{"id":2574,"date":"2009-06-24T11:06:20","date_gmt":"2009-06-24T16:06:20","guid":{"rendered":"http:\/\/countingpips.com\/fx\/?p=2574"},"modified":"2009-06-24T11:06:20","modified_gmt":"2009-06-24T16:06:20","slug":"jaguar-inflation-a-laymans-explanation-of-government-intervention","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2009\/06\/24\/jaguar-inflation-a-laymans-explanation-of-government-intervention\/","title":{"rendered":"Jaguar Inflation – A Layman’s Explanation of Government Intervention"},"content":{"rendered":"

This article is part of a syndicated series about deflation from \t\t\t\t\tmarket analyst Robert Prechter, the world\u2019s foremost expert \t\t\t\t\ton and proponent of the deflationary scenario. For more on deflation \t\t\t\t\tand how you can survive it, download \t\t\t\t\tPrechter\u2019s FREE 60-page Deflation Survival eBook<\/strong><\/a><\/strong><\/span>, \t\t\t\t\tpart of Prechter\u2019s NEW Deflation Survival Guide.<\/p>\n

The following article was adapted from Robert Prechter\u2019s \t\t\t\t\tNEW Deflation \t\t\t\t\tSurvival eBook<\/a><\/span>, a free 60-page compilation of Prechter\u2019s \t\t\t\t\tmost important teachings and warnings about deflation.<\/p>\n

By Robert Prechter, CMT<\/p>\n

I am tired of hearing people insist that the Fed can expand credit \t\t\t\t\tall it wants. Sometimes an analogy clarifies a subject, so let\u2019s \t\t\t\t\ttry one.<\/p>\n

It may sound crazy, but suppose the government were to decide that \t\t\t\t\tthe health of the nation depends upon producing Jaguar automobiles \t\t\t\t\tand providing them to as many people as possible. To facilitate \t\t\t\t\tthat goal, it begins operating Jaguar plants all over the country, \t\t\t\t\tsubsidizing production with tax money. To everyone\u2019s delight, \t\t\t\t\tit offers these luxury cars for sale at 50 percent off the old price. \t\t\t\t\tPeople flock to the showrooms and buy. Later, sales slow down, so \t\t\t\t\tthe government cuts the price in half again. More people rush in \t\t\t\t\tand buy.<\/p>\n

Sales again slow, so it lowers the price to $900 each. People return \t\t\t\t\tto the stores to buy two or three, or half a dozen. Why not? Look \t\t\t\t\thow cheap they are! Buyers give Jaguars to their kids and park an \t\t\t\t\textra one on the lawn.<\/p>\n

Finally, the country is awash in Jaguars. Alas, sales slow again, \t\t\t\t\tand the government panics. It must move more Jaguars, or, according \t\t\t\t\tto its theory \u2014 ironically now made fact \u2014 the economy \t\t\t\t\twill recede. People are working three days a week just to pay their \t\t\t\t\ttaxes so the government can keep producing more Jaguars. If Jaguars \t\t\t\t\tstop moving, the economy will stop. So the government begins giving \t\t\t\t\tJaguars away<\/em>. A few more cars move out of the showrooms, but \t\t\t\t\tthen it ends. Nobody wants any more Jaguars<\/em>. They don\u2019t \t\t\t\t\tcare if they\u2019re free<\/em>. They can\u2019t find a use \t\t\t\t\tfor them<\/em>. Production of Jaguars ceases. It takes years to work \t\t\t\t\tthrough the overhanging supply of Jaguars. Tax collections collapse, \t\t\t\t\tthe factories close, and unemployment soars. The economy is wrecked. \t\t\t\t\tPeople can\u2019t afford to buy gasoline, so many of the Jaguars \t\t\t\t\trust away to worthlessness. The number of Jaguars \u2014 at best \t\t\t\t\t\u2014 returns to the level it was before the program began.<\/p>\n

The same thing can happen with credit.<\/p>\n

It may sound crazy, but suppose the government were to decide that \t\t\t\t\tthe health of the nation depends upon producing credit and providing \t\t\t\t\tit to as many people as possible. To facilitate that goal, it begins \t\t\t\t\toperating credit-production plants all over the country, called \t\t\t\t\tFederal Reserve Banks. To everyone\u2019s delight, these banks \t\t\t\t\toffer the credit for sale at below market rates. People flock to \t\t\t\t\tthe banks and buy. Later, sales slow down, so the banks cut the \t\t\t\t\tprice again. More people rush in and buy. Sales again slow, so they \t\t\t\t\tlower the price to one percent. People return to the banks to buy \t\t\t\t\teven more credit. Why not? Look how cheap it is! Borrowers use credit \t\t\t\t\tto buy houses, boats and an extra Jaguar to park out on the lawn. \t\t\t\t\tFinally, the country is awash in credit.<\/p>\n

Alas, sales slow again, and the banks panic. They must move more \t\t\t\t\tcredit, or, according to its theory \u2014 ironically now made \t\t\t\t\tfact \u2014 the economy will recede. People are working three days \t\t\t\t\ta week just to pay the interest on their debt to the banks so the \t\t\t\t\tbanks can keep offering more credit. If credit stops moving, the \t\t\t\t\teconomy will stop. So the banks begin giving credit away, at zero \t\t\t\t\tpercent interest. A few more loans move through the tellers\u2019 \t\t\t\t\twindows, but then it ends. Nobody wants any more credit. They \t\t\t\t\tdon\u2019t care if it\u2019s free<\/em>. They can\u2019t find \t\t\t\t\ta use for it<\/em>. Production of credit ceases. It takes years to \t\t\t\t\twork through the overhanging supply of credit. Interest payments \t\t\t\t\tcollapse, banks close, and unemployment soars. The economy is wrecked. \t\t\t\t\tPeople can\u2019t afford to pay interest on their debts, so many \t\t\t\t\tbonds deteriorate to worthlessness. The value of credit \u2014 \t\t\t\t\tat best \u2014 returns to the level it was before the program began.<\/p>\n

See how it works?<\/p>\n

Is the analogy perfect? No. The idea of pushing credit on people \t\t\t\t\tis far more dangerous than the idea of pushing Jaguars on them. \t\t\t\t\tIn the credit scenario, debtors and even most creditors lose everything \t\t\t\t\tin the end. In the Jaguar scenario, at least everyone ends up with \t\t\t\t\ta garage full of cars. Of course, the Jaguar scenario is impossible, \t\t\t\t\tbecause the government can\u2019t produce<\/em> value. It can, \t\t\t\t\thowever, reduce<\/em> values. A government that imposes a central \t\t\t\t\tbank monopoly, for example, can reduce the incremental value of \t\t\t\t\tcredit. A monopoly credit system also allows for fraud and theft \t\t\t\t\ton a far bigger scale. Instead of government appropriating citizens\u2019 \t\t\t\t\tlabor openly by having them produce cars, a monopoly banking system \t\t\t\t\tdoes so clandestinely by stealing stored labor from citizens\u2019 \t\t\t\t\tbank accounts by inflating the supply of credit, thereby reducing \t\t\t\t\tthe value of their savings.<\/p>\n

I hate to challenge mainstream 20th century macroeconomic theory, \t\t\t\t\tbut the idea that a growing economy needs easy credit is a false \t\t\t\t\ttheory. Credit should be supplied by the free market, in which case \t\t\t\t\tit will almost always be offered intelligently, primarily to producers, \t\t\t\t\tnot consumers. Would lower levels of credit availability mean that \t\t\t\t\tfewer people would own a house or a car? Quite the opposite. Only \t\t\t\t\tthe timeline would be different.<\/p>\n

Initially it would take a few years longer for the same number \t\t\t\t\tof people to own houses and cars \u2013 actually<\/em> own them, \t\t\t\t\tnot rent them from banks. Because banks would not be appropriating \t\t\t\t\tso much of everyone\u2019s labor and wealth, the economy would \t\t\t\t\tgrow much faster. Eventually, the extent of home and car ownership \t\t\t\t\t\u2013 actual ownership \u2013 would eclipse that in an easy-credit \t\t\t\t\tsociety. Moreover, people would keep<\/em> their homes and cars \t\t\t\t\tbecause banks would not be foreclosing on them. As a bonus, there \t\t\t\t\twould be no devastating across-the-board collapse of the banking \t\t\t\t\tsystem, which, as history has repeatedly demonstrated, is inevitable \t\t\t\t\tunder a central bank\u2019s fiat-credit monopoly.<\/p>\n

Jaguars, anyone?<\/p>\n

\u2026\u2026\u2026.<\/p>\n

For more on deflation, download \t\t\t\t\tPrechter\u2019s FREE 60-page Deflation Survival eBook<\/strong><\/a> or browse various deflation topics like those below at www.elliottwave.com\/deflation<\/a><\/strong><\/span>.<\/p>\n