QUOTE(cherroy @ Dec 10 2014, 03:31 PM)
You don't understand the consequences, as you only see from consumer pov.
You need to take a macro picture.
Imagine you are manufacturers, seeing your produced goods price dropping, profit shrinking or worst become loss, what you will do? Stop hiring, retrenching employee, which lead to people jobless no income. People no income cannot consume lead to spiralling down effect.
Taking loan without money involved?
Bank has no money how to give loan?
A deposit Rm100 in bank, bank take RM90 to loan to B to buy car from C
A has RM100,
B has a car
C has Rm90
How much money available out there?
RM190.
That's why you don't see Nokia brand anymore.
Whenever you deal with product that falling in price especially technology one, business is very competitive, and once you lose out market share and leading edge, every quickly fall into struggling territory. There are plenty of company/business died down in phone and computer industry, just it is not in public eye, so public do not know the issue.
Price go lower, I as consumer also happy to see, but in term of macro level, it is hurting the economy.
Price deflated until manufacturers decided to close down, retrench time, people have no income, instead can buy thing cheaper.
No income, how to buy more stuff?
Yup i've heard this explanation about why deflation is bad for the economy...profit margins compressing as time goes by... company go out of business etc...but doesn't make sense... auto industry also experience the same thing... computer industry also same... phone company etc... yes some go out of business... they couldn't compete... but many others can compete... and the industry as a whole grows larger... auto industry... computer industry... phone industry... if the deflation explanation is used... these industries wouldn't be profitable in the long term... but they are... and they keep growing... thats why i don't quite believe the deflation explanation... i've got real life industries and companies who keep defying what the explanation says should happen... they haven't stopped hiring... they haven't retrenched anymore than other industries have... employees don't really earn less than counterparts in other industries...
Don't get me wrong... your explanation makes perfect sense... and i believe it happens as you say in many companies... the industries i've pointed out and those companies in those industries are some of the most inovative firms and brands on the planet... the ones who aren't just die the way you described... i can't see that as hurting the economy... in fact i think it improves overall efficiency of the economy... its a tragedy if you happen to work for one of the failed companies...
Yup still need money... but not talking about no money... just limited money.... your example... Credit was extended... but you not taking the example far enough
C has RM 90 which he deposit in bank...
So now bank has RM 190 in deposit
RM90 in loans outsanding
follow your exmple and say that fractional reserve is 10%
Means now bank just need to keep RM 19 and can lend out the rest....
Which mean they can lend out another RM 81
So say D come and borrow the RM 81 to buy the car from C... not same model as B, so cheaper
deal goes through...so now
A deposit RM 100
B loan outstanding RM 90
C deposit RM 90 + RM 81
D loan outsanding RM 81
The bank now has deposit RM 271 and oustanding loans of RM 171, ... so still can lend out another RM 73...
keep repeating the cycle...Available money in physical cash only the original RM 100 amount ... but you can see we can keep increasing it to more...
thats what im refering to as the credit supply growth... true some ppl still consider it part of money supply...
so let me be more specific about gold back currency... just the original RM 100 will be backed by gold... the rest which you can think of as money or whatever is not backed by gold.
instead it is backed by the loans outstanding
Dec 10 2014, 12:13 PM
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