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, 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?


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.

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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!

greggh99's picture

Computers. And all things computer related.

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.


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'.

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.

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.

TwoShortPlanks's picture

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

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.

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.

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.

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.

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.



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


jmcoombs's picture

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

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.

Bob's picture

+1  The 500 trillion ton elephant in the room. 

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..."

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

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).

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 



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.

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.

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% ?  

Sean7k's picture

I would prefer 50,000 and pay cash.

DaveyJones's picture

The value of my small business

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.

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.

Bananamerican's picture

Thank YOU Aprick....

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

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

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.

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! 

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.

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.


Prairie Dog's picture

Did you ever hear of the Great Depression?


dark pools of soros's picture

It was staged like the moon landing and the holocaust

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.

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.

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.

Umh's picture

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

Thisson's picture

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

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.

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.

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.

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.

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.

Thisson's picture

I downvoted you for being a cheerleader for ignorance. 

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.

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.