THE ECONOMIST: Of debt, deflation and denial

The Economist ^ | October 11, 2002 | The Economist

[MadIvan]

A word of warning. I doubt apart from Germany we will intimidate Japan, but it's going to probably be a while before boom times occur again.

Regards, Ivan

[MadIvan]

Bump!

[MadIvan]

The boring graph bit:

"There may be trouble ahead..."

Regards, Ivan

[justsomedude]

Many products, from clothes to cars, are certainly cheaper than they were a year ago. But full-blown deflation requires a persistent fall in the overall price level

The truck I bought in 1987 can be had for about the same $ amount today (though it's truly more if there has been deflation).

The part that gets me is why does a cheeseburger and iced tea cost 5 bucks?

[snopercod]

wages rarely fall

No, the wages stay the same right up until the layoff. It happened here recently. The biggest employer in town told the union that the employees would have to accept a 20% pay cut if the company were to stay in business. They refused, and went on strike.

All 400 of them are on the dole, now.

On deflation. I've noticed a couple of trends. Tools are getting cheaper and cheaper. A Milwaukee [a top-of-the-line American toolmaker] Hole-Hawg drill or Sawzall reciprocating saw cost less now than they did 30 years ago. You can buy lesser-quality tools for a fraction of what they cost thirty years ago.

OTOH, food prices are going way up where I live. Fresh vegetables cost about 50% more than last year, I believe.

And something that I still don't understand. The price of beef on the hoof is the same or less than it was 30 years ago. But the price of hamburger is roughly 5 times what it was back then. I still haven't figured out how the ranchers can stay in business.

Thank God that beer is still affordable!

[staytrue]

Deflation is particularly harmful when an economy is awash with debt.

I think this statement should read "Deflation is harmful ONLY when an economy is awash with debt. "

Inflation is the real enemy. Inflation causes savers to stop saving. That means no capital for capitalism to use. The best recent example is afghanistan where a large sack of money is needed to buy a loaf of bread and where they recently changed the money lopping off a number of zeros.

[IncPen]

On deflation. I've noticed a couple of trends. Tools are getting cheaper and cheaper. A Milwaukee [a top-of-the-line American toolmaker] Hole-Hawg drill or Sawzall reciprocating saw cost less now than they did 30 years ago. You can buy lesser-quality tools for a fraction of what they cost thirty years ago.

Without starting a flame war, I'll opine that advances in technology and manufacturing processes (and materials and design) allow manufacturers to produce better goods for less money

[thedugal]

I get tired of hearing about Japan's deflation being anything that any other country would have to worry about. Deflation is a symptom. The real problem is nationwide socialist corruption. In the 80's it was perfectly normal for a Japanese bank to create a child company and then loan the child company money for real estate which was overvalued anywhere from 10 to 1000 times with 0 intention of paying it back. With the exception of a few scapegoats who were given slap on the wrist sentences, the bandits are still in power. It's theft pure and simple. Estimates of the cost of these corrupt schemes is between 400 billion and 2 trillion US$. It makes Enron look like a petty pickpocket. Granted Americans can be docile (2 terms of Clinton), but if that crap went on in the U.S. there would have been a revolution. Japanese sheeple are like American sheeple in deep comma.

[ReadMyMind]

Question for all the arm-chair economists...

What's the difference between increasing bang-for-buck (seen most dramatically in the computer industry over the last 20 years) and deflation?

Is there a real difference or is it a point of view?

[Deuce]

Deflation is harmful ONLY when an economy is awash with debt.

Good point. There has been an escalating credit bubble for over 70 years since the last series of wholesale defaults. As von Mises pointed out, there are only two "solutions": try to keep the bubble going (resulting, ultimately, in a collapse of the entire system) or deflation. In either case, as you correctly point out, the initial inflation is the disease. Deflation might be (probably is) the least painful cure.

[snopercod]

In some cases, that's true. But the Milwaukee tools I mentioned are identical (as far as I can tell) to the ones produced 30 years ago. Maybe there are some subtle improvments that are internal. Cheaper gears, cheaper motors, who knows?

Their website did mention that they moved production from Wisconsin to Mississippi and Arkansas. Also they were bought out by a Swedish company in 1995.

And yes, the Milwaukee tools I bought thirty years ago are still running just fine.

[Bon mots]

Good post. I read this article in the Economist already. There are good arguments as to why we will see deflation. Don't expect the stock market to rebound either.

I have recently read this book:
Conquer the Crash
It makes some valid analyses and has good information despite the fact that it's sloppily written. The mathematical mistakes begin on page 14 in the hardcover version.(The percentage calculation errors actually soften the argument - the true picture is bleaker.)

You can click on my link and download the first chapter for free.

It confirms a lot of fears I have had. Gets a bit into Elliot wave and revives Kondratieff cycles...

Like anything, you can't treat it as gospel, but it does raise interesting issues and expands upon the theme of this article.

[oldcomputerguy]

Productivity is an efficiency phenomenon and
deflation is a monetary phenomenon, the destruction
of capital.

[oldcomputerguy]

Maybe you should ask the people in the 30's and the 70's which decade was worse.

The creation of capital in this country today is as easy as using the Feds magic checkbook, if people borrow. The Fed will take inflation anyday, at least they can control it, they cannot control deflation.

[lasereye]

Seems to me we can't have a general deflation as long as the money supply keeps growing, which it is. If we were headed for real deflation, gold would be sliding, which it isn't.

[Stultis]

Back-of-the-envelope calculations suggest that, if the old Bundesbank were setting interest rates to suit Germany alone, they would now be below 2%. Worse still, not only is Germany unable to cut interest rates, but the EU's stability and growth pact also obstructs any fiscal easing. Nor can it devalue its currency. Stripped of all its macroeconomic policy weapons, Germany now runs a serious risk of following Japan into deflation.

Hehehe. Maybe this Euro thing wasn't such a bad idea after all! Note that Germany cannot wriggle her way out of this with monetary policy, and therefore will have to do so (or fail to do so) with pro-growth regulatory/labor/business policy. Liberal (leftist) European governments have for years used monetary policy shenanigans to enable (and cover for the failure of) their socialistic policies. America did the same under LBJ/Nixon/Ford/Cahtah. Tightening of monetary policy was a key component of the Reagan revolution, and helped immensely to push along and underscore the efficacy of other elements of his conservative agenda. Something similar is happening in Europe due to the Euro.

[IncPen]

What's the difference between increasing bang-for-buck (seen most dramatically in the computer industry over the last 20 years) and deflation?

I think what you're referring to can be explained by volume units of sale, ie. computers are cheaper but they sell more of them, and thus can increase margins.

The kicker is when a cost (like labor) is outsourced or sent offshore.

[babble-on]

There have been a lot of studies on this question. The Boskin Commission made an estimate of how much CPI is overstated due to the 'more bang for the buck' principal you describe. For example, if a Red Delicious apple was in the CPI in 1970 and today, you are basically talking about the same apple. It makes sense to compare the prices of the two products to see whether apples have gotten more expensive, and by how much. But if a color television was in the CPI basket in 1970 and is still in the basket in 2002, it still doesn't tell you too much to compare the prices, because the 2002 television is a very different animal than the old one was. It may be three times more expensive, but how can you calculate how much better it is in terms of picture quality, sound quality, cable readiness, remote control and so on? The Boskin Commission actually put a number on this product enhancement creep, but I can't remember what it was.

[ReadMyMind]

deflation is a monetary phenomenon, the destruction of capital.

Are you saying someone is burning big piles of currency?

[ReadMyMind]

I don't think the computer bang-for-buck increase is explained by volume. It is explained by continuing advances in technological capability (making more smaller transistors for the same amount of money or less).

I'm referring to the fact that you can now spend less than $5,000 and get a computer that is more capable than a 1980 mainframe costing $10,000,000 or more. This has nothing to do with the production volume of 1980 mainframes.