Deflation??

"...a debt is a saleable commodity, or chattel; and ...it may be used like money; and produce all the effects of money." --John R. Commons, Legal Foundations of Capitalism, (New Brunswick, NJ: Transaction Publishers 1995), p.246 Originally published in 1924 by The Macmillan Company

But what happens when more than 95% of the money supply is debt -- that is, I.O.U.s of one kind or another?

Hi Jake!

There's monetary deflation and price deflation. They're related. The law of supply and demand applies. The supply of money constantly grows most of the time. The only time it shrinks is when the supply of I.O.U.s shrinks. I.O.U.s such as fiat paper money, megabyte money, the note on the back of Bill's airline sleeve that promised you $10,000 for your Backgammon BR, T-bills, corporate bonds, etc.

As long as the supply of these I.O.U.s doesn't increase (or, rarely, decrease) quickly, nobody cares or notices much. When gold circulates, because of the small amount that can be mined each year, production usually slightly lags the need for more money caused by always increasing trade. Additionally, technological innovation and market competition cause the prices of things to go down. Under those stable money conditions, prices "deflate" slightly despite the slight inflation in money supply. No problem!

The problems happen when the supply of fiat or credit suddenly shrinks or grows a bunch. If the supply balloons, that's hyperinflation, if it shrinks a bunch, that's MONETARY deflation. Both lead to the economy shrinking or "deflating." For the same reason but by different paths. That doesn't happen to any great extent with gold circulating because the supply of gold remains RELATIVELY constant.

Deflation is scarier because it becomes self-feeding. Sellers are forced to drop prices because people have less money. If you have money, though, that's good because supply and demand means the value of the money goes up. After price drops, you can buy more for less. So, what's wrong with that?

The problem is that debt doesn't get smaller. If you owe $100, it doesn't shrink to reflect the fact money is relatively more valuable -- and while the price you get for what you sell goes down, the amount you have to pay for that I.O.U -- or interest on it -- doesn't shrink.  So, for all intents and purposes, during monetary deflation, debt gets relatively larger for those in debt. So I can't pay you so you can't pay Wally so he can't pay Bill and all those IOUs we wrote become instantly worthless -- or at least severely discounted -- because people don't trust them anymore and won't readily accept them in trade or for debt payments -- or they want big discounts -- or a lot more interest to off-set the greater percieved risk of default.  Even banks across the road from each other don't trust each other's I.O.U.s  I saw this happene in Moscow in 1998.  As a result, fewer loan/I.O.U.s are written and circulated. 

That shrinks the defacto money supply and the monetary deflation becomes self-feeding. So the biggest problem is that after deflationary shrinkage, money isn't available to service or roll-over other debt. Like, for example, Greek government debt. Or Uncle's debt. That in itself is bad enough but then Governments get desperate, and unlike the rest of us, if there isn't a gold standard or circulating gold, they run the presses to take care of their debts, special "projects" like wars, etc.

If they get it just right, the bankster-government axis prints up the same amount that's been destroyed by debt deflation. Fat chance. Remember Keynes' Follies, or, Prediction: The Limits of Economic Control Keynes' follies. But, to the extent they create money, it steals from everyone holding money and money demominated I.O.U.s and enables them to transfer that stolen money to their friends, neighbors, campaign contributors -- and their special projects. In the case of the U.S. government-bankster axis, wars for example.

Even if they're well intentioned, they can't return the money to the people -- the part of the existing economy -- who lost it and so that disrupts the whole rest of the economy. It shifts spending from the rest of the economy to the interests receiving the newly created debt-money from the government and Federal Reserve.  Usually, the banks. 

Duck & cover,
Rick

P.S. And, of course, this reverse Robin Hood effect makes the rich richer and the poor poorer. And so you get increasing wealth disparity.

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Deadbeats?

There's always a discount on an I.O.U.  The amount depends on its
perceived likely-hood of being paid.  The dollar is, in essence, such an
I.O.U.  The perception of repayment is dropping and you can follow it
by watching the value of dollars on the market. --L. Reichard White, Tuesday, November 09, 2010 11:04 AM

Learning curve

~"There is a test of Keynesian economics going on all around the world.  In the U.S., in Europe, even China.  The idea is that you can spend yourself out of an economic downturn.  This is an experiment that has never been tried before."--Dan Hertzberg, Editor Wall Street Journal, BBC WORLD NEWS, February 9, 2009, ~06:37:06

"We're all Keynesians now." --U.S. President Richard Milhous Nixon, 1971

"It is astonishing what foolish things one can temporarily believe if one thinks too long alone, particularly in economics ...where it is often impossible to bring one's ideas to a conclusive test either formal or experimental." --The original Keynesian, John Maynard Keynes, December 13, 1935 from introduction to his "THE GENERAL THEORY of EMPLOYMENT, AND MONEY"

The Keynesian Dead End, Spending our way to prosperity is going out of style --http://online.wsj.com, JUNE 26, 2010

Your comedian wasn't funny.

After recording the  Peter Schiff vs James Galbraith interview on CNBC 4/26/10 , it seemed appropriate to post the following email to CNBC:

Subject: 4% interest rates for 20 years???? Your comedian wasn't funny.

Hi CNBC!

It doesn't matter whether Prof. Galbraith is right about interest rates remaining at 4% for 20 years (like drawing 10 blackjacks in a row in Vegas. -- OK, 20), it's the "off balance sheet" unfunded liabilities that everyone so glibly dismisses with a single sentence.

The minimum estimates of the cost of those (Social "Security" and Medicare -- before Obamacare) was somewhere around $66 trillion.

The debt clock currently shows them at about $108 trillion.

Health, happiness, & long life,
L. Reichard White

P.S. OK, like drawing 100 blackjacks in a row. And as Prof. Galbraith suggested in a backhanded manner with his "U.S. controls its currency" comment, inflation is the nearly inevitable outcome.

Medicare - - - The BIG Picture

At somewhere between $44 trillion (with a "t") and $85 trillion in unfunded liabilities, the 800 pound animal in the room is Medicare. 

About half the health "care" in the U.S. is delivered by Medicare. It isn't the tail, it's the dog.  And it wags so-called "private" health care like Lash LaRue wags the tip of his bullwhip.

The only way to fix the system is to "reform" Medicare. Mostly by eliminating it.

No, I'm not heartless, see, I just understand that the alternatives to markets aren't just worse, they're deadly.

According to "OUTCOMES RESEARCH," only 20% of the people in US hospitals absolutely belong there.  The other 80% are either receiving scientifically unproven procedures or are being treated for non existent conditions.  --William F. Buckley interview with Dr. Robert E. Weinberg of Dartmouth, Firing Line aired 25 April, 1993 in Las Vegas. (Video tape available. Call 803 799-3449.)

lrw

P.S. Lacking such radical reform, USA Corp will follow the Greek path. In fact, the path of all fiat-currency nations. 

Except it can't happen here of course.