Nonsense About Deflation

Liberty and Power at the History News Network ^ | November 30, 2008 | Robert Higgs

[Mase]

First you say this (of the 70's)

:Consumers and businesses weren't buying more because of the recession.

That's right. We had a recession from 1973-1975.

You then completely contradict yourself:

In the late 70's housing prices we're skyrocketing along with interest rates (rising rates were indicative of rising inflation) yet consumers continued to aggressively purchase real estate. Tangible assets do very well during periods of high inflation. Businesses will also accelerate capital investment spending during these times so that they don't have to pay more in the future.

There is no contradiction. Inflation accelerated in the last half of the decade as the economy recovered. Given your understanding of economics, purchases by consumers and businesses should have declined during that time. Just the opposite happened. That's because, as I said before, spending by consumers and businesses is mostly driven by GDP growth (and income growth and employment growth). Consumers accelerated purchases of homes during that time even though interest rates and home prices were dramatically increasing. Businesses were also active in making capital expenditures during that time.

According to the JPJones school of economics that can't happen. But, there it is.

Lol, well at least I'm not stating that consumers and business somehow buy less AND more during inflationary periods.

I said no such thing. You just chose to ignore the facts after I refuted your nonsense about retail sales being higher now that deflation has taken hold. Deflation occurs when too little money is chasing too many goods which, apparently, is how you define it also - and is no different than what the author is saying. It seems as though you agree with him (except for the fact that businesses sell less during periods of deflation) but just don't realize it (or want to admit it).... or, you're just confused. Incoherent indeed.

[ChessExpert]

I scanned your continuing debate. I see points that I agree with, and points that I disagree with, from each of you.

Price is both a cause and an effect in an economy. This can certainly lead to confusion.

One might want to consider the equation MV=PQ. Money times the Velocity (turnover of money) equals Price (level) times the Quantity of goods and services exchanged.

My understanding of the depression is that the left hand side of the equation fell. That is a story in itself. Now to the right side of the equation. It fell to match the left side of the equation. The Price level was on its way down. If it fell enough, Quantity (and employment) could return to its original levels. FDR had a faulty understanding of economics and tried, with some success, to keep prices from falling. With the Money supply falling by about a third, prices falling little, unemployment increased to about 30% at its peak. (Magnitudes are from recollection and I think are about right.)

Today, I see money going up, and velocity going down. This could be a wash on the left hand side of the equation. In the last year, we’ve seen the price of oil go up dramatically and go down dramatically. Housing prices vary by locality. They went up dramatically for many years. Some markets have seen them drop back but not, I think, to their original values. There have been differing claims on the price level. Some people exclude prices for such items as food and oil, as if it that made 100% sense.

We are probably on track for a large dose of socialism. This leads to great uncertainty for market participants, and a falling Velocity of money, and now falling Quantity of good/services and correspondingly employment. The falling Velocity has probably been mitigated some by increasing Money.

I think we, as a nation, are currently suffering from a split personalty. The oil companies were attacked when prices ran up. They received no kind words now that prices have fallen. Financial organizations were forced to make sub-prime loans for years - and are now attacked for having done so. We don’t want any more subprime loans, but poor, unemployed people should still get access to finance. Companies are easy targets, as they were in the depression. Since they can’t seem to do anything right, their best investment may be in politicians (who are to remain untainted by money).

Some banks, brokerages, states and companies, anticipate rewards (bail outs) for failure. More prudent entities are getting by, but may consider themselves saps for not being more aggressive.

Taxes are likely to go up. Regulation is likely to go up. This may not be a good time or place to invest. V and Q go down because of our socialist turn. We can anticipate more of the same. It’s best to allow prices to achieve their natural level.

When, and if, Americans and their politicians, no longer want government to “fix” the economy, and suspend or manipulate rules to be “fair” to everyone, then we will return to prosperity - with V and Q rising.