Wednesday, June 26, 2013

Alasdair Macleod: The Deflationist Error

Many people believe there is a significant risk that the Irving Fisher debt-deflation theory of great depressions is still an economic threat today. They overlook the fact that Fisher published his theory

The events he described arose as a consequence of the earlier expansion of bank credit in a fractional reserve system when the currency being used was convertible into gold. This was the case until 1933, when Fisher wrote his definitive article forEconometrica. Under those circumstances, it is obvious that contracting credit leads to a self-feeding liquidation of assets, driving their prices down, and an increasing demand for money, i.e. gold. This was reflected in the gold revaluation that took place that year.

This is not the situation today. The absence of the gold discipline allows central banks to replace credit with quantities of raw money sufficient to ensure that Fisher’s debt-deflation is bought off.
examining debt-deflation events under a gold standard, which does not apply today. Financial credit contractions therefore take a different appearance.

This short commentary by Alasdair was posted on Internet site on Sunday...and I found it buried in a GATA release yesterday morning.