Topic: Why there is no growth (Read 930 times)

Exactly, which is why a US dollar collapse wouldn't cause long term damage to the economy.  The economy runs on goods and services.  The supply of and demand for these goods and services would not change.  However, several alternative means of value transfer would have to pick up the slack.  While such a transition would be a bit rough around the edges, between gold, silver, bitcoin, livestock, and produce people will find ways to transact.

Going over a "fiscal cliff" would save us from the artificial bubbles that have distorted the pricing mechanisms, and improve the efficiency of capital usage within the economy.  This return to efficient markets is the only thing that will get the US economy going.  A "fiscal cliff" is far from the smoothest way of achieving it, and personally, I don't see it happening this decade.  However a return to sanity is the only cure for the economy.  Cheap capital makes for inefficient markets.

Unfortunately, if easing is reigned in too fast, the private sector will start defaulting because of their malinvestments, which would actually be deflationary for the dollar.  However, deflation is actually what a normal economy experiences when innovation displaces workers.  Labor becomes less valuable, wages stagnate, and prices normally fall.  Or at least, that's how Adam Smith described it in http://en.wikipedia.org/wiki/The_Wealth_of_Nations.

By easing, the Federal reserve is keeping housing and bonds inflated, so that banks can get cheap money to keep stock prices and commodities inflated.  This in turn keeps consumer prices up while wages fall.  This is why consumption has fallen off.  So, who benefits?  The homeowners, the banks, and the CEOs.  The worker, as always, is shafted.  This system will change, but we have a long road left to travel.

However likely you think a fiscal crisis is to wreck the USD, even if it does, things will improve for the man who makes his living by his sweat after a brief shock.  Unfortunately, some may be knocked on their asses if something like that happens, but as long as you have skills, you can find a way to store value and transact.

However, when economy eventually improved and loaning become active again, V will rise back to a normal level of 5, that will cause a 500% rise in price level if GDP keeps growing at a couple of percent per year, that will effectively crash the fiat money system

In such a case, central bank must quickly reduce the M accordingly. However, the way to reduce M is to sell their assets to commercial banks to get base money back, those assets include government bonds and mortgage backed securities, and a large sell of those assets will crash the market immediately and destroy many people's house value, drive economy back into recession