Daily Archives: December 30, 2010

Inflation. Deflation. Debt. (Update)(x2)

I’ve been trying to get an explanation from supposedly knowledgeable people who seem to believe inflation, or even hyper-inflation, is in the offing.  What makes them think that?

Robert Wenzel writes a busy blog called Economic Policy Journal.  He’s one of those Austrian economists, strongly associated with the Lew Rockwell crowd.  I’ve been asking him. Watch M2, he says, and not much else.

That’s not much of an explanation, especially since a lot of people can show that M2 is not correlated with inflation, or even negatively correlated with it.  There are so many opinions about M2 and what it means for inflation or deflation that it’s just intellectual noise at this point:

http://mjperry.blogspot.com/2010/03/why-inflation-concerns-are-overblow-m2.html

http://globaleconomicanalysis.blogspot.com/2007/01/money-supply-and-recessions.html

http://seekingalpha.com/article/181627-the-m2-inflation-correlation

I think the problem is much more fundamental than policy geek data.  This article on Zero Hedge has it just about right.  The economy as a whole – globally, that is – is not only unable to repay the principal debt it has already incurred; it cannot even “service” the debt.

If this were an individual or a business it would be bankruptcy time, and anyone who has done bankruptcy work for debtors knows that there comes a point where it is inevitable, it is a mathematical certainty.

But bankruptcy is not possible for an entire economy, an entire world.  So what then?

I’m open to suggestion, but I’m not hearing any.  “Watch M2” doesn’t cut it.

UpdateClick here to see that my conversation with Mr. Wenzel apparently ran out of steam.  It centered on the relationship between the money supply statistic known as “M2” and inflation or deflation or neither or both.  A sub-issue of that was Wenzel’s assertion that an increase in “required” bank reserves meant necessarily that banks were making more loans.

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