WRONG. If you know the house is going to go up in value, will you go into debt to buy one? Yes. Fast forward to today and you have massive housing deflation. Deflation always wins. You cannot fight it. With cheaper housing, people can afford to work for less and still keep a house over their heads. Unemployment is high. The economy is demanding workers to take a pay cut. Renters need to compensate for this loss of income by raising rent. Eventually, the cost of renting will be higher than the cost of taking a loss via buying that house. In the end, it all equals out. A deflationary spiral is exactly the cure this economy needs to get things back on track.
It would violate everything we know about human nature for that not to happen, but it is a long, long ways off.
Not necessarily. Bernanke has basically said, "I (the Fed) can/will print enough/unlimited amounts of money to turn deflation back to an inflationary environment." We don't know if this is really going to be the outcome. We also don't know whether his "cure" will be worse than the disease. Off the top of my head, I can think of no economy or country which ever went away because of deflation. But there are HUNDREDS of historical examples of INFLATION WIPING OUT A COUNTRY OR REGIME.... not that a country ceased to exist because of inflation/currency debasement, but rather all those who had their assets "inflated away" went bankrupt... and the "recovery" of the country benefited "somebody else".
Exactly. That's why grocery stores always have sales. They sell too much when the prices are higher. In order not to run out of items on the shelf and create a panic, they need to lower sales by lowering their prices.
Correctamundo! EVERYTHING WILL REBOUND NATURALLY... asset prices, wages, employment, etc... once "value" is restored. However deflation exposes government financial ills and greed, so they keep telling us what a bad thing deflation is... just another self-serving government lie. Deflation is the cure for EVIL INFLATION... THE DESTROYER OF WORLDS!!
It is a very bad thing for a debtor nation because it means you will pay your debts back with greater buying power than you borrowed. This in a nutshell is why the Fed wants to avoid deflation. The goal is mild inflation so you can reduce somewhat your debt burden. It is the equivalent of reducing the interest rate you pay on your debt when you can pay off your creditors with dollars that have less buying power than the dollars borrowed. This looks to be the only practical option the US has barring rather dramatic changes on the fiscal side. One can imagine a voluntary lowering of living standards along with bringing both military and medical spending down to fall in line with other developed nations as an alternative, but realistically what are the chances of that? I just don't see that happening any time soon. You will note that as long as the US was on the gold standard there were periods of both inflation and deflation (mild usually). But after Bretton Woods was abandoned there is no more deflation. The challenge now for the US is to maintain a favorable balance with regard to other major currencies. At the moment there is a currency war heating up to see which nation can out cheapen their trading partners. One of the more interesting phenomena that accompanies excessive inflation is the sale of hard assets to foreign interests, so long as a country does not adopt protectionist measures to prevent it. This is a mechanism for those holding US dollar denominated debt instruments to buy protection from excessive dollar inflation. I would expect more and more US assets to be acquired by foreign interests as these foreign interests cash in their bonds and use the proceeds to buy US hard assets.
Try to calm down. The caffeine may be getting to you. It's not like gold and silver can be created out of thin air. It requires a lot of work to get just a little, so the amount in circulation grows very slowly. Gold and silver are commodities and I would have no problem with a bascket (sic-consider taking spelling 101) of commodities being used instead of just gold and silver to back up a paper currency. I think we agree upon the need to back paper with real assets whether it is a few commodities or a basket of commodities.