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A specter is haunting the US economy - the specter of deflation.
Could the West simply start saving and paying back its debt?
If too many debtors pursued this path at the same time, the ensuing reduction in consumption would lead to lower growth, higher unemployment, and correspondingly less income,
making it more difficult for other debtors to save and pay back.
This phenomenon, described by Irving Fisher in 1933 in The Debt-Deflation Theory of Great Depressions, can result in a deep and long recession,
combined with falling prices (deflation).
David Rhodes and Daniel Stelter, via John Mauldin, January 2012
Irving Fisher, The Debt-Deflation Theory of Great Depressions
Professor Tim Congdon from International Monetary Research said the eurozone money figures are "horrifying" and portend a serious crunch ahead.
"My verdict is that the senior people in the ECB [and the Fed] have little organised understanding of the debt-deflationary processes initiated in late 2008," he said.
Ambrose Evans-Pritchard, 12 July 2009
Ireland's M3 contracted at a 30pc annual rate last month, a death sentence for a hyper-indebted economy. The wreckage will be evident just in time for the Irish to vote again – under extreme duress – on the EU's Enabling Act in October.
By refusing to join the US, Japan, Canada, Britain, and Switzerland in quantitative easing (QE) the ECB has allowed a contraction of private credit this summer. The M3 "broad" money supply has shrunk since February.
ECB experts think eurozone banks will have to write down a further €203bn by the end of next year. Yet ECB policy-makers seem unwilling to face the implications.
Yes, they have injected €442bn in a one-year tender, but the money is not reaching the economy.
Omräknat till dagens valutakurs har Riksbanken totalt lånat ut 500 miljarder kronor
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Michael Nystrom, December 28, 2006
A specter is haunting the US economy - the specter of deflation. The Fed and the Treasury - the central powers of Capitalism itself - have entered a holy alliance to exorcise this specter. The big question is, will they be able to do it?
From what we know of economic history, credit expansions lead to economic booms - this much is clear. What comes next is still up for debate.
Austrian economist Ludwig von Mises tells us "The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The credit expansion boom is built on the sands of banknotes and deposits. It must collapse. There is no means of avoiding the final collapse of a boom brought about by credit expansion." (emphasis mine)
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