As, frankly, I believe all deflationists can be ignored….
My definition of inflation is an
increase in money supply and credit with credit marked to market. Deflation is
the opposite.
Mish can have whatever definition he likes. This is one that seems rather peculiar. Mark to market has nothing to do with
anything.
One day I mark the asset up; the next day I mark the asset
down. What does this have to do with
anything other than my balance sheet? Has
any cash changed hands? No. Has my creditor agreed to lower my debt? No. Even
if he had, would those to whom I gave the money from the credit burn the FRNs
associated with the transaction? No.
Digits don’t leave the system. They might end up in hands other than the
hands of those to whom they are contractually owed, but they don’t leave the
system just because someone doesn’t pay them back.
Prices are clearly not part of my
definition, and prices can indeed rise in a credit-deflationary period.
If prices can rise, what’s the point? “We are having deflation!!! We are having deflation!!! All prices are rising!!! All prices are rising!!!”
Why call this deflation?
Call it something else – a mullet, or perhaps a screwdriver. But with prices rising, why would you call it
deflation?
I have given many reasons why a
focus on money supply alone is complete silliness, but the condensed version is
the total credit market is $54 trillion and base money supply is about $2.7
trillion.
If people think that $54 trillion
can and will be paid back, or if they think that money supply is more important
than credit, they will be wrong, but they are entitled to their opinions.
For the $54 trillion to be “paid back” requires that the $54
trillion was “paid” in the first place.
If it was “paid” in the first place, that means it is sloshing around in
the system, in someone’s digital account.
If the borrower defaults, it matters not to the money supply or the
credit supply or the supply of anything economically meaningful. Certainly,
the digits have not been returned to the contractually-entitled account –
however the digits are in someone’s account.
Where is the deflation – money, credit or otherwise?
Just because a debt is not repaid does not mean the digits
have disappeared. Why is this simple
concept so difficult to understand? Do
you want digits to disappear? Go to the
bank, withdraw cash, and keep it in your mattress.
Mish can be ignored about deflation.
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