What's Worse Than Inflation? Deflation.
The New York Times has an interesting article today about the rising specter of deflation -- in which a lack of demand causes prices to fall. Falling prices sounds like a good thing for consumers who have been battered with rising costs over the past year -- but experts agree -- deflation is nothing but bad news.
From the NYT:
Deflation accompanied the Depression of the 1930s. Persistently falling prices also were at the heart of Japan’s so-called lost decade after the catastrophic collapse of its real estate bubble at the end of the 1980s — a period in which some experts now find parallels to the American predicament.
“That certainly is the snapshot of the risk I see,” said Robert J. Barbera, chief economist at the research and trading firm ITG. “It is the crisis we face.”
With economies around the globe weakening, demand for oil, copper, grains and other commodities has diminished, bringing down prices of these raw materials. But prices have yet to decline noticeably for most goods and services, with one conspicuous exception — houses. Still, reduced demand is beginning to soften prices for a few products, like furniture and bedding, which are down slightly since the beginning of 2007, according to government data. Prices are also falling for some appliances, tools and hardware.
...
The new worry is that in the worst case, the end of inflation may be the beginning of something malevolent: a long, slow retrenchment in which consumers and businesses worldwide lose the wherewithal to buy, sending prices down for many goods. Though still considered unlikely, that would prompt businesses to slow production and accelerate layoffs, taking more paychecks out of the economy and further weakening demand.
Specter of Deflation Lurks as Global Demand Drops [NYT]
(Photo: a Photo Geek )
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What's worse than inflation and .. deflation? Stagflation. Thankfully, it doesn't seem like we're going to suffer from that like we did in the 70s.
So, deflation suppresses business growth and further constricts the job market.
However, prices fall across the board: a benefit to those on fixed incomes ... eg, retirees and entitlements beneficiaries.
What else?
Damned if you do, damned if you don't.
A big reason for deflation during the depression is that the federal government purposefully decreased the money supply. We have learned a LOT about economics since then, and the federal reserve is deliberately not doing that. If anything, it is going the other way.
When the federal reserve sets an interest rate, it does so indirectly -- it's called a "Target Rate" because it doesn't specifically dictate the rate. Instead, it increases or decreases the money supply until that rate happens. To lower rates, the fed basically just prints more money; to raise them, it takes some money out of circulation.
When the economy slows down, then printing money does not cause inflation.
You want to prevent deflation? Tell credit card companies like American Express that "PRIME" borrowers (according to Experian) shouldn't have their credit lines reduced to a few hundred over current balance, and limited to a few hundred in total charges in any given month. I can understand restricting people with questionable credit histories, but someone who have NEVER missed a credit payment in more than 20 years of established credit history????
If you make the economy a cash-on-the-barrelhead or barter-only system, deflation is not only to be expected, but guaranteed.
You know I keep hearing that the government can create inflation simply by printing money - but that is clearly not true. A second step is necessary - that money needs to reach the pockets of individuals, and they in turn need to spend it on goods and services. Only then will inflation occur. There are two problems here - right now the government is focused on giving cash as loans to institutions, who in turn are disinclined to give them as loans to individuals. (And how many people are actually interested in borrowing more money anyway?) Thus we have an ocean of money vaulted away.
Second, if the government decided today to just hand out checks to people, we are so overburdened as a society with debt, that a great portion of that would likely wind up simply paying down credit obligations.
I think deflation is actually a frighteningly likely scenario...
@ramthor:
So basically the poor and Senior Citzens living off a system that is going to bankrupt it for us so yeah the poor and the Seniors living on SS do not create jobs but this is the census that the boomers don't care about the future of the nation since they are American Hater Liberals who just want to turn the nation into a national nursing home to support them
Deflation is fantastic if you have cash
@swicklund: the relationship between the value of the dollar and its value has a definite, and direct, negative correlation. y = value of everything in an economy, and $x = y. if you had a number to x, without adding that number to y, the value of x automatically changes.
not to mention, money is created through bank loans. when a loan is made, money is created, and the borrower is in possession of the money (the 'individual' in your post), so even if there was a second step, that step would actually come first; the borrow needs to borrow money in order for the money to be created. so its not the government writing checks to people that injects money into the economy, its the federal reserve loaning massive sums of money to banks that then distribute it to either other banks, or borrowers.
so if no one borrows money, no money is created. as people pay off loads without borrowing further, the money supply deflates because credit/cash and debt cancel each other out. the value of the products remain the same, so x is then worth more.
we dont have any vaults with an 'ocean' of money. something like 90% of our money supply is imaginary; its not in 'circulation' in a tangible way. the money is instead represented by credit and debt in the form of mortgages and other major debts that are expected to be paid off. all the money that exist is in the economy. nothing is stored or saved away, and its all fluid to some extent (aside from frozen assets that cannot legally be transferred).
i think thats everything thats relevent.
oh yeah
if the government did send out checks to people and they paid off their debts with it, rather than live beyond their means, there would be a rather significant change in the money supply. i dont think a $600 check would cause any deflations though. it would just slow inflation, which is, depending on where you stand on the economic ladder, either good or bad.
@Pious_Augustus: I have no beef with the true 'senior citizens'...aka my grandparents generation.
As a gen x'er I have a lot of heartache over supporting my parents generation, especially my own parents who have shown little responsibility financially and in general have an entitled, selfish attitude toward life.
I would give up all the material crap they have given me (purchased on credit no doubt) to have their time, their attention or even their ear every once in a while.
Many experts agreed the housing boom was here to stay, as well.
@panzerschreck1: You're right that there is a correlation, but it's not that simple. The equation is:
MV=PQ, where
M is the total amount of money in circulation
V is the "velocity" of money -- the frequency at which it changes hands
P is the Price Level
Q is an index of expenditures
If V and Q are constant, then if M goes up, so does P and we have inflation. BUT, in a recession or economic slowdown, V is not constant -- it is decreasing. So, you can increase M without increasing the price level. In fact, if you don't, then P will go down, and you would have deflation.
Think of inflation and deflation as being a measure of how hard money is to get -- it may be easier to get because there's more of it around (due to an increase of the money supply), harder to get because people aren't spending it as much (economic downturn), or (of both happens) just as easy to get.
Deflation is great if you have no debt. If you have debt, heavy deflation will cripple you. The vast majority of Americans have debt, so a heavy deflationary period would cripple our economy and make you jobless. Since consumer debt in this country is staggering, we are particularly sensitive to deflation. Hopefully the Fed won't let this happen.
experts are gay
As they say, money isn't real.
And we base whole societies on it.
I'd take a short-term deflation over inflation caused by endless borrowing designed to weaken the dollar.
Thanksgiving's going to be a blast!
Whats even worse than both inflation or deflation? Stayflation. When the dollar stays low and the prices are so high, they cant change =\
Well, I for one welcome our new insect overlord called deflation. I have no debt, have significant assets in cash and am serving in the military (steady job, guaranteed income). I'm deathly afraid of hyperinflation (which i see as a much likelier possibility) but deflation? Bring it on!
Some deflation is necessary. Houses and commodities were overpriced. The credit bubble pushed prices over what people could afford to pay. I wouldn't worry too much though since sellers will resist price reductions fiercely. Bread is still $4 and houses that should be razed sell for a $.25million. Maybe now is the time to shut down the Chinese factories producing garbage and build demand for domestically produced quality products... Nah, let's continue on, drop interest rates to 0%...and invade Syriranistan!!
I agree with you. I am a police officer and my wife is a nurse. Both jobs that are always in high demand and will provide a steady paycheck. No major debt or minor for that matter and have some nice assests. So if prices want to drop, my smile will just get bigger. As far as this article, I personally think inflation is much worse than deflation. Primarily because high inflation usually leads to deflation, not to mention if costs go up and everyone's pay remains the same there is less spending, less money cycling, which leads to businesses getting less income, etc. etc. etc....Oh well, all I know is I am personally happy to have the deflation.
@methamp:
Whats the Fed going to do? Give the credit card companies a bail out so they can go to expensive hotels and buy out other companies that are also at risk like them?
@Pious_Augustus: print tons of money to cause inflation to counter it. But that's not the Fed...that's the treasury.
@Con Seannery: unless I'm wrong. Civics is kinda fuzzy to me now, either way, print more money to coutner it, take it out of circulation when you stop needing it.
@krom: When the green paper of nations stops being valuable, the walls of the nations start to show some holes.
A bit of deflation will happen to correct inflated prices on many things. This will not be catastrophic. If it goes on past that, it may be, but that can be avoided with good management of the economy.
@kenblakely: and f*ck the rest of society.. bigman.. bring it on.. if it's good for me I don't give a sh*t!!! pathetic..
everything is terrible, any situation right now is worse than the previous, and it's all a conspiracy.
@funkright: Come now, I thought 'enlightened self interest' is what made the world go round! kenblakely seems enlightened. He is acting in favor of his self interest. If we all did that, won't we all collectively prosper? And isn't "having no debt, substantial cash savings and a steady job" what we're *supposed* to have if we're fiscally responsible people?
deflation would be a better alternative than the "stag-flation" of the Carter years, where unemployment rose along with prices and interest rates.
That was 28 years ago, and many who read this blog may not recall those years but my wife and I remember them well, and don't wish to repeat them.
If you think the economy sucks now you haven't seen anything yet.
Maybe if commodities prices like copper come down druggies will quit stealing wire to support their habits. That would be a GOOD thing.
"Your lack of faith in the economy is disturbing."
@swicklund: Or you could also get people from foreign countries to spend money in the US through tourism. But that won't be happening anytime soon- not while the government keeps making it so darn hard.
@Marshfield: great no copper wire, they'll just kill me for my wallet. FANTASTIC! Sign me up for this.
Now would be a good time to Legalize most drugs and tax the crap out of them.
Well paying only 2.20 for gas the other day was rather nice. Though I would like a price of .80 cents like when i first started driving.
@funkright: Is it somehow his fault that everyone else thought that spending beyond their means was a good idea?
Some things are going to have to deflate. There's no way around the fact that home prices are artificially inflated beyond belief. The same homes we looked at buying 6 years ago at 180K are now on the market at 350K or more. They aren't actually worth it. We may still continue buying gas, and bread and milk at higher prices because we have to, but things that can be bargain down will be. We can't sustain these prices without the income to back it up.
@jamar0303:
Yes, but the US foreign exchange imbalances are so miserable that it wouldn't matter.
The US$ has a supply/demand curve all its own!
@kenblakely:
Good for you re no debt.
If you're in the military, have no fear of
inflation, 'cuz...
1. You are guaranteed COLA increses, AND:
2. Whoever is in the White House will keep
his guns (you) shiny & happy.
Inflation = Bad
Deflation = Bad
Stagflation = Bad
Flatus = Bad
As far as I can tell, we are doomed no matter what!
I couldn't read the article. I was distracted by the awesome Darth Vader hot air balloon.