Debt Deflation V Credit Deflation

The Bank of International Settlements (BIS) is the hub of all the central banks, the holy of holies among the powers that be.  The FED may be the chief priest, but the BIS is the Sanhedrin.

When their policy wonks put out a study, it does well to read it to see what they know and think.  They can only work within their own narrative.

Well, it turns out there are quite well apprised of what is going on....  and what they have to say is -

1. Credit deflation is happening, and there is a flip side, a good side, for small business etc.

2. If you depend on paycheck, property or pension, you are toast.  For the next 25-40 years at least.

What have I been saying?

You can read it here, it opens as a .pdf.

Some excerpts:

 And even if deflation is seen as a cause, rather than a symptom, of economic
conditions, its effects are not obvious. On the one hand, deflation can indeed
reduce output. Rigid nominal wages may aggravate unemployment. Falling prices
raise the real value of debt, undermining borrowers’ balance sheets, both public and
private – a prominent concern at present given historically high debt levels.
Consumers might delay spending, in anticipation of lower prices. And if interest
rates hit the zero lower bound, monetary policy will struggle to encourage
spending. On the other hand, deflation may actually boost output. Lower prices
 increase real incomes and wealth. And they may also make export goods more
competitive.2

Rigid nominal wages?  Start-ups paying less when less buys more will crush standing businesses paying more.  The $1 an hour more at WalMart and McD was exactly the wrong move, for them.

And then your mortgage becomes sisyphean, you can't afford the mortgage as time goes on...   the asset value regresses to the mean, ouch.    Most will simply jingle-mail, walk away.  And smart people will rent for 20 years and lower the rent on the landlord every year.  Right of first refusal will become popular in rental contracts.

There are two sides to every policy, a winner and a loser.    What Mish and I call credit deflation, the BIS lads are calling from their perspective, the other side, debt deflation. Two sides of the same coin.  Now these lads get it, but note the see the top policy folks still do not get it.   This is important, and good, meaning they will screw it up even more to small business advantage.

His envisaged mechanism, however, operates fundamentally through the impact of the liquidation
and repayment of debt on the money supply (deposit money) and, from there, on prices. Empirical
evidence for the relevance of debt deflation more generally is scant and anecdotal. In their
econometric analysis of the Great Depression, Bernanke and James (1991) do not include debt
deflation explicitly; they simply suggest that the (large) unexplained component in the output
contraction in a sample of countries may reflect its operation. Fackler and Parker (2005) infer the
relevance of debt deflation in the United States from the observation that debt grew rapidly in the
1920s against the backdrop of largely stable prices. That same observation, alongside the strong
increase in asset prices, led Eichengreen and Mitchener (2003), drawing on Borio and Lowe (2002),
to argue that the Great Depression was a credit boom gone wrong – a point subsequently
confirmed by Schularick and Taylor (2012). Meltzer (2003), in turn, argues against the debt deflation
view on the grounds that the fall in goods and services prices should have boosted real balances
and stimulated spending. He sees tight monetary policy as the main cause, as had already been
highlighted by Friedman and Schwartz (1963).

And Friedman and Schwartz were wrong, and Friedman said so before he died.  Unh!  Where are my notes on that!

 Against the background of record high levels of both public and private
debt (Graph 7), a key concern about the output costs of goods and services price
deflation in the current debate is “debt deflation”, ie the interaction of deflation with
debt. The idea is that, as prices fall, the real debt burden of borrowers increases,
inducing spending cutbacks and possibly defaults. This harks back to Fisher (1933),
who coined the term.16  Fisher’s concern was with businesses; today the focus is as
strong, if not stronger, on households and the public sector. This type of debt
deflation should be distinguished from the strains on balance sheets induced by
asset price  deflations.

Yes, distinguish between business debt and household debt.  but business debt problem is your pension assets, including social security hopes, since that is a ponzi scheme depending on the greater fool presently paying in from industry jobs.

So they know, at least at the wonk level, credit deflation, or form the hegemon's perspective, debt deflation, hammers the assets of the powers that be and their selected winners.  It open up opportunity for the small business, by lowering costs of labor and inputs and real estate, while the prices of all things is going down.

If you have your $15 an hour job (or more), in a prime real estate office space, with a wonderful 401K, and a mortgage on a nice house, you are toast because competitors can provide jobs to people who can gain more with less money, whereas you need to maintain status quo on all fronts to maintain your debt based economic status. Your law firm goes down.  Your biotech goes down.  Your real estate office goes down.  Your bank goes down.

Be agile, nimble.  Get a business going, so you can abandon the sinking ship and rebuild after the Spanish Armada like disaster we are sailing into...

And money does not matter, nor gold, credit is the thing.  Extend usury-free asset-backed credit to your customers.  The longer they take to pay, the richer you get.  The game has reversed, and the powers that be, at least their wonks, know it.

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