How to achieve a soft landing of a deleveraging, while growing economy?

Gassner's picture

For many years we see in the media experts believing in inflation and even hyper inflation. However, in the same time we face proponents warning against deflation. So far we all noticed.

Only a about a week ago I read an article by Myret Zaki clarifying that unfortunately inflation and deflation co-exists.

Myret Zaki's thesis is that we face inflation on financial markets, and deflation in the real economy (in French):

http://www.bilan.ch/myret-zaki/redaction-bilan/inflation-et-deflation-co...

In my view there is a general major shift in the price matrix and I still try to figure the magnitude and implications thereof. It is a bit irritating as at University we learned about neutrality of money:

http://en.wikipedia.org/wiki/Neutrality_of_money

This means any extra supply will increase prices equally, 5 % more money, all prices going up 5 %. Pretty plausible at first hand. However, it seems it does not work in reality any more (or never did).

All the extra (debt) money seems not to be equally distributed to people (e.g. via a helicopter) but through monetary agents, meaning banks. Thus it is distributed at different speeds at different sectors leading to various price effects and responses thereof.

There are sectors fast in absorptions (financial markets) and sectors slow in absorption (real economy,e.g. due to credit approvals, wage rises) of extra (debt) money:

It further shifts the price matrix in the real economy that certain sectors have easier credit checks and budget increases than others. Also pretty clear is that fast absorption goes in both directions. Reducing the monetary supply makes financial markets vulnerable - again, without being a market mechanism and is going to drown the real economy with it: Absorbing money originally meant to support the real economy; while the real economy is being deprived funding even more if not supplied with quantitative easing. Insane.

What we need is to reduce our dependency on debt. Deleveraging will lead, however, to severe economic problems - if driven by reducing debt finance.

We have to replace debt with more equity. It is this simple point, which concerns me most: Why nobody talks about amending Basel III to a banking regulation allowing to increase equity in society; thus allowing for a soft landing of a deleveraging, growing and innovative economy??? An economy growing with more equity in a balanced and financially sustainable manner?

Looking forward to positive change. We are living in interesting times!

Please join the discussion on LinkedIn: http://www.linkedin.com/groups/How-achieve-soft-landing-deleveraging-147...

Best regards,

Michael Saleh Gassner

NB:
Please also see my previous post discussing why equity finance is not avalaible in the markets: http://www.islamicfinance.de/?q=node/4012

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