Money Supply Question -- Sound of One Hand Clapping

Economics Economics Questions
1

Chris Martenson has written an article entitled “The Sound of One Hand Clapping, What Deflationists May Be Missing”.

I guess the main question becomes: if a bank never recognizes a loss does it actually occur? (My accountant friend tells me there’s a major difference between realizing and recognizing a loss) I’d really like the Austrian perspective on this question.

Also, are bank writedowns on loan losses a deflationary event?

2

I would also like to add a question of my own to this very thought:

If your currency is fiat currency, and there is a loss of value, but not a loss of resources, is there actually still a loss?

Hope I’m not breaking the rules.

3

you may want to contact a banker friend

4

Yes. Regardless of what happens to the individual firm. The Fed creates money and gives it to the failed banks. The real resources that the bank lost and had replenished MUST come from somewhere. Otherwise Germany in the 1920s, British and French after WW1 and WW2, Zimbabwae, Russia in the 1980, etc would be terrifically wealthy. The real wealth these failed banks receive comes from holders of currency or from holders of paper assets valued in the currency. The most hurt by inflation are holders of bonds, deposits and other fixed payout assets.

So there happen to be a lot of people holding things valued in the currency. The paper assets and currency of these folks are now worth slightly less. So what happens is that the pain of these failures is spread across the economy. So we have a seen event: a bank non-failure vs an unseen event, all currency holders in the entire economy suddenly have less real wealth. The folks in the economy then begin to make miniscule changes in their behavior that begin to pile on top of oneanother. Eventually these people refuse to make large purchases and restrict their activity and keep more currency. This to Keynes is call “The Paradox of Thrift”. Austrians call this saving. The worst thing is when the situation gets out of control and people begin to buy hard assets like gold instead of currency hoping to keep even with central bank inflation. Guess where we are now?