Posted on 10/23/2014 10:43:12 AM PDT by expat_panama
[snip]
The lowflation of being consistently below an already low target is bad in itself; the deflation it could easy lead to is even worse. There are several reasons. The belief that money made tomorrow will be worth less than money today stymies investment; the belief that goods bought tomorrow will be cheaper than goods bought today chokes consumption. Central bankers can no longer set real (that is, inflation-adjusted) interest rates low enough to restore demand. Wages, incomes and tax revenue all stall, undermining the ability of households, businesses and governments to pay their debts—debts which, in real terms, will grow more burdensome under deflation.
The threat is especially acute because central banks in much of the rich world have already lowered their interest rates to zero.
[snip]
A short spell of deflation driven by cheaper oil would in some circumstances be a tolerable thing. Indeed there are times when deflation can be a symptom of encouraging underlying developments. It can, for example, be brought about when advancing productivity enables the economy to produce more goods and services at lower cost, raising consumers’ real incomes. There were several such periods of “good deflation” while the world was on the gold standard; with growth in the money supply constrained, prices were pushed down whenever the volume of output grew rapidly. Michael Bordo and Andrew Filardo, two economic historians, point to America’s 1880s as a period of “good deflation”, with output rising by 2% to 3% a year from 1873 to 1896. For all the aggregate benefit, though, falling real wages hurt workers in many sectors.
[snip]
(Excerpt) Read more at economist.com ...
... If inflation is assumed, isn't the Fed failing at its mission?
Zero inflation? Never any change in any prices? Ever? Seriously? In the real world what happens is that real people will call for a different price today than what they asked yesterday. Workers tell the boss they want a raise. Merchants may brag about their 'everyday low prices' but they'll still stick you with some new carrying charge.
Sure, Stalin boasted that the USSR never had inflation --but they sure had a lot of long lines and shortages.
You'll only lose money on your assets if you sell. If possible hold onto these things until the value starts to comes back in 6 to 8 years. The house and car will depreciate some over the years but you will have the use of them. Definitely HOLD the precious metals.
“Folks didn’t want to buy stocks during the ‘30’s, so corps were forced to pay a dividend yield upwards of ten percent!”
A full one third of the American money supply had simply vanished from 1930-33. The scarcity of money was likely the driver behind the high rates. Dividend yields appear to have spiked three times during the 30s:
http://www.ritholtz.com/blog/wp-content/uploads/2012/09/equity-vs-bond.png
“fwiw, what I got was that “money made tomorrow will be worth less than money today” refers to the fact that during deflation we know that less money is going to be made tomorrow off of today’s bigger investment. “
That could be. He doesn’t get points for clarity.
There would be a lower nominal yield in the future but due to deflation the real yield is actually greater than the interest rate. You add the deflation rate to the interest rate, the opposite of how we had to subtract the inflation rate from the nominal interest rate to get the real yield.
Artificially low interest rates are equally to blame for our current economic malaise. You’re presuming that fiscal/regulatory policy is swamping the presumed ‘positive’ effects of low interest rates. But interest rates are a form of pricing, too.
What we know about people is that people are naturally risk averse. Loses are exaggerated, while the psychological benefits of gains are swift and ephemeral. So you have a Fed created yield curve that is forcing people out beyond their comfort zone. What has been the benefit of a Fed-juiced economy? A roaring stock market?
Low interest rates don’t mean expanding credit. Too many businesses cannot get loans. Too many individuals can’t either. Instead of allowing the market to clear, Bush and other interventionists started picking winners and losers. The Fed stepped in to help as well. The Fed is pro-creditor and pro-bank. It’s not neutral. It’s policies hurt savers and the prudent.
Furthermore, there’s no precedent for a deflation spiral in American history. It never happened pre-Fed. All deflations end once the market, aka you and I, recognize bargains and begin snapping them up.
To be able to recognize a bargain you have to have true pricing and that only occurs in a free market. It comes when risk/reward are matched individually, person by person. Government action distorts markets and continues to distort this market. Why?
Local governments couldn’t take a massive resetting of RE prices. It would have ended local government, most of which is in liberal-made shambles already. Sadly, we could have had the best of both worlds - an end to bad fiscal policy, which doesn’t happen only at the federal level, and a move toward a free market.
The credit meltdown would have ended and deflation would not be permanent if the market ruled. Would it have been disruptive? Yes, but volatility is where profits are made.
Nope, KarlInOhio has the correct definition. Improvements in productivity, which theoretically can lead to general deflation are good things.
Inflation is a monetary event, too much money chasing too few goods. See Spain’s experience with American gold.
Japan is a terrible and false example. The Japanese economy has never been free market. Its economy is suffering from government intervention, which is causing negative growth aka contraction.
The Japanese are the mad hatters of government intervention, not much better than China on that count and possibly worse. All the spending must be paid for. The Japanese economy has been and continues to be notably anti-entrepreneur.
It’s simply transference from those most responsible to the public and the public gets that. Private gains and losses are the essence of a free market and correctly priced risk. Instead where publicizing the losses and dumping them across our economy. This government intervention, and I include the Fed, is simply worsening what would have been a very deep credit crunch, but a short-lived one. Eventually, you have to pay the piper.
People “can’t get loans” (first of all that’s just false) because of credit overlays the banks are placing above and beyond the normal market restrictions because they are afraid of being prosecuted by DOJ if the loans go bad. I heard that over and over and over the last 3 years at housing conferences.
I will always disagree on TARP (the original not the porked out Congress version). I think it saved an epic disaster. Far more than mere “disruption”.
That's an utter myth. It's never happened in America, even pre-Fed, which is most of our economic history.
There has never been a deflation spiral in America. Prices reset, risk ratios return to order and investors re-enter the markets, many bargains make new fortunes once capital is correctly allocated.
The belief that money made tomorrow will be worth less than money today stymies investmentIn other words, belief that inflation will occur stymies investment.
McBride is right in most of what he’s written and he’s right to be a critic of Fed action, both before and after the crisis became obvious. The Fed is acting as the CDC. They didn’t catch the crisis in time, which is their entire job to end volatility in the economy, then they played catch up.
Yet two things are paramount here. Volatility is the life blood of a free market and the Fed wasn’t trying to offset the Democrat’s horrible fiscal policy. The wWe’re lucky they did’ responses are foolish. It only allowed Obama’s and the Democrat’s reelection, thus extending the bad fiscal policy through to today.
Note bene: "post recession high", but only for 4 months. The low was so low you'd expect some improvement. The small businesses I talk to, anecdotal, cannot get credit. You can blame Democrat policies and I completely agree, but you cannot say that the Fed isn't mixing up risk/return with low interest rates.
I’m open-minded. What would have happened in the absence of TARP (the original not the porked out Congress version) or any Fed intervention? Walk me through it. Maybe I’m not seeing it correctly.
Huh. All I got was the word "inflation" being used for various different things --I hate it when folks change definitions in mid sentence, it makes logic impossible. We can only converse if we give our words meanings; if you don't want to use the dictionary one then tell me what you do mean or pick a different one off of this page here. Either that or we can enjoy our Friday morning posting words and just skip having meanings --I'm easy.
great link —thanks! [saving to desktop]
In other words, belief that inflation will occur stymies investment.
Now I don't know what he meant, tho our guess was that the writer was talking deflation. Whatever it was we took a vote and agreed he botched that line.
The real problem is that the government's war on deflation is killing investment and ironically creating more deflation. See Japan.
Well, the line makes sense of its own right, but I'm having a hard time attaching any deflationary concern to the observation.
If the price of the goods is not apt to change over time, it makes sens to defer purchase with today's dollar, if you can buy the same product with tomorrow's inflated dollar. That makes sense only if one pays in cash. If you pay with borrowed money, it makes sense to borrow today, because you will be paying back with inflated dollars.
The wages being cut thing really confuses me...
Why would deflation cut my wage that I already earn in salary arbitrarily, but at the same time as inflation goes out of control I seriously doubt my company will randomly tell me one day “Hey due to inflation here’s a 30% raise” I don’t see that ever happening.
By the same token it shouldn’t happen the other way... or is it we should just expect that the CEO is always so dastardly that they would cut due to deflation but never raise due to inflation? If so, then they are both worse than each other and 0% moving is the only thing we should aim for, so a raise is a real raise.
Complete collapse of the credit system for years as banks unwound billions of derivatives and took massive losses. Runs on liquidity as everyone pulled out cash. Thousands of banks go under. Bigger collapse in asset prices unable to be paid back as they are now under water. Even more businesses shut down and tens of millions lose their jobs. It would have been what happened but x 1000. TARP allowed the Fed to step in as the lender of last resort and backstop the losses thereby securing the “full faith and credit” of the financial system.
Yes it “distorted” the market and didn’t “allow it to clear” but the impact of that would have been disastrous. TARP did what it was supposed to do and stopped the freefall into many years long credit collapse.
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