Monday, 3 August 2009

Inflation vs Hyperinflation vs Deflation (again).

This issue is so critical and yest so hard to decide that I think it is worth looking at from every possible point of view. I'm going to make two lists, one for things that increase the money supply and one of things that decrease it:

("customers" = individuals, businesses, foreign governments etc. MS = money supply. MB = monetary base)
Don't forget that MB is much smaller than MS.

Factors that can lead to increases:
  • Customers taking out new loans from banks. (Directly increases MS)
  • Governments printing money to buy their own bonds to "pay" for their debt. (Directly increases MB)
  • Governments printing money expressly for the purposes of avoiding deflation. (Directly increases MB)
  • Lowering reserve requirements (gives permission to increase MS via extra allowed loans, but that's if the banks can find suitable borrowers)
  • Lowering capital requirements (gives permission to increase MS via extra allowed loans, but that's if the banks can find suitable borrowers)
Factors that can lead to decreases:
  • Customers paying back loans to banks (Directly decreases MS)
  • Customers defaulting on bank loans (Directly decreases MS)
  • Raising reserve requirements (leads to decreased MS)
  • Raising capital requirements (leads to decreased MS)
I know this does not answer the question of whether we are going to have inflation or deflation in the next few years, but I hope that it at least breaks down the problem in to more manageable chunks. I'd love to hear you comments on A) have I got the right things in the lists and B) what are the prospects for the future developments of size of each of the items in the lists.

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