Actually, I really have to thank Vince for pointing out Mish's column.
This column is very close to my own thinking, and very powerfully
makes the deflationary spiral case that Generational Dynamics has been
predicting for almost ten years.http://globaleconomicanalysis.blogspot. ... ation.html
However, I want to focus on one particular section that opens up a
potential area of research:
Mish wrote:> Would Printing $50 Trillion Tomorrow Do Anything?
> Ignoring interest on excess reserves (a proviso I mentioned),
> printing $50 trillion dollars tomorrow might not do anything.
> Indeed, if $50 trillion printed tomorrow sat as excess reserves
> (the most likely event), it would have the same effect as if it
> was buried in the ground, or not printed at all. Such is the
> nature of a credit-based economy, and a point that has caused
> hugely inaccurate inflation forecasts from many Austrian
> As previously mentioned, such massive printing might briefly cause
> a temporary attitude change accompanied by a brief asset bubble of
> some sort (especially in long-dated treasuries given banks would
> put some of it to that use).
> However, massive printing would collapse treasury rates, further
> destroying those on fixed income, and make it even harder for
> pension plans to meet assumptions.
> Since printing $2 trillion did not spur credit expansion, pray
> tell why would $50 trillion?
What particularly caught my attention was the phrase "credit-based
The thought is this: What if "printing money" is irrelevant to or only
indirectly responsible for hyperinflation? What if the only thing
that matters is money created through debt, and the only effect of
"printing money" is to make more debt available?
This would provide an additional generational explanation for why
there was near-hyperinflation in America in the 1970s, but no
inflation today when there's a lot more "printed money" in the system.
In the 1970s, a rising Boomer generation was only too willing to go
into debt to buy things for themselves and their Gen-X kids.
Businesses too were only too willing to borrow and hire lots of
employees, providing a route by which debt-created money worked its
way into inflated salaries, and from there into the general economy.
Today, those same Boomers, as well as their Gen-X kids, have been
badly burned and are becoming debt-averse, resulting in no inflation,
or a deflationary spiral. (This argument can also be related to the
velocity of money.)
So the difference between the 1970s and today is that there's less
debt-created money, even though there's a lot more printed money, and
it's the debt-created money that's affecting the inflation/deflation
The research project would be to go back to the Weimar inflation, and
see whether or not the hyperinflation fits the debt-created money
It's well known that the Weimar government printed money, but how did
that money make its way into people's salaries, so that a person would
have the wheelbarrow of money to buy a loaf of bread? Did the
government provide it to the banks, which then lent the money out to
businesses to pay inflated salaries? Then the debt-created money
model would apply.