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 ...
Yes. The keyword is generally.
If beef prices go up because of a drought in beef-producing regions, that's not inflation. That's just supply and demand. But if it's the 15th Century, and the mediums of exchange are gold and silver, and the Conquistadors bring back boatloads of new gold and silver from the New World, and prices rise generally, that's inflation.
The prevailing theory is that the price level (P) is a function of the money supply (M), the rate at which it circulates (V), and the total amount of goods and services in the economy (y):
MV = Py
So, if the money supply, in combination with the rate of circulation rises faster than overall economic output, you get inflation. The explanation as to why the Fed's "quantitative easing" has not caused more inflation is that the money hasn't circulated much, being not loaned out by the banks, but rather, kept on deposit at the Fed by the banks.
Inflation:
is nothing more than the local barkeep Watering Down the Booze
ie:
the Emission of Un-Backed Credit, the Printing and Spending of Money in excess of Receipts.
Since Obama took office we have been running 12% roughly on a Mathematical Basis.
Deflation is Good, It means the Money Changers are NOT STEALING the VALUE of your Dollar
“That’s not “deflation” :-)”
Ok, here is another example. Amazon is suffering from deflation in the after hours market. ;^)
Yeah well that’s different ;-)
Deflation is far far far worse than inflation. See Japan for reference.
We talk about velocity a lot. The unwinding of the asset purchases (taking liquidity back out of the system) is going to be critical. expat_panama and I have discussed that numerous times.
On a serious note what was the cause of the high inflation back in the 70’s and 80’s?
I admit I don't understand economics, but I never understood the notion that if a business makes $X in year one and also made $X in year two, then they "lost money" in year two because it is assumed they must always make more in each successive year. I can only figure that inflation is assumed. If inflation is assumed, isn't the Fed failing at its mission?
Surprising that this is simply not on the public's radar. Like that IBD editorial thread about the energy inflation blamed on Obama. Reality is that there hasn't been energy inflation. Sure, by itself (like the Economist pointed out) a drop in oil prices should be beneficial, but since Sept. '08 the total money supply's only grown by just $4T, and folks on these threads want the Fed to dump all those 'bail-out' assets bought w/ 'printed money'. We're talking about a $4.4T cut, and that means the money supply contracts.
Sure, we like to think policy makers couldn't be so amazingly stupid but I'm reluctant to underestimate the power of an overwhelming populist clamor on officials that should know better.
These are the actual numbers from the Fed
| annual money supply growth | average annual gdp growth | average money velocity | ||
| 1980-2008 | 8.5% | 6.1% | 2.428 | |
| 2008-2014 | 6.4% | 2.6% | 1.485 |
Since 2008 both velocity and GDP growth have fallen. Money supply growth fell too, and what little growth we did have was thanks to the Fed's money printing --and now it's phasing out. Something big has to change or we're looking at a very big deflation problem.
I think the primary catalyst was the removal off the gold standard and allowed free floating dollar. Volcker’s raising of rates and choking off demand to bring in line with supply finally broke the cycle that begin in 71.
It’s not just people on these threads. A lot of republicans think that QE is “printing money” and therefore is inflationary. All anyone has to do is look back at 1937-38 to see what happens if you tighten too soon and too quickly.
Most people do not understand monetary policy. Both the DEMAND and the supply side.
Not really, but in a Debt Based Monetary system it is bad for those that believe in Debt Management, those that don’t usually do quite well because they don’t BORROW!
With that being said it would take a Massive amount of deflation just to get back to where we started in 1964 when LBJ began this War on the Family, which incidentally forced President Nixon to officially declare the USA Bankrupt on August 15 1971. Up until that point we were a Cash Society, Credit Cards did not exist.
“The belief that money made tomorrow will be worth less than money today stymies investment;”
That sounds backwards to me. It’s during inflation that tomorrow’s money is worth less than today’s. Other than that the article looks good.
Stagflation is stagnant output plus inflation. Not something you will see in a deflation.
In a deflation the economy will stall or go into a vicious spiral of ever declining employment and output. A negative feedback loop.
Interestingly Bill McBride who does the Calculated Risk blog posted this today:
Few Comments on QE
A few comments on QE:
• The FOMC is expected to announce the end of QE3 on Wednesday October 29th, following the FOMC meeting next week.
• Most research shows that the primary impact of QE on interest rates is from the size of the Fed balance sheet (”stock”) as opposed to the impact on supply and demand (”flow”). This means that interest rates will not spike when QE ends (something I’ve noted at the conclusion of previous QE purchases).
• The positive impact of QE on the economy was probably modest and was the result of lower interest rates. QE probably lowered interest rates 50 bps (maybe more or less). However monetary policy has been the only game in town since fiscal policy has had a negative impact on the economy over the last 4 years (my view is the pivot to austerity was a mistake, and the actions of Congress for the last 3+ years have been negative for the economy).
• The possible negative impacts of QE (such as inflation, weak dollar) never materialized. Inflation remains below the Fed’s target, and the U.S. dollar has strengthened recently. As I noted yesterday, without the recent increases in shelter (rent and OER), inflation would be close to 1% year-over-year. Without QE, inflation might be dangerously low!
• At the end of the previous rounds of QE, the economy was still struggling from the effects of the housing bust and financial crisis. Households were still deleveraging in the aggregate. Now the economy is in much better shape, and the effects of the crisis are diminishing. Therefore I do not expect another round of QE during this recovery (although I think the first rate hike might be later than most people expect).
• On inflation: Some people are warning that inflation will pick up as the economy gains traction (because of the size of the Fed’s balance sheet). That is possible, but I don’t expect a rapid increase in inflation. Many of the factors that led to sharply rising inflation in the ‘70s are not currently present (like wages and contracts tied to CPI and different demographics).
• My view is QE was not a panacea, but overall QE was a success. I was a frequent critic of the Fed prior to the financial crisis - I think the Fed was almost anti-regulation during the housing bubble, and initially the Fed was behind the curve when the crisis was looming - however once Bernanke became aware of the severity of the crisis, the Fed was aggressive and effective. Perhaps they were a little slow in implementing QE3 - and with low inflation an argument could be made now to extend QE - but overall I think QE was a success.
Good stuff.
Welcome to the business world. Don't worry, things don't have to make sense to be the way they are, they rarely ask permission. It's like bond values. Many people don't understand why bond values fall when interest rates go up. Sometimes I try to explain it to 'em but that's when I find out that their minds are made up and they really don't care about how things really are.
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. Folks didn't want to buy stocks during the '30's, so corps were forced to pay a dividend yield upwards of ten percent!
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