T Nation

Problem of 'Collapsing Banks' and Deflation


"U.S. banks are collapsing amid losses on residential and commercial real estate loans, and the FDICâ??s list of â??problemâ?? lenders is the longest since 1992, at 702. FDIC Chairman Sheila Bair has said she expects failures to slow, yet still exceed last yearâ??s total of 140.


The number is up to 72 so far. Because banks work on a 10 to 1 ratio, this leverage is now in full reverse. Deflation ahead?


A different perspective. Makes sense to me.

Come to think of it, isn't there a poster on this board that has been warning of deflation for some time now?


I was right their with you :smiley: (digital high five)



No way, not unless the Fed totally stops papering over debt.

There are tons of small banks that are going to fail but the bigger ones will be protected.

Inflation, full steam ahead.


BTW, I am in the camp that deflation is exactly what the US economy needs.


Inflation = Expansion of money and credit
Deflation = Shrinkage of money and credit

What the Central Bank is doing is breaking natural law, and the effects can be unpredictability dangerous.


I always have an active mind with regard to new information or a new perspective.

Of course, Homestake Mines soared from 1929 to 1936...


Meh, not quite. Can you define what you mean by "expansion"? Inflation can occur even with a constant level of money supply and an increase in money/credit doesn't mean inflation will occur.


Irrelevant. They can print as much as they want, someone still has to accept the credit. The Fed still has to find a way for the money its printing to enter the market. It takes 2. And right now, in this bearish market, people have turned fearful and do not lend or borrow at the same rates as the confident ones (the very few). As consumers become more conservative, they save more and spend less. These behaviors reduce the velocity of money, thus putting downside pressure on prices. = deflation.

First, The credit implosion. Then, the deflationary period. First, optimism. Then, pessimism.

When will inflation occur?
When the FED monetizes the governments debt (hyperinflation, likely). But that may be 7-10 years away.

"When credit expands beyond economy's ability to pay the interest and principal, the trend toward expansion reverses, and the amount of outstanding credit contracts as debtors pay off their loans or default. The resulting drop in the credit supply is deflation." - Robert Prechter


"The true source of deflation is system-wide bankruptcies induced by the contraction of a prior credit bubbble. Without the preceding bubble, "demand" would never "collapse"


I disagree, the inflation has already occured, the thing is they are keeping prices somewhat level as the deflation is running through the system. When the stimulus runs out, the FED will cause a direct shoot up of trillions of dollars just like Krugman is saying they should do. We will then see massive inflation, which will cause the rest of our funders to run for the hills leaving the FED to print even more that will then trigger hyperinflation.


A depression? WHY?

Prices fall = people lose wealth.

One's ability to offer credit, service debt, and support production is drastically reduced.


Deflation would in a sense restart the market, which at this point sounds a lot better then hyperinflating it to restart it.


TRUE. Deflation is def. the lesser of the two evils.

except with deflation... will then come hyperinflation afterwards. How else will we pay back our debts?


Here is a table of conditions and whether or not one would expect to see those conditions in inflation, deflation, stagflation, hyperinflation, and disinflation. Some expectations are debatable so they are left blank.


From December 2008


Expansion = The money that is on the market becoming larged and credit limits being raised.


Deflation cycle


Deflation cycle explained with human emotions.



"The late Milton Friedman was an American economist and recipient of the Nobel Memorial Prize in Economic Sciences. He is famous for saying "Inflation is always and everywhere a monetary phenomenon." He said that inflation was caused by excess money supply and the velocity of money.

The question we ask is "Is it possible, if money velocity remains low, that inflation might not arise even if the government printed money?" To the best of our knowledge that's pretty well what happened in Japan from 1990 - huge amounts of money creation but no velocity. Deflation happened because the Japanese banks hoarded the money."


Shows how the U.S. has been experiencing both long-term inflation and deflation at the same time.