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In the article below, try substituting the word "cash, without any repayment obligation" for "credit" and see how Prechter's reasoning sounds.
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February 06, 2009 - Jaguar Inflation - A Layman's Explanation of Government Intervention - by Robert Prechter
This article is part of a syndicated series about deflation from market analyst Robert Prechter, the world's foremost expert on and proponent of the deflationary scenario. For more on deflation and how you can survive it, download Prechter's FREE 60-page Deflation Survival eBook, part of Prechter's NEW Deflation Survival Guide.
The following article was adapted from Robert Prechter's NEW Deflation Survival eBook, a free 60-page compilation of Prechter's most important teachings and warnings about deflation.
I am tired of hearing people insist that the Fed can expand credit all it wants. Sometimes an analogy clarifies a subject, so let's try one.
It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing Jaguar automobiles and providing them to as many people as possible. To facilitate that goal, it begins operating Jaguar plants all over the country, subsidizing production with tax money. To everyone's delight, it offers these luxury cars for sale at 50 percent off the old price. People flock to the showrooms and buy. Later, sales slow down, so the government cuts the price in half again. More people rush in and buy.
Sales again slow, so it lowers the price to $900 each. People return to the stores to buy two or three, or half a dozen. Why not? Look how cheap they are! Buyers give Jaguars to their kids and park an extra one on the lawn.
Finally, the country is awash in Jaguars. Alas, sales slow again, and the government panics. It must move more Jaguars, or, according to its theory -- ironically now made fact -- the economy will recede. People are working three days a week just to pay their taxes so the government can keep producing more Jaguars. If Jaguars stop moving, the economy will stop. So the government begins giving Jaguars away. A few more cars move out of the showrooms, but then it ends. Nobody wants any more Jaguars. They don't care if they're free. [ :confused: :eek: :rolleyes: ] They can't find a use for them. Production of Jaguars ceases. It takes years to work through the overhanging supply of Jaguars. Tax collections collapse, [ :confused: :eek: :rolleyes: ] the factories close, and unemployment soars. The economy is wrecked. People can't afford to buy gasoline, so many of the Jaguars rust away to worthlessness. The number of Jaguars -- at best -- returns to the level it was before the program began.
The same thing can happen with credit.
It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing credit and providing it to as many people as possible. To facilitate that goal, it begins operating credit-production plants all over the country, called Federal Reserve Banks. To everyone's delight, these banks offer the credit for sale at below market rates. People flock to the banks and buy. Later, sales slow down, so the banks cut the price again. More people rush in and buy. Sales again slow, so they lower the price to one percent. People return to the banks to buy even more credit. Why not? Look how cheap it is! Borrowers use credit to buy houses, boats and an extra Jaguar to park out on the lawn. Finally, the country is awash in credit.
Alas, sales slow again, and the banks panic. They must move more credit, or, according to its theory -- ironically now made fact -- the economy will recede. People are working three days a week just to pay the interest on their debt to the banks so the banks can keep offering more credit. If credit stops moving, the economy will stop. So the banks begin giving credit away, at zero percent interest. A few more loans move through the tellers' windows, but then it ends. Nobody wants any more credit. They don't care if it's free. [ :confused: :eek: :rolleyes: ] They can't find a use for iT. [ :confused: :eek: :rolleyes: ] Production of credit ceases. It takes years to work through the overhanging supply of credit. Interest payments collapse, banks close, and unemployment soars. The economy is wrecked. People can't afford to pay interest on their debts, so many bonds deteriorate to worthlessness. The value of credit -- at best -- returns to the level it was before the program began.
See how it works? [ :confused: ]
Is the analogy perfect? No. The idea of pushing credit on people is far more dangerous than the idea of pushing Jaguars on them. In the credit scenario, debtors and even most creditors lose everything in the end. In the Jaguar scenario, at least everyone ends up with a garage full of cars. Of course, the Jaguar scenario is impossible, because the government can't produce value. It can, however, reduce values. A government that imposes a central bank monopoly, for example, can reduce the incremental value of credit. A monopoly credit system also allows for fraud and theft on a far bigger scale. Instead of government appropriating citizens' labor openly by having them produce cars, a monopoly banking system does so clandestinely by stealing stored labor from citizens' bank accounts by inflating the supply of credit, thereby reducing the value of their savings. [ :confused: :eek: :rolleyes: ]
I hate to challenge mainstream 20th century macroeconomic theory, but the idea that a growing economy needs easy credit is a false theory. Credit should be supplied by the free market, in which case it will almost always be offered intelligently, primarily to producers, not consumers. Would lower levels of credit availability mean that fewer people would own a house or a car? Quite the opposite. Only the timeline would be different.
Initially it would take a few years longer for the same number of people to own houses and cars - actually own them, not rent them from banks. Because banks would not be appropriating so much of everyone's labor and wealth, the economy would grow much faster. Eventually, the extent of home and car ownership - actual ownership - would eclipse that in an easy-credit society. Moreover, people would keep their homes and cars because banks would not be foreclosing on them. As a bonus, there would be no devastating across-the-board collapse of the banking system, which, as history has repeatedly demonstrated, is inevitable under a central bank's fiat-credit monopoly.
Jaguars, anyone?
_________________
OK - Let's try this again with a pissed off government that has not managed yet to jump start the economy despite strenuous efforts at bank recapitalization, who decides to use "STRAIGHT CASH" instead of "CREDIT" - Now the government is "really frustrated and giving it one more shot:
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February 06, 2009 - FREE CASH Inflation - A Layman's Explanation of Government Intervention - by "Prechter REDUX"
I am tired of hearing people insist that the Fed can't hand out AS MUCH FREE CASH as it wants. Sometimes an analogy clarifies a subject, so let's try one.
It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing heavily discounted CASH and providing IT to as many people as possible. To facilitate that goal, it begins operating CASH-production plants all over the country, called Federal Reserve Banks. To everyone's delight, these banks offer the STRAIGHT CASH in the form of nearly flat-out gifts. People flock to the banks and collect FREE CASH. It offers these BUNDLES OF CASH at 90 percent off the old CASH price. People flock to the cash stores and walk out with tons of 90% discounted cash. Later, cash withdrawals slow down a bit as people are sated with this nearly free cash and have bought every useless consumer item they can think of with it (before the foreign manufacturers raised the prices in a fury), so the government cuts the CASH price in half again, down to 95% discounted. More people rush in and walk out with CASH that costs only 0.5 cents on the dollar of the former money..
The program proves so popular that people are swamping the FREE CASH stores. People return to the stores to pick up several more shopping carts full of the nearly FREE CASH.. Why not? Look how easy to get it is! Buyers give nearly FREE CASH to their kids, to bums on the street, royally tip taxi drivers, busboys and shoe shiners, and park an extra shopping cart full of cash on their front lawns, for spares.
Finally, the country is awash in FREE CASH. The prices of all goods and services are starting to nudge up sharply again - and the government backs off on the FREE CASH issuance. People are working three days a week because, at least this far, they can replace any lost income with PRACTICALLY FREE CASH both for everyday purchases or for everything else, through a whole host of Government programs.
People are now overflowing with SPARE CASH, and the banks start to slow down the FREE CASH GIFTS a little bit. They don't necessarily need to move more FREE CASH, as money velocity is now humming along. The banks now begin giving CASH away, with no obligations for repayment of any principal at all. Bank earnings shortfalls are handily plugged with yet more infusions of central bank FREE CASH. All interest bearing loan rates are gyrating like yo-yo's because the market has no clue what the real interest rate should be yet, but this is a minor setback in a world of plentiful FREE CASH. Although prices are beginning to rise notably, nobody refuses the availability of more FREE CASH. They don't care if it's free. They can always use it for something on a provisional basis. :p :p :p Production of credit winds down while CASH GIVEAWAYS increase vertiginously. Interest payments which had been collapsing prior to the interventions, stabilize and then start to turn up sharply, as liquidity is ample. The government has found a wonderful new way to plug any gaps or reductions in it's income. The economy is "temporarily stabilized" and asset values begin to rise as the FREE CASH begins to herd the entire population out of all savings and into assets.The real burden of older debts begins to shrink rapidly, causing the bid on all cash intensive goods to increase sharply as well. Money velocity begins to hum yet more.
See how it works? [ :confused: :p :p :p ]
I hate to challenge mainstream 20th century macroeconomic theory, but the idea that a collapsing credit saturated economy can't use FREE CASH is a false theory. FREE CASH can and should be supplied by the Government to abate the deflationary monster. Would lower levels of FREE CASH availability mean that fewer people would own a house or a car? Quite possibly! However as all the Governments primary interests lie in causing asset prices to rise, this is never a problem as the FREE CASH spigots can be kept open indeterminately.
Yours truly - Prechter the "sound logic deflector".
________________
February 06, 2009 - Jaguar Inflation - A Layman's Explanation of Government Intervention - by Robert Prechter
This article is part of a syndicated series about deflation from market analyst Robert Prechter, the world's foremost expert on and proponent of the deflationary scenario. For more on deflation and how you can survive it, download Prechter's FREE 60-page Deflation Survival eBook, part of Prechter's NEW Deflation Survival Guide.
The following article was adapted from Robert Prechter's NEW Deflation Survival eBook, a free 60-page compilation of Prechter's most important teachings and warnings about deflation.
I am tired of hearing people insist that the Fed can expand credit all it wants. Sometimes an analogy clarifies a subject, so let's try one.
It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing Jaguar automobiles and providing them to as many people as possible. To facilitate that goal, it begins operating Jaguar plants all over the country, subsidizing production with tax money. To everyone's delight, it offers these luxury cars for sale at 50 percent off the old price. People flock to the showrooms and buy. Later, sales slow down, so the government cuts the price in half again. More people rush in and buy.
Sales again slow, so it lowers the price to $900 each. People return to the stores to buy two or three, or half a dozen. Why not? Look how cheap they are! Buyers give Jaguars to their kids and park an extra one on the lawn.
Finally, the country is awash in Jaguars. Alas, sales slow again, and the government panics. It must move more Jaguars, or, according to its theory -- ironically now made fact -- the economy will recede. People are working three days a week just to pay their taxes so the government can keep producing more Jaguars. If Jaguars stop moving, the economy will stop. So the government begins giving Jaguars away. A few more cars move out of the showrooms, but then it ends. Nobody wants any more Jaguars. They don't care if they're free. [ :confused: :eek: :rolleyes: ] They can't find a use for them. Production of Jaguars ceases. It takes years to work through the overhanging supply of Jaguars. Tax collections collapse, [ :confused: :eek: :rolleyes: ] the factories close, and unemployment soars. The economy is wrecked. People can't afford to buy gasoline, so many of the Jaguars rust away to worthlessness. The number of Jaguars -- at best -- returns to the level it was before the program began.
The same thing can happen with credit.
It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing credit and providing it to as many people as possible. To facilitate that goal, it begins operating credit-production plants all over the country, called Federal Reserve Banks. To everyone's delight, these banks offer the credit for sale at below market rates. People flock to the banks and buy. Later, sales slow down, so the banks cut the price again. More people rush in and buy. Sales again slow, so they lower the price to one percent. People return to the banks to buy even more credit. Why not? Look how cheap it is! Borrowers use credit to buy houses, boats and an extra Jaguar to park out on the lawn. Finally, the country is awash in credit.
Alas, sales slow again, and the banks panic. They must move more credit, or, according to its theory -- ironically now made fact -- the economy will recede. People are working three days a week just to pay the interest on their debt to the banks so the banks can keep offering more credit. If credit stops moving, the economy will stop. So the banks begin giving credit away, at zero percent interest. A few more loans move through the tellers' windows, but then it ends. Nobody wants any more credit. They don't care if it's free. [ :confused: :eek: :rolleyes: ] They can't find a use for iT. [ :confused: :eek: :rolleyes: ] Production of credit ceases. It takes years to work through the overhanging supply of credit. Interest payments collapse, banks close, and unemployment soars. The economy is wrecked. People can't afford to pay interest on their debts, so many bonds deteriorate to worthlessness. The value of credit -- at best -- returns to the level it was before the program began.
See how it works? [ :confused: ]
Is the analogy perfect? No. The idea of pushing credit on people is far more dangerous than the idea of pushing Jaguars on them. In the credit scenario, debtors and even most creditors lose everything in the end. In the Jaguar scenario, at least everyone ends up with a garage full of cars. Of course, the Jaguar scenario is impossible, because the government can't produce value. It can, however, reduce values. A government that imposes a central bank monopoly, for example, can reduce the incremental value of credit. A monopoly credit system also allows for fraud and theft on a far bigger scale. Instead of government appropriating citizens' labor openly by having them produce cars, a monopoly banking system does so clandestinely by stealing stored labor from citizens' bank accounts by inflating the supply of credit, thereby reducing the value of their savings. [ :confused: :eek: :rolleyes: ]
I hate to challenge mainstream 20th century macroeconomic theory, but the idea that a growing economy needs easy credit is a false theory. Credit should be supplied by the free market, in which case it will almost always be offered intelligently, primarily to producers, not consumers. Would lower levels of credit availability mean that fewer people would own a house or a car? Quite the opposite. Only the timeline would be different.
Initially it would take a few years longer for the same number of people to own houses and cars - actually own them, not rent them from banks. Because banks would not be appropriating so much of everyone's labor and wealth, the economy would grow much faster. Eventually, the extent of home and car ownership - actual ownership - would eclipse that in an easy-credit society. Moreover, people would keep their homes and cars because banks would not be foreclosing on them. As a bonus, there would be no devastating across-the-board collapse of the banking system, which, as history has repeatedly demonstrated, is inevitable under a central bank's fiat-credit monopoly.
Jaguars, anyone?
_________________
OK - Let's try this again with a pissed off government that has not managed yet to jump start the economy despite strenuous efforts at bank recapitalization, who decides to use "STRAIGHT CASH" instead of "CREDIT" - Now the government is "really frustrated and giving it one more shot:
_________________
February 06, 2009 - FREE CASH Inflation - A Layman's Explanation of Government Intervention - by "Prechter REDUX"
I am tired of hearing people insist that the Fed can't hand out AS MUCH FREE CASH as it wants. Sometimes an analogy clarifies a subject, so let's try one.
It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing heavily discounted CASH and providing IT to as many people as possible. To facilitate that goal, it begins operating CASH-production plants all over the country, called Federal Reserve Banks. To everyone's delight, these banks offer the STRAIGHT CASH in the form of nearly flat-out gifts. People flock to the banks and collect FREE CASH. It offers these BUNDLES OF CASH at 90 percent off the old CASH price. People flock to the cash stores and walk out with tons of 90% discounted cash. Later, cash withdrawals slow down a bit as people are sated with this nearly free cash and have bought every useless consumer item they can think of with it (before the foreign manufacturers raised the prices in a fury), so the government cuts the CASH price in half again, down to 95% discounted. More people rush in and walk out with CASH that costs only 0.5 cents on the dollar of the former money..
The program proves so popular that people are swamping the FREE CASH stores. People return to the stores to pick up several more shopping carts full of the nearly FREE CASH.. Why not? Look how easy to get it is! Buyers give nearly FREE CASH to their kids, to bums on the street, royally tip taxi drivers, busboys and shoe shiners, and park an extra shopping cart full of cash on their front lawns, for spares.
Finally, the country is awash in FREE CASH. The prices of all goods and services are starting to nudge up sharply again - and the government backs off on the FREE CASH issuance. People are working three days a week because, at least this far, they can replace any lost income with PRACTICALLY FREE CASH both for everyday purchases or for everything else, through a whole host of Government programs.
People are now overflowing with SPARE CASH, and the banks start to slow down the FREE CASH GIFTS a little bit. They don't necessarily need to move more FREE CASH, as money velocity is now humming along. The banks now begin giving CASH away, with no obligations for repayment of any principal at all. Bank earnings shortfalls are handily plugged with yet more infusions of central bank FREE CASH. All interest bearing loan rates are gyrating like yo-yo's because the market has no clue what the real interest rate should be yet, but this is a minor setback in a world of plentiful FREE CASH. Although prices are beginning to rise notably, nobody refuses the availability of more FREE CASH. They don't care if it's free. They can always use it for something on a provisional basis. :p :p :p Production of credit winds down while CASH GIVEAWAYS increase vertiginously. Interest payments which had been collapsing prior to the interventions, stabilize and then start to turn up sharply, as liquidity is ample. The government has found a wonderful new way to plug any gaps or reductions in it's income. The economy is "temporarily stabilized" and asset values begin to rise as the FREE CASH begins to herd the entire population out of all savings and into assets.The real burden of older debts begins to shrink rapidly, causing the bid on all cash intensive goods to increase sharply as well. Money velocity begins to hum yet more.
See how it works? [ :confused: :p :p :p ]
I hate to challenge mainstream 20th century macroeconomic theory, but the idea that a collapsing credit saturated economy can't use FREE CASH is a false theory. FREE CASH can and should be supplied by the Government to abate the deflationary monster. Would lower levels of FREE CASH availability mean that fewer people would own a house or a car? Quite possibly! However as all the Governments primary interests lie in causing asset prices to rise, this is never a problem as the FREE CASH spigots can be kept open indeterminately.
Yours truly - Prechter the "sound logic deflector".
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