I’ve asked this before, but seeing as how I got no responses, I rethought a bit more, and am still at a point where I’m wondering if this is the case or not. (Note: I use the typical Austrian definitions of inflation/deflation)
Under a fiat monetary financially regulated system, inflation comes from one of two sources:
-Government printing press.
-Fractional Reserve System.
When a recession occurs, there are bankruptcies, defaults on loans, and other market corrections from malinvestments.
Due to these corrections, there should be deflation due to the fractional reserve system.
Therefore, I should be able to uniquely identify all recessions by taking the True Money Supply and subtracting the base monetary supply.
Feedback?
Fractional reserve banking depends on bailouts to exist. In the vast majority of cases, credit has actually grown during recessions due to this fact.
I’ll admit that right now I don’t know what the True Money Supply is, but a recession doesn’t necessarily have to have a contraction of the money supply in it these days. That was only before the Great Depresion, as now banks (really starting the in the 70s) were able to inflate in a recession to prevent prices from falling.
Taken from Rothbard’s America’s Great Depression
But, in the last few
decades, monetary deflation has been strictly prevented by governmental
expansion of credit and bank reserves, and the phenomenon
of an actual
decline in the money supply has become at best a
dim memory. The result of the government’s abolition of deflation,
however, is that general prices no longer fall, even in recessions.
Did this help?
No, the deflation still occurs, it’s just that the government attempts to stop it from happening by pouring more money in, with the idea that the overall money supply would remain relatively constant. This effort fails, because it isn’t so much the sum total money floating around that’s important, as where the money is at any given time. Credit contracts in one area, money is poured into another, and what you end up with is not a continuous level, like a bathtub that’s being filled and drained at the same rate, but rather a hideously distorted capital structure with some areas bubbling, other areas shrinking, and nobody able to use the availability and price of credit to gauge economic conditions.
Your explanation would be correct if government solely used fiscal measures to reinflate the economy. However, not only is monetary “stimulus” very important to our government’s “anti-recessionary” actions, but every government fiscal stimulus, if it uses new money, necessarily includes monetary stimulus since the Fed buys that debt and monetizes it, thereby injecting money into the financial system. Moreover, bailouts via the Fed’s discount window and other emergency action also direct funds to the financial system. Thus, in most cases, the financial system is able to exist during recessions without a full market correction.
The result of all of this has finally been the severe economic/financial collapse we are now witnessing.
Deflation only occurs if part of the money supply is destroyed, for example under a gold standard when claims on the gold that are counterfeit are destroyed. But under a fiat money standard no claims are destroyed, and so there is no deflation.
What we are experiencing is disinflation, a decrease in the growth rate of the money supply, not a decrease in the money supply.
In order for a bailout to occur, the government prints a ton of money in order to raise TMS, but if I subtract the monetary base from the TMS to account for this the government borrows a bunch of money from the fractional reserve system. I ended up answering my own question. Thanks, nice responses.
Sure there are defaults on loans under a fiat system too. So certainly deflation is very much possible.