Re: causes of the depression

On Sat, 03 May 2008 20:17:31 -0700, orangatang1 wrote:

> On 2 May, 22:02, Ron Peterson <r...@[EMAIL PROTECTED]
> wrote:
>> On May 2, 1:12 pm, orangata...@[EMAIL PROTECTED]
 wrote:
>>
>> > It has long been recognised that deflation is the main cause of
>> > recessions and depressions.
>>
>> What causes deflation? And, how do you know that?
>>
>> --
>>    Ron
> 
> Inflation is caused by increasing the amount of money in circulation.
> Roughly speaking, if the amount of money in circulation doubles the
> value of money halfs. So, if the fed creates a lot of new money
> inflation increases.

That is what would happen if the money is injected at the bottom -- wages
or other injections at the consumer level.  But if the additional money
does not pass through the hands of the dudes at the bottom, of it is just
injected at the top like right into the financial markets then it quickly
settles into the pockets of people who will not spend it.  It is simply
dead money.

> Deflation is a contraction of the amount of money. If the amount of
> money in circulation decreases the value of each unit of currency
> increases.

Yes that is true unless the money comes from those who are not using it
anyway.  Then it is merely a recovery of dead money that was lying around
in savings accounts and T-bills and such and there is no real effect on
prices.

> Credit created by banks is interchangable with money. When a bank
> gives you a credit card with a 10000 dollar limit it does not need to
> have the 10000 dollars in its vaults. It only needs to have 10% of the
> amount it lends as reserves, as i pointed out earlier.  so the bank
> can create 9000 of those dollars out of thin air.

Maybe even more.....

> thus  a credit card increases the amount of money in circulation,
> causing inflation. If the credit card is taken away the amount of
> money in circulation decreases, causing deflation.

That is essentially correct and it illustrates the effects of interest
rates on the amount of "money" or "credit" in the economy.

BUT BE WARNED!!!!!  The existence of low interest rates cannot make people
borrow and spend.  If they are afraid that the rates will go back up or
that money will again be scarce then they will not borrow and spend.  A
Fed chairman said that "It is like pu****ng a string".  When it gets that
bad the government must find ways to get people actively involved in the
economy through infrastructure projects and the like.

-- 
"I know no safe depository of the ultimate powers
of society but the people themselves; and
if we think them not enlightened enough to
exercise their control with a wholesome
discretion, the remedy is not to take it from
them, but to inform their discretion by
education." - Thomas Jefferson
http://GreaterVoice.org/extend