The Asset Inflation Is Over

The Asset Inflation Is Over

Post by Paul Miln » Mon, 10 Jan 2000 04:00:00



Contra Keynes, instead of genuine capital accumulation, central-bank credit
expansion generates the boom-bust cycle. Newly-created money is used to buy
securities from banks, expanding their supply of credit and lowering
interest rates. Entrepreneurs and consumers borrow the money and spend it on
capital projects and consumer durable goods, respectively. Prices rise for
capital goods and consumer durables which makes their production more
profitable and brings about a shift of productive factors into them and out
of other goods. If energetic enough, as the Bank of Japan's efforts were in
the late 1980s, central-bank credit expansion leads to a bubble in asset
prices.

The boom ends when the central bank's credit expansion can no longer
maintain artificially low interest rates. Typically this happens when the
monetary inflation results in significant, widespread price inflation. Once
people realize that money's purchasing power will be lower in the future,
they adjust interest rates upward. Sometimes, as in Japan in 1989, the
central bank cuts off the monetary inflation. In any case, these higher
interest rates collapse capital values, including stock and asset prices.
With their prices smashed, the production of capital goods and consumer
durables suffers losses and must be cut back.

The true financial corrective to the artificial and unsustainable inflation
of asset prices induced by central-bank credit expansion during the boom is
deflation of asset prices. No longer distorted, prices now reveal
misallocated factors and malinvestments and make profitable the transfer of
the former and the liquidation and reinvestment of the latter into valuable
activities. In short, asset-price deflation is the market economy's way of
restoring its function of effectively satisfying consumer preferences.

But what really frightens Keynesians is not, strictly speaking, asset-price
deflation but its complement: credit contraction. When the central bank
inflates paper money during the boom, banks expand credit and checkable
deposits. Assets valued at inflated, boom-level prices serve as collateral
against these loans. When asset prices collapse and borrowers default,
banks' net worth becomes negative. They retrench in the face of bad loans by
scaling back their lending. Customers, realizing the banks' distress, cash
out their checkable deposits, further reducing bank reserves and adding to
the financial pressure on banks.

=======================

This is what has happened in Japan and is what we are now facing. The ONLY
appropriate palliative is a deflation of overly inflated asset prices.

Can it happen slowly enough to restore a sensible level  and avoid a panic.
I think not. For several reasons.  An asset inflation by ITSELF is one
thing. An asset inflation wholly fueled by a mountian of debt is another. An
asset inflation fueled by a mountain of debt based on fiat money is yet
another.

'Fiat' is Italian for 'faith'. Our 'money is not backed by anything at all.
Not by anything but the mere 'confidence' of those holding it. In
otherwords, it is a scam, a 'con' game. When the asset deflation begins
people will undoubtedly understand that their 'money' is worthless.
It is so much paper, and not even good for 'toilet' use, at that.

It was always the fault of the credit expansion; the incresing amounts of
debt accumulation; the fault of a specious Keynesian monetary policy.

Every time we needed an appropriate and healthy contraction the Fed did just
the opposite. They continued to inflate the money supply. It temporarily put
off a contraction, a cooling off period,  in the name of continued growth.

Its like a game I  used to play as a kid called 'Blockhead'.  You have a
great number of random sized and shaped blocks that you build up and the
winner is the last one to stack a block before the tower falls down. The
'Blockhead' is the one who puts on the last block causing it to tumble.

Now, if every once in a while, as the the 'growth' of pile became unstable,
the player removed some of the blocks and restacked them in a more suitable
and more stable foundation before proceeding, the 'growth' could have
proceeded nicely.  If the Fed had allowed the economy to contract, allowing
those who borrowed unwisely or invested unwisely to feel the pain of their
foolishness,  it could have built a more stable foundation.  That would have
revealed malinvestment and curtailed some of its potentially painfull
results. It would have allowed retrenchment and reallocation of  resources
into more appropriate channels.  It would have allowed banks to  take the
painful steps of calling in bad loans and writing them off at levels, that
while painful, were still manageable. But, it did not.

What it did do, was provide a never ending source of blocks to build as high
and as fast as possible, only making more inevitable the fall and
exacerbating the severity.

It provided a never ending stream of easy credit creating more opportunities
for malinvestment  up until the point that over-capacity is reached. Saddled
with bad debt, banks will curtail credit just at the point when a
never-ending stream of increasing amounts of credit is vital. And it will be
over.... in an avalanche of bad debt. The mountain of unrepayable debt will
come crashing down.

Just like in the Tulip Mania of 1634-1637, at some point people will realize
it is over.  The 'capacity' will have been reached.  There will be no bids.
Plenty of bids one day and the next....gone.  The 'blockhead' will have laid
the last block.

http://www.mises.org/fullarticle.asp?control=322&month=13&title=+Japa...
7t+Inflate+Away+Its+Woes&id=16
--
Paul Milne

Clinton: "I did not  have sex with that woman, Miss Lewinsky"

bks: "It was not overt lying. It was overgeneralization for rhetorical
purposes."

 
 
 

The Asset Inflation Is Over

Post by Ben » Mon, 10 Jan 2000 04:00:00


I've had enough of PMs off-topic posts too:

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The Asset Inflation Is Over

Post by The Goober » Mon, 10 Jan 2000 04:00:00


[snippolinio]

Quote:> 'Fiat' is Italian for 'faith'.

Is that what earns a degree in languages - *with* honors - at the
Ouachita Baptist University, Mr Milne?  Last time I looked the Italian
word for 'faith' was 'fede'; the imperative statement for
calling-into-existence ('let there be') in Latin is 'fiat'.

Right up there with your egregiously bad (and still unsourced)
mistranslation of 'ergazomai', Mr Milne.

DD

 
 
 

The Asset Inflation Is Over

Post by Tom Beckne » Mon, 10 Jan 2000 04:00:00


Ben,

This road has already been paved by others with the result being the
initiation of a moderated news group. Others here can give you the
URL.

Tom Beckner

 
 
 

The Asset Inflation Is Over

Post by Dean T. Mill » Mon, 10 Jan 2000 04:00:00


Hey Ben,


>I've had enough of PMs off-topic posts too:
>From: Cornerstone Networks Abuse Dept. (auto reply)


>Sent: Sunday, January 09, 2000 6:07 AM
>Subject: Re: Off topic posts to news groups

Since when is the economic effects of Y2k problems off topic in a Y2k
newsgroup??

-- Dean -- from (almost) Duh Moines  (CDP, KB0ZDF)

 
 
 

The Asset Inflation Is Over

Post by Ben » Mon, 10 Jan 2000 04:00:00




> Hey Ben,


> >I've had enough of PMs off-topic posts too:

> >From: Cornerstone Networks Abuse Dept. (auto reply)


> >Sent: Sunday, January 09, 2000 6:07 AM
> >Subject: Re: Off topic posts to news groups

> Since when is the economic effects of Y2k problems off topic in a Y2k
> newsgroup??

And just where do you see any mention of economic effects due to Y2K
problems in the PM post listed at the front of this thread? It's purely
non-Y2K related.
 
 
 

The Asset Inflation Is Over

Post by Dean T. Mill » Mon, 10 Jan 2000 04:00:00



>And just where do you see any mention of economic effects due to Y2K
>problems in the PM post listed at the front of this thread? It's purely
>non-Y2K related.

Not so.  As Paul M. says, "it's the economic context of Y2k."  The Y2k
situation isn't happening in a vaccuum, it's primary result is
economic (even if the power or water goes off, the wires and pipes
aren't destroyed -- the effect is economic).

What Paul's trying to point out is that the stability of our current
economic systems is near a breaking point, and the ongoing Y2k
problems could destabilize it.

-- Dean -- from (almost) Duh Moines  (CDP, KB0ZDF)

 
 
 

The Asset Inflation Is Over

Post by DrNybb » Tue, 11 Jan 2000 04:00:00




[snip]

Quote:>The boom ends when the central bank's credit expansion can no longer
>maintain artificially low interest rates.

[snip]

I know your post is taken from other sources but in presuming you
ascribe to its contents, have you ever given any thought to the
possibility that the government will not ALLOW the credit to dry up?

 
 
 

The Asset Inflation Is Over

Post by GFost » Tue, 11 Jan 2000 04:00:00


Paul Milne managed to write:

Quote:>Contra Keynes, instead of genuine capital accumulation,
>central-bank credit expansion generates the boom-bust cycle.
>Newly-created money is used to buy
>securities from banks, expanding their supply of credit and lowering
>interest rates. Entrepreneurs and consumers borrow
>the money and spend it on
>capital projects and consumer durable goods, respectively.
>Prices rise for
>capital goods and consumer durables

<<Major Snippage>>

Wow, Paul, your expertise in information systems has me really impressed and
now it turns out you know just as much about macro ecconomics.  Or .... is it
maybe ....

Y o u ' r e   s t i l l   a  d um b a s s !

No one is going to listen to anything you say.  Go get some potatoes and
cabbage out of the root cellar and spend a little time "teaching" your children
your wisdom.  Sure the stock market is over valued and there's going to be a
correction.  Did Japan sink under the waves of the Pacific?

One thing that seems to be true of survivalists:  they are full of beans.

---GaryFostel---

 
 
 

The Asset Inflation Is Over

Post by Ed Car » Tue, 11 Jan 2000 04:00:00





>>Tulip Mania

>Anyone else think this loser is (permanently) off-topic?
>Has anyone ever gone after his ISP account?

>Just wondering.

It's astounding to me that someone can say:

Don't let the door hit you in the ass on yer way out.

in response to:


Quote:>Well, I was proud to be an American as a child.  I can't be now.. spend an
hour
>at *any* Veterans hospital and you won't be either.

the implication being that if you don't like this country you can get the
hell out, and then post a suggestion to go after someone's ISP account for
expressing their opinion, in effect censoring their right to free speech.

Absolutely astounding.

 
 
 

The Asset Inflation Is Over

Post by Ed Car » Tue, 11 Jan 2000 04:00:00



>I've had enough of PMs off-topic posts too:

Another free speech lover, I see ... but only when it applies to you, huh?
 
 
 

The Asset Inflation Is Over

Post by Ben » Tue, 11 Jan 2000 04:00:00


He can speak all he likes.. Just on-topic. That is *how* newsgroups
operate.. There are many newsgroups that PM could post to completely
on-topic as I and several others have already suggested to him. His post in
this thread and several others are not on-topic for *this* newsgroup.



> >I've had enough of PMs off-topic posts too:

> Another free speech lover, I see ... but only when it applies to you, huh?

 
 
 

The Asset Inflation Is Over

Post by Ben » Tue, 11 Jan 2000 04:00:00


That's funny, I did see that written in PMs message on this thread. If he is
trying to point that out, then I suggest he point that out as his post at
the top of this thread and several others *are* off-topic.
Quote:> >And just where do you see any mention of economic effects due to Y2K
> >problems in the PM post listed at the front of this thread? It's purely
> >non-Y2K related.

> Not so.  As Paul M. says, "it's the economic context of Y2k."  The Y2k
> situation isn't happening in a vaccuum, it's primary result is
> economic (even if the power or water goes off, the wires and pipes
> aren't destroyed -- the effect is economic).

> What Paul's trying to point out is that the stability of our current
> economic systems is near a breaking point, and the ongoing Y2k
> problems could destabilize it.

> -- Dean -- from (almost) Duh Moines  (CDP, KB0ZDF)

 
 
 

The Asset Inflation Is Over

Post by Roger Barne » Tue, 11 Jan 2000 04:00:00


In article:



> >I've had enough of PMs off-topic posts too:

> Another free speech lover, I see ... but only when it applies to you, huh?

Why don't we just get rid of all the separate Usenet groups ?
I mean, almost all of them are trying to infringe my right to free
speech by restricting what I should discuss when I post to them.

Indeed, why should what I want to say in a news thread be in any way
influenced by what others have said ?  Lets throw out threads as well.

I've also seen suggestions that people shouldn't post in all upper
case, or using offensive words, or in a language containing characters
that can't be displayed properly on many readers' systems. I have even
seen complaints about commercial messages, "spam", and multi-megabyte
binaries. Thank goodness for those like Mr. Carp who defend the right
to do all these things; were it not for such stalwarts who knows what
Usenet would come to ?

--
Roger Barnett

 
 
 

The Asset Inflation Is Over

Post by Paul Miln » Tue, 11 Jan 2000 04:00:00





> [snip]
> >The boom ends when the central bank's credit expansion can no longer
> >maintain artificially low interest rates.
> [snip]

> I know your post is taken from other sources but in presuming you
> ascribe to its contents, have you ever given any thought to the
> possibility that the government will not ALLOW the credit to dry up?

Hasve you given any thought to these thing;

The FED is NOT a government body.

Adding MORE credit to the situation merely inflates the problem further
exacerbating the severity of the crash.

Lastly , the government is POWERLESS to MAKE any institution extend credit.
It could merely print money, which would make what we have even more
worthless in a crash.

--
Paul Milne

Clinton: "I did not  have sex with that woman, Miss Lewinsky"

bks: "It was not overt lying. It was overgeneralization for rhetorical
purposes."