The Deflating Bubble

Mises Institute ^ | 6/22/2009 | Doug French

[djsherin]

***can be used by central banks to fight inflation.***

Not printing money can also be used to fight inflation.

***The world is still stuck in a deflationary death spiral.***

You make it sound like falling prices are a bad thing.

[Southack]

The downside to deflation is the slowing of the Velocity of Money.

It’s not something that you’d have a chance to understand.

[djsherin]

No one is arguing that there aren’t a lot of deflationary forces in the economy right now (though computers and electronics always tend to be deflationary so that’s nothing new). What we’re saying is that the government is doing everything it can to prevent deflation and given the modest dips in the CPI, I would say unfortunately these efforts are relatively successful. You make it sound like prices are collapsing through the floor and in the aggregate that isn’t true (what is true is that there has been modest price deflation so far).

[djsherin]

***It’s not something that you’d have a chance to understand.***

Huh?

[oblomov]

Inflation in everything we need; deflation is everything we don’t.

[secretagent]

For starters, Hoisington believes the economy will continue to be weak for years. And with unemployment at such high levels, companies won't be raising wages, and consumers won't be increasing their spending. That means demand for commodities and other goods will be muted, so there will be no upward pressure on prices. Overall, he sees the economy being no bigger in 2012 than it is today.

Even if inflation and interest rates were to rise in this recession or the beginning of a recovery, the economy would quickly stall. “With unemployment widespread, wages would seriously lag inflation,” he writes. “Thus, real household income would decline and truncate any potential gain in consumer spending.”

What about all the money the government is pumping into the system? That's not by itself inflationary, he says, pointing to the work of economist Irving Fisher (who died in 1947).

Fisher believed that gross domestic product is equal to money times its turnover, or velocity, which is basically, the speed with which people spend it. In the last two quarters, money supply has grown at 14% but velocity has declined by about 17%, so nominal (non inflation-adjusted) GDP fell 4.5%.

One reason velocity is down, according to Hoisington, is that people would rather repay debt than go out and buy a lot of new stuff. He points again to Fisher, who wrote in a 1933 article “The Debt-Deflation Theory of Great Depressions” that excessive debt controls all, or nearly all, other economic variables.

Hoisington sees this today. “People are more interested in trying to get out of debt than increasing it, which means the economy cannot grow,” he says. “If there's no increase in demand, there can be no increase in prices.”

http://themessthatgreenspanmade.blogspot.com/2009/06/inflation-deflation-debate-continues.html

Pertinent?

[vets son]

Actually they are backed up by bonds being sold to china and the Saudi’s. As unemployment gets deeper and deeper that means less and less taxes and the gov’t needs to sell more bonds to cover. More unemployment puts more pressure on gov’t entitlements.

The only problem with selling bonds is there is not enough money in the world for foreign investors to buy the bonds with, hence bankruptcy, also known as default when it comes time to honor the interest the gov’t is paying for its deficit.

[Southack]

http://www.freerepublic.com/focus/f-news/2278623/posts