Thursday, November 27, 2008

Breaking the Link Between Money and the Real World

Over at the Caluclated Risk blog, it was noted that Woolworths, an old and storied chain of stores in England, is going out of business. In the comment thread of that post was this excellent analysis of what's happening right now.
Original comment: IMO consumer demand is contracting faster than retail capacity. We won't be able to close retail square footage fast enough to generate supply constraints pushing up prices.

Reply to that comment: This is the real world manifestation of deflation.

This is why I think people have it backwards - they look at the deflation in the monetary supply as a problem to be solved.

They ignore that money is just an engineered proxy for the real economy and that the monetary deflation is simply the money doing its job and reflecting what's happening in the real world.

So they think by stopping the monetary deflation they can stop it's real world analog. By making more dollars and credit the real world excess capacity goes away.

I think all they do is break the relationship between money and the real world.
Curing deflation is like curing your fuel gauge of reporting that your gas tank is empty.

It doesn't fill your tank up with gas; it just makes your fuel gauge useless.
That's kind of how this whole Keynesian stimulus business feels to me.

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