Monday, August 6, 2012

Mish can be Ignored about Deflation

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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