2009-07-26

Prechter on Deflation

From The Guide to Understanding Deflation.

pg. 9
Because the idea of money is so highly psychological today, the line between what is money and what is not has become blurred, at least in people's minds, and that is where it matters when it comes to understanding the psychology of deflation.
pg. 19, excerpted from 2003, on Bernanke's advice for defeating deflation:
They have met the Wizard of Oz in person, and he is impressive!

He is also delusional. Can you imagine the laughingstock that the Federal Reserve System would become if its "assets" consisted of defaulted mortgages, bonds of bankrupt companies and municipalities, IOUs of shaky foreign governments and stock certificates of companies no longer in existence? Can you imagine the panic that would ensue to escape a monetary system with such assets as its reserves?
The Federal Reserve is halfway to that system today...

pg. 23, from the same excerpt:
There is no way that Fed officials will buy junk paper unless and until the social pain gets unbearable and political pressures force it to choose a terrible policy in response to public demand to "do something."
Been there, done that. Prechter even accurately predicted the "do something" mentality of the American people.

On pg. 26, in an excerpt from 2004, Prechter gives a great example of what would happen if the government decided that a specific good was necessary for economic growth, and if it promoted the production of this specific good (Jaguars in the example), and it resulted in oversupply and overownership, to the point that no one wanted any more, even if they were free. He then compares it to credit:
It may sound crazy, but suppose the government were to decide that the health of the nation depends 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.
Eventually, everyone has more than enough credit and they do not want any more...but the economy is built around the industry that...
People are working three days a week just to pay the interest on their debts 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. They can't find a use for it.
And that's where the U.S. economy finds itself in 2008, 2009 and beyond.

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