FED Fighting Off Deflationary Depression (Jan. 22, 2008)Submitted by TxRedneck on Tue, 01/22/2008 - 14:24
The FED cut rates .75% today as Worlwide stock markets deflated. They want to increase the money supply because they fear deflation.
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.