My essay of the week
The problem with modern economic and Central banking policies is that they are not soundly based on anything resembling science or logic but rather predicated on purely imaginary processes very much out of touch with actual economic cause and effect relationships. The financial engineers and economists at the Federal Reserve with their PhDs may be educated in a credentialed sense but the economics they teach at places like Princeton University is a fanciful concoction devoid of attachment to basic sound principles that were once understood. The upshot is that you have economically illiterate people awarding Nobel prizes to other economically illiterate people and you have Central Banks running amok with policy conceived in ignorance and based on presumptive processes conjured out of thin air.
These people don't even understand the essence of money--what it is and how it attains value and its relationship to production. They don't realize that when things are bought and sold it is really goods being exchanged against other goods. One person's production provides the purchasing power to buy another person's production. Money is just a medium of exchange to facilitate the exchange of goods. Units of sound money--within a money supply that is fixed or nearly so--fluctuate up and down in value according to the total production and supply of goods and the price signals thus given across the economy keeps things humming and aligned with constant multi-directional adjustments Central Bank or government currency printing distorts everything, gives false signals resulting in malinvestments and over time severe imbalances in the economy; a bubble economy with distorted asset values and production processes that cannot stand on their own but require constant increases in debt via fiat currency.
That's why the financial engineers fear deflation so much. In an honest non-financialized economy deflation would be a good thing and the consequence of increased efficiency and increased production would be a decline in prices which is the flip-side of an increase in the value of each unit of money. In-other-words, an increase in the standard of living. But in the world the bankers have created, the constantly increasing debt means constantly increasing debt service costs which requires constantly increasing currency printing. Otherwise the debt can't be serviced and the debt pyramid collapses on itself and everything in the artificial construct unravels. That's what they mean by deflation. It's debt deflation that scares them and has them trapped.
It all started because these poorly educated bankers got a basic premise wrong. They think that it is spending that powers an economy and that people saving creates a drag on the economy. So they do everything in their power to reduce savings within the economy and increase spending including increasing spending by accelerated debt accumulation. They have it completely backwards. Savings creates an increasing pool of capital which can be used for productive investments that over time increases the productivity of society which is what creates the increased purchasing power to keep everything going. Depleting savings and increasing debt does the opposite.
Using debt to fuel an economy is dumb in another way. When something is purchased with debt today you have just drawn future purchasing power into the present. In the future you will have less purchasing power because you have to service the debt. So at some point there is a drop-off in spending and payback happens. When society as a whole and the economy approaches maximum debt possible the wall is hit and payback happens. That's the world bankers and governments have created. They are trying to outrun the payback by ever more currency printing but they will ultimately fail.