Request for comment on an article about deflation.

[Sjalq]

Hi guys,

Would like to hear your take on this article. Also how would this affect bitcoin?

http://www.businessinsider.com/mike-maloney-deflation-2011-4

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[MoonShadow]

I take a dim view of the idea that a barrel of oil is going to ever hit $10 anytime soon.  Not that I don't somewhat agree with their analysis, but if such massive deflation occurs (this would be roughly a 10x increase in US FRN trade value, which almost certainly requires an equal drop in the monetary base) it's not going to be occurring in a sudden manner unless some very unlikely events occur.  Such as an asteroid impact takes out the entire credit system of the US while leaving the US federal government largely intact.  In a slower deflationary perioid, as we were in between 2008 & 2009, a deflationary contraction of credit can (and was) be largely balanced out by the increase of the monetary base (printing, electronic creation, quanitative easing, etc) so that the consuming public doesn't really see a great deal of changes of prices.  This creates other inbalances, which eventually can lead to an inflationary period (which we have been in since at least Jan of this year).

That said, hyperinflation simply isn't in the cards, unless the US federal government actually ceases to exist.  Hyperinflation is, always and everywhere, a political event not an economic one.  Since the House of Reps control fiscal policy, and at present the Federal Reserve still controls monetary policy, and the House is presently dominated by fiscal conservatives; a political trigger for hyperinflation would truly be a black swan.

[Sjalq]

@creighto

I disagree, the US is teetering on governmental debt collapse. One bad auction and it's all over. Since the banks at the auctions are all Fed backed buyers there will never be a bad auction. However when any of the holders of US debt finally realize that the debt simply will never be paid back then the US government can rapidly reach a scenario where it pays more in interest than it gathers in taxes. This will again never be allowed and the outstanding debt will simply be bought by newly printed money. However outside of a decreasing money supply, you cannot loan such vast amounts to the government without quickly reaching unsustainable inflation. So the federal government can only be funded by what is contracting in the money supply without causing panic. This means you have a very shaky situation that if they pull it off leads to everyone being contracted by the government and the availability of freely (free market) produced goods falling very low and the purchasing price of a dollar along with it. I doubt they can pull it off.

This is however only one of the ways the US federal government is broke. If we add social security and or the medical programs then we definitely have the political event you spoke of.

Have you read Thomas Woods' Rollback?

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Furthermore in deflation (under our current debt based fiat system, not sound money) debt becomes impossible to service as the money supply is always less than the outstanding debt. If the population attempts to pay it off they approach a line below which all money and debt implodes extremely rapidly under the force of earlier issued debt.

This will probably also not be allowed to happen and will lead to the banking complex (central banks + banks) issuing credit simply to keep their business model alive. Not over steering on this maneuver is not something that seems humanly possible.

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The eventual outcome is the default on the debt, not just national but individual debt. Be that through defaulting and a deflationary implosion, high inflation or hyperinflation. Default can happen easily but wont be allowed to. Inflation under fiat debt based currency wont help since an overburdened populous will not borrow more, so there is either an eventual default or hyperinflation.

[MoonShadow]

@creighto

I disagree, the US is teetering on governmental debt collapse. One bad auction and it's all over. Since the banks at the auctions are all Fed backed buyers there will never be a bad auction. However when any of the holders of US debt finally realize that the debt simply will never be paid back then the US government can rapidly reach a scenario where it pays more in interest than it gathers in taxes. This will again never be allowed and the outstanding debt will simply be bought by newly printed money. However outside of a decreasing money supply, you cannot loan such vast amounts to the government without quickly reaching unsustainable inflation. So the federal government can only be funded by what is contracting in the money supply without causing panic. This means you have a very shaky situation that if they pull it off leads to everyone being contracted by the government and the availability of freely (free market) produced goods falling very low and the purchasing price of a dollar along with it. I doubt they can pull it off.

This is however only one of the ways the US federal government is broke. If we add social security and or the medical programs then we definitely have the political event you spoke of.

I don't disagree, but the question becomes "when?"  Austrian economists have been predicting this for decades, and they are right, but all that have provided a time frame have been wrong.

Have you read Thomas Woods' Rollback?

No, I have not.

[Sjalq]

They will collapse within the next 800-1000 days.

If not the IMF will have assumed the responsibilities of the Fed and we have entered the new dark ages.