Mood Swings: Should We Prepare for Secular Deflation?
While inflaton requires an increase in money and credit supply, more monetary demand is also necessary
Meeting so many people
Who are trying to be free
- Moody Blues
Although most folks define inflation in terms of rising prices, the classic definition of inflation is expansion in the quantity of money and credit.
To realize inflation, economies need a mechanism for creating more money and credit supply. In modern economies, that mechanism is primarily the central bank. Central banks, such as our Federal Reserve, are empowered to create money and credit by fiat. Due to political influence, this empowerment is certain to lead to propensity for generating excessive supply over time.
While money-printing machines are necessary, supply alone isn't sufficient to create inflation.
Demand is also required. People must be willing to take risk. Because modern monetary systems are structured around the pyramiding effect of credit, economic actors need to be willing to borrow in order for monetary quantities to appreciably expand. If folks aren't willing to take on additional debt, then significant inflation can't occur.
So what's happening currently? The money printers are certainly doing their part, as bureaucrats around the world are creating trillions of dollars in potential supply.
But borrowers aren't jumping on board with the same reckless abandon. Instead, they're showing a proclivity for saving and paying down existing debt. Money velocity is slowing dramatically.
Should this risk-averse behavior relate to a secular change in social mood, then one has to wonder whether bureaucrats aren't essentially pushing on a string in attempts to inflate the monetary system.
If this turns out to be true, then do bureaucrats basically pack it in and accept a secular deflationary context? Or do they pursue innovative ways to circumvent the broken credit machine?
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter