The Escape Will Be An Extraordinary Inflation

By Author: Paolo Pamini
Total Articles: 62
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Some commentators are convinced that the international economic crisis will lead to deflation, and taking as example the experience of the American Great Depression of the '30s or the last two decades in Japan. These works are not of the Union. The current monetary system confuses money and financial credit. Hence both the risk of deflation, is that of inflation. Consider 1,000 francs in banknotes or coins deposited in a bank account: they can in turn be provided to third parties (eg a mortgage), although the investor may believe that you always have 1,000 francs available. In fact, he can spend this money with payment cards, and even withdraw cash when he wants. Assuming for simplicity a 5% reserve requirement (in fact even less), the bank pays 950 francs and takes 50 as reserves. Only the first step in this overall credit currency (ie the sum of all current accounts) rose from 1,000 to 1,950 francs. This mechanism, called technically money multiplier, artificially increases the availability of credit. Projects not funded with the simple private savings become possible by a miracle. Poste reserves at 5%, to 1,000 francs of ...
... our example will generate a total of 20,000 (ie 1,000 / 5%) which if made circular push up prices. In such a situation, however, sooner or later, some investors necessarily collide with the hard wall of reality and fail to complete their projects. Their failure will result in the opposite direction to the destruction of credit chain above, hence the disappearance of money (in the limit returns from 20,000 francs to the initial 1,000) and the famous deflation by contraction of debt: they are in the 30s USA (the money was halved from '29 to '33). This is the essence of Austrian business cycle theory, developed by Mises and Hayek and Rothbard, able to explain both the inflationary boom and the bursting deflationary. The Keynesian love, instead believing that the recession is for sudden changes of mood of investors (the famous "animal spirits), while the grandchildren of Milton Friedman (as Ben Bernanke, head of the Fed) argue that if the central bank would guarantee the provision of credit created from nothing, the economy succeed, as Kenneth Lester of Captain Future, also to cross the wall of reality and continue their journey in Bengodi. In his book The Holy Grail of Macroeconomics, Richard C. Koo has recently explained the dynamics of what he calls a recession budget, in which companies use all their net proceeds to reduce its high debt. This is the case today, the Japanese and that of the '30s. This leads effectively to support the view of the serious risk of deflation. However, and here's the news, recognizing the systemic risk linked to the idea of too big to fail, Western states are swallowing all the toxic foods that have done consistently fail banks and insurance companies. The State, tell us, can not fail. But although the reality of things is crucial, this calm may only have temporary effects. The state can pass on to others the costs of financial bubbles burst, he can get the shot, but can not prevent the damage. By dint of swallowing poisonous pills and squander resources nell'insaziabile welfare state, the Western states may soon fail. Reality knows no party. If the sovereign risk of failure becomes manifest, there are two possibilities. One case failed state: anyone with evidence of stroke were collected, if the case failing and causing cascading failures that destroy currency accounting as described above. We never saw much deflation. This is why you do not want the failure of Greece, Portugal, Spain, Italy or Ireland, which sank commercial banks (Swiss, German, British, ...) who own the bonds of those countries affected by natural disasters. Or, if it's only right to issue currency, a State bankrupt repay their debts with money fresh off the press (it is also true for the euro area.) How to teach Peter Bernholz University of Basel in Monetary Regimes and Inflation, historically is precisely what happened to finance the debts of Louis XVI and the French Revolution (assignats), or those of the First World War (hyperinflation in Weimar), to name two prominent examples. In essence, the hour of trial will come when the current tensions will result in failures of sovereign debt. The way out then will be historic hyperinflation, not deflation. Like Greece, the fault will be given to wild speculation.
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