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SW Ontario | Thanks for reiterating this concept of how deposits are created. It has been one of the missing pieces in helping me understand the macroeconomic climate we are in today.
I am not sure if you are actually implying that debt expansion needs to continue and that without out it a complete collapse occurs; not sure what you mean by an implosion caused by a deflationary spiral. Yes, there could be significant deflation, even greater than the 40 percent or so contraction that happened during the great depression. Thanks to central banks, a natural contraction of the money supply has not been allowed to occur for over half a century. Somewhere along the line, central banks decided that no amount of deflation is palatable. Peter Schiff phrases it well when he states that "saving" must occur before capital expansion and real economic growth can once again occur. The word "save" is really the same as "deflate" in this instance. If he used "deflate" he would be even less popular than he already is. Using your banking explanation, money must "disappear" by paying down debt; effectively causing deflation and shrinking the money supply. Yes bad things would happen on our watch; but I am genuinely concerned for my children and future grandchildren. Since the average North American only spends less than 10 percent of their income on food, I am pretty sure most of us will survive a deflation of say 50 percent over a five year period. I might not be able to afford a Mediterranean cruise and I might lose some deposits because my bank goes bust but so be it. Hopefully my new bank will be smarter and I will learn not to rely on them so much.
I think one cannot have inflation to perpetuity. Some deflation, although painful must occur every so often to balance out excess inflation. The Fed is doing everything it can to prove this theory wrong. They are the modern day example of Roman emperors issuing currencies excessively diluted with cheap metals. As the world's reserve currency, they can probably keep this thing going for another decade or two, and print another 5 or 10 trillion in the process.
The more the Fed and other central banks manage to inflate, the more deflation must eventually occur to balance things out again. I don't know how long this thing keeps going but you are probably right that things eventually collapse; it is currently looking like central banks are going to lead us all over the cliff. I'm personally hoping the Winston Churchill quote "You can always count on Americans to do the right thing - after they've tried everything else." rings true and that they lead the world out of this financial debt crisis in time before complete collapse. Otherwise we will all eventually become slave states of communist China which is not something I am particularly looking forward to.
Edited by Bert 2/27/2015 22:47
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Loans make deposits II
