Posted on 11/30/2008 10:49:54 AM PST by Captain Kirk
So when would the printing of money over take a recession? It seems to me like there is a fine line between deflation and hyperinflation - like you could rubber band from one to the other. I have a decent understanding of both just trying to really get an even better grasp on the possibilities of occurrence during the current crisis - Thanks!
I agree with your logic. Credit is a much abused currency, the consequence of which was an unjustified inflation in critical sectors, especially housing and automobiles. The public’s supply and demand decisions will be sharpened during the deflationary period and consequently drive down the demand for these commodities until the price meets the public’s willingness to pay and the availability of credit to complete the purchase.
What I hope that this economy will focus on is our overly litigious society which has fueled inflation in practically all sectors of the economy. We need tort reform to help restore sanity in the markets.
I agree with most of the posters that deflation is not necessarily bad, but it can be.
When it's caused by a severe contraction in the money supply, an economy-wide deflation can result in lower sales simply because buyers hold off on purchases in the expectation that the price will be lower in the future.
Let's not go to the extreme of thinking that deflation is always good.
But rising prices DO lead to increased sales during inflationary periods.
The higher the expected rate of inflation, the more likely it will be that people will buy goods at ever higher prices because delay will cost them even more.
During severe deflationary periods, like we see in todays housing market, the prospect of even lower prices do stop people from buying even during periods when the price continually drops.
It is the expectattion of price inflation or price deflation which affects buyer behavior...
Ha! How do people this ignorant get published?
Ignorant? When prices are declining consumers and businesses put off buying things. So, yes, businesses will sell less in a deflationary environment. Why would you or a business buy something today when it's just going to get cheaper in the future?
The biggest problem with inflation is that it encourages people to borrow instead of save. Why pay off your home mortgage when the real cost of the loan will just be going down over the years anyway? It's just as well to spend that money now. Don't save it, because it will be worth less and less. With extreme inflation, you could have loans worth less that what they were written for. That's a good thing? Economists don't seem to consider the human factor and what inflation can do to a society. It's just numbers to too many.
Exactly, it creates a debt-ridden society. This is great for lenders, but the Bible says a borrower is a slave to the lender.
It’s especially wrong when bankers create credit (debt) out of nothing.
Another reason central banking needs to be done away with.
Lets see. Is deflation of stock value, home value, commodity prices, and eventually WAGES a bad thing? Only if you own a home, stocks or have a job.
“Deflation is defined as a reduction in the supply of money.”
Generally, deflation is defined as lowering of the overall price level. The definition you offered seems to be associated with the Austrian school of economics (see below) and is definitely the minority usage. From Wikipedia:
“Deflation in economics is a persistent decrease in the general price level[1] of goods and services below zero percent inflation. ... Alternatively, the term deflation was used by the classical economists to refer to a decrease in the money supply and credit; some economists, including many Austrian school economists, still use the word in this sense. The two meanings are closely related, since a decrease in the money supply is likely to cause a decrease in the price level.”
I like to read the Austrians, but I see no point in continuing to use a second definition of the word deflation.
Historically deflation (reduced price level) has often followed a post war return to a gold standard, as happened after out civil war. Gradual deflation can result from increasing output while keeping the money supply unchanged.
Deflation is not so much as a bad thing as is the anticipation of continued deflation. That’s when people stop buying and companies stop being able to afford to produce.
I don’t actually think we’ll try to inflate our way out of the current housing prices, but I do think we’ll try to inflate our way to a manageable national debt and obligations.
..or they trample business employess to death to get to those things.....
So, yes, businesses will sell less in a deflationary environment. Why would you or a business buy something today when it's just going to get cheaper in the future?
Because I need it today.
“The boogie man of Deflation reminds me of the boogie man of Global Warming. Both are considered bad, yet not really supported by reality. Is deflation of gas prices a good thing? Does anyone believe that if a shortage or product X is occuring, that deflation will reverse itself and the price will achieve equilibrium?”
I don’t think this is an accurate way of framing the problem. “Deflation” is not the same thing as “falling prices.” A few definitions:
“Falling prices” = a fall in the aggregate price level. This could occur for many reasons: (i) consumers stop purchasing the product; (ii) new technology so increases labor productivity that aggregate supply — economy-wide supply — has increased. This would lead to a fall in the average level of prices. That’s a good thing.
“Disinflation” = a slowing down or stopping of a previous increase in the quantity of money. An increase in the quantity of money is “inflation” WHETHER OR NOT IT IS ACCOMPANIED BY AN INCREASE IN AGGREGATE PRICES.
“Deflation” = a sudden decrease in the quantity of money and credit. On the Austrian view of things, this is the “bust” part of the “boom-bust” business cycle caused by too much borrowing — “over-leveraging” — on the part of businesses for the sake of spending on so-called “higher order” goods: factories, labor, etc. In other words, too much spending on capital goods whose purpose is to make either more capital goods or lower-order consumer goods. Part of this malinvestment process usually includes a business’s decision to borrow money to pay most of its operating expenses, rather than pay these expenses directly out of its own cash reserves — in other words, businesses find it advantageous to keep a very low checking-account balance, and to pay its operating expenses by taking out loans. They do this because the inflationary environment in which it makes these decisions leads it to believe — mistakenly — that there WILL BE (note future tense) lots of demand for its products, and Federal Reserve policy has lowered made an “easy money” policy by lowering interest rates.
However, as the fiat money and credit wend their way through the economy, ALL prices begin to rise...though not evenly and not proportionally. What happens is that both consumers and producers are now faced with higher prices for everything — including higher prices for labor — so that it cuts back its spending on FUTURE goods. Businesses that were relying precisely on that future demand now find that (i) they have no revenue stream to pay back those loans they took out, and (ii) not enough in their cash reserves to pay back the loans, either. So they start laying off workers, scaling back or canceling projects that they had intended to start, start selling off their assets, or declare bankruptcy.
Under conditions of “deflation”, there is physically not enough money to cover the volume of payrolls, hence the unemployment during downturns. Monetary deflation need not wreak havoc, however, IF prices — including the price of labor — is allowed to readjust DOWNWARD to the level at which the new, lower quantity of money can absorb. At lower wage rates, payrolls can afford to absorb the unemployed workers. With everyone working — even at a lower money-wage — productivity and supply will increase; with increased productivity and supply, the general level of prices for consumer goods will also fall — so the “poorer” wage earner need not be any worse off than he was before the deflation. He makes less of a money-wage, but the price level of everything is lower, too. Additionally, there is no burden on the rest of the economy in having to support the unemployed, so the overall economy is better off.
The problem, of course, is unions, labor legislation, minimum wage laws, etc., that view the worker’s income ONLY in terms of a money-wage. Just as in the Great Depression, these sorts of laws will operate to prevent wages from falling, thus leading to lots of unemployment and the need, therefore, to put people “on the dole.” The usual government response to a sudden deflation is to do everything possible to re-inflate the money supply, lower interest rates, and create another “boom” cycle.
By the way, it’s also possible to go into an economic downturn — with layoffs, bankruptices, etc. — even while inflating the money supply to create or sustain a “boom”. You have to keep in mind an important fact about inflation: the (unstated) purpose of inflation is to FOOL PRODUCERS into thinking that there is lots of additional “aggregate demand” occurring or about to occur. If, however, the producers are NOT fooled, they will act AS IF the economy is IN FACT in a downturn or about to go into a downturn. The cause of this behavior is that the government is not inflating fast enough, or furiously enough, to fool businessmen and producers. This is precisely what happened in the 1970s during the Carter administration, and Keynesians were shocked: “How is it possible to have BOTH inflation AND unemployment at the same time!?” For according to Keynesian dogma, the first is upposed to be the antidote to the second. These economists even coined a silly name for this “unheard of” condition; if you remember, they called it “Stagflation” — a “stagnating inflation.” It wasn’t that hard to analyze from the businessman’s point of view: he distrusted the economy, which meant that the Federal Reserve was simply not inflating fast enough to fool him into thinking that the greater aggregate demand was real.
Thankfully, Reagan took office soon after and chose NOT to increase the pace of inflation but to decrease it. That was a key economic decision on his part (in direct opposition to many economists of the day) and an important factor in turning the economy around.
For the sake of analysis and conceptual clarity, it’s important to keep these ideas distinct:
“inflation” [has to do with quantity of money]
“rising prices” [has many causes]
“deflation” [has to do with quantity of money]
“falling prices” [has many causes]
“disinflation” [has to do with quantity of money]
Paper wealth? Good grief. The bear markets in stocks and real estate are not imaginary. They represent massive losses in real wealth.
Are you using this example to prove that some people behave like animals or to prove that people will search for bargains in a deflationary or inflationary environment? Either way, your anecdote is meaningless to the discussion.
Because I need it today.
Yeah, well, the facts show that in a deflationary economy people will put off buying big ticket items like cars and appliances when they'll be cheaper next year. Capital expenditures by businesses will also be reduced because they know that a $10 million piece of equipment will be cheaper in the future. This is how it works, which is why mild inflation is always better for the economy than deflation. You only need to look at Japan in the 90's to understand this fact.
If I buy a stock at $50, it goes up to $100, then down to $40 dollars, how much money should the treasury print to make up for my loss?
Well, that was quite the response. Possibly the biggest I’ve ever seen to one of my posts. So.....it appears that the upshot is that you don’t consider deflation a threat if wages are allowed to adjust to the new price baseline. Correct?
The problem is when an asset inflates in value (like houses or stocks)—it gives people the illusion of wealth. Then they go out and take home equity loans or other otherwise load up on credit to act as rich as they feel. They also buy a lot of foreign goods, sending $$ out of the country. Then prices for those assets collapse, and those previously rich people not only feel poor, they ARE poor—because they are holding the bad with all that debt. Then they default on the debut and........(hey, sounds familiar).
My anecdote is meaningful in that it disproves the author's "As prices decline, businesses sell less" nonsense.
Yeah, well, the facts show that in a deflationary economy people will put off buying big ticket items like cars and appliances when they'll be cheaper next year.
Perhaps, but that's not what I was commenting on.
Capital expenditures by businesses will also be reduced because they know that a $10 million piece of equipment will be cheaper in the future. This is how it works, which is why mild inflation is always better for the economy than deflation. You only need to look at Japan in the 90's to understand this fact.
I agree with you inasfar as being in a sustained deflationary enviroment such as the Depression. But the comment that was ignorant and remains so is the sweeping: ""As prices decline, businesses sell less".
There's no evidence supporting that assertion and quite alot to the contrary.
Perhaps the author really meant: "as wages decline, businesses sell less", or "as tax revenue declines, government gets less", etc.
Expectations are important, but I don’t see them repealing the law of demand.
By and large, lower real prices stimulate demand. Higher real (inflation adjusted) prices decrease the quantity demanded. When prices go up, there may be some inclination for some people to load up before prices go up even higher. But even they will probably conserve and wait as long as possible before buying again.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.