mick silver
27th September 2010, 07:10 AM
http://www.safehaven.com/print/18314/gold-attention-deficit-disorders-add ... The world is afraid of a repeat of the deflation of the Great Depression. Deflation is a negative drop in prices caused by the contraction of money supply, the opposite of inflation. In 1932, US consumer prices fell 10 percent and between 1929 and 1933 fell 27 percent in total. Today despite inflation at 40 year lows, prices are still going up, not down. In the 12 months ended in August, prices rose 1.1 percent.
Amid this fear of deflation, economists forget that deflation does not happen when there is an abundance of money. In fact the economy is not even suffering from a shortage of liquidity, but a shortage of confidence. Part of the reason is that the looming red ink and liquidity is unlike anything seen in US peacetime history. Banks today have plenty of reserves, but they are hoarding rather than lending. US corporations have repaired their balance sheets but are sitting with trillions of cash. Consumers are paying down their debts and savings are increasing. And nobody wants to borrow or use money despite zero interest rates. Maison
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Amid this fear of deflation, economists forget that deflation does not happen when there is an abundance of money. In fact the economy is not even suffering from a shortage of liquidity, but a shortage of confidence. Part of the reason is that the looming red ink and liquidity is unlike anything seen in US peacetime history. Banks today have plenty of reserves, but they are hoarding rather than lending. US corporations have repaired their balance sheets but are sitting with trillions of cash. Consumers are paying down their debts and savings are increasing. And nobody wants to borrow or use money despite zero interest rates. Maison
click on link for the whole story