Alarm bells ring at Fed (deflation alert)

Financial Review ^

[freeper12]

I know its not a popular opinion, but I do belive we are heading for deflation. IMO, the evidence is mounting...I do have a question however, many articles liket his refer to the ability of the govt to simply start up the printing presses and flood the economy with "free" money"...but I don't get it. I assume that the "firing up the presses" is really just an expression, but how exactly would the fed "flood" the economy with "free" money? Besides lowering interest rates, how does the fed actually increase the money supply? If they are giving away "freea" money...who do they give it too???

[afz400]

I think that the hope is for war with Iraq to re-ignite inflation, much like it did under Johnson. I'm not sure that will help, since the core problem is that we have exported all meaningful (manufacturing) jobs overseas, with no hope of ever getting them back. Pretty risky since we need to know how to make clothes, shoes, etc if and when war with China begins. We are fast becoming a nation of people who know nothing about how to build anything, just like Spain or France. We can thank the leaders of both parties for this mess.

[GOPJ]

Are the Chinese and other strong production cultures doing "a Ford"? The folks who make the cars have to be able to buy them or you get glut? Give them all a car and Malthus might be proven right. Maybe it's time to change the system of accounting and accountability.

Today's deflationary pressures come from excess supply of goods and industrial capacity.

[Leisler]

"Indeed, all the inflation in US consumer prices is coming from only five areas that make up a quarter of the index - housing, tobacco, car insurance premiums, hospital services and tuition.

All caused by decades of government policies, rules, regulation, codes, etc. Taxes for tobacco. Housing is a popular delusion but were else are you going to hide your money.

[imawit]

Lots of easy available credit through banks and all other lending institutions is how money gets' pumped into circulation.

My only question is, if they are really serious about just inflation and not also keeping the borower under their thumb then they should see to it that the consumer has more income to pay off debt and purchase anew without incurring new debt.

Reduce taxes ! Increase salaries !

More money and spending in terms of creating more debt only makes the problem worse. What would make me go out and buy something ?

More income and the potential for more income that I get to spend and the sense that I could partake in more income over an extended period of time.

This is really simple but it will not happen because the manipulators always want a string attached and the public is waking up to this and also feeling it with the increase in debt as they spend and the actual fact that one may never get out from under the rock that is the burden of debt let alone be able to earn a comfortable wage and living without the slavery that debt imposes which pushes the drop in economic activity which then begets recession which then begets deflation. You can't have your cake and eat it too. This goes for the big boys as it does for the little guy. No one is above this physical law, not even the powerful.

[Leisler]

Oh our leaders and elites know how to produce. No one beats us in producing studies, reports, collations, reviews, codes, laws, forms, rules, regulations, suits, counter set of suits, counter-counter suits, appeals, pleadings, reforms, programs, plans….


We could do even more if the last few holdouts would put down their engineering degrees and the last few loyal manufactures quit being the Kulaks of the information age.

[snopercod]

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[arete]

If they are giving away "freea" money...who do they give it too???

They simply use the newly printed money to buy back government debt. Whoever was holding the 30 bond for example, now has a handful of newly "created" cash. The thinking goes that he will then spend it on something -- consumer goods and services, etc. In the past however, much of the loose cash went into speculative financial activity such as betting in the stock market. That is one reason we got into trouble in the first place with the stock market bubble. Many people have argued that the reinflation will fail because you are trying to cure an economic illness with the very same measures that caused the illness to begin with.

Richard W.

[philman_36]

I think that the hope is for war with Iraq to re-ignite inflation, much like it did under Johnson.
It's a sad day in America when one looks to the prospect of war to fix an economic crisis.
It has worked in the past so I shouldn't be too surprised.

[arete]

It's a sad day in America when one looks to the prospect of war to fix an economic crisis.

We wouldn't even be talking about Iraq if it wasn't for our poor economy. It only goes to show you how bad things really are -- which no one wants to admit to. They want us to believe that everything is okay here and the real problem is Saddam. Yeah right.

Richard W.

[Stefan Stackhouse]

Reasons why there will be no deflation:

1. We are the world's most powerful economy, and we have an abundant supply of paper, ink, and printing presses, so we are actually free and able to inflate as much as we need to.

2. Deflation is bad for debtors, and the US Govt is the world's largest debtor, so it has a strong incentive to inflate rather than deflate.

3. Millions of people getting disposessed from their homes is not good for politician's job security.

[dirtboy]

The fed is structured to fight inflation - so, despite their claims to the contrary, their ability to fight deflation is like attempting to push a rope. The main problem exists primarily with the staggering amount of debt in this country (a condition that also existed prior to the Depression). So far, people have been able to re-finance debt as interest rates have dropped, thereby keeping debt payments close to the value of money - and that is in turn reflected by a fed funds rate of 1.25. However, if this country goes deflationary, what can the fed do? It can't pay people to borrow money, and re-financing offers would not go to that point as well. So even if people can re-finance their debt to, say, 1 percent, they are still having to pay that debt with deflated (i.e., more valuable) dollars. And that is where the vicious circle can kick in.

IMO tax cuts are the only action at this point that can arrest this cycle, because they create a real net increase in the puchasing power of households.

[KC_for_Freedom]

IMO too, and apparently the Bush administration is in agreement too.

[bvw]

In the past however, much of the loose cash went into speculative financial activity such as betting in the stock market

In some present effect the printing and disbursement of "currency money" now in a deflatation acts as the fine (the piper to be paid) for all the lousy, tinkerbell,pie-eyed "investing" that has occurred in the past 10 years, once people forgot dividends and genuine hard profit and chased and put a grand premium on outright lies and vain promises.

[austrianecon]

Unlike inflation which as Friedman once said (and I paraphrase): 'is strictly a monetary phenomenon', deflation can be influenced by many factors. Deflation, in the classical sense, was a tightening of the money supply through bank credit contraction, something we don't have to worry about right now. I personally think that we are in a slightly deflationary period due to increased productivity and cheaper imports. This is the type of deflation that was prevelent for roughly 120 yrs prior to the creation of the Federal Reserve System. There is absolutely nothing wrong with this type of deflation.

[OldFriend]

Larry Kudlow has been using the 'deflation' word for over a year now and blaming the boneheaded policies of Greenspan.

[bvw]

Yet people will overborrow, prefering purchases that are levereged -- why? Because it is the established habit, and that habit has not yet been broken. Thus tax cuts will increase public debt, and the result? A number of possible scenarios. Probably most still bad news.

A few of things might work, though. And include tax cuts -- not because tax cuts as tax cuts, but as a change of the ratio of incremented government debt to private debt, under the assumption that the public leverages less of a spent dollar than the government. Might make owned preferred stock, regular dividend stock in PRIVATE companies a better hedge against deflation than government bonds, and thus redirect captital flow to the *hopefully* more efficient private engine. I says hopefully because accountability and general expectations accountability (theose two are different things) must be there at every level to make the private stock a better hedge than a T-Bill.

Other things that would help are import tariffs on labor and goods. Labor? -- H1B, etc. Incentives for starting new corporate businesses (not adding to the dinosaurs) in manufacturing and transport stateside. All to help capital flowing more in the States.

[arete]

Kudlow has to carry a map with him to find his way back home at night. If he called Greenspan a bonehead, then that is the only thing he has been right about for 3 years.

Richard W.

[Moonman62]

Whoever was holding the 30 bond for example, now has a handful of newly "created" cash.

What about the cash that was used by the holder to pay for the bond in the first place? And when the Fed buys that bond, it isn't retired. The government (really the taxpayer) still has to pay it off.

[dirtboy]

once people forgot dividends and genuine hard profit and chased and put a grand premium on outright lies and vain promises.

Exactly. It's not very difficult to cook the books to inflate a corporate valuation. But dividends have to be paid in cold cash, and it's hard to generate that through creative accounting. Dividends enforce discipline.