut in paychecks.  More layoffs.  I started here in 2006 when we had 1300 ee's.  Now we have 300.  Still more layoffs planned.  No demand, no sales due to the popping of temporary demand from easy money in housing.


Just down the road from us GM closed another plant.  Local suppliers are closing.  Increasing UE => lower demand.  Can I say it enough?  Our employer is cutting price in the face of lower demand because we had been selling into a bubble.  Now we are sellling into nothing.  Demand destruction creates deflation in real prices for real goods.  The Fed can do whatever the Fed wants to the money base but its not flowing so no inflation.  Contracting demand means deflation.  The domino effect is not done playing out by a long shot. So yes prolonged deflation.


Inflation long term sure as banks reconsider what is valuable and start loaning again.  But no deflation!?! Puh- leeaze!