I've only skimmed Mish's long article, responding to Murphy, but saw that he presents this graph to show how we are following Japan's route into deflation. I've seen similar graphs other places - in Krugman's blog, perhaps.
This is what Mish gets, and the inflationistas don't (from his original post.)
Inflation/Deflation Definitions Once Again
Those are my definitions. I cannot force anyone to accept those definitions but they do explain what is happening quite nicely.
- Inflation is a net expansion of money and credit, with credit marked to market.
- Deflation is a net contraction of money and credit, with credit marked to market.
And
If you are focused on prices or money supply alone, you are focused on the wrong thing.
In a fiat credit-based economy, where credit dwarfs money supply, changes in credit is what's important, not changes in money supply, not nominal changes in prices.
It's as simple as that.
Anyway, when you're right, your right. Mish has this right, and our lack of agreement on just about everything else in the known universe in not especially relevant. The only downside is I'll probably need to go read Murphy's piece of dreck at the Ludwig von Mises Institute, linked above.
Update: After a quick look at Murphy's post, I see that, in addition to the distortion Mish complains about, Murphy also cherry picks a five day span in the $ to Euro exchange rate to make Mish's basically correct argument look bad, and displays a general level of the very special brand of obtuseness that is only found in Libertarians and Austrians. I will admit to some schedenfreude in seeing this exchange. Shame on me.
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9 comments:
Yes, and if we listen to Snowflake Snookie and the list of conservative economists screaming for the Fed to stop devaluing the currency and causing inflation (how that works, I can't tell), we'll be sliding further down the deflation ladder.
I sent you two links in the Argentina post pointing to recent discussions on your pet peeve: M1 Multiplier being back in the spotlight. If you have seen them, excuse the pestering. If not, for your consideration: http://www.nakedcapitalism.com/2010/11/guest-post-the-fed-is-saying-one-thing-but-doing-something-very-different.html
And here is Ellen Brown on a different take on what the fed is doing re: QE2: http://www.globalresearch.ca/index.php?context=va&aid=22014
Brown is essentially saying that the Fed is paying down debt without added borrowing. It sounds plausible.
Nanute -
Yes, I saw them. I do want to put up a relevant post, but sometimes life gets in the way.
Or I get distracted, and put up a different one.
Anyway, this one was being revised when you commented, so it's been expanded a bit.
Pestering is fine - don't worry about that. Sometimes I need help.
Cheers!
JzB
Thanks. I just wanted to let you know I don't like being a pain in the ass. If I'm being one, I'll expect you to let me know going forward.
How does one define credit? The debt due on borrowed money? With all this suspension of mark to market on questionable assets what's the effect on credit. Or, am I talking out my ass?
"Debt due on borrowed money" sounds about right to me. And marking to market means you write down bad debts. That is, you honestly realize that money is not being paid back, so that amount of credit has vanished in a puff of cold, hard reality, and the credit asset mo longer exists.
Not marking to market means you pretend that this bad debt is going to be paid back someday. This makes inflation look larger than it really is - or makes deflation look smaller.
Not marking to market now means you wait for the buzzards to roost at some later date. Meanwhile, they're still circling, and will not go away.
So, no, you're not talking out your ass. Dig below the surface, and things are actually WORSE than they appear.
WASF!
JzB
"Not marking to market... This makes inflation look larger than it really is-or makes deflation look smaller."
Perhaps this is why "they" suspended the rules on mark to market. If your analysis is correct, it would mean that deflation would be greater in real terms if the credit assets were valued at mark to market. Could one argue that increasing the money supply is being used as a buffer/reserve balance, for the inevitable questionable credit assets disappearing?
Could be. Now we're getting into realms of deviousness that are more than my little pea brain can handle.
It's also likely the not marking to market is a way of putting off the inevitable. Besides avoiding an unpleasant reality, it gives the insiders a chance to do whatever they need to do to escape any down-side effects.
Which means we get screwed even worse.
JzB
JzB: Don't discount the size of your "pea brain". From what I've read, you've got a better grasp of the issues here, than I. (Then again, that might not be saying much.) To your most recent point: As you've noted previously, flushing the system all at once is putting us in Mellon territory. A slow burn is easier to control than a raging forest fire, for lack of a better metaphor. But, I'm still troubled by the notion that prolonging the inevitable could have unintended consequences that will compound the problem. (Like interest.)
I am happy to see that someone besides me notes that deflation is a money supply event, not a price event. If the money supply contracts and prices remain the same, volume of trade will contract (since there are no longer enough dollars in the economy to purchase all of the goods and services available at the proffered prices), so monetary deflation can happen without price deflation. Of course, the Austerians insist that this situation can never happen, despite the fact that it did happen during the Great Depression and is happening now and we have numbers to show that it's happening now. But then, Austerians live in a parallel universe of pink unicorns and cotton candy trees, not in this universe, so...
- Badtux the Snarky Penguin
Bad Tux: If money supply contracts, and prices remain the same...
This begs the question: If less dollars are available to purchase goods and services, could it not lead to price inflation during a money supply deflationary period? Just curious.
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