Higgenbotham wrote:
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It is interesting that the US government has so far failed to take action to curb these kinds of frauds.
If they do, a lot of "bad money" is going to get wiped out. According to the article, about 20% of the Treasuries cleared in this market have been failures. Therefore, there is up to $1 trillion in fraudulent "money" out there floating around in the form of Treasuries.
If any crackdown on this fraud isn't highly deflationary, then I don't know what is. That's probably why the US government is avoiding that for now.
To me, this seems typical of what to expect when a deflationary episode hasn't run its course. But failure to act could at some point collapse the entire system. For now, investors can still run to short term bills purchased directly, cash, or gold. If the public loses faith in short term bills and cash and moves to gold, then I suppose the game is over. For now, that will be difficult in my estimation. It's hard to imagine seeing Wal-Mart hauling precious metal to Bentonville. Wal-Mart, etc., are still going to want payment in US dollars and so that is what people will bring to the stores. It will take a lot of time to set up the physical alternatives that would cause a rush out of dollars. It seems to me that it is more than a psychological process, but psychology does enter into it.
Higgenbotham
I think that you are quite near the final answer.
Agreed also that it is shockingly that US government did nothing against this widespread fraud in Treasuries, but also "imaginary" stocks and gold derivates too.
And it is obviously deflationary... but
Debt (credit) deflationary.
Somebody here (John perhaps) put a very good link from Wikipedia about history of money (and deflation too) and it explains quite much.
Here it is again:
http://en.wikipedia.org/wiki/History_of ... th_bankers
Obviously - deflation can happen in all sort of assets, but since credit is not direct an asset (just "looks" as one) deflation in credit has other implications.
John also got the right question:
John wrote:
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For an international reserve currency like the US dollar, how do you
distinguish debt deflation from monetary deflation?
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Just for start to simplify:
In Monetary Deflation - the paper money (with PEG to gold (commodities) or "real money") - increase in value.
In Monetary Inflation - the paper money which has NO connection to "real money" - loosing value in comparison to gold (commodities). In extreme fall - it leads to "Hyperinflation" i.e. money destruction.
Lets imagine now 2 extreme situation:
1. the US government did not bail out any of banks!
Since the credit balloon is about (at least) 100 times bigger that then "real money" and this phenomena is obvious everywhere on the Planet but US has (at least) 80% of the balloon - it is not difficult to predict the consequence:
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sudden and irreversibly collapse of the present financial system based on the USD!
If you believe that in this kind of collapse the "USD would be stronger" - please check again the short story from Wikipedia link.
Namely, the only thing which permit the fiat money system to function is - "confidence".
I am sorry, but I can not believe that rest of the world will keep this kind of "confidence" in the USD if
financial system which "producing" this currency - collapsing... Even worse - its collapse is based on the fraud of very members and leading forces of this system (FED, Treasury, Wall Street,....)
I can find only one description for it - "currency destruction".
2. the US government bail out every bank!
It is obviously that US government, with all institutions even try to do it now:
http://www.bloomberg.com/apps/news?pid= ... q2B3XeGKok
In this very moment when the US government "succeed to close gap" of (at least) 100 times to the "real money" - the "confidence" in the produced paper of US government will be - zero (0) %!
With other words - currency destruction even in this case.
Even if I try to think a model which John mentioned i.e. "international reserve currency" - AND even if I forget the question of "confidence"...
... I can not see a possibility for Monetary "Deflation" in US.
Namely, if we (just as example!) forget US debt to the other countries on the Planet - and take JUST US debt to China situation is - clear.
Additionally - take trade deficit to China and enormous USD reserves of China.
Now you can try to imagine that "everything we need" (except houses, US
financial shares, cars ......) are starting to
decrease in price because of - monetary deflation.
In this very moment China will
start to buy HUGE those kinds of things - energy, food,.... and "everything we need" but what is not "connected" to US.
This will:
1. stop declination of prices for those articles in US
2. destroy "confidence" in USD since it will be obvious that China would like to get rid of those fetters.
Even in this case - the final results is very clear:
Total destruction of currency i.e. - USD.
You can call it what ever you like ("deflation or inflation") - but what I see now it looks only (unfortunately) as - hyperinflation, i.e. "money destruction".
That is final count down.
The hyperinflation - can easily come to the anarchy... especially in a over-armed country as US.
"Unfortunately" - because the destruction of USD would imply destruction of the "world monetary system".
Not because this system is good - but because of bad consequences of it.
I still hope that this explosion will be damped just on the US and countries very strong connected to US
financial institutions, but even it will be bad enough.
Finally USA is the biggest military power on the World which massive nuclear capabilities.
One anarchy like situation in US - can have a bad consequence on the entire World.
