Posted on 11/30/2008 10:49:54 AM PST by Captain Kirk
We are now hearing ominous warnings about imminent deflation. Checking the welcome page at AOL this morning, I see that the lead item in the financial news section heralds “The Looming Threat of Deflation.” This headline encapsulates two highly problematic ideas. The first is that deflation would necessarily be a bad thing. The second is that deflation is likely to occur in the near term.
That deflation is always and everywhere a bad thing, not simply a bearer of bad news, but bad news in itself, is now an almost universal article of faith among mainstream economists and financial commentators. Clicking on the scary headline, I opened an article by Ted Allrich, who is described as “the founder of Comfort Zone Investing: Build Wealth and Sleep Well at Night . Allrich’s article, which does nothing to alter my belief that most investment “experts” are simply charlatans, encapsulates virtually every untutored and fallacious idea you’ve ever encountered in regard to deflation.
As he tells the story, deflation brings on all the horrors in the catalog of economic devastation.
As prices decline, businesses sell less, then go out of business. Fewer goods and services are offered. Less doesn’t become more. It becomes less. As businesses fold, capital dries up because investors don’t believe any business will make it, no matter what the product or service. Investors hang on to their cash. Hording becomes synonymous with survival. Wall Street (what’s left of it) can’t find capital for new companies to grow. Investors won’t invest.. . . So with deflation, there is less of everything. Businesses don’t grow. Jobs are fewer. Capital is not available. Everything comes to a slow and grinding halt.
(Excerpt) Read more at hnn.us ...
Journalists and politicians don’t understand even basic economics. Nor do most Americans, which is why we continue to elect Democrats in massive disporportion to their ability to deal appropriately with the economy.
Truth be told, this is not a good solution to the problem, but apparently our government is trying to go in that sort of direction. Fools.
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?
The real story is that politicians are scared witless at the though of any letup in consumer spending. On the other hand, most consumers are deluged with debt—it is irresponsible to “stimulate” them more until we have paid some of it off. We have thrown more $$ at this recession than we threw at WWII. Its really ridiculous that we will go to this level of excess to prevent an economic contraction brough about by 25 years (+) of credit excesses.
Deflation has many sources, not all of them bad. Greater efficiency should cause prices to fall as per unit costs fall. Not a bad thing, as this article by Christopher Mayer points out, at Mises.org,
“The Imaginary Evils of Deflation
Daily Article by Christopher Mayer | Posted on 9/3/2002.”
Short, succinct.
Ha! How do people this ignorant get published?
We already have experienced deflation..commodities, houses, cars,and stocks have already dropped in value. But, at the rate they are printing money we are in line for some big inflation in the future. The Govt is fighting the deflation of realestate, securities and stocks by injecting tons of money.
printing money causes inflationary pressure. but recession causes deflationary pressure. if the recession is bigger than the printing of money then you still get deflation. small deflation over time is not a bad thing. large, quick deflation in a time when everybody is over their head in debt is very bad. loan defaults, large scale unemployment, etc.
solution:
no more bailouts (especially for unsecured debt, ie. cars), invest in infrastructure (roads), steady hand at the fed (aiming for no inflation, rather than growing the economy), lower the minimum wage (to keep employment low), and eliminate stupid spending.
Exactly so! If that were so then rising prices ought to lead to increased sales!
And such nonsense largely goes unchallenged.
“On the other hand, most consumers are deluged with debt—it is irresponsible to “stimulate” them more until we have paid some of it off.”
I fully agree with this. People should live within their means.
However, there is legitimate debt incurred by persons that deflation makes worse. If you bought a home within the last five years....well within your income and modest....the deflation is hurting you. You are paying off a loan today with money that is worth more (dollar per dollar) than what you paid for it. Not only have you been hurt by the loss of equity...the actual money you still owe is now worth more than when you purchased it.
Now I’m not talking about the idiot that overbought or bought with the idea that it was an “investment.” Many of us purchase a home to be shelter and won’t buy outside our income. We don’t think of our home as an investment. However, should we need to sell for some reason...we would like to at least be able to sell the home for what we paid for it.
Now, in regards to government bailouts...I have to agree that this is not the solution. Eventually the market will sort itself out. Tinkering with it will just make it worse.
Also, I think it is important that the deflation in real estate and stocks is mostly a deflation of paper wealth, but it is being fought with a real expansion in the money supply.
Indeed, the gush of money will simply make recovery longer and more difficult. Such are the perils of fiat money.
That’s a nice article by Robert Higgs.
Higgs quotes the mistaken views of Ted Allrich, who rails against deflation. One problem will Allrich’s anti-deflation piece is that it totally fails to distinguish between cause and effect. I think many economic issues are easier to understand on a local (micro-economic) rather than national (macro-economic) level. If you own a business and have trouble making sales, you might reduce price in order to make additional sales. It would be wrong to correlate lower prices with reduced sales, as though the former caused the later. Amazingly enough, Allrich makes this mistake.
From Robert Higgs:
“Does deflation actually loom at present? If it does, its occurrence will surprise me greatly, because the Fed has been creating base money as if there were no tomorrow, and if the bailouts continue, as seems likely, more of the same is virtually certain.”
That has generally been my thinking too. But what about consumer and investor demand. The press has been talking down the economy for the duration of the Bush Presidency. On top of that, we’ve had (have?) the financial crisis. Perhaps Americans have finally been scared into spending less. If so, will it last? What should investors think of a Democratic Senate, Democratic House, and Obama Presidency? It will be even worse if the Democrats get 60 votes in the Senate and can close down a Republican filibuster. Investors should be less willing than before to invest in America.
There are forces for inflation and forces for deflation. I don’t have a macro-economic computer simulation model to balance these things out. Besides, these models may be like climate models - incomplete and unreliable.
And inflation is bad too, so then what? I think it’s just the media seeing doom and gloom in everything.
Deflation is what you get after a credit bubble pops. Deflation is defined as a reduction in the supply of money. When you consider that credit is considered a form of currency that people used to fund purchases, expansion or even investment then when it contracts you have a set of side effects that are recessionary and destructive to both demand for goods and services but also asset values.
If there is a persistent deflation, then nominal interest rates on mortgages will fall to reflect the anticipated decrease in prices. This would be an opportunity to refinance the mortgage and have monthly payments commensurate with the lower house value. Unfortunately, you would still have the unrealistically high principal payoff.
“You are paying off a loan today with money that is worth more (dollar per dollar) than what you paid for it.”
A very important point: Generally, debtors and creditors are affected by both deflation and inflation but in opposite ways.
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