Re: A fractional Reserve
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Deflation rewards savers. If you save your money you will be able to buy more goods and services with it tommorrow. Inflation rewards debtors, so it is no wonder why the US has steadily become the largest debtor nation in history.
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Wouldnt this lead to less spending---> less production ---->less jobs?
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In addition this leads to devaluation of inventories-->lower profits ---> falling stock prices -----> layoffs----> lower individual net worth -----> lower spending----> recesssion that can quickly spiral into depression.
With deflation, putting your money under the pillow carries zero risk, raising the premium needed for capital formation which quickly stifles economic growth.
The present value of existing fixed rate bank loans (their liabilities) skyrocket, because current interest rates are much lower than what they are paying out, so the banking system is hurt.
Interest rates get so low that banks would want to pay you to borrow their money, because you would be paying them back in more valuable dollars..ie interest rates would theoretically go negative, obviously an untenable situation, because loans still carry risk of default. A bank would be better off just holding the money they have and not lending any out. Thus the credit markets dry up totally again crippling economic growth and the housing market.
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