Debt based economy explained
Someone asked this question on marketwatch
I don't understand deflationary depressions, i admit i do not know much. I need to learn though. Why couldn't the fed just print money to get the currencies value down? Or am i misunderstand deflationary.
Seems like theres a debate between inflationary depression and deflationary depression. Either way its bad. But can any tell me why we would go into a deflationary?
Here is the best answer someone posted there, thought people over here would be interested in reading so copied here
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Our money is entirely create from debt. If ALL debt was retired in our country, there would be NO money. Deflation is defined as a reduction in the credit/money supply. Everytime a loan is created it increases the money supply. Once that loan is retired, the money that was created is also retired.
This would all be different if the money was actually printed. But only a very small fraction of money created is actually ever printed. Only the money needed to carry our day to day transactions is printed. Near ALL of our money is nothing more than book entries, or today, a computer entry.
Our fiat debt based money system REQUIRES inflation. If you go and buy a house on debt, at first you may have a hard time affording it. But due to inflation your wages increase and after a few years your mortgage payment becomes less and less of a percentage of your income. Same with the government. They borrow, get in over our heads, but they know that due to inflation their revenues will increase. So this HUGE debt, in theory, becomes less and less percentage of revenue.
Currently the subprime markets are seeing increasing defaults. Remember, when a debt is retired, it decreases the money supply. That computer entry that created the money is now zero. That money is gone. Into thin air, from which it came. Debt can also be retired by default or a debt being forgiven. So massive defaults are deflationary, they take money out of the system.
Lately the FED has lost its control, and Greenspan has openly talked about this in an interview a couple months ago. When he dropped rates to near zero, mortgage rates followed. But recently as rates have been increased, mortgages did not follow. Mortgage rates did increase but not proportionately to the previous decrease.
For those who remember, in 2002 Greenspan was talking a lot about "the risk of deflation" to our economy. This was the purpose of cutting rates to near zero. This was to encourage borrowing. Borrowing increases the money supply. At the same time, for those who remember, Bush issued tax rebates. Another increase in the money supply. Both are only temporary bandaids, and result in a larger problem later on (which is nearing).
So inflation is kept going to avoid deflation. Inflation is a increase in the credit supply, increasing debt. To increase debt REQUIRES 2 things. A WILLING BORROWER and a WILLING LENDER. When the banks lose confidence, they stop lending. When borrowers lose confidence, they stop borrowing. This is what controls the FEDS effectiveness. The FED lowers and raises rates to encourage/discourage lending. But this is their only control, they can't fully control the emotional side, the confidence equation.
In 2001 as the recession set in, the borrower lost confidence in borrowing, as is normal in a recession. Lower rates persuaded borrowers to borrow. Borrowers are not as smart as lenders, and more easy to persuade into borrowing. With lower rates borrowers were persuaded to buy new, bigger houses. They cashed out equity in their homes for consumption. And the money supply inflated, the desired goal.
This time around, as the subprime markets crumble, the Lenders have lost confidence. The FED has been injecting 100's of billions into the credit markets. But the credit markets have still stopped a large portion of lending. They are holding onto the cash as they fear that as this unwinds they may need it to cover their ASSetts. This failure to persuade Lenders to lend, combined with increasing defaults, is resulting in a failure to inflate and leading to deflation.
Bushes Tax Rebates. Bush is borrowing for us, increasing the money supply, to avoid deflation. He is borrowing for us because, well because he can, and we can't. When I say we can't I'm referring to the banks loss of confidence, they have cut back significantly on lending. When deflation rears its head, SOMEONE has to borrow, increase the money/credit supply, to inflate.
Fiat debt based money systems are ALL ABOUT ever increasing debt. Without it, they collapse into deflation through defaults. Deflation results in falling prices, wages included. As prices fall, there are less profits for corporations and corp. debt defaults increase causing further deflation. Wages drop resulting in large defaults in consumer debt further increasing deflation. At this point BOTH borrowers and lenders have lost confidence. Deflation continues to spiral downward until most debt has been cleansed from the system, and someone starts borrowing again. This someone is usually the government and usually to finance a war. The USA has gone though 4 depressions since its inception. Near the bottom of all these depressions you find a war followed by economic recovery. The larger the depression has been, the larger the wars have been.
Note: If the FED starts actually printing all the money, then we're in for hyperinflation, as once the money physically exist, it does not dissappear when a default occurs as it does currently. Germany, before they totally collapsed, was printing physical moeny so fast the they started printing on only one side of the bill, to speed up the printing. The back side of their bill was blank
Nice article.
Nice article.
>>But due to inflation your
>>But due to inflation your wages increase and after a few years your mortgage payment becomes less and less of a percentage of your income
in the dream world...!
If the FED starts actually
If the FED starts actually printing all the money, then we're in for hyperinflation
<< like what Zimbabwe is doing right now. Currency note of 1 Trillion Zim Dollars!!!
- येडचॅप
US economy has always been
US economy has always been debt-based and deficit-based. US Governments, traditionally, have never bothered to keep budgetary-deficits down. As long as US $ is in demand world over, US Treasury is not worried about 'printing' money- not necessarily currency notes but bonds and IOUs. As long as major markets such as the oil market conduct their trade-transactions in US $ terms, the oil-importing countries will continue to hanker after acquiring & hoarding the dollars! So, why worry?
American economists sitting in World Bank & IMF never cease dishing out lessons in 'Fiscal Responsibility' to the Developing Countries but gloss over he fact that US Treasury & Fed are one of the most irresponsible institutions in the world.
The American Banks & Financial Institutions can not remain far behind. When they find that they are holding on huge amounts of money, they become reckless in 'parking' their monies. The Asset-valuation becomes less and less important, the so-called 'prudent' norms of lending are forgotten and they end up acquiring 'sub-standard' assets thru either direct financing or re-financing.
The real crisis is yet to come. How are the 'bail-out' packages running into several hundred billions of dollars going to be financed? Of Course through budgetary deficits - either increased public borrowing or 'printing' more currency notes or both.
When this bubble is also about to burst, US can start a war in some developing country. That acts as a booster dose to the US Economy! Second option is to bring the oil market to boil - that keeps the demand of US $ up! Make OPEC countries and developing countries take on infrastructure projects on a mega-scale. Don't let them worry worry whether those projects are economically viable or not. You have American Consulting firms on the pay-rolls of Bank & Fund. For a fat fee, they will give favourable reports on any project. Bigger the better. For OPEC countries, the inflated project-costs don't hurt. They have enough petro-dollars to pay the American Consulting & Contracting firms. What about the developing countries, who can not afford theses projects? A nice debt-trap for them. Let them borrow recklessly from Bank-Fund. So long as it keeps the US economy on the up-swing, what does it matter?
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Melt-down on the Wall-Street
Melt-down on the Wall-Street
Many observers suspect the culprits are mainly those who have been freely dishing out the market driven economics model of growth to the rest of the world, this forwarded Email from Ralph Nader (the famous consumer activist and a candidate who always loses) for the post of the President of United States, may make some things clearer.
In the Public Interest
Behind The Deregulatory Curtain
by Ralph Nader
The current finger pointing by the deregulation crowd in Congress and their ideological soul mates in the media reminds me of the 1939 film classic The Wizard of Oz. It is as though these spin masters want us to pay no attention to the government officials behind the deregulation curtain.
Indeed, the right-wing pundits and the revisionists in Congress are spending an inordinate amount of time falsely claiming that our nation's current financial disaster stems from the Community Reinvestment Act, a law passed by Congress and signed into law by President Jimmy Carter in 1977. The primary purpose of this modest law is to require banks to report on where and to whom they are making loans. Community organizations have used the data produced as a result of this law to determine if banks were meeting their lending obligations in the minority and lower-income communities in which they do business. Congress passed this law because too many lenders were discriminating against minority borrowers. "Redlining" was the name given to the practice by banks of literally drawing a red line around minority areas and then proceeding to deny people within the red border home loans – even if they were otherwise qualified. The law has been in place for 30 years, but the right-wing fringe claims it somehow is responsible for predatory lending practices that date back just to the beginning of this decade.
Notice what these revisionists are not mentioning.
No "thank you" to former Senator Phil Gramm for pushing the repeal of the Glass-Steagall Act.. This law was passed in the wake of the stock market crash of 1929 - and designed to separate banking from securities activities. In 1999, when Congress passed the Gramm-Leach-Bliley Act and in so doing repealed Glass-Steagall the banks strayed into rough waters by looking for fast money from risky investments in securities and derivatives.
As predatory lending mushroomed out of control, the regulators -- key among them, the Federal Reserve and the Office of Comptroller of Currency -- sat on their hands. The Federal Reserve took exactly three formal actions against subprime lenders from 2002 to 2007. Bloomberg news service found that the Office of Comptroller of the Currency, which has authority over almost 1,800 banks, took three consumer-protection enforcement actions from 2004 to 2006.
No "tip of the hat" to the Bush Administration for preempting state regulators and Attorneys General from using state consumer laws to crack down on predatory and sub-prime lending by national banks.
And, let us not forget the folks at Fannie Mae and Freddie Mac. Imagine allowing these two government sponsored enterprises--that were weakly regulated by HUD--to claim they were meeting the national housing goals by counting the purchase of subprime loans. Back in May of 2000, our associate Jonathan Brown warned that it would be inappropriate and counterproductive to encourage Fannie and Freddie to meet the housing goals by purchasing subprime loans. Too bad our members of Congress and the regulators at HUD were infected with deregulatory zeal. Former Texas Senator and current UBS executive Phil Gramm -- would-be President John McCain's Treasury Secretary-in-waiting -- pushed through the Commodities Futures Modernization Act of 2000, which deregulated the derivatives market. With help from his wife, Wendy, the former head of the Commodity Futures Trading Commission who went on to a post on the Enron board of directors, Gramm removed the controls on Wall Street so it could innovate all sorts of exotic financial instruments. Instruments far riskier than advertised, and now at the core of the financial meltdown.
The SEC, through its "consolidated supervised entities" program, decided that voluntary regulation would work for the investment banking sector. Not surprisingly, this was a scheme cooked up by Wall Street itself. The investment banks were permitted to double, triple and go 20 times (and more) down on their bets by using lots of borrowed money. They made minimal disclosures to the SEC about what they were doing, and the SEC didn't bother to review those disclosures adequately. Too bad for the investment banks -- and the rest of us -- they made lots of bad bets. The SEC has now closed the voluntary program, though now there aren't any major investment banks left (the two remaining ones have converted themselves into conventional banks).
It is time to start paying very close attention to government officials behind the deregulation curtain. Let your Members of Congress know you are not willing to bailout the gamblers on Wall Street with a no-strings attached pile of taxpayer dollars. The time for regulation is upon us.
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