This comment was made today at Macrobusiness  (link may be locked – but there is a free trial available)

Flawse,

Your inflexible bladder analogy is over stating the position. Sure the economy should be more flexible but that does not make it completely inflexible.

The economy will adjust to a lower exchange rate just as it adjusted (developed bed sores) to an exchange rate bloated with capital inflows. It may be slow and it will involve pain but it will happen. Nothing in this world stands still. The economy changed in the 1980s and 1990s and then mutated on a household debt binge.

In any event you are missing the point of what happens in debt deflation – the money supply shrinks. Which means without any action in relation to the money supply your ‘inflexible bladder’ collapses inwards.

Creating money does not create capital but it does allow economic activity to take place. Allowing the money supply dry up during deleveraging instead of seeking to maintain stability in value would be an act of vandalism.

Even if you maintain that the bladder has lost the capacity to expand that doesn’t mean that you should allow it to collapse inwards which is exactly what will happen if we just stand by when the bank centred model of money creation starts to fail.

You can’t bemoan the current madness but then claim that any attempt to correct it is doomed to failure. When the current model fails which it will – what do you propose the country does? Curl up in a ball? The country will go on because it must go on and hopefully it will have learnt something from the experience.

I do agree that we will not see any serious attempts to make changes until the streets are full of people rendered unemployed and destitute by the current broken model.

Let’s face it even the most switched on still think the current economic model can be salvaged and believe that interest rate cuts offers a solution (or path to a solution).

The only real solutions are radical. But not that radical as they were standard practice 30 years ago.

Regulate capital, especially international capital flows carefully.

And I am not even talking about going back to that level of rigidity – merely curbing some of the most unproductive capital transactions.

The economy will not collapse with some moderate and gradual re-regulation of unproductive capital transactions and flows.

Sure it will not be a Sunday picnic but exaggerating the difficulty just makes it harder to build a consensus to start the process.