Washblog

Am I a broken record on this deflation thing? If you knew there was a tsunami headed for Ocean Shores and you saw a lot of people still on the beach, wouldn't you remind them ... you know, a couple times at least? Ah well, I guess economics is different. In economics we make our own tsunamis and then sit there like idiots as the wave heads towards shore.

I can explain the problem to you in one word: "Default". And I can give you all the math you need in one formula: Every 1 dollar of value lost from the core capital of a bank equals 8 to 25 dollars less lending. So, as these assets lose value, money disappears from the economy - just vanishes.

As previously safe assets like government bonds, mortgage bonds and municipal bonds suddenly look like they're going to lose value - maybe really quickly - the world financial system starts to go into a well-justified panic. There's nowhere to hide from a major credit crunch. There's no way to hedge against it. There's no asset to swap for another asset. Tightening your belt won't help you. Credit crunches cause deflation and deflation makes everything worth less simply because there's too little money.

In a deflationary crisis, the only hope is Progress, and that's why I go on about it with Progressives. Only Progressives have the intrinsic optimism necessary to help people believe that for the world to be a better place tomorrow - and therefore worth more, economically - they have to act on that belief. Deflation feeds on cynicism, self-pity and surrender.

Deflation is the scenario that's unimaginable to the American business elite: Nobody Makes Money From It. Risk-averse politicians will retire by the dozen (as we're seeing now), and when the crisis hits, the "Masters of the Universe" of American capital will run like the cowards and criminals they are.  As with the Great Depression, the only people left standing will be Progressives ... and, unfortunately, some right-wing lunatics. Progressives had better find some self-confidence or it's not going to be pretty.