Sunday, April 19, 2009

Stagnant Wages and Hoarded Funds

So, let me see if I can combine Mish's explanation of hoarded funds with my explanation of stagnant wages when it comes to what will be the cause of this coming deflation.

Mish is saying that there can be no inflation caused by the mere capitalizing of the banks and that it can only be caused by the lending of those funds. I'm saying that stagnant wages and the rising cost of living is setting us up for an inevitable correction with prices and that prices must come down.

But new lending is only going to postpone the day of reckoning. So Mish is not even saying that new lending is inevitably good or bad for the economy. He's just saying that even if they were hoping to keep deflation in check, they're going to have to get new lending going on and that's simply not going to occur as long as lenders feel that people are not going to be able to pay the new loans back.

I, on the other hand, am looking at the longer term issues of economic sustainability and that lending, stimulus packages, tax cuts or whatever else you want to put between stagnant wages and the rising cost of living is not a long term solution. We simply must endure deflation until inflation-adjusted prices are more in line with 1975 wages.

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