Does debt deflation plus monetary inflation equal goldilocks?

[Guest]

Is it possible that bad inflation is avoided if the money evaporating in the form of credit is simply replaced by govn't printed fiat money so that we wind up with goldilocks-type "just right" money supply and no lasting harm done (other than the massive moral hazard precedent)

My common sense is telling me no, but I can't explain why it wouldn't be the case. Can someone put it in a nutshell for me?

[friendly_jacek]

Re: Does debt deflation plus monetary inflation equal goldilocks?

Is it possible that bad inflation is avoided if the money evaporating in the form of credit is simply replaced by govn't printed fiat money so that we wind up with goldilocks-type "just right" money supply and no lasting harm done (other than the massive moral hazard precedent)

My common sense is telling me no, but I can't explain why it wouldn't be the case. Can someone put it in a nutshell for me?

Possible, but so far the legal money "printing" is not fast enough to catch up with money destruction (credit), except for the last 2 days.

At some point the money supply will overshoot, but not until the deflation burns out itself.

The real question is how many deflational bombs are left in the system.

[blazespinnaker]

Re: Does debt deflation plus monetary inflation equal goldilocks?

Is it possible that bad inflation is avoided if the money evaporating in the form of credit is simply replaced by govn't printed fiat money so that we wind up with goldilocks-type "just right" money supply and no lasting harm done (other than the massive moral hazard precedent)

My common sense is telling me no, but I can't explain why it wouldn't be the case. Can someone put it in a nutshell for me?

It's a distinct possibility.

It's also quite possible that this gives Obama an execuse to spend 700B on public works projects without causing inflation.

No doubt dozens of iTulipers will chime in saying how this all leads to hyperinflation.

Most of the arguments I disagree with, though. Metalman is the only one that I think had a good counterpoint, though, and that is the illusion of value will be broken, thus leading to hyperinflation.

That's not a bad argument.

Another good argument (mine) is that Obama needs inflation in the price of oil in order to create incentive for people to migrate to a different form of energy.

Another argument might be that you really can't control this sort of thing like it were some sort of simple dial. You push and and you push and you push to maintain the goldilocks and then suddenly - everything snaps from too much overt government influence.

Still, Japan seemed to dance on the razors edge for quite awhile. If we go through what japan did, that's not so bad. They maxed out at 6% unemployment, I think.

[blazespinnaker]

Re: Does debt deflation plus monetary inflation equal goldilocks?

Possible, but so far the legal money "printing" is not fast enough to catch up with money destruction (credit), except for the last 2 days.

At some point the money supply will overshoot, but not until the deflation burns out itself.

The real question is how many deflational bombs are left in the system.

Indeed. Any thoughts?

[Raz]

Re: Does debt deflation plus monetary inflation equal goldilocks?

I'm a stock and futures trader, NOT an economist (Thank god!), but I'll try giving a "layman's answer".
Think of it this way: fiat money and capital are two entirely different things. Assuming the money the banks loaned out represented capital (someone had to produce a good or provide a service in order to obtain it), said capital has been wasted/destroyed (at least in part) by placing it into McMansions that cannot be sold for the loan balance remaining. When the Fed comes along and replaces it with Bernanke Pesos, said "money" only represents the clicking of a mouse at the Fed to "produce" the money that has been lost/squandered, but not the capital. It went to money heaven when the stick-slapping nitwits built their zillionth McMansion that isn't needed and cannot be afforded at price to allow the capital to be retrieved.

(I also hope that someone more erudite in these matters will vet my thoughts.)

[grapejelly]

Re: Does debt deflation plus monetary inflation equal goldilocks?

the money destruction isn't...it is destruction of FUTURE credit.

When A borrows from B, and doesn't pay it back, the money A borrowed has been spent and propogated already in the economy.

If A borrows from B and pays B back, then the money that was borrowed into existence is extinguished.

As I have pointed out many times, borrowing and defaulting is NOT deflationary. It is disinflationary only...it stops future money creation.

So the replacement of defaulted credit with newly borrowed presto chango fiat currency is highly inflationary. It dilutes the existing money stock, penalizing savers and investors. And it rewards the big banks who wrongly took enormous risks and are getting bailed out.

The new money is real money. The old stuff is collapsing asset values. So this is the very worst thing you can do, pouring gasoline on a fire that should instead be allowed to burn itself out.

[rabot10]

Re: Does debt deflation plus monetary inflation equal goldilocks?

I'm a stock and futures trader, NOT an economist (Thank god!), but I'll try giving a "layman's answer".

Think of it this way: fiat money and capital are two entirely different things. Assuming the money the banks loaned out represented capital (someone had to produce a good or provide a service in order to obtain it), said capital has been wasted/destroyed (at least in part) by placing it into McMansions that cannot be sold for the loan balance remaining. When the Fed comes along and replaces it with Bernanke Pesos, said "money" only represents the clicking of a mouse at the Fed to "produce" the money that has been lost/squandered, but not the capital. It went to money heaven when the stick-slapping nitwits built their zillionth McMansion that isn't needed and cannot be afforded at price to allow the capital to be retrieved.

(I also hope that someone more erudite in these matters will vet my thoughts.)

Makes sence to me

[grizam303]

Re: Does debt deflation plus monetary inflation equal goldilocks?

The new money is real money. The old stuff is collapsing asset values. So this is the very worst thing you can do, pouring gasoline on a fire that should instead be allowed to burn itself out.

I think you've got it wrong. It's not that we're wrong in using gasoline, it's that we're not using enough gasoline.

[grapejelly]

Re: Does debt deflation plus monetary inflation equal goldilocks?

I think you've got it wrong. It's not that we're wrong in using gasoline, it's that we're not using enough gasoline.

we need more productive capacity. We need to reward savers and investors. The current regime is paying those who were most irresponsible. How is that right?

[grizam303]

Re: Does debt deflation plus monetary inflation equal goldilocks?

we need more productive capacity. We need to reward savers and investors. The current regime is paying those who were most irresponsible. How is that right?

Sarcasm is hard to convey online; my post was made in jest.

I agree wholeheartedly that we need more productive capacity. I also find it egregious that an industry which produces literally nothing could be receiving the overwhelming majority of our country's monetary resources.

When I see such large numbers being thrown at banks, it starts to look to me like coal being thrown into a furnace. I can see the writing on the wall...

[LargoWinch]

Re: Does debt deflation plus monetary inflation equal goldilocks?

As I have pointed out many times, borrowing and defaulting is NOT deflationary. It is disinflationary only...it stops future money creation.

this is very insightful; I am often confused (and believe that I am not the only one) by this dynamic. Thanks for the explanation grapejelly.

[grizam303]

Re: Does debt deflation plus monetary inflation equal goldilocks?

Defaults being disinflationary only makes perfect sense.

So would deflation only be caused as a result of overvalued assets?

[grapejelly]

Re: Does debt deflation plus monetary inflation equal goldilocks?

Defaults being disinflationary only makes perfect sense.

So would deflation only be caused as a result of overvalued assets?

Deflation can result when people pay back loans and do not take out new ones.

If asset values collapse, as they are now, and somehow borrowers start paying back the loans they took out to buy those assets, that is deflationary.

I think we have a mix because some people who borrowed are in fact liquidating the collateral and paying the loans back, which is deflationary.

However, the Fed move to "inject" (god I hate that word now) trillions into the system somehow, is supposed to forestall people paying back their loans.

That's what it is all about. Have you borrowed money? Don't pay it back. Here's the clams so you won't have to pay it back. We'll hang out and let asset values balloon up so you can pay it back then.

It's sickening.

[dtimwinn]

Re: Does debt deflation plus monetary inflation equal goldilocks?

I am new here, so please forgive. I am mighty confused by the different thoughts expressed. Does anyone have a suggestion as to what a person is to do in this financial environment -- i.e., where, if anywhere, one can/should put investment money? Thanks.

[Guest]

Re: Does debt deflation plus monetary inflation equal goldilocks?

the money destruction isn't...it is destruction of FUTURE credit.

When A borrows from B, and doesn't pay it back, the money A borrowed has been spent and propogated already in the economy.

If A borrows from B and pays B back, then the money that was borrowed into existence is extinguished.

As I have pointed out many times, borrowing and defaulting is NOT deflationary. It is disinflationary only...it stops future money creation.

So the replacement of defaulted credit with newly borrowed presto chango fiat currency is highly inflationary. It dilutes the existing money stock, penalizing savers and investors. And it rewards the big banks who wrongly took enormous risks and are getting bailed out.

The new money is real money. The old stuff is collapsing asset values. So this is the very worst thing you can do, pouring gasoline on a fire that should instead be allowed to burn itself out.

Man, this stuff is mind blowing at times. So when money is eliminated by being paid back, am I correct to assume this is because of fractional reserve banking? I guess I had it backwards, assuming money borrowed and not paid back was eliminated, rather than the opposite.

Makes Mongo's head hurt.