Deflation at work

As I point out here and in many other essays before it, once deflation sets in, government revenue collapses. The trouble with this situation is that in deflation gov revenue collapses right at the time that social costs are increasing; i.e. unemployment. In turn, this means that social expenditure must be reduced at first but then, eventually, discontinued in an attempt to maintain those government disbursements that are perceived directly by the public; i.e. pensions. But, if I am correct and this is the end of a secular inflationary cycle, eventually even pensions will not be maintained as promised.

As a side note, those of you that may believe in the logic of stimulus, you should think again. In the past thirty years in the West, money and debt creation has progressed at an average rate of 10% year on year with peaks at 20%. However, the money multiplier has declined inversely and is currently below 1. This means that although we’ve aggressively, consistently, relentlessly and pervasively stimulated the economy over thirty years, each additional new Dollar created has a diminishing effect on GDP expansion. Sure enough, despite accelerating money and credit creation at an average of 10% year on year, GDP progression only averaged around 4% year on year over the same period.

So now, as the money multiplier is below 1, more money creation and Quantitative Easing of gargantuan proportions will not help in reviving demand or GDP. How could it? We’ve been at it for thirty years having to create ever greater amounts of money and credit and still the money multiplier has been steadily declining. So, now that it is finally below 1, how can anyone think that even more money creation can bring it back up? However, what stimulus will do is first place a fiscal burden of biblical proportions on the economies of the West and, in addition, it will necessarily take away from social spending right at the time that social costs are rising.

Federal Tax Revenues plummeting

http://news.yahoo.com/s/ap/20090804/ap_on_go_ot/us_plummeting_taxes;_ylt=AoMATEJ21gb_mVpg_hux5Wh2wPIE;_ylu=X3oDMTJta2QxNG1sBGFzc2V0A2FwLzIwMDkwODA0L3VzX3BsdW1tZXRpbmdfdGF4ZXMEY3BvcwM2BHBvcwM2BHNlYwN5bl90b3Bfc3RvcmllcwRzbGsDYXBlbnRlcnByaXNl

Postal service considers closings, consolidation

http://news.yahoo.com/s/ap/20090804/ap_on_go_ot/us_postal_closings;_ylt=AokEaBJaqDJKzdtExb1ofvT9xg8F;_ylu=X3oDMTJsMWxrY3VpBGFzc2V0A2FwLzIwMDkwODA0L3VzX3Bvc3RhbF9jbG9zaW5ncwRjcG9zAzUEcG9zAzUEc2VjA3luX3RvcF9zdG9yaWVzBHNsawNwb3N0YWxzZXJ2aWM-

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One Response to “Deflation at work”

  1. Tic, toc, tic, toc… « Guido’s temple of the absurd Says:

    […] toc, tic, toc… By guidoamm Take a pick from previous essays here, here or […]

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