richard5za wrote:vincecate wrote:However, every central bank everywhere knows how to make a fiat currency weaker, just print a bunch of money and buy any crap until prices go up and the currency gets weaker. They could buy up bonds, other currencies, toxic assets, rice, used cars, whatever, and it would work.
Yes, but consider this possibility: I suspect that sooner or later the European crisis is going to "pop" the sovereign debt bubble, at first in Europe and then globally. The banking system becomes dysfunctional, and 'hundreds of Trillions' of derivatives stop functioning. World trade becomes hobbled; business everywhere beomes hobbled and lays off massive numbers of employees. Its beyond the control of government. It was the brakes on world trade that made the 1930's so very deflaionery; same is posible here in a different way.
I think defalion also needs to be measured in real terms. If I have 30% deflation is real terms but simply the currency has been manipulated to that it looks inflationery, it remains a deflationery problem at its core. The Fed can create money but it cannot make that into the commerce that oils the economy. Currency manipulation, especially be the world largest economy will create an immediate reaction probably along the lines of currency wars.
My example above may be extreme but it is possible.
I am not an expert in finance or these matters of international financial organizations and how they interoperate. But the argument that a deflationary failure of the system could get beyond the ability for the government to print money to try to address it does not seem reasonable to me because it takes so very little for the government to take action.
Suppose Goldman Sachs sees that its various financial chickens are about to come home to roost, to the tune of $5 trillion dollars. If nothing is done, they will go bankrupt/insolvent and their millions of customers will lose their money and the owners of GS will lose their money and so on. The CEO of Goldman calls the Secretary of the Treasury and the Chairman of the Fed, and says "sorry to say this, but we go bankrupt tomorrow unless we get help. It will bring everything down." "How much do you need to get through this?" "We need $5 trillion." Of course the Treasury politically can't just give them $5 trillion but what we've seen since the 2008 crisis is that when it comes to this kind of thing, where there's a will there's a way. The Fed buys the bad GS debt in a secret deal, or it does something with reserves, or it gets the IMF to lend money, or whatever. By whatever means, the money appears and is provided. Or, the rules about what has to be reported are suspended so GS's bad debts are hidden. Whatever it takes. It can be pulled together in a day or two because all it takes is some phone calls among some top-level people and then some pressing of keyboard keys on some keyboard to magically create $5 trillion out of thin air. All with the best intentions of course of saving the financial system and the intention that it will be paid back later.
If they had to come up with some actual gold or other item of value (like they would have had to in the 1930s) they could not do it. No way could they keep up with the tumbling dominos. But the amount of money needed now is immaterial because any amount, literally any amount, can be created. The only thing needed is a cover story for presenting it to the public. And the public can't follow this stuff anyway.
I think what the politicians learned from the reaction to 2008 is that the public doesn't want any more big TARP things passed by Congress, because they think it's bailing out the rich (they ignore that it also bails out their much smaller pension plans, retirement accounts, etc). So Bernanke just uses some creative language to call it something else. In 2008 he was willing to (as I understand it) actually break the law and use printed Fed money to buy asset classes that the Fed is prohibited by law from buying.
So I just don't see a scenario where the government presses can't keep up with any amount of deflationary collapse. For the most part they are dealing with a few dozen or so major, centralized corporate and government entities like the central banks, the major commerical banks, etc. They all know one another. They can make a phone call anytime things get real hot and they will get as many bilions or trillions as they need.
Especially after watching how they did exactly this in 2008, why would you think they can't do it again? There's just not enough complication or required time involved to make it unfeasible.
Just to totally beat it into the ground, the choice facing the Treasury, the Fed, and Congress in the face of major deflationary collapse is this:
(1) Stand by while pretty much everyone loses all of their savings, their homes, and their jobs - including these powerful people and their friends. Ruin your chances for re-election because you "did nothing" to stop it from happening.
or
(2) Do some backroom dealings, use some loopholes, some secrecy, and press the 0 key on the keyboard as many times as necessary to bring into existence the Federal Reserve notes to put the problem off into the future and buy you some time.
I just don't see any chance they would do (1). And if they did, and they let the deflationary collapse happen, the next Congress and President to be elected would be so left-wing, so dedicated to socialism and government giveaways, that the same money creation and spending would happen anyway, just delayed by a year or two. It will happen because we the people want them to print and protect us from the immediate crushing pain of deflation.