Wednesday, July 19, 2006


Mike Sedlock (Mish) provides an interesting Post with several Links to other of his articles on Inflation and Deflation. The Good Reader should read The Kondratieff Cycle Revisited, not because the Kondratieff Cycle holds validity, but because it discusses the propellents of Inflation and Deflation; it listing a table of Deflation cause:

Here is the Deflation Case once again:
Rising productivity and rampant credit expansion led to massive overcapacity.
Global wage arbitrage is putting downward pressure on wages and benefits.
An enormous bubble in credit lending developed causing malinvestments and speculation.
Speculative credit lending fueled bubble prices in houses and other assets including the stock market
At some point housing prices will fall as the pool of stupid buyers exhausts itself. The housing sector will stall
A stalled housing sector will cause rising unemployment and lower demand for goods and services, appliances, eating out, etc, etc, etc.
Bankruptcies will rise.
Banks will not be willing to extend further credit on assets declining in value, especially to those out of work, or nearly underwater on their homes. In fact, appraisals get tighter at long last.
Credit lending plunges. We have already seen the second consecutive month of declining consumer credit. This is the first time since 1992. There is every reason to believe a reversal is underway. If not now then soon.
Bankruptcies and falling asset prices and people walking away from mortgage loans is a destruction of credit.
If credit counted as inflation on the way up, a destruction in credit MUST be counted as deflationary on the way down.
The destruction in credit, rising bankruptcies, an unwillingness of banks to lend, and a rising propensity for people to save will be greater than any monetary printing by the FED to stop it. That is what happened in Japan and that is what will happen here.

I do not intend to present a Case for Deflation here, though I will state some of the above listing is purely imaginery or wrong. What does concern me is the listed causes of Inflation located in the Postings, as they are the current belief of most Economists. My Studies of Inflation finds myself long proclaiming the worst cause of Inflation is Government Deficit Spending, followed by loose extension of Consumer Credit, and ending with overInvestment of Business Profits to escape Taxation. The real Source of Inflation, in final analysis, is overzealeous pursuit of Business profits, which leads to Overpricing of Products, evasion of Taxes, and incitement of Consumers to exceed their Spending capacities. Here is the crux of the problem! lgl

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