Is Inflation Or Deflation Coming? Part 2

Not A Theoretical Argument

One might assert that our argument is rather theoretical. To this, we offer two answers. One, it is not the same kind of theory or theorizing of conventional macroeconomics. Look at Paul Krugman in this recent debate video. He talks a lot about choosing the appropriate “framework” to analyze government policy. That is basically an admission that he has multiple theories and whips whichever one out of his pocket that rationalizes his conclusion.

Two, our theory is that people respond to a change in incentives. We can understand the changed response due to endlessly falling interest rates. At each downtick, businesses will invest in projects that didn’t previously make sense. And they thereby lower the return on all such investments going forward.

In other words, we don’t have to listen to a guru like Krugman or a “maestro” like Alan Greenspan to tell us what to think. We can have a solid understanding of what’s really going on in the economy, in business, and in credit and capital markets.

Can there be a temporary race between, say, a building boom fueled by lower interest rates (and mass exodus from the cities, due to social policy) beating the commodities production boom fueled by the same lower interest rates? Yes, of course. Mining companies are slower to respond to a change in the cost of capital than home builders.

But in the end, falling interest will do what it always does. Fuel the expansion of production capacity, and keep fueling it, until the return on capital is marginally above the cost of capital.

In future articles, we will consider the next two questions. One, what, if anything, would break us out of this cycle of falling interest? What could return us to the 1947-1981 rising cycle? Two, if the government is not getting the means to pay for its deficit spending by diluting the currency and its purchasing power, where is it coming from?

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Disclaimer: The content in this article is provided as general information and for educational purposes only and should not be taken as investment advice. We do not guarantee the accuracy ...

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