DISQUS

Market Folly: Commodity Inflation Versus Asset Deflation (Guest Post)

  • BS Detector · 5 months ago
    The flaw in your logic regarding the "self reinforcing" deflationary spiral is that in a closed economic system, bancrupcies not only reduce demand but even more supply: Laid off workers still consume at least something, while producing (supplying) nada.
    Therefore deflation is a self correcting cycle, not self reinforcing.
    I wonder, why so few people get that.
  • marketfolly · 5 months ago
    just wanted to clarify that these are not our own thoughts, but rather those of Phil, the guest author. I'll see if I can get a response from him though since you do bring up a valid point.
  • BS Detector · 5 months ago
    OK, thank you!
    I also was over at Phil's web site but haven't found this article.

    Historically deflation has always self corrected (by letting the market run its course => bancrupcies), the only exception being the great depression (aggravated by banking crises). Since then, on the premise of preventing the "deflationary death spiral", the fed always acted to prevent deflation, pumping liquidity into the system thus prefering potential inflation.
    IMO the lesson from the 1930ies should be to maintain banking liquitity at all costs, but not to counteract the deflationary process itself, which provides the necessary "cleaning" of the system and the fastest path to a recovery.