Price Deflation, Black-Scholes & The Fed 12-01-09 mpg Why the Deflationist Argument Is Wrong in Both Theory and Practice Must Read - Charts - A quote...."A debate has gone on for over 35 years: Austrian School economists and analysts who predict price inflation vs. non-Austrian School analysts who claim to be Austrian and who predict price deflation. -- For the entire period, the consumer price index, January to January, has never declined. This goes back to 1955. This fact has had no effect on most deflationists. They remain deflationists." Gary North is probably correct; there might not be much price deflation....and if true, it would appear that the Feds are practicing their own version of the Black-Scholes Formula They intend to steadily pump out paper products (dollars, t-bills, derivatives, electronic digits, what-have-you) and increase the credit/debt in the "virtual" economy to balance against the continued contraction in the "real" economy and thereby help prevent a massive price decline in "asset valuations" (rich peoples' stuff, stocks, bonds and commercial real estate, although they've failed to protect commercial real estate prices from falling). All the while demand continues to contract as wages, capacity utilization, manufacturing, and trade continue to decline while unemployment, foreclosures, and bankruptcies continue to rise. So, as an example, if two or three years from now assuming present trends continue, or there's another depression era down-leg in the "real" economy, if a million cars were bought in this country in a given month (most of them would be imports of course), whereas before the down leg it used to be ten million cars bought, assuming the Fed's theory is working out the way they think it should, manufacturers will still be able to charge the same price per car, or possibly even a little bit more. Great, just wonderful, what a super idea! Meanwhile in this example the nation will be experiencing a thirty percent unemployment rate with the same percentage of people out on the streets living in cars they bought ten years ago because they were kicked out of their homes, don't hve a job and don't have a penny to their names. And of course the worst part of the whole scheme is, if the Fed is ever forced to open their books (as a very nervous Bernanke has just recently suggested, such an act might be highly imprudent) and the Government (i.e. the taxpayer) is forced to bail them out, along with paying back all of the government's own red ink, most people's share of all this debt will be more than they could ever earn in their entire lifetimes. Hence the Fed's conundrum, how to maintain "balance" as the nation slowly attempts to dig itself out of its self-inflicted hole. How to maintain asset valuations for the parasitic class, help them continue to occupy three, four, five, or whatever number of countries they've targeted for assimilation, maintain funding for the largest military budget on the planet, keep the bond market from imploding, keep the bonuses flowing on Wall Street and keep the filthy rich in the comfort they've become so accustomed too, all the while attempting to slowly ease back on the production of red ink (the credit/debt side of the BS-formula) hoping the slaves...'scuse me, serfs, 'scuse me again.....peons, work really, really, hard, save their little pennies, start spending them again and hopefuly kick all these debts down the road and onto their grandkids. Such a plan didn't work for LTCM, and it's sure not going to work for the Fed or this country. - mpg |