||Pillars of deflationists' arguments disputed; entered at 2007-12-01 18:32:51 |
I would remind folks, who are not sitting on a pile of debt or a pile of gold, that none of these theses take into consideration the amount of money, virtual and hand to hand, that will be destroyed and removed from circulation by accelerating debt default and panic debt redemption.
Also...be concious, when visitng the sites linked above, of how many of these writers are sponsored by gold merchants...the amount of ad money they put out to move merchandise is hard to miss.
You're a fast reader. No comment on your ad hominem type arguments, but actually some of the articles do discuss the amt of money that will be destroyed. Panic redemptions are also discussed (Norcini), although to rebut the dollar gaining value theory.
The creation of credit money constitutes a pyramid upon a base of central bank reserves. The larger the pyramid, the greater the danger that defaults in one part of the system will trigger a contagion of cascading cross-defaults that will topple [and] bankrupt the entire system. The inter-relationship between bank assets and bank liabilities is the mechanism by which debt defaults in one banking sector to cascade through out the entire system. In a crisis, as more banks default, more inter-bank liabilities are defaulted and more credit money vanishes.
Such a collapse contract the money supply, possibly to the level of central bank reserves. The principle of supply and demand that (all other things equal) a decrease in the supply of something increases its price shows that the purchasing power of the money increases during a monetary contraction. According to this line of thinking, those who had either paper currency or some near-cash asset that survived the default would find their purchasing power in the domestic economy increased, while those with deposits in failed banks or who owned assets of bankrupt companies would find theirs wiped out.
That is in addition to linking to articles that advocate the deflationary - dollar value thesis. Also, at least one of the articles even presents counter arguments,
Those who would still prefer to forecast a period of dollar strength would be better to cast off The Dollar Strength Syllogism, and switch to a more classical, Austrian School deflation scenario, brought on by a collapse of the credit bubble. My feeling is that the chances for a period of dollar strength would be a improved by the specter of a broader, systemic phenomenon in which asset prices tumble worldwide, thus making oil, gold, global equities and global real estate correct downward in price against all currencies, including the Dollar. A worldwide recession could indeed cause an unwinding of long positions in hard assets. And while the Dollar would surely continue to be less attractive compared to other currencies, the Dollar could pick up some sympathetic strength in this scenario, as the world moves back into cash. Rather than a short-covering rally favoring the Dollar per-se, this would be a short-covering rally globally, into cash.