This page has been archived and commenting is disabled.

Guest Post: The Deflationary Spiral Bogey

Tyler Durden's picture





 

Authored by Robert Blumen of the Ludwig von Mises Institute,

What is deflation? According to dictionary.com, it is “a fall in the general price level or a contraction of credit and available money.”

Falling prices. That sounds good, especially if you have set some cash set aside and are thinking about a major purchase.

But as some additional research with Google would seem to demonstrate, that would be a naïve and simple-minded conclusion. According to received wisdom, deflation is a serious economic disease. As the St. Louis Fed would have us believe,

While the idea of lower prices may sound attractive, deflation is a real concern for several reasons. Deflation discourages spending and investment because consumers, expecting prices to fall further, delay purchases, preferring instead to save and wait for even lower prices. Decreased spending, in turn, lowers company sales and profits, which eventually increases unemployment.

The problem with deflation, then, is that it feeds on itself, destroying the economy along the way. It is the macro equivalent of a roach motel: perilously easy to enter but impossible to leave. The problem, you see, is that deflation reduces consumption, which reduces production, eventually shutting down all economic activity.

Wikipedia explains it this way:

Because the price of goods is falling, consumers have an incentive to delay purchases and consumption until prices fall further, which in turn reduces overall economic activity. Since this idles the productive capacity, investment also falls, leading to further reductions in aggregate demand. This is the deflationary spiral.

Deflation is far worse than its counterpart, inflation, because the Fed can fight inflation by raising interest rates. Deflation is nearly impossible to stop once it has started because interest rates can only be cut to zero, no lower. For this reason, "The Ben Bernank" believes that monetary policy should be biased toward preventing deflation more than preventing inflation.

Economist Mark Thornton cites the prominent New York Times blogger Paul Krugman who compares deflation to a black hole, a type of astrophysical object whose gravitational field is so strong that no matter or energy that comes near it can escape. Krugman writes,

... the economy crosses the black hole’s event horizon: the point of no return, beyond which deflation feeds on itself. Prices fall in the face of excess capacity; businesses and individuals become reluctant to borrow, because falling prices raise the real burden of repayment; with spending sluggish, the economy becomes increasingly depressed, and prices fall all the faster.

In case you’re not already scared straight, the deflationary doomsday has already happened in America when (according to the New York Times) it caused the Great Depression.

Japan, according to Bloomberg “has been battling deflation for more than a decade, with the average annual 0.3 percent decline in prices since 2000 damaging economic growth.” The New York Times reports that Japan’s new prime minister Abe “has galvanized markets by encouraging bold monetary measures to beat deflation.”

I hope that everyone is clear on this.

Now that you understand the basics, I have some questions for the people who came up with this stuff.

Why do falling prices make people expect falling prices?

The observation that prices are falling, means that in the recent past, prices have fallen.

One person noticing that the price of a good, that appears somewhere on their value scale has fallen for some time, might interpret that information and conclude that in the future, the price of that good will be lower. But a second individual might see the same thing and expect the price to level off and stay where it is, and a third might interpret falling prices as an indicator that in the future prices will be higher.

Why should a price having fallen indicate that it will continue to fall? That is only one of three possible future trends. Why should past trends continue indefinitely?

Why will the public mainly choose the first of these three outlooks, more than the other two?

According to economist Jeffrey Herbener, the assumption that falling prices create expectations of more of the same is a feature of certain popular macroeconomic theories in which price expectations are modeled as part of the theory. In his testimony to Congress, Herbener observes that “the downward spiral of prices is merely the logical implication of assumptions about expectations within formal economic models. If you assume that the agents operating in an economic model suffer from expectations that are self-reinforcing, then the model will produce a downward spiral.”

Are expectations self-reinforcing? It would make just as much sense to say that expectations are self-reversing—after people have seen prices go down for a while, they will expect prices to go up.

Are these formal models a good description of human action? Contrary to what these models say, there is no fixed response to an event. In my own experience, I can think of many times I, or someone that I know, jumped on a low price because we did not expect the opportunity to last.

But what about wages?

The postponement theory depends on the assumption that a fall in prices will benefit buyers who wait. This is true if we are talking about people who have lots of cash and can sit on it indefinitely. But most of us have ongoing monthly expenses and we depend on our wages to replenish our cash reserves. Our purchasing power, at the time when we want to make a delayed purchase, comes from our cash savings and our wages. A fall in wages, if substantial, would wipe out any gains in purchasing power realized from lower prices.

If consumers do not buy today because they expect lower prices tomorrow, then what are their expectations about their wages? Do they anticipate that their wages will be the same, higher, or lower? If lower, then by how much? As much as prices have fallen?

If consumers forecast lower prices and stable wages, then why are consumer prices included in the models, but wages are not? Does deflation only affect consumer goods prices, leaving all other prices untouched?

According to the deflationary death spiral theory, decisions not to buy drag the economy into a death spiral. Does anyone expect that could happen without affecting wages?

And what about asset prices?

In addition to cash savings and wages, individuals decide how much to spend and save taking into account the amount that they have already saved. Someone who is trying to save to meet their family’s future needs will feel less comfortable about spending.

Most people hold some of their savings in cash. That portion of their savings increases in purchasing power when prices fall. But people also save by purchasing financial assets, such as stocks and bonds, or real assets such as property, and rental housing. All of these assets have a price, which could rise or fall. Depending on the mix of cash and other assets that an individual holds, a fall in asset prices could wipe out any gains in purchasing power from the cash portion of their savings.

Do people take value of their past savings into account when deciding whether to buy or wait? Or do people form expectations about consumer prices only and ignore what might happen to their savings in a deflation?

If falling consumer prices generate expectations of more of the same, what impact do falling prices have on expectations about asset prices? Do buyers who delay purchases expect the prices of their saved assets to be lower as well? If not, then do they expect that consumer prices will be lower and asset prices will be higher?

If deflation causes the economy to disintegrate, will asset prices be spared?

Is it only buying behavior that is affected?

The deflation death star begins to destroy the earth when buying is postponed.

But is it only buying that is affected by expectations about the future? If buying is affected but not selling, then why not?

If consumers expect lower prices of most things, including things that they already own, it is equally logical that they would sell their possessions and their assets in order to buy them back later at a lower price. Selling your home and renting a similar one would be the place to start. Selling your car and leasing would be the next step. Finally, selling your assets for cash would be equally profitable. Expectations of lower prices should lead to a spiral of selling, driving prices down even faster, leading to more deflationary expectations and more selling until everyone has no possessions and no assets other than cash.

If this happened, then who would buy?

Do prices ever get low enough?

If buyers expect lower prices, then how much lower? Any number in particular? If a buyer expects a specific lower price, and the price reaches that level, will he buy? Or does he always expect prices to go even lower than they are today, no matter how far they have fallen already?

If expectations of lower prices turn out to be correct, and prices drop to even lower levels, then is there any point where a minority of contrarian buyers defect from the consensus and begin to see a bottom, or even an uptrend? Or do these expectations go on forever adapting to lower prices causing prices to drop indefinitely?

The point of delaying a purchase is so that you can make the purchase in the future and have some additional cash left over to make another purchase or to save. What is the point of delaying a purchase that you never make?

We have all had the experience of buying a new computer, or some other device, the day before the next version was released and it costs less and does more. If you knew would you have waited? Maybe, but maybe not. If you need a computer for work, then you will buy it sooner rather than later.

Many people delayed their purchase of the iPhone 4 in order to buy the iPhone 5, then when available they bought the iPhone 5. My iPhone4 was worn out by that time and I needed a new phone.

What about the Law of Demand?

According to the law of demand, a greater quantity of a good is demanded at a lower price than at a higher price. If that were true, then people would buy more, rather than postponing purchases.

What happens to the law of demand in a deflation? It turns out that the law of demand has a loophole: it requires that all other things remain equal. In a deflation death spiral, all things are not equal. Consumer preferences change in response to prices. Stationary supply and demand curves do not exist in such a world. For prices to fall and yet still fail to induce buyers to buy, the quantity demanded must always fall by more than enough to compensate for the lower asking price. The demand curve is always shifting downward faster than the price falls, to prevent an equilibrium price from ever forming. Economist W. H. Hutt calls this “an infinitely elastic demand for money.”

Does this describe the world that we live in, or any world that we could imagine? Do people really react in such a mechanical way to price changes? How do we explain, for example, shoppers competing to buy at low prices?

Why do sellers not lower prices?

Why is it only buyers whose expectations of lower prices are based on falling prices? Are the expectations of sellers included in the model?

If not, is that because the models assume that sellers do not have expectations? Or do the expectations of sellers not match the expectations of buyers?

If sellers have the expectations of lower prices, why do they not lower their prices immediately in order to sell inventory ahead of their competitors?

According to the deflation spiral theory, expectations frustrate market clearing. Yet, as Rothbard argues, speculation about future prices helps prices to converge to market clearing values. If buyers and sellers both expect future prices to be lower, why do market prices not converge upon this new, lower level immediately?

If customers are postponing purchases expecting lower prices in the future, but sellers do not cooperate, then inventories will accumulate. If this began to happen, then why would sellers not lower their prices immediately in order to clear out inventories?

All of us are both buyers and sellers, of different things at different times. To say that only the expectations of buyers are affected by falling prices, is to say that the same person, early in the day, has expectations about his own future purchases, but later the same day, does not have expectations about his own current and future sales. Does the model assume that we have all been lobotomized so the two sides of our brain do not communicate with each other?

Do producers have any control over their costs?

Previously, I asked if sellers could anticipate lower prices as well as buyers. If the producers anticipated lower prices, why did they go ahead and produce the item, or order raw materials with such high costs that they could not make a profit?

If a single business firm is experiencing fewer sales, they may not be able to reduce their costs because a single firm is close to being a price taker in the markets for labor and capital. There are usually alternative uses for their factors that value them more highly, at or close to current prices. But if prices, and sales are falling everywhere, or if everyone expects this to be the case, then why will suppliers not lower their prices if they expect their costs to be lower?

What are people doing with the money that they did not spend?

Suppose that people postpone spending. What do they do with the money they did not spend? Are they increasing their cash holdings? Or are they spending on investment goods? Saving and investing is a form of spending, only the expenditure is for capital goods rather than consumer goods. In this case, there would be no general decline in total spending or employment. Workers would have to change jobs from working in the consumption industry, to working in the capital goods industry, as Hayek explains in his essay "The Paradox of Savings" but production would continue.

How lower prices are necessary to induce people to postpone purchases?

There is a return on the purchase of a consumption good that results in the services provided by the good. This must be balanced against the return on the cash by holding until prices are lower. As noted by the Center for Economic Policy Research (CEPR), a small price change is not much of a motivation to wait, if you need a new product:

[postponement of purchases] would be true for rapid rates of deflation, but Japan's deflation has almost always been less than 1.0 percent a year. In 2011 its inflation rate was -0.2 percent. This means that if someone was considering buying a $20,000 car, they could save $40 by waiting a year. It is unlikely that this rate of deflation affected the timing of many purchases to any significant extent.

Why do quantities adjust but not costs?

If there is a generalized increase in money demand, then prices need to adjust downward. Why is it that all the quantity of goods bought and the quantity of labor employed can adjust, but prices cannot?

According to The Asia Times, when deflation strikes, factories lay workers off in order to cut costs. Why cannot producers lower their bid prices to their labor force and their suppliers in order to preserve production? If they could lower their costs, then they could produce profitably at a lower price level.

The general price level does not matter to business firms, so long as their costs are below their sale prices. Why does a deflationary meltdown assume that business can not operate profitably at any nominal price level? Why can business not lower costs?

Is this really what caused the Great Depression?

What about the credit bubble of the 1920s?

What about bank failures? The great contraction of the money supply?

The Smoot-Hawley tarrif?

What about regime uncertainty?

How about new deal wage and price policies that prevented prices from falling, which would have allowed employment to recover?

Conclusion

The deflation death spiral is a theoretical description of a situation but it does not describe the reality of human action, for any number of reasons:

1. There is in reality always a diversity of expectations among the public. While some people will expect prices to continue in the same direction, others will form the opposite view. Everyone’s expectations will change not only in response to changes in the data, but taking into account their entire life experience, their own ideas, and their situation.

2. Expectations are not entirely driven by prices. A broad range of things influences our expectations about price.

3. Lower prices are not always sufficient motivation to delay purchases because everyone prefers to have what they want now, rather than later.

4. Expectations of buyers tend to be met by sellers, if not at first, then fairly soon. In some cases, buyers can hold onto their cash for a bit longer, but most businesses have no choice but to sell their inventories at what the buyer will pay. In other cases, buyers may not be able to delay purchases, or may not wish to, and will pay what they must in order to buy.

5. Everyone—buyers and sellers (and every one of us acts in both of these roles at different times)—has expectations not only about consumer prices, but about wages, employment prospects, even asset prices, the economy in general, the progress of our own life, and the future of our family. A coherent plan of saving and spending takes all of these things into account.

6. Expectations can be met. Buyers have a buying price. Even if not known in advance, they know it when they see it posted. Even if they do not know what they plan to buy in the future, a bargain price will be met by buyers.

7. People only need so much cash. Beyond that, they start to look around for either consumption goods, or investments.

 


- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Thu, 02/14/2013 - 23:45 | Link to Comment NoWayJose
NoWayJose's picture

Name me something that has gone DOWN in price the last year... The problem is that things are costing more and wages are not going up . Thanks Fed!

Thu, 02/14/2013 - 23:54 | Link to Comment greggh99
greggh99's picture

Computers. And all things computer related.

Fri, 02/15/2013 - 00:05 | Link to Comment Stuck on Zero
Stuck on Zero's picture

Precisely.  And who holds off buying more than a few weeks even knowing that before you get that box home it's outmoded.

 

Fri, 02/15/2013 - 00:34 | Link to Comment Popo
Popo's picture

The reason deflation is intentionally portrayed as the greatest evil (and the reason governments always prevent it from happening) is that deflation destroys those with leverage. "Leverage" is a double edged sword. Leverage makes the rich richer under an inflationary regime, but tears them a new asshole under deflation.

Deflation would actually help all salaried workers enormously, but it absolutely obliterates banks which use large amounts of leverage to maximize profits.

So once again the banking system wins. The policy of all governments to inflate rather than deflate is largely a bid towards the true overlords of government: Banks and the wealthy.

Inflation is the primary means by which the poor can be robbed and the rich (who not only own assets whose value grows with inflation, but use large amounts of leverage) grow much richer. Inflation is at the very core of the great scam.

Deflation would represent a loss for the ruling classes. They will fight it tooth and nail -- and use whatever propaganda is necessary to convince this public that deflation is 'bad'.

Fri, 02/15/2013 - 00:46 | Link to Comment markmotive
markmotive's picture

Deflation would kill the banking system.

Any whiff of deflation (even if it is propaganda) soon results in inflation.

Mid-2012 markets started pricing in deflation. What happened? Pledges for endless monetary support around the world.

Deflationists beware: There is clear evidence that, under an elastic, fiat currency regime, the deflation endgame is, paradoxically, inflationary.

http://www.planbeconomics.com/2012/07/02/the-amphora-report-from-deflati...

Fri, 02/15/2013 - 00:58 | Link to Comment TruthInSunshine
TruthInSunshine's picture

A re-refresher on how badly scumbags such as Krugman torture Keynes posthumously:

J.M. Keynes on inflation in The Economic Consequences of the Peace (p. 235-6):

[T]he best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some."

 

"The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

 

"There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

Fri, 02/15/2013 - 02:22 | Link to Comment TwoShortPlanks
TwoShortPlanks's picture

Forget Stall Speed, we're at, "Sink Rate, Whoop-Whoop, Pull Up!"

Fri, 02/15/2013 - 03:10 | Link to Comment zhandax
zhandax's picture

And clearly, if there were any merit to the bullshit concept that declining prices result in expectations of more declines, the 'housing recovery' is impossible.  This is not to claim that housing is in any way recovering, but to point out that the keynesians can't have it both ways; if they want to claim price declines produce expectations of continuation, they can't claim a housing recovery without revealing their asses are bare.

Fri, 02/15/2013 - 11:25 | Link to Comment El Viejo
El Viejo's picture

What happens when you have Deflation with a Central Bank fighting it with Inflationary practices at the same time as well as an occurance of Peak Everything due to an expanding demand by the emerging world??

How long can you delay purchases?? Yes people want what they want now, but Baby Boomers must retire at some point and spend less. That will be the long term trend unless boomers try to work forever. Is that not what the Japanese are doing?

Stiction(Static Friction) may describe the man-made resistance to Deflation, but resistance may be futile as natural forces over-take man-made forces. This may cause sudden large moves in the market and in prices of goods. If the natural forces win then you would see a stair step down. Is this not what we are seeing on some charts long term? Maybe life will imitate the markets. Fewer participants, but their life will improve while others will fall by the wayside.

If producers can mark down prices on goods after retooling and making plants more efficient then what about the reduction in cost of labor. Is this not the same thing? So if the cost of labor remains the same or is reduced then prices should remain the same or also reduce especially if there is less demand, but what if the rest of the world places demand on raw materials and commodities go up. That would put pressure on manufacturers. This is called a squeeze. We all are being squeezed. Call it trickle down squeeze.

Yes the US can fight against world demand, but Peak Oil supply and demand drives oil prices up. That drives prices on everything up and as we have seen the glass ceiling is tempered glass and maybe even be bullet proof glass and we/markets/oil (not the glass) comes crashing back down.

Fri, 02/15/2013 - 10:01 | Link to Comment sessinpo
sessinpo's picture

Markmotive:   "Deflationists beware: There is clear evidence that, under an elastic, fiat currency regime, the deflation endgame is, paradoxically, inflationary."

 

Actually the paradox is reverse. Under an elastic regime, the central banks have to print at even higher rates (as we have seen) just to keep up with deflation (to cover bad debts).  This continues on (as we have seen) and as long as fiat is the demand to settle debts, the demand for certain fiat continues.

 

We currently see that in real life examples in Egypt and Venezuela.

In Egypt, no one wants the Egyption pound, they want US dollars. But US dollars are scarce there. Why is that after all the US dollars printed (the worlds currency reserve)?

Again, we see something similar but different in Venezuela. They just devalued their local currency. What is the demand now? US dollars (the worlds currency reserve).

This is no coincidence.

Most simply assume that inflation is too many printed fiat dollars chasing to few goods. But few realize that in some extreme circumstances, the printed dollars are not chasing goods. Those printed dollars are disappearing to pay off old global and local debts.

Fri, 02/15/2013 - 13:26 | Link to Comment El Viejo
El Viejo's picture

And where are those dollars now?? Are they chasing goods? NO! Those dollars are sitting at the FED. Just look at their balance sheet.

Mon, 02/18/2013 - 05:45 | Link to Comment All Risk No Reward
All Risk No Reward's picture

The death of the banking system was assured the moment they made it based on debt based money.

Now that the people have bought into TBTF&Jail, I'm not so sure that deflation will kill the TBTF&J crowd, just their competition.

Oh, that could be a feature and not a bug - good thing the Bigs don't decide monetary policy.

Oh.

Wait...

The scenario i see playing out is as follows:

1. Leverage and inflate, rake in profits.

2. When the debt Ponzi breaks, as it must, steal trillions in cash from the public and offload trillions in debt to the public - they are such schmucks.  WE ARE HERE.

3. Retrict credit, bust the debtors and exchange that debt paper for the underlying reality.

4. With the economy in the tank, take the trillions looted from society and buy up everything not mortgaged for pennies on the dollar.

5. Hyperinflate to "balance the books" and then blame "capitalism" for failing an doffering up a New World Order, same as the Old World Order*...

6. Own most of the world outright, eliminate most of the competition, coonsolidate power and rule like feudal lords.

Do you really think the mega banks are giving out 3% 30 year mortgages ahead of this super inflation eveyrone talks about?  I think not!

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert by secret agreements arrived at in frequent private meetings and conferences."
  -- Quote from Caroll Quigley's Tragedy and Hope, Chapter 20

The Shadows of Power: The Council on Foreign Relations and the American Decline

http://www.youtube.com/watch?v=j_gj1uZ6194

 

Fri, 02/15/2013 - 01:14 | Link to Comment jmcoombs
jmcoombs's picture

Wow!  Very insghtful.  Popo has zeroed right in on what it is all about.  Amazing.  Thanks. 

Fri, 02/15/2013 - 06:01 | Link to Comment new game
new game's picture

thanks popo-i learned something today!!!!

and they lever pm down to support the faith in fiat-the fuckers...
rope and trees is the only answer.

Fri, 02/15/2013 - 08:30 | Link to Comment Bob
Bob's picture

+1  The 500 trillion ton elephant in the room. 

Fri, 02/15/2013 - 08:06 | Link to Comment Ghordius
Ghordius's picture

Popo has nailed it regarding leverage

There is an additional aspect, though, that Martin Wolf (FT) nailed in an article in 2010: "the world is trying to deflate the US. the US is trying to inflate the world" (from memory)

this ties in with the leverage level "preference", so you could generalize and say "the superleveraged fear deflation, the hyperleveraged dread it more than death, the rest..."

Fri, 02/15/2013 - 10:59 | Link to Comment Groundhog Day
Groundhog Day's picture

I am a saver, I have saved my whole life, lived within my means, didn't buy fancy cars even when i could, didn't upgrade to a mcmansion even though i could, never maxed out my credit card, paid off my student loans, paid off 90% of my house loan in 10 years and have not really had the benefits of blindly putting my money in a rigged casino.  Inflation has not been kind to me.  I WELCOME DEFLATION

Fri, 02/15/2013 - 11:33 | Link to Comment Marco
Marco's picture

Even traditional banks which just hand out small business loans and local mortgages are obliterated in deflation ... no type of banking except for full reserve banking can survive significant deflation.

Properly managed the rich can rob the poor both in inflation and deflation. Once the important rich have deleveraged and offload all their shit onto pension funds and the FED deflation will be allowed to come ... and it won't help the poor one fucking iota.

The rich will simply use all their surplus cash to buy up everything and sail forward into their rentseeking neo-feudal future. Austerity ahoy (for the little people).

Fri, 02/15/2013 - 16:47 | Link to Comment DaveyJones
DaveyJones's picture

Missed your post Popo the first go around. Vey well said

Hmmm, it would help the common man and hurt the elite.

They really are the government of the people

You know what this reminds me of, sorry, I always relate this shit to criminal cases but then again..

You can see a trend in police agencies when a bad cop starts to slide. At first they discipline him accordingly but as he gets worse, and more dangerous, they start to hide shit and lie and cover his tracks fearful of the truth. Same thing with the bad banks. Sure they're more poweful than some stupid cop with a gun, but look at the insipiration the LA boy just brought. Is the country fucked up because the bankers are evil (probably) but the bankers are MORE evil and MORE powerful because the country is fucked up.

This is the definition of criminal conspiracy. They need each other. They're both afraid and they're both using each other to cover shit. And like the stupid police agency, they are making things more illegal, more dangerous, compounding the victims and above all else, more hypocritical to any public cause 

 

 

Mon, 02/18/2013 - 06:16 | Link to Comment All Risk No Reward
All Risk No Reward's picture

Given your 112-0 positive rating, my little missive debunking your theory probably won't go over well.

Let's review a case study - the Roaring 20s (money supply inflation) and the Great Depression (money supply deflation).

Did the ruling class lose power or consoldate it relative to the common person?

What is consolidate power for $1000, Alex.

In the age of the TBTF&Jail, the ability of the ruling dElites to use deflation to consolidat eeven more power as they wipe out their non TBTF&Jail competition.

The bottom line is that deflation is the trap door leading to the debtor spike pit...  unless one is TBTF&Jail and theior losses are tied to Treasury - you know, like the ruling class fornt corporations.  See how that works?  It sure looks to me like the ruling class is getting ready for deflation.

Deflation also gives the TBTF&Jail type the ability to call in the collateral on their debt holding turning paper into physical reality...  That's what you would do - ditch the worthless paper for physical reality, right?  Since the economy would be in collapse mode with scarce money - the trillions they've been looting would dramatically increase in value, now?  Pennies on the dollar would buy up whatever they couldn't seize through bankruptcy proceedings.

They way I see it, deflation is the mechanism used to offload their paper for reality - and that's a good thing, right? At least for the Human Predator Class.

TBTF&Jail is just that - they can't fail, by definition, so that glowing nuclear trash of a balance sheet won't matter to them.

Once they are done transferring society's wealth to themselves, well, they'll break the bond market (which is of no use - they've already won the game and own the world), hyperinflate, balance their books and proclaim that capitalism failed and they have a New World Order that will be so much better.

Of course, that's a lie - it will be the Old World Order...

...exactly as Carroll Quigley wrote in Tragedy and Hope.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert by secret agreements arrived at in frequent private meetings and conferences."
  -- Quote from Caroll Quigley's Tragedy and Hope, Chapter 20

PS - Your deflation paradigm isn't accurate, IMHO.  Deflation is no job for 10s of millions.  Deflation is no Social Security.  deflation is no Medicare.  Deflation is no unemployment.  Deflatin is wiped out bank accounts.  Deflation is wiped out retirement accounts.  Deflation is 28 hour work weeks at a lesser wage - now you know why the dElites wrote ObamaCare to promote 28 hour a week work weeks.  Oh, and you get to pay for your own healthcare now and the corporations pay nothing.

Since that debt won't go away, those who don't want to be homeless will work two 28 hour a week jobs - or 7 days a week at 8 hours a day...  for less pay than they used to make 40 hours a week.

Deflation IS NOT a lowering of prices, all else equal.  "All else" gets thrown in the fire and burned to a crisp.

Now you know why JP Morgan Chase is lending 30 year money at 3%.  It is an "I Dare You" loan.

Fri, 02/15/2013 - 02:59 | Link to Comment dunce
dunce's picture

I have, on certain things like computers and digital cameras because Moores law promises big savings. I have also waited on new cars to just before the new models come out because the dealers will go well below the MSRP to cleatr the lot. Timing the stock market is much more difficult and does not always work, but there are some opportunities there as well. If you are young and have a stable job, i would argue that now is a prime time to buy a house, low interest rates and prices related to building cost.

Fri, 02/15/2013 - 06:56 | Link to Comment skipjack
skipjack's picture

No, now is a very BAD time to buy a house.  Why ?  BECAUSE interest rates are low, prices of houses are higher.  As soon as interest rates start to climb, house prices will decrease to ensure there are buyers who can afford the payment.  Buying at the higher valuation also means higher property taxes.

 

Which would you rather ?  Buy a house for 50k at 10% interest, or buy the exact same house for $100k at 5% ?  

Fri, 02/15/2013 - 07:32 | Link to Comment Sean7k
Sean7k's picture

I would prefer 50,000 and pay cash.

Fri, 02/15/2013 - 00:08 | Link to Comment jim249
jim249's picture

Houses

Fri, 02/15/2013 - 00:19 | Link to Comment DaveyJones
DaveyJones's picture

The value of my small business

Fri, 02/15/2013 - 00:20 | Link to Comment Clowns on Acid
Clowns on Acid's picture

The VXX /VIX

Fri, 02/15/2013 - 07:32 | Link to Comment SunRise
SunRise's picture

Honest Governance

Fri, 02/15/2013 - 10:06 | Link to Comment sessinpo
sessinpo's picture

One year?

 

Well if you are going to cherry pick a time frame, you open the door for others to do so. How about real estate for most markets in the last 5 years?

And by the way, as you stated: "The problem is that things are costing more and wages are not going up ."

That is a symptom, not the problem. In other words something is causing that situation you described. That something is the problem.

Thu, 02/14/2013 - 23:46 | Link to Comment Abrick
Abrick's picture

1. Thanks for explaining reality to me.

2. No shit.

3. Fuck off.

4. Only if sellers are desperate.

5. Thanks for explaining everyone to me.

6. Fuck you and the set of balls you rolled in on.

Fri, 02/15/2013 - 00:26 | Link to Comment Bananamerican
Bananamerican's picture

Thank YOU Aprick....

"What's in it for MEEEEEE ?!?!??"

Fri, 02/15/2013 - 00:52 | Link to Comment Carmagnole
Carmagnole's picture

Hey dude, no need to be snarky because you feel you don't need a reality check refreshing course that is offered to whomever may want it.

Just imagine how mind-boggling this article may be for some PhD economist at the FED, frinstance

Fri, 02/15/2013 - 10:11 | Link to Comment Anonymous peon
Anonymous peon's picture

There isn't anyone at the FED that doesn't know this, they just don't want you to know that they know it.

 

Stupidity and malice are the only explanations for where we are. The people pulling the levers didn't get there by being stupid.

Fri, 02/15/2013 - 13:23 | Link to Comment Thisson
Thisson's picture

I disagree.  They really are stupid.  Look at Citi's multi-billion in losses from liquidity puts.  The CEO didn't even know that Citi had a puttback obligation until the losses hit! 

Thu, 02/14/2013 - 23:51 | Link to Comment Acidtest Dummy
Acidtest Dummy's picture

I doubt a regime of artificial scarcity can be maintained for long, too many things can go wrong. Real scarcity, however, cannot be hidden forever.

Thu, 02/14/2013 - 23:52 | Link to Comment Herkimer Jerkimer
Herkimer Jerkimer's picture

 

'

'

'

 

Then how come we don't ever hear of great deflationary episodes, let alone an event causing so much trouble as the economists portray, like we do inflationary ones, like the Weimar Republic, or Zimbabwe?

I'd kind of like to have nice deflationary period as, I've got lots of cash.

Let the prices drop on the fat-cats.

Sure beats inflation, in my opinion.

•J•
V-V

Thu, 02/14/2013 - 23:57 | Link to Comment Prairie Dog
Prairie Dog's picture

Did you ever hear of the Great Depression?

 

Fri, 02/15/2013 - 00:05 | Link to Comment dark pools of soros
dark pools of soros's picture

It was staged like the moon landing and the holocaust

Fri, 02/15/2013 - 00:22 | Link to Comment Curiously_Crazy
Curiously_Crazy's picture

Did you even read the article?

We hear day in day out about inflation and it's causes and effects, but very little about deflation. Almost as though it's not the done thing to talk about as it's supposedly the scary boogeyman economy killer. I found this article a fantastic read and will definitely be passing it on.

Fri, 02/15/2013 - 02:00 | Link to Comment RockyRacoon
RockyRacoon's picture

We hear day in day out about inflation and it's causes and effects, but very little about deflation.

You don't hear about deflation because, since it sounds like a great place to be for most common folk, it isn't good for the upper crust.   That's easy.  Every person or organization which has any influence in transmitting information/knowledge has an inflationary dog in the fight.

Fri, 02/15/2013 - 00:40 | Link to Comment Matt
Matt's picture

Great Depression != Great Deflation.

The only things that plummeted in price where assets purchased with leverage, when the debtors could no longer service their debts and their assets were sold at auction: buying a skyscraper for a price equal to the cost of the elevators, for example.

energy, food, wages, government fixed spending all set a floor on deflation. The only things that can have sustained deflation are credit based goods, because credit becomes unavailable or unaffordable.

Fri, 02/15/2013 - 09:58 | Link to Comment Umh
Umh's picture

Many farmers lost their farms. They could not pay their mortgages when the price they could get for food fell.

Fri, 02/15/2013 - 13:27 | Link to Comment Thisson
Thisson's picture

Only if they had mortgage debt.  See the lesson here?

Fri, 02/15/2013 - 08:36 | Link to Comment Cloud9.5
Cloud9.5's picture

Over expansion of industry and agriculture was caused by WW I.  Farmers and factory owners went into debt to expand production to feed and arm the Europeans. Peace ended the global demand but the debt still lingered.  Wall Street and Broadway collude into to pulling demand forward with advertising and buy now pay later schemes.   And by 1927 the exponential electrification of the nation slowed killing demand for durable consumables such as electric ranges and refrigerators.  The illusion of growth was continued a couple of more years by high finance and manipulation.

 

What’s different?  In 1929 we were an oil exporting nation and our contraction was caused by over production.   Today we have little in the way of trinket production.  Our heavy industry is hollowed out.  And we are an oil importing nation.  In 1929 we had too much production and too few consumers.  Today we have too little production and too many consumers.

Fri, 02/15/2013 - 11:19 | Link to Comment TeresaE
TeresaE's picture

Exactly Cloud9.5, exactly.  We produce nothing and these competing theories refuse to take that truth into account.

Difference this time too, in the Great Depression America still produced the majority of its own food.  Now our mega-corporations ship the food to other countries for processing before shipping it back here.

If China (whom produces over 80-85% of nearly EVERYTHING including medications and food) decides our money is worthless, then we will continue to see deflation in all we own and inflation in all we need.

Everything we are mandated to have, or we really need, will rise in price.  Everything we own, or earn, will deflate.

Fun times ahead no matter what.

Fri, 02/15/2013 - 00:38 | Link to Comment ToucanSam
ToucanSam's picture

The reason why you never hear of deflationary implosions is because inflation is a political issue and deflation causes governments to fall through default (lack of revenue and cost of debt increases) which they'll fight to the end, only to end up defaulting anyway.  Banks always need to create debt to make money, and governments are the spend-a-holics.  The policies and promises of bad governance in a fiat system enable the central banks to create inflation through debt, thus government has a mandate to inflate in order to pay down their ever-increasing spending habits (remember the brain-washing manta: "money equals wealth").  In order to have either inflation or deflation, you need buyers/consumers and sellers/producers.  The wages earned by the buyer theorethically balances the purchasing power set by the seller's prices, as long as there is no outside influence.  Besides natural resources, monetary policy disrupts this balance by tipping the scale to one side or the other.  The negative effects of inflationary policies is not just price increases, but wage disparity, class warfare, and monopolies.  This far outweighs the "negative" effects of deflation, which at worse creates less productivity for those unable to reduce expenses forcing them to close (this is true for businesses and individuals, as long as this process isn't intervened), and at best, creates a level economic playing field since the wealthy can't consume fast enough regardless of their purchasing power, but lower prices allows more people to be consumers even at lower wages since there is always an equilibrium between wages and prices (as long as there is latent demand), thus leading to increased production and ultimately employment.

Fri, 02/15/2013 - 00:42 | Link to Comment CheapBastard
CheapBastard's picture

thnx toucan, I learn sumthin every time I read zh. I love simple, clear explanations like yours since I flunked out of Econ 101...became a brain surgeon instead 'cause I hate math and all those econ dmeand supply graphs that move left or right ...up or down depend'n which way the wind blows.

Fri, 02/15/2013 - 10:23 | Link to Comment Ayn NY
Ayn NY's picture

I proudly got a C in macro Econ. Those curves, charts, and graphs, were as silly as anything learned in a gender studies course.

Fri, 02/15/2013 - 13:30 | Link to Comment Thisson
Thisson's picture

I downvoted you for being a cheerleader for ignorance. 

Fri, 02/15/2013 - 04:08 | Link to Comment Matt
Matt's picture

This. When governments have extra money, do they pay down their debts? No, they use that surplus to buy the debts of other countries. If they paid down their debts, they would be shrinking the money supply, since money is debt and debt is money in this crazy system.

Fri, 02/15/2013 - 08:45 | Link to Comment Clark Bent
Clark Bent's picture

If I may pile on here...most corrupt governments operate on streaming wealth and valuables up to themselves so that they can be the ones controlling access to all valuables within the given society. When Mubarak (and soon to be Chavez) starts looking to his nobles like he will no longer be able to deliver the goods and overmatch rivals, they start looking for the new center and shift their support there. Briefly interrupted by Reagan, the general progress of our nation has been to undermine social institutions, divide the political populace and solidify the government's centrality over control of the economy. They do this through onerous and selective taxation and regulations which favor the new nobility over mere citizens. We are in the endgame now of anything like a democracy and the masters are more openly taking their benefits while supporting the regime. The propaganda press is creating a faux reality where this is not occurring, and anyone who says so meets with social assassination out of the mainstream. The government calls its transfer stimulus where the wealth is immediately transferred to the regime's uspports and the tab is quietly delivered to the middle class. As usual the societal losers are enthusiastic supporters of the wealth transfer because they are too stupid to understand the role they play in advancing the totalitarain project. They suppose they are finaly getting what they deserve in terms understandable to their limited comprehension. 

Obama encourages division and confusion, and class warfare. While this feint is going on his other hand is quietly delivering the goods to the government's supporters. At the same time the outright fraud and theft of the financial (and other, think "green") industries is not just ignored by the "authorities" but encouraged and supported by government. The show trials are for political opponents of the regime and just as window dressing or to change resources over to more politically expedient places. Soon we will be feeling the effects of destroying the monetary system but the transfer will already be completed. Wealth to the politically connected, debt and destitution to what were once citizens of the middle class. This is also why the project of diluting the electorate through floods of thrid world foreigners who have no long term stake in America's survival can join in the auction of the country's wealth. The model is so common historically that it's outlines can be nderstood by comparison. 

Federalism or a new Caesar are probable results. The State nobility is being ostracized in favor of the central nobility adn there are not enough goodies to support both as the economy contracts. We can expect further conflict between these sovereignties. State structures, especially in the West and South, can solidify their support in contests against the federal power by offering more libertarian programs, and perhaps eventually by outright secession. Deals may be made between the nobilities on the other hand especially as the center collapses the monetary system. Because they are not yet able to use the greater efficiency of violence to shore up support and defeat opposition, they are having to use mostly carrots, and we are swiftly running out of those. Soon they will need the resources of those oppositional States, and also to quell thier opposition. 

The system is irredeemable probably, certainly without a Cromwell-like reformation that would probably have to include the termination of many Progrressive supreme court decisions. Each step along the way in this power grab seems a step closer to violence and war. These are dark days indeed. Where is out culture? Is it merely American Idol and internet porn and the insane nihilism of the so-called black culture? We are about to find out I think. 

Fri, 02/15/2013 - 11:55 | Link to Comment Marco
Marco's picture

That's a nice theory, which works in the case of infinite availability of natural resources ... in the absence of that history proves feudalism can provide a nice steady state of vast wage disparity. If the rich start valuing land ownership more than paper wealth we could move to that steady state again. As you say, their ability to consume is limited ... so they don't need the little people to make optimum productive use of the land they own.

Of course a new black death reducing labour to the point where it would impact the wealthy's ability to consume might turn the tables again in favour of labour ... but in the face of increasing automation that seems unlikely.

Fri, 02/15/2013 - 01:21 | Link to Comment willwork4food
willwork4food's picture

Yea, that's nice if you've got cash or have a steady job. But those of us that are self-employed are getting fucking creamed.

Fri, 02/15/2013 - 08:30 | Link to Comment e-recep
e-recep's picture

don't worry, he'll get his reality check when his salary gets deflated as well.

Fri, 02/15/2013 - 00:07 | Link to Comment scrappy
scrappy's picture

Want to end this shit? Here's how.

https://libertyrevival.wordpress.com/keith-gardner/

Read the comments and explore the website.

Rejecting Marx, Keynes, AND Mises; Reviving Classical Liberalism and Georgism; Ending Taxation upon Toil; Overturning the Tables of Usury; Reclaiming the Profit of God's Earth for All

 

 

 

Fri, 02/15/2013 - 00:08 | Link to Comment Prairie Dog
Prairie Dog's picture

"The deflation death spiral is a theoretical description of a situation but it does not describe the reality of human action"

Wrong on first count. It does describe very well what happened during the Great Depression, an episode that spelled the death knell for Austrian economists because their theoretical model was completely unable to explain the behaviour of the economy in the crisis. Yet 80 years later, it still has its adherents.

"3. Expectations of buyers tend to be met by sellers, if not at first, then fairly soon."

Again, reality says no. The price level fell 30 percent between 1930 and 1932, yet the depression continued for the best part of another decade.

Austrian witch-doctor economics are popular on zero hedge, where it is fashionable to pour scorn on the Fed and central bankers in general. Apparently, we'd have been better off squeezing the money supply and sending unemployment up to 30 percent again. At least it'd be good pure money, eh (for those who have it).

Laughable.

 

 

Fri, 02/15/2013 - 00:48 | Link to Comment Quit Your Bitchin
Quit Your Bitchin's picture

Don't "squeeze the money supply", just turn off the faucet!  You obviously don't live on the nonexistant interest rate for savers. In case you havent noticed the gubbmint is reallocating money from people like baby boomers and giving it to the banks to invest in ...    I'm guessing you think that's ok also. 

Fri, 02/15/2013 - 00:49 | Link to Comment Quit Your Bitchin
Quit Your Bitchin's picture

Don't "squeeze the money supply", just turn off the faucet!  You obviously don't live on the nonexistant interest rate for savers. In case you havent noticed the gubbmint is reallocating money from people like baby boomers and giving it to the banks to invest in ...    I'm guessing you think that's ok also. 

Fri, 02/15/2013 - 00:51 | Link to Comment Matt
Matt's picture

We would be better off with the freedom to use whichever currency and banking we want, rather than all being forced into a single global banking system. That way, when one system inevitably fails, there are other systems running, instead of this "one falls we all fall" fragile mess.

As for the Great Depression, government interference prevented the system from clearing out and building a solid base. That, and there are things beyond human fiscal and monetary games. Things like weather, food production, water, and energy. 

Fri, 02/15/2013 - 02:01 | Link to Comment steve from virginia
steve from virginia's picture

 

 

 

@ Matt:

 

"As for the Great Depression, government interference prevented the system from clearing out and building a solid base."

 

Good grief Matt, where do you get this nonsense?

 

The world's banking system was insolvent, the government of the US was nearly insolvent, local (wildcat) currencies were useless b/c nobody trusted the banks or their issue. There was no business (DJIA was down to 40), no commerce, there was no overseas trade ... farmers could not sell b/c townspeople had no money to buy food ...  what sort of a base was this?

 

Any more deflation and the USA government would have been completely bankrupt. As it was, the government was able to bail out the banks and jettison the useless gold standard: commerce returned and the preliminaries for violent revolution and government overthrow in communist hotspots like Indiana and Iowa were shelved.

 

Read William Manchester "The Glory and the Dream", any number of economic treatments of the Depression including anything by Galbraith, Friedman and Schwartz, history of 3d Reich and pre-war UK ... get thee to the library.

 

 

Fri, 02/15/2013 - 02:46 | Link to Comment adr
adr's picture

Bullshit, there were less people out of work during the depths of the depression than there are now. Those that suffered the most were the ones who got caught up in the credit boom of the '20s. The mega wealthy did just fine, in fact better than the decades prior. The depression allowed the largest corporations to buy up the competition.

People had enough cash to go to the movies, go to dance halls, etc. They may have not had cash to splurge on the consumables that drove RCA stock to bubble heights, but they made enoug to live.

My great grandfather never lost his job, he took a pay cut but still paid for his home and fed his six kids. Great grandma stayed at home and took care of the family. Even in the depression a family of eight could live off one income. It is nearly impossible to pay for a family of four on two incomes today.

Deflation is not bad, some would say it is a market force that establishes price based on demand. Apple going from $700 to $475 is deflationary, who did that hurt? Only those stupid enough to invest compensation for labor in the stock market for the hope of returning wealth without labor.

The root cause of the ills of society is and always has been the stock exchange and the banks that enable its functions. Without the stock market wealth could only be derived from productive labor, not gambling with others money.

Fri, 02/15/2013 - 05:24 | Link to Comment zhandax
zhandax's picture

Any more deflation and the USA government would have been completely bankrupt.

I gotta call both of you out on this one, and not that I will argue about the .gov bankrupt part.  Hungover from the wartime boom by 1920, the US economy started into a tailspin that, statistically, looked worse than the great depression.  Warren G Harding told the public to suck it up, told Secretary of Commerce Herbert Hoover to STFU, and proceeded to cut government spending and taxes.  He allowed the insolvent to be liquidated, and late in 1921, the 20's roared back to life.  By 1922, unemployment was down 50%.

Fri, 02/15/2013 - 04:04 | Link to Comment Matt
Matt's picture

If you cannot pay your debts, the value of those debts need to be revalued. America could have had a restructuring and cut spending.

If no one trusts the banks, they should be free to use money they do trust. If they choose to use silver coins, why shouldn't they be allowed to use silver coins?

"farmers could not sell b/c townspeople had no money to buy food"

Really? How many millions of Americans starved to death while food rotted in store windows and in Farmers' barns? 

If it was all about money and gold, why did the Nazis want to invade Russia for farmland instead of Switzerland for gold? Do you really think 500,000 Swiss were a greater deterrant than the Soviets?

Fri, 02/15/2013 - 08:54 | Link to Comment AlaricBalth
AlaricBalth's picture

I see you have been reading Ben Bernanke and Mark Gertler, circa 1989 -1990, and their debt/deflation theories, first hypothesized by Irving Fisher in 1933.

Yet the debt/deflation hypothesis of Bernanke and Gertler was based upon a flawed assumption that the deflation of 1930-32 was unanticipated.

Data on both prices and interest rates of that era show empirical support proving deflation was anticipated in short term time horizons. In 1927-1933 nominal interest rates were low, yet real interest rates were exceedingly high, implying that deflation was expected.

Deflation during that time was something that many people of that era had experienced in their past. Between the Civil War and the Great Depression there were 4 sustained incidences of deflation. Therefore it was clearly on their mind, widely reported in the press and consequently, many people anticipated another bout of price declines.

I guess the point I am making is, Bernanke's debt/deflation theory is clearly based on a highly flawed assumption. Yet he is using his theory when modeling out our current economic situation. He is, in essence, trying to fit a square peg into a round hole, and for that he certainly deserves our scorn. Bernanke's flawed theory is having serious adverse consequences and real people are paying the painful price for his hubris and ego.

Fri, 02/15/2013 - 09:27 | Link to Comment Clark Bent
Clark Bent's picture

I think your reports of the death of Austrian economics is exaggerated. Interestingly Austrian economics does explain very well what happened during the great (government sponsored) Depression (see Murray Rothbard's book on the subject, or Amity Schlaes' The Forgotten Man). And the Austrians also expose the same actors making the same mistakes in our new, Greater, Depression which we are in now. The panic is to prevent the "masses" from understanding that we are in another government sponsored depression brought about by socialist fantasy and real theft. We can confidently the repeat of other actions from the government's greatest hits catalog from the Roosevelt era when their efforts to reinflate an overheated economy ultimately fail, as they must, according to Von Mises and common sense. Prices far in excess of their relative value in productive options (e.g. labor, even Marx wrote that) cannot be maintained. Indivudual buyers earning no wealth in a collapsing debt soaked economy cannot come up with the wealth to save us from the government's inflicted overspending. (If we were all rich we wouldn't need an economy, kinda like if men were angels we would not need government). As we can see the Fed's injection of trillions has served merely to mask the problem and make no improvement on the ability to create wealth. Also predicted by Von Mises. So soon, we can expect price and wage controls (also to resist deflation) control over hours, and finaly just outright fascism when all else fails and our betters tire of criticism and challengers based on that criticism. The fascism will fail to address the problems too, but has the tendency to start wars of aggression (plunder). 

Want to soleve the problem in eighteen months? Look at Iceland. Let the correction that must occur, occur. This will be sad for Mr. Buffet and Mr. Soros (and Obama, and the entire NWO globalist socialist project) but individuals will flourish in a real economy where they can accurately predict value. Of course we have to unbend the distortions inculcated in the rule of law now, and maybe wait a generation of privation to re-teach the virtues of reality and thrift and private property and a legal system that functions similarly for ordinary citizens and the ruling class.  

Fri, 02/15/2013 - 00:17 | Link to Comment NoDebt
NoDebt's picture

The big thing that was missed in the article:

1.  Debt.  Who wins and who loses when there are gigantic MOUNTAINS of debt in existence?  Especially when most of it is held by the government

2.  Promises of future payments.  Especially when most of it is promised by the government.

The article ignores the elephant in the room.  If we had anything like a "free market" those arguments would be valid, but curently this is all about the government and your relationship to it.  That is the defining characteristic of the present situation.

 

Fri, 02/15/2013 - 03:20 | Link to Comment dunce
dunce's picture

You have a good point on debt. i have never read any thorough analysis about the effect that too much debt had in precipitating the great depression. It gets some mention, but many people lost their farms because they could not service their debt, others kept their farms because they had small debt burdens. It was the same with many businesses, the owners borrowed using the business as collateral and invested the money in the stock market on margin. The house of cards all came down when they could not meet a margin call as the market crashed, then they could make good on the loan against their business. Pyramiding debt is very risky.

Fri, 02/15/2013 - 00:16 | Link to Comment suteibu
suteibu's picture

Deflation does not occur in a vacuum.  Neither does inflation.  Therefore, both are merely symptoms of a more fundamental problem most certainly either caused or exacerbated by politicians and bankers. 

Fri, 02/15/2013 - 00:23 | Link to Comment booboo
booboo's picture

Statist will never see the human side of the equation since they believe that turning knobs and pushing buttons can herd cats.

Fri, 02/15/2013 - 00:29 | Link to Comment helping_friendl...
helping_friendly_book's picture

Deflation is caused because people don't have income. They stop spending, not because they expect lower prices in the future, but because they don't have expectation of future income or they don't have any money. Experienced consumers, when they have interuption in their income, will not buy on credit, will stop consuming to make what monwy they do have last longer.

This will cause inventory to to pile up causing vendors to lower prices. Producers who cut production balance supply and demand and support prices for their product. They also lay off workers who stop spending as described above.

The gov't is ruining the economy. This country is done. When we default on our debt we should force the FRBNY into bankruptcy.

Sat, 02/16/2013 - 02:12 | Link to Comment helping_friendl...
helping_friendly_book's picture

and i would pie hole bernanke.

the jew bastard has ruined this country.

where is all the guns and ammo?

I thought you people were pissed?

Killing children?

A Army Captain kills, only four, people; burns in a cabin and all that is recovered id a pristine drivers lisence? 

Jews are goat ass fuckers.

You think they care about you?

PLO will rise to rinse the holy land of vermin.

 

Fri, 02/15/2013 - 00:37 | Link to Comment CheapBastard
CheapBastard's picture

Retail sales are getting killed. Nothing moves unless it's discounted 80-90%. Adding to retailers' misery is the postal rate increase so they cannot survive via mail orders...

Oh yeah, and about that internet sales tax....

 

Hasta la vista Middle Class !

Fri, 02/15/2013 - 00:40 | Link to Comment enloe creek
enloe creek's picture

this alot of crap producers fail as the cost of production exceeds what can be returned from the market

Fri, 02/15/2013 - 00:41 | Link to Comment Peter Pan
Peter Pan's picture

The issue of deflation is a complex one and encompasses to one degree or another the effects of deleveraging, excess capacity, changing attitudes and demographic shifts, all of which are impacted by the level and security of employment.

I may be mistaken but the underlying principle to all these movements is the market trying to return to a mean or to some sustainable balance in the face of deviations which are neither natural nor sustainable.

The greater problem is not the deflation we are experiencing in certain areas, but the persistence and the way in which the FED and the government are resisiting the rebalancing of the system.

Fri, 02/15/2013 - 01:19 | Link to Comment GoNavy
GoNavy's picture

You can't say that.  That makes sense.  (And I've been saying the same thing for four years now.)

 

Keep talking like that and you're likely to be the target of a drone strike for being an "imminent threat" to the powers that be. And if you survive, there's always Gitmo.

 

Jack Lew is dialing in your coordinate right this minute, I bet....

Fri, 02/15/2013 - 00:46 | Link to Comment moneybots
moneybots's picture

"Deflation is nearly impossible to stop once it has started because interest rates can only be cut to zero, no lower."

Inflation and deflation complete a cycle.  The Nasaq inflated to 5,000 then deflated to 1,100.  Once inflation has started, it is nearly impossible to prevent deflation.

 


Fri, 02/15/2013 - 01:22 | Link to Comment GoNavy
GoNavy's picture

But we'll spend trillions and trillions of dollars just to prove you're right.

 

Then, you'll be so deep in debt, you'll have to debase your currency to pay back what you owe!

 

Chipmunk, meet spinning wheel.  Spinning wheel, meet chipmunk.  You guys are going to be great friends.

Fri, 02/15/2013 - 00:53 | Link to Comment Curt W
Curt W's picture

I have always wondered why the herd goes shopping on friday after thanksgiving(or that day this year)

If everybody stayed home that weekend, by the following weekend prices would be slashed.

American consumers have a herd mentality, once some thought this is as low as it gets, they will all jump in, driving prices back up.

Fri, 02/15/2013 - 01:12 | Link to Comment steve from virginia
steve from virginia's picture

 

 

@Mises:

 

"What is deflation? According to dictionary.com, it is “a fall in the general price level or a contraction of credit and available money.' ”

 

Deflation is where the cost of repayment of any debt is greater in real terms than the worth of the debt.

 

Funny ... a longish article about deflation without mentioning debt or energy. The world is running out of energy and has taken on $800 trillion+/- debt in order to run out of energy.

 

There is debt deflation where the cost of repaying a debt increases as the debt is repaid as the act of repayment extinguishes currency. The scarcity premium of currency increases faster than the rate at which the debt(s) can be retired. In fact, debt repayments by 3d parties has the effect of rendering all debts unaffordably costly to repay. Read Irving Fisher's paper on 'Debt Deflation' (1933).

 

Energy deflation occurs when energy becomes scarce and more expensive in real terms, there is a scarcity premium added to fuel that the customers cannot afford ... fuel becomes too valuable to waste by driving tens of millions of cars in circles from gas station(s) to gas station(s).

 

Since 2000, each incremental dollar (euro, yen or other currency) produces less crude than the dollar before. That is, today’s dollar produces less crude than yesterday’s dollar, tomorrow’s dollar will produce less crude than today’s. What is important is the relationship between the real cost of gaining fuel relative to the ability of the customers to meet this cost. This relationship is driven by the need of the driller to spend more in order to return less: this is net energy, it is currently declining, at some point net energy will become negative, that is, the use of energy will not provide returns, in the form of credit, sufficient to bring new energy supplies to the market.

 

This last state of affairs is underway right now, under everyone's noses, few are paying attention. Certainly not Mises Inc. Countries are being bankrupted right now by energy deflation and there is nothing any of the countries or countries can do to escape the consequences. See 'Greece'.

 

You might want to take some time and read this:

 

http://www.economic-undertow.com/2013/01/23/net-energy-end-game-theory/

 

There is a limited period of time to get ready for the time period when fuel is unavailable -- in two years or less. Leave the Mises fools to founder and sink, they deserve it.  

 


Fri, 02/15/2013 - 01:45 | Link to Comment andrewp111
andrewp111's picture

Sorry to disappoint you,

It will take a lot longer than 2 years to reach the Mad Max endgame. Maybe 20?

Fri, 02/15/2013 - 02:05 | Link to Comment steve from virginia
steve from virginia's picture

 

 

 

Okay sucker ... you take 20 years ... I'm preparing.

 

Just don't come by my house, okay. I don't store dog food.

Fri, 02/15/2013 - 04:15 | Link to Comment Matt
Matt's picture

By 2030, total global oil production could fall to half of current production. However, do you think it will take until then for things to fall apart?

Fri, 02/15/2013 - 02:32 | Link to Comment RebelDevil
RebelDevil's picture

 "Countries are being bankrupted right now by energy deflation and there is nothing any of the countries or countries can do to escape the consequences. See 'Greece'."

The whole energy scarity thing has been artifical all long as there are many cheaper sources of energy than fossil fuels.

Luckily, some radical engineers have done something incredible - Stan Meyer's cell has been finally replicated! 

The only problem with these new technologies is that the moment you try to get them to market, the FBI will be on your ass in no time!
http://www.youtube.com/watch?v=4nnvley2N4g

Fri, 02/15/2013 - 04:18 | Link to Comment Matt
Matt's picture

A power cell that produces more energy than it consumes? Sign me up, unlimited free energy is definitely the way to go. Don't talk to a scientist, they're all lyin'.

Fri, 02/15/2013 - 14:09 | Link to Comment steve from virginia
steve from virginia's picture

 

 

Funny! All these 'energy breakthroughs' are found on YouTube instead of Platts.

 

It's not going to be Mad Max, people will be desperate to survive. There will be a lot of malnutrition and disease, more like the Great Depression and less like Hollywood.

 

BTW: energy companies, EIA and IEA all project a gap between petroleum production and demand  by 2030 of 30 million barrels per day (mbpd) to 70 mbpd (Petrobras).

 

We are transitioning to net-energy negative right now, will be net-energy negative within two years. Afterward ... game over.  Then everyone will get a chance to experience full-on deflation for themselves ... they can all post over here how 'cleansing' the process is ...

 

... If there IS a Zero Hedge or an Internet in two years.

 

 

Fri, 02/15/2013 - 01:07 | Link to Comment TahoeBilly2012
TahoeBilly2012's picture

Inflation = new money. New money = the PTB's money center banks control the new supply. Controlling the new supply allows them to control business, politicians and with enough hard working debt slave workers, most of the world. End of story.

Fri, 02/15/2013 - 01:25 | Link to Comment hannah
hannah's picture

jesus christ...10,000 words to describe deflation! how about no one has any money/credit so they cant buy anything so everything goes down in price til the price matches the money that people can scrounge up...period....end of bubble.

 

housing to zero

luxury cars for $100 and no takers....get ready.

Fri, 02/15/2013 - 01:45 | Link to Comment willwork4food
willwork4food's picture

Good points, but I might add there is definitely a bottom for anything. Those that build houses an build cars have to live. They have expenditures whenever something is built They wll not do the work for what they finally determine is free.

 

Fri, 02/15/2013 - 01:59 | Link to Comment TruthInSunshine
TruthInSunshine's picture

Those who don't believe inflation can persist and kick the asses of a downtrodden people (where the majority do not live in the "most favored" city centers of corrupt finance -- where the financiers own the politicians and regulators) who have very little disposable income have never been to Britain.

London is one of the most expensive cities I've ever been to in my life, and only the truly wealthy can afford what most here would consider a genuinely good standard of living. Yet, even other cities/areas in England have an extemely expensive cost of living, and an extremely small % of residents on a relative scale have anything remotely close to a genuinely good standard of living.

This is where the U.S. is headed based on its current trajectory, with all the taxpayer flesh flowing to the elite in cities such as New York City (Manhattan), while the plebes in what Chuck Schumer refers to as "fucking flyover country" get continuously pulverized into the dirt forever.

Fri, 02/15/2013 - 05:54 | Link to Comment Seer
Seer's picture

People will flee cities, just as they've always done.

The "elites" in cities won't have enough others there to subsidize all the necessary infrastructure.

BTW - much of "flyover" country consists of highly subsidized BIG ag, just as much of the "cities" are comprised of highly subsidized BIG finance.  I don't care for all the political buzz-words, prefer to just view things as they are: "rural" or not.

Fri, 02/15/2013 - 06:22 | Link to Comment BigDuke6
BigDuke6's picture

The message on ZH - i feel - has always been that a period of deflation will be followed by (hyper)inflation...

and that seems how its panning out.

but practicalities have always been the thing for me

i looked at starting a small business back in the uk - nothing too big and the land seemed a bargain.

but i cant help feeling the uk will become like south africa with livestock stealing and raiding becoming more common and the toothless police tolerating it.

the idyllic farm needs many chillun to protect it.

thoughts?

Fri, 02/15/2013 - 04:21 | Link to Comment Matt
Matt's picture

The workers get paid to make the cars before the car is sold. If GM had been left to go bankrupt, the cars would have sold for extremely low prices at auction and the workers would be unemployed (until / unless they found other work). While fewer people would be making houses and cars, there would also be fewer people buying them, since the credit would be unavailable or unaffordable.

Fri, 02/15/2013 - 06:03 | Link to Comment Seer
Seer's picture

A bottom can also mean an "extinction."  Economies of scale in reverse could very well undo most everything, to the extent that there's insufficient volume for continued production.

Shelter will always be required, though there's plenty of means for providing for it.  And as for cars, cars are NOT an essential part of life (Food, Shelter and Water); humans, most that is, have legs for transportation.

Fri, 02/15/2013 - 05:49 | Link to Comment Seer
Seer's picture

Yeah, "luxury cars for $100 and no takers" esp because energy/oil will continue to be less affordable.  I guess one could say that energy/oil is the "use" fee- items will become less expensive, but the service fees won't.  Use/service fees cover the larger infrastructural costs (which tend to rely on sufficient numbers of participants in order to provide an economies-of-scale [in a growth "positive" way] benefit).

Fri, 02/15/2013 - 01:25 | Link to Comment delivered
delivered's picture

Deflation may yet occur and it could be argued that certain assets have been deflating while necessities (just check college tuition rates or health costs the past five years) are inflating. But one key concept to remember is that eventually, any prolonged deflationary environment will lead to a debt crisis, then a currency crisis, and eventually hyper inflation. If deflation does take hold, the tax base of the country will shrink thus driving tax receipts much lower. Without the ability to reduce spending (something the US cannot comprehend), the amount of debt required to keep the government operating and entitlement payments met will explode so high that eventually, there's noway to support the deficit. Once that happens, debt defaults become widespread, eventually wiping out banks, and then finally, the currency (as no faith is left that the debt can be repaid). So this is when the fun would really start as once people who have saved but only in a currency that may not have any value moving forward, the dash to the exit to convert whatever currency they have into productive assets would be extreme and drive a hyper inflationary environment.

Deflation rewards savers and punishes borrowers and the largest borrowers in the US are the Government and Banks (which are absolutely dependent on leverage to earn a return). So the article is right about one key issue. Inflation is painful and will hammer the masses but would be a windfall for the government and financial industry. Deflation is a dissaster for the ruling elites and would not only cost them their jobs but possibly their lives in the event the banks, currency, and government all fail. There's no doubt the deflationary forces are in play but they are battling against CB's and governments hell bent on preventing a complete collapse of the system.

So place your bets and pick your winners as this party is just getting started.

Fri, 02/15/2013 - 04:58 | Link to Comment Seer
Seer's picture

Good post.

I'd add that deflation will take a severe toll on "economies of scale."  I've coined this as "economies of scale in reverse."

Talking about vortexes and such tends to hide how this is all an exponential function.  It's all easy to see in one handy parabolic curve: people fixate on the swirling vortex and get drawn down and are unable to really identify that the base is from which the "inflation" (bubble) also rose from (growth equation).

Because so many things (goods) are highly dependent upon a big infrastructural layer one needs to step back and view the impact on individual goods from any declines in the infrastructural layers.  For example, a decline in GPSes (hand-held or auto-based) could occur not because of costs with these devices (assuming they held steady), but with the costs associated with the satellites serving them (materials, degradation etc.)*.  The item itself might not be all that costly, but the operation/service of it would be, which would make the over-all costs too high; this might result in the item's cost being lowered, but the service costs might not be able to be brought down.  Linkage... A knife (or a gun, though it need additional items to make it functional) isn't dependent on any infrastructural layer, in which case its FULL cost, on an item scale, would be much more straight-forward to determine.

* This example identifies a hidden cost (we don't actually pay any service/use fees directly [govt satellite means taxpayer subsidized]).  Other devices, such as offering two-way communications, however, would be susceptible to fee spikes in cases of lower subscriber numbers (only the "rich" could afford).

Fri, 02/15/2013 - 01:26 | Link to Comment GoNavy
GoNavy's picture

We've had lengthy and deep cycles of deflation throughout American History; its was either part of -- or presaged -- some of our strongest growth years.  With all the production we have moved offshore in recent years, deflation should have been the norm even before the burst of the leverage bubble in 2007/2008.  The only reason people think deflation is a bad thing is because we have brainwashed them in Econ 101 with almost entirely Keynesian Economic theory.

Fri, 02/15/2013 - 04:26 | Link to Comment Seer
Seer's picture

I'm no Keynesian, but I do see deflation as being "bad," but only so far as I see it being the END of all current systems (bad for these systems, but good for natural forces, for setting us to be more in-line with the physical world).

If viewing things as always coming around, the "cycle," yes, "deflation" is healthy.  This time, however, it's total growth, lack of (negative) that will keep deflation running deep and long, with it ultimately breaking out of any notion of "cycles" (based on previous history): I don't know whether these folks could be seeing it this way or not, though if they did they'd have to realize, as do I, that it is purely impossible for "inflation" to correct the problem of growth.

What I am referring to is pretty well covered in this paper:

http://ftalphaville.ft.com/files/2013/01/Perfect-Storm-LR.pdf

Fri, 02/15/2013 - 01:56 | Link to Comment Notarocketscientist
Notarocketscientist's picture

We need more VOODOO ECONOMICS

Cut taxs - deficit spend big time - borrow

That IS prosperity!

Fri, 02/15/2013 - 02:49 | Link to Comment q99x2
q99x2's picture

Nice article. The NWO can take over the world easier through inflation. So they choose inflation as the weapon of financial destruction and also use it to transfer all the wealth from the population to them. The politicians make policies that transfer the most money and power to them. Deflation doesn't cut the mustard.

Fri, 02/15/2013 - 04:35 | Link to Comment Seer
Seer's picture

The NWO can, at best, take over the "market" (the non-black one).  It's based on a highly flawed model, in which case it WILL fail.  I see no reason to spend ANY energy flailing away at the NWO- it ain't going to happen.

TPTB don't give a shit about what's going on as long as they stay TPTB.  Got it?

The "model," from about as far back as anyone cares to go, has been about GROWTH.  INFLATION = GROWTH.

To get a clearer picture just replace 'inflation" with "growth," and "deflation" with "negative growth."  And keep in mind that all "growth" stems from the extraction/inputs of new physical materials/resources, and that the planet is unable to keep up with our demands for MOAR (perpetual growth [extraction of resources] isn't possible).

Fri, 02/15/2013 - 03:00 | Link to Comment adr
adr's picture

To sum up Bernanke and Krugman:

Prices go down = BAD

Total revenue go down, stock multiple look bad, stock market go down, stock market go down Wall Street no make big bonus, $250 plate restaurant not have customer, might need eat at Outback, traders no like Outback, can't rub Outback in face of Goyim.

Prices go up = GOOD

Total revenue go up, stock multiple no look so high no more, stock market go up, Wall Street make big bonus and buy new Range Rover and new beach house, get rub new stuff in face of Goyim. Goyim jealous and give money to invest so they can buy beach house, we make bag holder and say ha ha when they lose and we keep.

Sorry, I had to write in a style the Krugmanites can understand.

Fri, 02/15/2013 - 03:12 | Link to Comment Poor Grogman
Poor Grogman's picture

Deflation is amplified if a hard currency (gold) is used in conjunction with fictional reserve banking. When the bank runs inevitably occur the gold supply is not there to cover the withdrawals, so the banks fail and depositors lose the lot. This hastens the death spiral as people shut businesses and stop spending.

In a fiat system there can be no lack of money, unless it is artificially made scarce by the CBs therefore real hard core deflation is like talking about free markets, a nice quaint concept of a bygone era.

Nowadays we just have to swallow whatevein variation of ('flation) we are given.

So
If you are a borrower, beware your central banker....

If you are a saver, beware your central banker...

Fri, 02/15/2013 - 04:25 | Link to Comment Matt
Matt's picture

Except for one thing. The deposit insurance does not come from the central banks, and Europe does not have any deposit insurance.

If any bank loses out on its derivatives, the depositers will lose everything, unless the central bank prints the money for the FDIC.

Fri, 02/15/2013 - 04:34 | Link to Comment Poor Grogman
Poor Grogman's picture

They will...

There will be smoke and mirrors to go with it of course, but that will be the end result...

Fri, 02/15/2013 - 06:30 | Link to Comment Seer
Seer's picture

"In a fiat system there can be no lack of money, unless it is artificially made scarce by the CBs therefore real hard core deflation is like talking about free markets, a nice quaint concept of a bygone era."

The point that's been made that making too much of it WILL make it become worthless to the point of extinction.  Therefore, there IS a limit on the amount that can be "created."

I wouldn't be so quick to dismiss deflation as no longer possible.  Somewhere along the line the PHYSICAL world will trump the virtual (artificial).  The more there continues to be an apparent disconnect between the PHYSICAL and how it's valued/measured, the more the devices of measurement/valuation lose credibility (or the PHYSICAL loses its recognition as being of value- i.e. iCrap).

Credit coupled with fractional reserve banking tends to cloud the entire picture.  Much of the increases on the CBs books is no more than backstopped credit (govt pledges) to support reserve requirements.

None of this can continue.  Fiat WILL collapse.  That which cannot continue forever won't.

Fri, 02/15/2013 - 04:17 | Link to Comment Seer
Seer's picture

As usual, folks at the Ludwig von Mises Institute get economics right, but fail to understand the greater picture.

This is all set up (are the two "sides" just playing us all?) by not going to the heart of the matter, starting off with the fundamental premise by which we base our economic analyses from- all is predicated on GROWTH, perpetual growth on a finite planet.

It's like the joke of the surgeon declaring a successful operation, but the patient died.  The patient is GROWTH, and the economic discussions/theories are the "operation."  BUT...perhaps there comes a point in which the discussions/theories fail because the structure that they ride on/operate off of, the "patient," is in-operable? if the patient is unable to grow new replacement cells then does it really matter which discussion/theory is correct?

Entropy (end of our ability to conjure up enough energy to stave off entropy) is going to pull "economic" deflation past any cyclical market forces (correct theory/practice not withstanding).  While hardly anyone sees.understands this true force, people are sensing it, there's a sense that much of what is measured in our economic system isn't really worth it (worth the loss of liberty- the State, which the major suppliers to our economic system is plugged in to, needs to control the field for the big players lest it all crumble, and these activities are increasingly more detrimental to individual liberty).

I wonder whether the Ludwig von Mises Institute can see it's demise (which all non-producing entities, whether they espouse the correct theories or not, will suffer)?

Fri, 02/15/2013 - 04:49 | Link to Comment Sudden Debt
Sudden Debt's picture

It's actually 400$ not 40$

 

[postponement of purchases] would be true for rapid rates of deflation, but Japan's deflation has almost always been less than 1.0 percent a year. In 2011 its inflation rate was -0.2 percent. This means that if someone was considering buying a $20,000 car, they could save $40 by waiting a year. It is unlikely that this rate of deflation affected the timing of many purchases to any significant extent.

Fri, 02/15/2013 - 06:43 | Link to Comment Seer
Seer's picture

BUT... that "-0.2" percent looms much bigger when the game is all about growth.

Also consider that that "someone" is also likely seeing a wage reduction of "-0.2" percent.  Because there has to be profit we can assume that downward forces on wages would persist  Eventually material costs (due to scarcity) will assert to the point that affordability becomes increasingly harder, and "consumers" discover that it's just not worth spending scarcer income on non-essentials; this results in driving people away from sectors producing non-essentials.  Food, Shelter and Water.  I'm not thinking that the "shelter" market is going to increase, which pretty much leaves the "food" sector, and we know that margins (profitability) there is really tough...

Fri, 02/15/2013 - 04:53 | Link to Comment Sudden Debt
Sudden Debt's picture

This article is missing the issue by a longshot.

 

What actually will happen is this:

INFLATION IN ESSENTIALS

DEFLATION IN NON-ESSENTIALS

 

Essentials: Food, energy, rent (not property)

NON-essentials: electronics, clothing (non basic clothing), Tourisme, Housing (property)...

 

AND THAT IS WHAT I CALL STAGFLATION!

Fri, 02/15/2013 - 06:48 | Link to Comment Seer
Seer's picture

"AND THAT IS WHAT I CALL STAGFLATION!"

Yes, but this is a state/condition, one of only three -increasing, static, decreasing-, none of which can persist indefinitely.  What direction AFTER stagflation?

For what's it's worth, many years ago I was calling out for stagflation (saying that this is what we were going to run in to).  But, again, it can only be a transitory state.

Fri, 02/15/2013 - 06:11 | Link to Comment Dry Drunk
Dry Drunk's picture

Charles Savoie has an article titled "The Silver Stealers" who makes the argument that deflation of silver in terms of gold crashed consumption worldwide as most of the world was using silver as money and savings. 

 

http://silverstealers.net/choice.html

 

Makes sense why changes in general price levels doesn't explain the Great Depression.

Fri, 02/15/2013 - 06:23 | Link to Comment hooligan2009
hooligan2009's picture

my two cents worth..

the measurement of inflation and deflation is an approximation of an average..inflation in essentials and deflation in discretionary is averaged.

the article misses the point of deflation being a natural and desirable outcome of a correction in the value of goods. simply put, where prices have been increasing by too much for too long, they are epxensive and need to fall in order to achieve equlibrium at the point of value that should have been present all along but for a transfer of economic rent from consumers to producers.

you can see this in house prices and the price of bank shares, from bom to bust and (for the banks with artificial stimulus, inventory rigging, book valuing of assets like mortgages) boom again for banks.

neither inflation or deflation, or for that matter, growth or recession represent measures that have any basis in common sense. if prices have gone up too much, the must come down..similarly if an economy is producing too much (that not enough people want) it must reduce output.

the economy still needs to adjust to a non-scary multiple of household income for house prices

(3 times $50,000 (from here http://www.census.gov/prod/2012pubs/acsbr11-02.pdf) = $150,000, rather than average house price of $280,000 (from here http://www.economagic.com/em-cgi/data.exe/cenc25/c25q07)

either by wages increasing by $40,000 or 80% to $90,000 or house prices need to drop by around one half.

if wages went up by 80%, corporate sector profits would drop by $4.6 trillion (c. 30% of gdp) from a positive $1.5 trillion to a negative $2.1 trillion

(corporate profits from here http://en.wikipedia.org/wiki/File:US_Corporate_Profits_1947-2011.jpg)

if houses were revalued to affordable median levels, the drop in value of housing stock would need to fall from the current 115 million houses times 280,000 to 115 million houses times 150,000 or c. $15 trillion. this would need to be taken by the fhs, fraudie and funny (heaven forbid its the banks) you can adjust these numbers for the number of mortgage free households, but the principle is the same.

the problem with a house value adjustment comes from the fact that there are only 13 trillion of mortgages outstanding (from here http://www.federalreserve.gov/econresdata/releases/mortoutstand/current.htm ). this gives you some idea of the corruption that exists in the housing market. the value of mortgages (13 trillion) is way less than the value of housing (32 trillion) and yet the tail wags the dog and mortgagors dictate terms to mortgagees.

so...wage earners need a 5 trillion injection or banks need to take a 15 trillion dollar hit or a combination of both

what is needed to fix the governments fiscal deficit (and then the debt problem) is a combination of substantial wage increase, not a bank balance sheet subsidy of $15 trillion.

the largest driver of inflation is wage inflation. increasing wages would raise more taxes. this needs to be combined with corporate activity in overseas markets so that the US runs a large trade account surplus. the corporate sector needs to increase wages by a large amount and sell more goods overseas to generate the profit to do so. 

the missing factor inthe above analysis is the degree to which the dollar (DXY) needs to go down in order for the US to be export competitive. this is the deflation that the Fed/Treasury should be actively targeting. But then so is every other country and their currency whores!

Fri, 02/15/2013 - 10:20 | Link to Comment GoldenTool
GoldenTool's picture

Beautiful summation of what is happening and what will happen.

The only choice is inflation to prevent deflation and it will hit wages this time.  It is the only answer.  Unless the doomer energy people are correct and oil is done.

 

+100 for you.

Fri, 02/15/2013 - 06:37 | Link to Comment Mr. Hudson
Mr. Hudson's picture

During boom and bust cycles, there is always a deflationary period before hyper-inflation. This time though, we will have deflation with hyper-inflation. 

Fri, 02/15/2013 - 06:48 | Link to Comment Dangertime
Dangertime's picture

The whole "deflation keeps people from buying stuff" is no more accurate than saying people rush to buy things because the price may go up 2% in a year.

 

Tons of people still bought PC's and flat-screens even as the prices were plummeting.

 

What makes deflation dangerous and people not buying much is the fact that there just isn't enough leftover cash compared to the debt servicing required of them.

Fri, 02/15/2013 - 07:00 | Link to Comment Seer
Seer's picture

"What makes deflation dangerous and people not buying much is the fact that there just isn't enough leftover cash compared to the debt servicing required of them."

Excellent point!

A claim on future earnings...

Credit is based on (in general) the ability to repay.  A decline in total credit markets pretty much states that there's an expectation of less work being able to be performed- LESS GROWTH.

I think that a big test of all of this inflation-vs-deflation debate lies in the question: Can there be inflation in a negative-growth environment? ("stagflation" comes close to describing this, but it does seem to more closely do so against a low/zero growth environment- negative growth presents, I believe, a greater set of problems such that "stagflation" just doesn't seem applicable)

Fri, 02/15/2013 - 07:09 | Link to Comment hooligan2009
hooligan2009's picture

austerity + deflation = ausflation...or perhaps deflerity!

Fri, 02/15/2013 - 07:34 | Link to Comment Seer
Seer's picture

"assflation" - "Does this make my ass look big?"

Fri, 02/15/2013 - 06:53 | Link to Comment Monedas
Monedas's picture

What deflation .... Afrikans used to live on a dollar a day .... Obama now says they live on $2 a day in his pathetic SOTU massage ?    LOL     

Fri, 02/15/2013 - 07:01 | Link to Comment Seer
Seer's picture

Is that you, Freddie?

Fri, 02/15/2013 - 07:17 | Link to Comment BigDuke6
BigDuke6's picture

An important point that the africans have never had it so good.

If it wasn’t for Jews they’d be in their huts jerking off to lion sex instead of on the Jewish invented internet, using Jewish invented Google to surf for Jewish produced white girl porn.

We all have to accept that Jews are simply smarter, richer, and more productive than them. 

Fri, 02/15/2013 - 07:33 | Link to Comment BigDuke6
BigDuke6's picture

Ach I'm just upset pretorius killed my soulmate ...

Fri, 02/15/2013 - 07:37 | Link to Comment Seer
Seer's picture

So, what you're saying is that you think "inflation" is rampant?

Anyway... "and the white monkeys thought themselves superior, and most definitely NOT monkeys"

Fri, 02/15/2013 - 06:59 | Link to Comment Monedas
Monedas's picture

If gold and silver were money .... GDP would tend to outgrow new mined money supply .... if there was economic freedom .... people would make more rational purchases .... they wouldn't have to chase the dragon's tail of inflation ?

Fri, 02/15/2013 - 07:05 | Link to Comment Seer
Seer's picture

WTF does "economic freedom" mean?

Equation: 100 = <some vague thing> x <a measureable known thing> (yeah, pretty stupid looking, right?)

Fri, 02/15/2013 - 07:39 | Link to Comment Seer
Seer's picture

I get down-arrowed by some ass-clown who is INCAPABLE of defining "economic freedom."  Another fucking Party Pussy who is trained on all the meaningless talking points...

Fri, 02/15/2013 - 07:53 | Link to Comment overmedicatedun...
overmedicatedundersexed's picture

I am confused, why with free trade the cost of goods goes down, you ship jobs out of country, people earn less and those earnings do not keep up with the the lower cost of goods, so more free trade and fewer jobs to lower prices more, how is this diff from deflation?? which is bad No? too complex for a non economist I guess.

Fri, 02/15/2013 - 08:03 | Link to Comment Seer
Seer's picture

Ah!  It's my position that the only real "wealth" comes from natural resources.  What you're noting is really all part of an on-going down-turn, which, it appears, most thought was some positive activity ("free trade").

Ultimately all should be measured not by some fabricated "cost," or a fabrication of "circulation of 'money'," but, by total extracted resources, whether increasing or decreasing.  I suppose it could be narrowed down to just energy, as energy = the ability to do work (and more work means more "production," which means more growth).

It's the economist's job to obfuscate in order to hide the fact that their pay-masters don't produce/contribute.

Fri, 02/15/2013 - 08:52 | Link to Comment AnAnonymous
AnAnonymous's picture

WTF does "economic freedom" mean?
_______________________

Economic freedom is one of these things 'americans' claim to be deprived of and when returned to them, shall allow them to deliver on their 'american' promises.

Unfortunately for 'americans', it keeps appearing that on their journey to better humanity's fate,started on 1776, July, 4th, there have always been some greater powers in action to frustrate them and keep them away from delivering what they are claiming to be able to deliver.

Ah, if only the world were to enjoy some 'american' economic freedom, what a place to live it would be!

Fri, 02/15/2013 - 07:19 | Link to Comment gmak
gmak's picture

2 things.

 

1. Prices move before wages.

2. If your 'wealth' is really just income then you are hurt by inflation and benefit from deflaton. If your wealth is in real assets then you benefit from inflation and are hurt from deflation.

So, who benefits from inflation? Those who own lots of things and derive their income from those assets. I'm looking at you 1%'s.

I'm not a paranoid, just a cynic - but doesn't it seem that the internet is the perfect vehicule to plant false ideas and myths in the (generally intellectually lazy) public?

Fri, 02/15/2013 - 07:54 | Link to Comment Seer
Seer's picture

You're correct, but here's the more, IMO, relevant reason:

TBTB live off of excesses; inflation is created through growth.  Think about this, think about how in nearly every corner of every discussion about the "economy" that it's always desired for there to be growth.

Reagan was wrong on the direction of the "trickle."  It wasn't from the top down, it was from the bottom up.  During that very time-frame financial institutions started to take off on an opening up of transaction fees.  The "connection" is that one can rally rack up a lot by large volumes of a small amount: think of the movie Office Space.  The "top" don't provide/keep the "bottom" alive and prosperous, the "bottom" keeps the "top" held aloft, and this is only possible via growth.

While inflation does support asset prices (I don't think that anyone here doesn't get this point), it cannot hold those asset prices unless there is growth: they can be supported "artificially," but without real growth they're destined to drop back down, which means that the big asset holders' wealth (which was propped up) can necessarily be maintained.  Well, yes, if they SELL assets at a "top" and then repurchase on the "downside" their "wealth" can be increased: if, however, they don't have regularly performing income stream then this increased wealth will end up being drawn down on, and most likely during a bottom (when a sell-off will bring in less).

Fri, 02/15/2013 - 16:41 | Link to Comment hooligan2009
hooligan2009's picture

prices can move after wages....when you have collective wage bargaining independent of company performance for example..i.e. the extension of socialism into the work place

Fri, 02/15/2013 - 08:11 | Link to Comment El
El's picture

I don't think we can rely on the same theories on deflation today as were relied upon fifty years ago. Back then, people saved for their purchases and were more cognizant of price fluctuations. Today, folks simply finance everything for instant gratification. With no money down, easy credit terms, people even finance breakfast sandwiches at McDonald's with their handy dandy Visa cards.

Fri, 02/15/2013 - 08:58 | Link to Comment Seer
Seer's picture

That's kind of getting around the point I was making, that "credit" is clouding things.

Fri, 02/15/2013 - 08:16 | Link to Comment smacker
smacker's picture

Anybody who follows Paul Krugman and his krackpot theories is in serious need of medication. Nevertheless, his claims about deflation are shared by virtually every political elite and central banker. 'Mervyn "King' of Inflation" pulls a deathly white face whenever he explains the phony risks of deflation to a bunch of sycophantic financial journalists. (If one wants to know how much idiocy exists in the UK BoE and UK Treasury, this Telegraph article says it all: http://www.telegraph.co.uk/finance/economics/9871236/Treasury-has-put-ta... ). These faceless, unelected Civil Servants are the people charged with wrecking the UK economy, irrespective of which political party is elected into office.

If one takes Krugman's absurd theory to its logical conclusion, then nobody would be buying anything, on the expectation that its price would be lower tomorrow or next week. This is plainly absurd. As we see, people in Japan are still buying things every day even in the knowledge that it might be cheaper tomorrow. Because they need it today. The probable effect of price deflation is that people would reduce spending on excess junk on a once-off basis to a new level where they only buy today, what they need today. It therefore encourages more thoughtful spending. This is a good thing, but apparently much disliked by central bankers and their ilk who are obsessed with phony GDP stats.

If you look at the PC components market (HDD, SSD, graphics cards, RAM, USB sticks etc etc), all of these items have been in price deflation for years (bar occasional hiccups) as technology and mass production move on. Yet it is a very successful and thriving market. When I build a new desktop PC, I buy what I need for it, despite knowing that next month it may be cheaper.

 

No, ISTM the only people who benefit from inflation and dread deflation are those in debt, especially those in difficult-to-manage debt, invariably of their own making. They do not see the real value of their debts eroded year-on-year by inflation. But this in itself encourages people who are thinking of taking on debt to consider the matter more seriously. That is another very good thing as it encourages better investment and reduces mal-investment.

The above is obviously a tad simplistic as I'm not an economic expert. I leave it to the experts at LvMI to make the case. But it tells me that our financial world is being run by people best described as nutters, even though they might have a Nobel Prize in economics or, as in the UK, a Knighthood.

Fri, 02/15/2013 - 09:08 | Link to Comment Seer
Seer's picture

"But it tells me that our financial world is being run by people best described as nutters,"

You make it sound as this is all something new, recent.

The "system" was put in place a LONG time ago.  As soon as we disconnected from the Sumerian's "interest" payment means -calves from cattle- it was destined for exploitation and eventual disaster.  We've put off the day of reckoning only through our ability to extract more and more from the planet; eventually, however, the planet is going to cry "uncle," and I think that time is now upon us.

Since 1970 the US has been hiding the fact that's it's bankrupt.  During the 70s the US stumbled around like a drunk.  And then in the 1980s the financial sector was let loose to "create" wealth.  The progression has been a continued onslaught of bubbles and financial trickery, leading many to believe that there was actually an improved economic base.  We are now discovering the hollowness of it all...

Fri, 02/15/2013 - 09:56 | Link to Comment smacker
smacker's picture

"You make it sound as this is all something new, recent."

That wasn't my intention! But I agree with all that you say.

I describe the masters of our economies as nutters because ISTM that anybody with a modicum of capability at logical thought and more brain cells than a boot size would know that the economic policies being advocated by the banking elites and followed for a very long time by all political parties do not work and are never going to work. *I* can see that and I'm not a trained economist. Their solution to the collective madness of their own making is to apply more madness. And to reinforce their madness they introduced a whole range of mad official statistics that are worse than useless. Only other madmen would formulate policy based upon them, yet they do it every day.

Why is all this serious to recognise?

Because it paints a picture -- not of a slow, steady recovery from where we are --  but of progressive sliding down the pan until populations appear with "Enough is Enough" placards and revolution soon follows. Blood on the streets and all that. The madmen have their own survival at the very top of their priorities.

Fri, 02/15/2013 - 08:35 | Link to Comment sbenard
sbenard's picture

I don't buy the argument that popping bubbles constitute deflation. I don't buy that increased productivity (increasing technology capabilities) constitute deflation. I trade the commodity markets. I have yet to see any sustained deflationary price structures. The bellweather ag commodity, corn, is twice the price it was 18 months ago. Crude is once again knocking on the door of $100. There is no significant risk of deflation. The real and rising risk, is that all that monetary mayhem created by the Fed over the past five years, will break forth and create it's evil consequences.No one can show me any signs of broad-based deflation! It doesn't exist!

Real estate? Ha! A popping bubble in an over-extended and finally self-correcting market is NOT deflation! That's a correction!

It is virtually impossible to have broad deflation with so much easy money sloshing around. The risk is inflation, not deflation!

Fri, 02/15/2013 - 09:22 | Link to Comment Seer
Seer's picture

According to Austrian economics (one must state what theories one is speaking to) inflation and deflation have to do with money supplies.

"It is virtually impossible to have broad deflation with so much easy money sloshing around. The risk is inflation, not deflation!"

Is it NEW money?

And, is it really moving around, or is it, as I suggest, mostly just padding books (for the banks so that they can show that they are not over-leveraged?

Commodities reflect the real world, a world where physical resources are depleting.  One can state that these prices are rising, that they are inflating, but perhaps they're being driven more so by a shift in our overall paradigm- away from the less-essential toward the more-essential?  That which cannot continue forever means that it won't, in which case everything could be said to be a "bubble."

For me the inflation vs. deflation debate is a distraction from the Big Picture, the Big Picture being about growth (are we increasing or decreasing?).

Fri, 02/15/2013 - 13:00 | Link to Comment hooligan2009
hooligan2009's picture

growth for growth's sake is a fallacy. why should sales (output) keep increasing if there is a certain point at which the sales/output aren't demanded at an (elevated) price?

bubbles mean that output is not waranted by the overall economy. why build expensive houses that an insufficient number can afford? why let people borrow to sustain a lifestyle beyond their rational means? and why provide credit for elective surgery (straight teeth, nips and tucks) that charges usurious credit card interest rates that double the amount borrowed in five years? or that huge car etc etc.

articficially stimulating an activity that makes people poorer by facilitating purchases on credit beyong the means of repayment is not a valid macro monetary or financial response. it is a form of corruption (unnecessary impoverishment) that leads to schizophrenic and defensive behavior and leads, for want of a better analogy, to all of the seven deadly sins.

namely: greed, sloth, envy, pride, lust, wrath and gluttony.

it also results in the same perceptions of US citizens amongst foreign nationals, whether these are moslem, asian or other Americas countries. the europeans and japanese want to copy the US, go figure!

Fri, 02/15/2013 - 08:35 | Link to Comment dcb
dcb's picture

actually deflation should be the nporm, not the exception.

all the economic models that deal with expected humman behavior seem wrong to me. once more foundations of models without evidence of support.

if one assumes that total fator produtivity is the reason gdp gorws, then improvents in effiiency are what inreases gdp, then the cost of the item should go down. why moore's law works for hips, but not eonomi thought is beyond me.

 

they don't like deflation beause it's bad for over leveraged banking systems, and bankers, then they dome up with reasons to justify it. it's that simple

Fri, 02/15/2013 - 08:44 | Link to Comment orangegeek
orangegeek's picture

Deflation is “a fall in the general price level or a contraction of credit and available money.” - Not so.

 

This is a symptom/result of deflation.

 

Deflation is the lack of available and the lack of desire for credit.  This is why Ben and Barry keep pumping the economy - to make available all credit.  But if few are using it, then Ben and Barry will fail - which is exactly what is  happening.

Fri, 02/15/2013 - 08:47 | Link to Comment hooligan2009
hooligan2009's picture

what happened to saving up for soemthing..this prediliction for credit is weird

Fri, 02/15/2013 - 09:01 | Link to Comment smacker
smacker's picture

Same issue looked at from a different angle. Deflationary expectations reduce demand for credit on a once-off to a lower level for obvious reasons. This encourages better investment, reduces mal-investment. The issue is whether that is a good thing or bad. Krugman says it's bad. Austrians say it's good.

Fri, 02/15/2013 - 08:47 | Link to Comment AnAnonymous
AnAnonymous's picture

I cant remember that 'american' author as a previous writer but what is good with 'american' writers, they are 'american' so you can expect 'american' writings from them (aka propaganda and fantasy)

So as usual with 'americans', it is all about prepping. Quite a lot of them learned their lessons from Plato and know how to stage a good, solid and honest 'american' debate.

And the article is such packed with cheap propaganda (aka 'american' propaganda) and fantasy.

Quick example: the 'american' author raves about delayed consumption.
Down there, he also goes on consumption that can not delayed (consumption based on a monthly basis vs monthly pay check) and ponders why the price going down should influence the delayment of consumption that can not be delayed.

Newsflash: consumption that can not be delayed is not influenced by price either up or down. You can do the undelayed consumption act or you cant.

As from that big miss, the 'american' author goes on further, introducing declining wages but as a factor of immediate consumption. Since wages are expected to decline, then people will try to consume as soon as they can.

Save that once again, that stupidity is based on the fact that some consumption acts can not be delayed.

Newsflash: same here. Salaries going up wont delay consumption acts that can not be delayed.

Of course, as soon this layer is removed, and noting that pondering over factors that can delay consumption can only address consumption that can be delayed, well, it is very easy to answer the 'questions' as asked by this 'american' author.

Who is, as one 'american' on this site puts it on this forum, certainly part of the thinkers of tomorrow.

Fri, 02/15/2013 - 09:13 | Link to Comment CDNX fan
CDNX fan's picture

The real estate crash of 2006-2009 WAS the "deflationary spiral" alluded to earlier. What we are seeing now is the reflation needed to repair the collateral held by and SO DANGEROUS to the NY/London money-centre banks. Since the banks own politicians, then don't expect lower prices. Just BUY STOCKS and prosper!

Fri, 02/15/2013 - 09:51 | Link to Comment madcows
madcows's picture

I think you were close, but missed the mark.  Deflation is about a collapsing economy, and nothing else.  Imagine this:  you are a company.  You're goods aren't selling, b/c people don't have money.  So, in order to stay in business, you lay people off.  But, you can only do that for so long.  And still, your product isn't selling, so you reduce it's price.  But, to do that you need to reduce the wages of your current employees.  They keep their jobs, but have less income.  So, they don't buy a car or a house or whatever.  They try to make due.  So, the house builder, car buyer, and gadget maker all sell less goods.  And, in turn reduce their staff and wages, and on and on.

Deflation is caused by a deflating economy.  Good Ol' Benny is trying to combat that by "printing", or buying down the price of borrowing.  You see, our country hasn't "Grown" in decades.  We've been net debtors for generations, and the only way we have "Grown" is to have borrowed from the Chinese.  Now, the debt is due.  In order to have a non-deflating economy, we'd need to sell more than we buy.. or borrow.

The question becomes, as the FED destroys the value of the dollar to inflate the economy do we suddenly collapse into a deflation environment or a hyper-inflation environment, or both.  The Bernanke will create a hyperinflation environment, which will collapse the economy, which will result in a depressionary deflation.

Fri, 02/15/2013 - 11:42 | Link to Comment smacker
smacker's picture

Methinks that deflation can follow the scenario you describe, but IMO that is an unusual case often caused by other factors, eg a completely broken society caused by war or whatever. In the West, deflation would cause economic activity to contract to a new level as people adjusted their spending habits to only buy what they needed today, thereby ridding the economy of the frothy credit bubble that we have had building up for several decades, so favored by the political elites who cannot see beyond their nose.

Fri, 02/15/2013 - 09:51 | Link to Comment ginunn
ginunn's picture

The theoreticians forgot the world is populated with real people. You feel like a coffee. Will you wait a week to get one because it may be 5 cents cheaper? You're out of toilet paper - how long do you wait for the price to fall to the point you want? If the economic theorists had more than two nerons functioning, they might have understood the idiocy of their argument.

Fri, 02/15/2013 - 10:08 | Link to Comment IamtheREALmario
IamtheREALmario's picture

I am thinking that the biggest deterrant to market forces sorting out inflation and deflation is the government monopoly on power. To maintain that power, the government will not allow market forces to impact its power based: the number of people it employs, its spending and deficit spending/borrowing, its empire building, its taxes, its restrictive and useless law creation, its use of money as a weapon, its corruption and its meddling in the free market.

My guess is that the reason deflation is worse that inflation is simply because the government thinks it is immune to free market forces and does not play the required market adjusting game... because, that would decrease its absolute power.

Do NOT follow this link or you will be banned from the site!