The Living Force
Divide By Zero said:Hmm, very interesting with the credit in the formula. So it makes more sense that deflation happens, because nobody will have real money in the bank, just credit- which will dry up.
At this time it will be very scary and dangerous, because with deflation comes lower raises or pay cuts. At the same time , like mentioned, prices will go up for necessities, but go down for frivolities.
Yes, deflation is a real threat to the economy and that's why central bankers try to inflate the currency supply. Only problem is that they seem to be blind to the fact that increasing credit availability does the exact opposite of the assumed outcome. The Great Depression was a clear example of this and it's surprising how modern day economists aren't able to see it.
The only 'positive' aspect that I see is that real estate and farmland prices will be hit hard so if you have capital to invest in before the next crisis begins, it will then become a lot cheaper to buy property to build communities where needed. This is something that FOTCM could consider. Here's an article on the subject that might be of interest:
The Great Depression's Farmland Bubble Looks Eerily Like Today
The housing bubble during the Great Depression was caused by overvaluation of properties and easy access to credit.
Greater credit availability makes the economy more sensitive to any shocks, according to a recent study by Raghuram Rajan at the University of Chicago and Rodney Ramcharan of the Federal Reserve Board.
In the 1920's, anyone could get a big loan for a farm or a house. But when the markets tanked and people lost their jobs they found they couldn't sell their property for the same value they bought it.
Here's what the study had to say about the effects of easy lending on the economy:
Our evidence suggests that the rise in asset prices and the build-up in associated leverage was so high that bank failures (resulting from farm loan losses) were significantly more in areas with greater ex ante credit availability. Moreover, the areas that had greater credit availability during the commodity price boom had depressed land prices for a number of subsequent decades – probably because farm loan losses resulted in the failure of banks that lent to farmers, and depressed agricultural credit in subsequent decades.
The study's findings about the cause of the mortgage bubble hit home today, with an estimated 23 percent of Americans underwater on their mortgages.