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Recs 5

inflation vs deflation


posted by klooloola on Monday, December 15th, 2008


Quick thoughts: Two things cause and increase in perceived money. 1) Someone must print it. 2) Banks must lend it. Bank Lending multiplies the money in the system. A 5% deposit reserve means a 20 Times multiplication of virtual money. As 2 is crashing 1 can increase to compensate, that is why despite all the complaints about dropping money from helicopters inflation is far far away. Any thoughts? I nearly flunked economics so may be quite wrong.

posted by klooloola on Monday, December 15th, 2008


Inflation is a function of money supply and the wealth multiplier (which you have described). So when there is massive deleveraging in the system (both in real money and derivatives), printing a few 100 bn is not going to put inflationary pressure on the system.

However, there could be scenarios where poor allocation of this capital could lead to inflation - for instance, imagine a scenario where the fed prints money and directly hands it to households (without giving any to the financial intermediaries or to companies). Here we could suddenly have a situation where food and FMCG companies could jack up prices just to stay in business (high interest burden etc) and all that helicopter money could just chase those goods.

Which is why capitalizing banks makes sense as they have decent exposure to all sectors of the economy.


posted by morphiusx Monday, December 15th, 2008


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