there are so many holes in dr. fekete's thesis that it is tempting to say he has everything backwards. as has already been pointed out, if new currency and old currency have the same denomination then they are fungible, and they have the same value.

I don't think that's what he meant exactly, although it's not really clear. What I get from it is that people will hoard their cash (old money) awaiting lower prices (deflation) but that attempts to move newly created money into circulation will fail for the basic reason that there's no one left to borrow it. Individuals are tapped out, or awaiting lower prices, and businesses won't borrow because of falling interest rates and shrinking markets for their products (unemployment). Banks aren't that willing to lend now anyway and loan standards are getting tougher as well. I may be reading more into it than is there, but that's my basic take on the situation, with or without Fekete.

almost all of the money will be created electronically, and his notion that little of it will be used for anything but executive bonuses is completely wrong. the aig bonuses that caused so much furor were less then 1/10 of 1% of the aig baliout ($165 million out of $170 billion.) some of the "new" money will find its way to consumers in the form of home foreclosure forgiveness, extended unemployment benefits, and so on.

Some will, but it won't be enough to offset the amount of new debt being created.

the idea that money will be in short supply and this will lead to a cascading deflationary depression is also completely wrong. that is what would happen if a laissez faire government stood by and did nothing. the continued creation of credit (and debt) has so far prevented a deflationary collapse, which would have started last september had the government not intervened to prop up the money market funds after lehman when bankrupt.

Hmmm. If you lose your job, money by definition will be in short supply. So will cash flow at the places the formerly employed once shopped. I'm thinking of Japan here. Prices fell for over a decade, while people basically hoarded savings in lieu of spending due to fear of job loss, or expectations of lower prices. Just what Fekete is predicting for the USA.

i don't know how he expects to see further interest rate cuts ahead. interest rates are already so close to zero that it is mathematically impossible to cut them much further. finally, if the government was willing to accept the painful medicine of a deflationary depression, would they have put ben bernanke in charge of the fed?

I think you're looking at rates from the standpoint of a savings account. Bond traders typically are highly leveraged, as is the balance sheet of most corporations. Small movements in rates have a greater effect than they would on a savings account with no leverage. Leverage is the problem from end to end in this economy. 50, even 80 to 1 in the case of some hedge funds. 30 to 1 is not uncommon for investment banks. When you run with that little capital, small moves get magnified by the same multiplier. Also, I'd point out that while short rates are near zero, long rates still have a ways to go, and that's where most people do their borrowing - over 5, 10 and 20 year terms.

As you've no doubt noticed, I'm gnawing on the deflation bone a lot these days. That's not because I subscribe to the theory so much as I see far too many people in the inflation camp. Bears are contrary by nature. We are solitary creatures who don't like to run with the herd. I'm just giving air time to some of the theories I'm seeing, and on balance, I'm about 70/30 in the deflation camp, but ready to change the minute I see a convincing argument for inflation. Right now the argument seems to be "deflation now, inflation later." Very convenient, as you can keep pushing out the date for when inflation kicks in, and sooner or later you'll be right.

Frankly, I think the inflation/deflation debate misses the point. The underlying economic reality is that most of us are redundant. We may be needed as consumers, but most people today contribute very little to production. Essentially, the industrial/technological revolution that occurred over the last 150 years has completely altered the dynamics of production to the point that we simply don't need as many workers - the machines do most of the work now. Trouble is, we're still dragging a 19th century model of employment and ownership behind us, which vested interests seek to maintain at any cost (to us).. Inflationary policies kept this problem at bay, but now it's staring us in the face. To earn a living, you need a job, but we don't need you anymore, so just go away. But you're not going to do that, right? You see goods being produced, some people enjoying the good life, and you want your share. This is where revolutions start. Look at Ecuador, Venezuela, etc. You really have no choice at this point because the subtext is: "give us what we need, or we'll burn it all down." You get enough people who have nothing to lose, and that's exactly what will happen.

ebear