Deflationary forces

Washington Times ^ | Tuesday, December 17, 2002 | House Editorial

[JohnHuang2]

Federal Reserve Chairman Alan Greenspan and his central bank colleagues continue to publicly downplay the prospect of a sustained period of price deflation. But the recently released minutes of the Fed's Nov. 6 monetary-policy committee meeting indicate that Mr. Greenspan and other Fed policymakers are focusing more intently on deflation than their public comments suggest. Given the potentially calamitous consequences of persistent deflation, which represents a state in which the average price level is falling, that is good news. What is even more important is for the Fed to take strong action against incipient deflation. This the Fed has also done; and that, too, is good news.

[JohnHuang2]

Tuesday, December 17, 2002

Quote of the Day by detective

[cherry]

can someone put this in simple laymen's terms?

does this mean that the prime rate will probably stay low or go lower?

and what should you do with any money left over from the govt....????

[MigrantOkie]

The prime would tend towards zero, you will probably do what everyone else will do with cash in a deflationary spiral, hang on to it. You would do this for two reasons 1)job instability and 2) why buy today what will be cheaper tommorrow.

[DB]

While those with large debts will bleed...

[DB]

If deflation really starts to happen you want to get rid of any debt you have. Even with low interest rates the dollars you pay back the debt with become worth more and more over time.

And second, the items you owe money on become cheaper each day making the dollars owed more valuable than the item with the debt. This means, for example, that your house can become worth far less on the open market (deflated price) than the mortgage you have on it. Basically you can't sell your house for how much is owed on it.

Deflation is hell.

[MigrantOkie]

I don't know about all that DB. It would seem to me that if your large debt purchases were ones that you were going to stick with a while anyway, let's say that house with a 30 year note, then you would actually be better off as long as you held onto your job and kept the same pay. (I know "if" but without that you're screwed and tattood anyway) Since the cost of living would be going down a greater portion of your earnings would be available to pay off the debt, the amount of the debt is the same as it was no matter what the currency is doing. You could do even better by refinancing at a lower rate (if you haven't already)

[staytrue]

deflation is not hell, it is wonderful, except when a society has too much debt, then it is hell. If no debt exists, deflation is a good thing as people get more for less.

[jasonalvarez]

Savers have been getting screwed for as long as governments have been control of money. Inflation is good you see, if you are the government and have a ton of debt. The fact that inflation is a tax on every productive member of society is never mentioned. Deflation would be necessary right now to correct the excesses of the past. But it will never be allowed to occur. Just read the hysterical op eds like this one and the recent speeches of Greenspan, Barnanke et al. The FED will inflate or die. Hold on to your wallets.

[DB]

First of all, if the price of things is going down people wait to buy things because the price will be even better tomorrow. The more they wait, the more inventories buildup and the more jobs are lost. Since dollars are worth more your employer pays you fewer of them for the same work done. Employer can hardly continue to pay workers the same amount while profits go lower and lower due to the reduced relative value of what they produce. The loan you have still demands repayment in the original amount of dollars with no correction for their new value. Even at zero percent interest large debt will destroy you in a deflationary environment. The dollars you pay back the loan with become more and more valuable (and therefore scarce) as time goes on.

As far as "refinancing", the Fed rate is 1.5% now. It can only go to zero and deflation hasn't even started yet. Then what?

Japanese have the highest savings rate of any people in the world. Deflation and high debt has destroyed them.

[DB]

That's a nice bunch of ifs.

That fact is our country and large numbers of its citizens ARE in debt big time at this very moment. There are no ifs about it.

Deflation will destroy most of them and we may well find ourselves as collateral damage in the process.

Some of you seem to think it would be great if there were some great day of reckoning and we could simply start over regardless of the losses. You figure it will be someone else that pays the price…

You may just find out that once the "reckoning" gets going, no one escapes.

[DB]

I'm fortunate to not currently have any debt.

[CobaltBlue]

>>Japanese have the highest savings rate of any people in the world<<

And an aging population. It's normal for older people to save, because they already own what they need, so they are socking away a nest egg for when they are too old to work.

The US has a far younger population, thanks, in part, to immigration, and to a lesser extent to a higher birth rate.

[DB]

That may be true but it is also Japanese culture to save long term.

No doubt that culture is changing...

[varon]

That fact is our country and large numbers of its citizens ARE in debt big time at this very moment. There are no ifs about it.

True. Our economy is debt driven, pure and simple.

[DB]

And lower interest rates makes the problem worse...

Barrowing more becomes more "affordable"...

[staytrue]

I agree that the us is in debt (corporate, individual and govt.) big time and that is why the fed wants to avoid deflation at all costs because it will be hell. I simply disagree with your blanket statement that deflation is hell all the time and in all circumstances.

[cherry]

"To make matters even worse yet, most of the "deflation" will be centered on wages, and to a lesser extent on consumer items, however, taxes, medical expenses, insurance, etc. will not trend lower. "

when there is no more money for insurance,or doctor visits etc....then those things too will move downward....they have to....some many people can not afford insurance or health care now....

there will be a day where middle age people in what used to called middle- income wage earning jobs...will have to seriously decide NOT to buy health insurance....at hundreds of dollars a month to cover a small family, a lot of people will just have to take their chances...same with car insurance....

there is little discretionary money nowadays....believe it or not...

change is a coming....

[DB]

I understand now.

I was answering a reply that was based on being in the US.

I'd venture to say there are few places currently on this planet where deflation wouldn't be hell due to large debt pretty much everywhere...

[BrucefromMtVernon]

When one steps back and eyeballs the big picture, I'd venture to say that the U.S. economy has been experiencing deflationary pressures for a long time, perhaps since 1973. Richard Nixon and Jimmy Carter deliberately trashed the U.S. economy. I remember former Federal Reserve Chairman Paul Volcker calling for the "controlled disintegration" (or some such remark) of the industrial economy.