Where Deflation Comes From
Financial bubbles blown on the back of massive amounts of debt, of necessity lead to debt deflation (it’s just entropy, really). Fighting this is futile, and grossly costly to boot. The only sensible thing to do is to guide the process as best you can and try to minimize the damage, especially at the bottom rungs of society, because that’s where the deflation first takes hold, and where it spreads out from.
Attempting to boost inflation, or boost demand, before letting the debt deflation run its course through restructuring and defaults (perhaps even a -partial- jubilee) leads only to -further- distortion, and -further- impoverishes society’s poorer (at some point to a large extent the former middle classes). Whose lower spending, as nary a soul seems to comprehend, is the origin of the deflation to begin with.
All the attempts by central bankers to boost inflation that we’ve seen so far squarely ignore this, and operate on the false assumption that if only prices for financial assets and real estate can be raised even higher -artificially-, deflation can be warded off.
Thing is, deflation starts not at the top, it starts at the bottom. It’s not the banks or the bankers or the well-off who are maxed out and stop spending, but the people in the street.
They are responsible for most of the spending in an economy, and therefore for the velocity with which money moves in a society. And if the velocity of money falls below a critical point, no increase in the other side of the inflation/deflation equation -the money/credit supply- can make up for the difference. There is a point where all of the King’s horses and all of the King’s central bankers can’t put Humpty Dumpty together again.
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