Comments on: The Great Credit Contraction Cometh http://dailyreckoning.com/the-great-credit-contraction-cometh/ Entertaining Ideas on the Economy, Markets, Gold, Oil and Investing Strategies. Sat, 11 Feb 2012 01:59:47 +0000 hourly 1 http://wordpress.org/?v=3.2.1 By: douggo http://dailyreckoning.com/the-great-credit-contraction-cometh/#comment-14582 douggo Sat, 11 Jul 2009 18:09:50 +0000 http://dailyreckoning.com/?p=17123#comment-14582 If everyone is saving and nobody is borrowing then the Feds printed money will sit in banks and the price of gold will drop. Why are so many of your contributors gold happy? In the future gold will be king but at the moment it looks as though the price will drop significantly. What do you say about this theory. If everyone is saving and nobody is borrowing then the Feds printed money will sit in banks and the price of gold will drop. Why are so many of your contributors gold happy? In the future gold will be king but at the moment it looks as though the price will drop significantly. What do you say about this theory.

]]> By: Patrick P http://dailyreckoning.com/the-great-credit-contraction-cometh/#comment-14550 Patrick P Sat, 11 Jul 2009 05:18:31 +0000 http://dailyreckoning.com/?p=17123#comment-14550 <b>James R:</b> Good points, but if your definition of "money supply" includes only physical currency or, possibly, even "base money", then you may be using an impractical definition for today's world. As is advocated by <a href="http://globaleconomicanalysis.blogspot.com/2006/02/inflation-what-heck-is-it.html" rel="nofollow">Mike Shedlock</a>, especially, or even <a href="http://www.minyanville.com/articles//7/6/2009/index/a/23402" rel="nofollow">Mr. Practical</a>, credit (debt) is effectively money under fiat fractional reserve banking. So if you were to expand your definition of "inflation" and "deflation" to include credit, then <i>money supply</i> could be said to be contracting, advancing deflation and depression. Theoretically the FED can overcome this via monetary expansion, but that might destroy their own assets (and those of its favored banks) at the same time. James R: Good points, but if your definition of “money supply” includes only physical currency or, possibly, even “base money”, then you may be using an impractical definition for today’s world. As is advocated by Mike Shedlock, especially, or even Mr. Practical, credit (debt) is effectively money under fiat fractional reserve banking. So if you were to expand your definition of “inflation” and “deflation” to include credit, then money supply could be said to be contracting, advancing deflation and depression. Theoretically the FED can overcome this via monetary expansion, but that might destroy their own assets (and those of its favored banks) at the same time.

]]> By: James R http://dailyreckoning.com/the-great-credit-contraction-cometh/#comment-14518 James R Fri, 10 Jul 2009 22:50:19 +0000 http://dailyreckoning.com/?p=17123#comment-14518 Mr. Bonner, could you please do your readers a favor, and stop using the term "deflation" to mean "the fall in price of goods"? <i>Deflation</i> is the contraction of the money supply, just as <i>inflation</i> is the expansion of the money supply. Inflation and deflation tend to <i>lead to</i> higher prices and lower prices, respectively, as increasingly the money supply means that more money chases the same number of goods (ergo prices rise), and decreasing the money supply means that less money chases the same number of goods (ergo prices fall). But supply and demand also affect prices. If demand falls (because consumer preferences switch from spending to saving), prices will naturally fall. <b>This is not deflation</b>, as this has nothing to do with the money supply. It is simply a <i>fall in prices</i>. Furthermore, it is temporary, as businesses reduce supply in accordance with the reduced demand. No matter what the Keynesian economists think, falling prices are not a bad thing. In fact, the price of most goods is constantly and gradually falling, as production methods (one of the many forms of capital) become more and more efficient. The computer and cell phone industries have not collapsed because prices constantly fall, and nor will the rest of the economy. When so-called economists say that we must fight "deflation", what they really mean is that they want to fight against falling prices. This is not economics; it is total insanity. And it should be unmasked for what it truly is, by refusing to mislabel it is "deflation". Mr. Bonner, could you please do your readers a favor, and stop using the term “deflation” to mean “the fall in price of goods”?

Deflation is the contraction of the money supply, just as inflation is the expansion of the money supply.

Inflation and deflation tend to lead to higher prices and lower prices, respectively, as increasingly the money supply means that more money chases the same number of goods (ergo prices rise), and decreasing the money supply means that less money chases the same number of goods (ergo prices fall).

But supply and demand also affect prices. If demand falls (because consumer preferences switch from spending to saving), prices will naturally fall. This is not deflation, as this has nothing to do with the money supply. It is simply a fall in prices. Furthermore, it is temporary, as businesses reduce supply in accordance with the reduced demand.

No matter what the Keynesian economists think, falling prices are not a bad thing. In fact, the price of most goods is constantly and gradually falling, as production methods (one of the many forms of capital) become more and more efficient. The computer and cell phone industries have not collapsed because prices constantly fall, and nor will the rest of the economy.

When so-called economists say that we must fight “deflation”, what they really mean is that they want to fight against falling prices. This is not economics; it is total insanity. And it should be unmasked for what it truly is, by refusing to mislabel it is “deflation”.

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