Posted on 06/07/2010 5:21:11 PM PDT by dennisw
In America, the euro area and Japan, deflation is either uncomfortably close or a painful reality, despite near-zero interest rates and other efforts by central banks. In the year to April core consumer prices rose a mere 0.9% in America, the slowest pace in four decades. In the euro area they rose by 0.7%. And in Japan, which has battled falling prices for more than a decade, they fell by 1.5%.
Deflation, if it becomes entrenched, is more dangerous than most forms of inflation. When prices fall consumers put off their purchases in anticipation of even greater bargains later, condemning the economy to a vicious cycle of weak spending and sliding prices. In heavily indebted economies falling prices would increase the real burden of consumers’ and governments’ debts.
Deflation is harder to fight than inflation. Over the past two decades central bankers have gained plenty of experience in how to conquer excessive price increases. Japan’s ongoing inability to prevent prices falling suggests the opposite task is rather less well understood. It is true that heavily indebted governments might be tempted to erode their debts through higher inflation, there are few signs that political support for low inflation is waning (see article).
All this together and the world’s big three central banks—in America, the euro zone and Japan—should worry most about falling prices. The scale of budget belt-tightening suggests these banks’ policy rates could stay way down for several years. But this will cause problems elsewhere. Near-zero interest rates in the big, rich economies send capital flooding elsewhere in search of higher yields, making it harder for the healthier countries to keep their economies stable.
The problem will be most acute in emerging economies. Many are already overheating, with prices rising and asset bubbles inflating. Most have inappropriately loose monetary policy.
(Excerpt) Read more at economist.com ...
My solution as always is to cut the government to 1/3 of current size, exempt capital gains from taxation and a flat tax of 15%.
Then stand back
My dream too. We’ve tried all the other BS, so why the hell not ?
And if the prices somethings are at today are in fact, historically and fundamentally inflated, then protecting those prices today will cost what???? in the future???
Or is the fear of too much “deflation” simply the fear of a reality that must eventually be met, sooner or later???
The economically unsure want to know.
[deflation is either uncomfortably close or a painful reality, despite near-zero interest rates and other efforts by central banks]
Au contraire. Deflation is caused by near-zero interest rates and other efforts by central banks. When no one trusts the banking system because of manipulation, velocity goes to zero faster than you can ratchet up the money supply.
The worry about people not spending in anticipation of even lower prices in the future is pure Keynsianism. If people aren't spending, they must be saving. That would make more money available for investment. Yet small businesses are complaining about the unavailability of capital. A percentage point or two of deflation should be no worse than a percentage point or two of inflation. Of course, zero inflation or deflation would be even better. But this one-sided fear of deflation, coupled with a blase attitude toward inflation, is going to lead to trouble.
We had a mild deflation through the 90s. There was nothing but boom in the 90s. The deflation was never officially recognized but it was there. People who got little or no increases in their nominal income got by more and more comfortable because prices at the grocery store and elsewhere (not including housing, of course) were declining slowly but steadily.That ultimately contributed a little bit to the housing bubble because people whose income was tight early in the period were not so tight later, even with the same income. They bought bigger houses than they would have or, it turns out, should have.
Right on.
Deflation don’t sound so scary. Hunt and fish more, grow a bigger garden, maybe keep chickens, maintain and repair the various technological instruments I’ve become dependent upon, or do without them. I could handle that.
I still have a picture when gas up here dropped to 49.9 CDN/Litre.
It was great. Every day the price kept dropping!
BS - I think the dollar I earned in the year 2000 was only worth about 80% of the dollar I earned in 1990. I didn’t see much deflation. Show me numbers instead of throwing out generic statements :)
Cornflakes (ProQuest Historic Newspapers, Star Ledger [Newark NJ], Daily Record [Morris County, NJ], SuperFoodTown [Cedar Knolls, NJ]. )
[1991] 18 oz, $2.19
[1992] 18 oz, $1.99
[1993] 18 oz, $1.29
[1994] 24 oz, $2.19
[1997] 18oz, $2.59
[1998] 18 oz, $2.29
[2000] 18 oz, $2.99
Gas (Rocky Mountain Weekly Retail) (http://www.eia.doe.gov/petroleum/data_publications/wrgp/mogas_history.html) went from $1.12 in 92 to $1.45 in 2000.
The examples pointed to merely demonstrate that crony capitalism will never be the solution - Japan was, and still is, beset by crony capitalism, the Euro area is nothing but, and we are fast becoming just like all the other sad-sack economic failures in the world. Socialist crony capitalism simply doesn’t work, it merely kills the capitalism part, and leaves the cronies holding whatever value there is that hasn’t deteriorated or fled.
The scientific/economic problem with deflation is that deflation destroys the entire “Buy and Hold” business model.
You can’t buy a house, lease it out, and live to tell the tale if the value of the house deflates by more each year than your rent brings in.
Ditto for stocks and their dividends.
What’s left if the Buy-and-Hold model is gone is a “cash flow” business model. Used car dealers and computer chip makers (cell phone makers, too) use the cash flow model.
But losing an entire Buy-and-Hold business model is dramatic.
Thus, preventing deflation was the original goal of fiat currency.
Later, central banks were created to manage fiat currencies to again prevent deflation.
Each generation claims that deflation has been conquered by the printing press, government, and central banks, yet deflationary spirals seem to re-occur (1893, 1929, 2006).
Certainly *debt* is deflationary. Have governments conquered debt yet?!
I do think, however, that DEflation is generally a product of the investment environment (as exacerbated by goobermint, to be sure) offering too few opportunities for investors to earn an honest return on capital relative to the risk implied by the investment, whereas inflation is invariably a product of overexpansion of fiat 'money', or, as Dr. Friedman once so accurately said: 'Inflation is everywhere and always a monetary phenomenon: a matter of too much "money" chasing too few goods.'
Thus, preventing deflation was the original goal of fiat currency............Later, central banks were created to manage fiat currencies to again prevent deflation.
Each generation claims that deflation has been conquered by the printing press, government, and central banks, yet deflationary spirals seem to re-occur (1893, 1929, 2006).........Certainly *debt* is deflationary. Have governments conquered debt yet?!
The problem may just be that the methods of fiat-money-management cannot, under any circumstances, be "perfectly" managed and therefore the fiat-money-management cures themselves produce (eventually) inflationary conditions that only deflation can cure, as painful as that medicine may be. IF that is the case (I don't pretend to know that for sure), then the world needs to disabuse itself of the notion that fiat-money-management can prevent inflation-deflation cycles.
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