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Can We Get Inflation AND Deflation at the Same Time?

Posted by
May 23, 2012
in Blog

Submitted and © by Keith Weiner of the New Austrian School of Economics

Dollar Backwardation

The current financial crisis, may progress to a phase where people demand and hoard dollar bills but take electronic deposit credits only at a discount which increases until electronic deposit credits are repudiated entirely.  The Federal Reserve would be powerless to solve the problem, because while they can create unlimited electronic deposit credits they can’t create unlimited paper dollar bills, “money you can fold” as Professor Antal Fekete calls it.  There would be a glut of electronic deposits, but a shortage of dollar bills.

Before the financial crisis metastasized in 2008, Fekete wrote a paper that I think is underappreciated and under-discussed.  “Can We Have Inflation and Deflation at the Same Time?” (http://www.safehaven.com/article/8507/can-we-have-inflation-and-deflatio…)  In his paper, he discussed the “tectonic rift” between paper Federal Reserve Notes (i.e. dollar bills) and electronic deposits.  By statute, the Federal Reserve cannot print dollar bills without collateral (e.g. Treasury bonds).  Also, they have limited printing press capacity that is insufficient to keep up with a catastrophic crisis.

He discussed the inverted pyramid of John Exter.  Gold is the triangle at the bottom, and then above is silver, dollar bills, and then the various kinds of electronic deposits, stocks, real estate, etc.  In a crisis, people want to move from top to bottom of the pyramid, but of course there isn’t enough of the stuff at the bottom…

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image: zerohedge.com