The limited debate

The NYT doesn’t know what a real deflationista is:

The split between the chief economists, whose work helps inform trading strategies recommended to investors by their firms, echoes a broader and sometimes fiercer debate among academic economists and commentators about the threat posed by deflation and what the government’s response should be.

According to the deflationistas, as they are nicknamed, a new round of stimulus spending by Washington is urgently required to stave off a Depression-like cycle of falling prices and wages that is difficult to reverse once it is set in motion.

Inflationistas, by contrast, worry more about the effect that additional government borrowing could have on the recovery. With the budget deficit expected to hover around $1 trillion a year for the next decade, they say, interest rates could eventually surge, making borrowing — and goods — more expensive. A double dip, they say, is highly unlikely.

This isn’t a genuine inflation vs deflation debate, it’s merely an intra-Keynesian one that completely misses the points made by the hyperinflationists and the true deflationists alike. A true deflationista is someone like Bob Prechter, who has long predicted that neither fiscal nor monetary policy can possibly prevent deflation brought about by the collapse of credit. The real debate – although it is more a question than a proper debate – is whether the central banks can print money faster than credit collapses in a fractional-reserve, debt-money system.

Given that there is $53 trillion in total credit market debt compared to $8.6 trillion in M2 and the mainstream deflationary fears have been caused by total credit merely remaining flat for the last two years thanks to the heroic debt-creation measures of the Soebarkah administration and the Federal Reserve increasing M2 at an annual rate of 5 percent, the outcome increasingly appears to favor the real deflationist camp.


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