An Answer to the Question from Julie

BarroMetrics Views:  An Answer to the Question from Julie

Julie asked:

I would be glad if you could answer me a question, when will your nr. 3 happen?
U.S. Government has pumped soo great amounts of money into bank market and banks still don’t want to release their money into circulation, so without that economy won’t be able to get into healthy state.What’s more, a deflation threat is becoming real more and more.
Julie

Julie, my best guess is third quarter, especially if China gets serious about containing inflation. The fallout there may cause the FED to again ‘save’ the system.

Turning to your assumption that inflating the money supply will restore health to an economy.

I can’t come at that argument. For me inflation is the creation of ‘money’ over and above productivity. Whenever that occurs, you end up with malinvestment: the extra ‘money’ goes into the wrong sectors – principally it causes bubbles. When bubbles burst, printing more money only prolongs the recovery.

Deflation  in these circumstances is merely the process by which the malinvestment is corrected.

The problem with printing money as a  means of staving off the reckoning day is the fact that more and more money is needed to produce the same effect.  The net result of this is to create the threat of hyperinflation.

The US FED/Treasury could get the banks to lend simply by not paying interest on the deposits they hold. Right now there is no incentive for banks to lend because they are receiving risk free interest from the St. Louis Fed Reserve. Take that away and pressure will build on them to lend out their  money.

Is deflation  around the corner for the US? I don’t see enough signs to say this is so. The US is certainly in a recession. It could become a hyperinflation led deflation if the FED fails to act in a timely manner once inflation raises its ugly head.

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