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Guest Post: What’s So Scary About Deflation?

Tyler Durden's picture




 

Submitted by Frank Hollenbeck via the Ludwig von Mises Institute,

When it comes to deflation, mainstream economics becomes not the science of common sense, but the science of nonsense. Most economists today are quick to say, “a little inflation is a good thing,” and they fear deflation. Of course, in their personal lives, these same economists hunt the newspapers for the latest sales.

The person who epitomizes this fear of deflation best is Ben Bernanke, chairman of the Federal Reserve. His interpretation of the Great Depression has greatly biased his view against deflation. It is true that the Great Depression and deflation went hand in hand in some countries; but, we must be careful to distinguish between association and causation, and to correctly assess the direction of causation. A recent study by Atkeson and Kehoe spanning a period of 180 years for 17 countres found no relationship between deflation and depressions. The study actually found a greater number of episodes of depression with inflation than with deflation. Over this period, 65 out of 73 deflation episodes had no depression, and 21 out of 29 depressions had no deflation.

The main argument against deflation is that when prices are falling, consumers will postpone their purchases to take advantage of even lower prices in the future. Of course, this is supposed to reduce current demand, which will cause prices to fall even further, and so on, and so on, until we have a deflation-depression spiral of the economy. The direction of causation is clear: deflation causes depressions. You can find this argument in almost all introductory economics textbooks. The St. Louis Fed recently wrote:

“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.”

There are several problems with this argument.

The first is that, regardless of how low prices of consumer goods are expected to fall, people will always consume some quantity in the present and in order to do so, they therefore need to spend in the present on investment to ensure the flow of consumer goods into the future. We can see that many high technology products have had brisk demand despite living in a deflationary environment. Apple has been able to sell its latest version of the iPhone, although most people expect the same phone to be much cheaper in six months.

 

The second mistake with this argument is that it assumes that we base our expectations only on the past. Falling prices makes us anticipate prices to continue to fall. Of course, our expectations are based on a multitude of factors, of which past prices is just one. I am sure that the economists at the Fed are surprised that we did not react to lower interest rates as we did after the dot com bubble of 2001. Human actions simply cannot be modeled as you would the reactions of lab rats in a biology experiment.

 

A third mistake is that if we are consuming less, we must be saving more. Investment must therefore be higher. Therefore increased saving that can lead to deflation does not reduce aggregate demand but simply alters the composition of demand. The demand for consumption goods will decline, to be replaced with demand for capital goods. If anything, this will lead to growth and more consumption goods in the future, since the economy has more capital to work with.

Growth lowers prices: that is a good thing. The period of the greatest growth in the U.S. during the nineteenth century, from 1820 to 1850 and from 1865 to 1900, was associated with significant deflation. In those two cases, prices were cut in half.

Let me explain this point with a very uncomplicated example. Suppose you have 10 pencils and $10. What is the price of a pencil? It can’t be $2 since we would have pencils that remain unsold, so the price would tend to fall. It can’t be 50 cents since people would have money and nothing to buy. Prices would be bid up. This would lead to equilibrium where pencils would be sold for $1 each. Now suppose we double the amount of pencils, so we have 20 pencils and $10. The price will fall from $1 to 50 cents. Other things being equal, including the stock of money, the price will be cut in half, falling prices here is very positive since our dollars now give us more goods and services. It reflects society’s ability to push out the bounds of scarcity. We can never conquer scarcity, or all prices would be zero, but falling prices shows that we are winning this crucial battle. More goods and services for all is a good thing and deflation reflects this additional abundance.

Now let’s talk about the deflation which causes such fears in so many economists. Suppose the production cost of a pencil is 80 cents. The rate of return is 25 percent. Now suppose people hoard $5 and stuff money in their mattress instead of saving it. The price of a pencil will again be cut in half, falling from $1 to 50 cents. If input prices also fall to 40 cents per pencil then there is no problem since the rate of return is still 25 percent. What economists fear is that input prices are sticky, and don’t adjust to output prices, so that firms produce at 80 cents and sell at 50 cents. This leads to bankruptcies, unemployment, and falling output, so now we may only be producing 8 pencils, which causes more hoarding, more bankruptcies, and so on, and so on. You get the picture. To avoid this, most economists advocate that the government print $5, keeping the price of pencils steady at $1, and avoiding a deflationary-depression spiral in the economy.

Of course, there are also some major problems with this little story. There is always a certain amount of stickiness in both input and output prices. You don’t want to have to constantly renegotiate your salary, nor do you want to constantly check on the hourly ticket price of the latest movie. So what is important is the lag existing between changes in output prices and input prices. If the lag is not long, then the policy solution described above may not be necessary and counterproductive. Also, entrepreneurs survive by forecasting output prices and then bidding for the inputs to be able to make a profit. This would suggest that the lag is probably relatively short.

Also, the printing of money is distortive. When the government adds $5 to the economy, it is not neutral. It initially benefits those that receive the money first, the government and banks, and penalizes the late receivers of the money, the wage earners and the poor. The printing of money and its associated price effect is the reverse of Robin Hood, taking from the poor to give to the rich. These early receivers, the rich, will spend the money in a certain way, altering relative prices in the economy.

Now what happens when the economy improves and people reverse their hoarding? We now have 10 pencils and $15. Other things being equal, prices will rise from $1 to $1.50, unless the government retires the $5 it put into the system. If they do, this will create another round of altered relative prices. The medicine is likely to be worse than the disease.

In a multiproduct world, inflation (including asset prices) from excessive credit growth causes changes in relative prices that induces unsustainable investments, like housing from 2001-2007. Deflation, in the bust phase, is a partial realignment of these relative prices closer to what society really wants to be produced. The printing of money simply interferes with this essential clearing process. The real solution is to end fractional reserve banking and central banking.

Inflation is much worse than deflation because it robs wage earners and the poor. Central banks are the primary cause of inflation and are the main reason for the growth of income inequalities, as the rich get richer and the middle class sinks toward poverty. This income trend has been self-evident and growing since the demise of the Bretton Woods system in 1971 and its replacement with fiat currencies. Central bank power depends on the ability to generate inflation.

This is why central banks have been so generous supporting economic research in so many academic institutions that serve to theoretically justify the central bank’s current inflationary policies. The common fallacy of “a little inflation being good” has been expounded by the media and economists for a reason. Inflation is theft as you sleep, since it robs the value of the dollars in your wallet. Two-percent inflation over 35 years reduces the value of money in your pocket by 50 percent. If anything, evil has a new face; it is called a central bank.

Many times deflation follows a period of central bank inflation. Deflation is part of the deleveraging process that is necessary following such an excessive policy by the central bank. As Austrian economists have always said, “fear the boom, not the bust.” Delaying the deflation by extending the bubble or creating new bubbles by printing more money only delays the adjustment making it much more painful.

The real solution is to end fractional reserve banking and central banking. A world without fractional reserve banking and central banks would be a world of gentle deflation, which should be hailed as indicative of one of mankind’s greatest achievements: the raising of living standards for all.

 

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Fri, 06/28/2013 - 17:52 | 3704822 Midasking
Midasking's picture

Lower cost of living never helped anybody! http://tinyurl.com/qhxpkyn

Fri, 06/28/2013 - 17:59 | 3704839 mikla
mikla's picture

True, and the correlary:  Forced economic activity allows "organized crime" to take their cut.

Government wants to force economic activity, and inflation, because it increases their control (humans must come up with more for property taxes, etc.)

Inflation is a tax, and forced economic activity is slavery.  It's definitely a "win-win".  Deflation is bad because it reduces the number and nominal value of transactions that would occur.

Fri, 06/28/2013 - 18:25 | 3704891 blindman
blindman's picture

national governments have been reduced to goons for
the oligarchic elite families and corporate structures
and as compensation to local authority they have partnered
and given dominion to the local mob, state run outfits,
so long as they collectively support the de facto hierarchy.
command and control, incident command rules in full effect.
the individual exists only as a cog in the scheme or as grit
in the cog, or maybe a grease for the wheel?
only the artist can breath in this atmosphere.

Sat, 06/29/2013 - 00:48 | 3705571 All Risk No Reward
All Risk No Reward's picture

>>Guest Post: What’s So Scary About Deflation?<<

Really?  Are the folks at Mises so ignorant of the monetary system that they could ask a question this absurd?

Hre's a hint for ya, the debt based monetary system is a fraud.

If the international banking cartel (IBC) lends $20 to a society @ 5%, society owes $21 in a year's time due to bookkeeping adjustments that add a $1 interest liability to society and a $1 interest asset to the IBC.

The debt is unpayable unless the IBC sheds all their monetary wealth - BY DEFINITION.  There is no other way out.  This is a 3rd grade math level artificial monetary constraint that empowers the IBC to covertly rule over sociiety.

The youngsters would call society's state "pwned."

In order to prevent this society from going bankrupt right away and realizing the fraud, they create more $20 (inflate) that allow the payment of previous debts, but this creates exponential debt growth...  as seen here:

http://www.keepandshare.com/doc/3324744/wmdebt-graph-3-79k?tr=77

This is why a teady state economy is impossible - steady state will lead to unpayable debts and collapse.

So, what happens when the exponential debt growth halts?  Previous debts in society become unpayable and prices collapse as a result.  Deflation under these circumstances isn't what you think it is or what you would like to believe.  It is what mathematically unpayable debts en masse will trigger in society:

1. Bank insolvency.  Lenders (aka, depositors) wiped out.

2. A drop in the money supply approaching or surpassing 50% in due time - but debts remain the same.

3. Indebted assets will be defaulted to the TBTF&Jail banks - homes, land, farms, businesses, vehicles...  you name it, the TBTF&Jail banks turn trillions in debt holdings into real assets (that used to be yours)and trillions more into whatever is left at pennies on the dollar.

4. More for bankster, a lot more...  less for you and society.

Yes, hyperinflation is the end game, but they will force people into default and turn their debt holdings and cash into real stuff before they hyperinflate to balance theirt TBTF&Jail books and proclaim "capitalism failed" so it is time for our authoritarian financial dictatorship.

How to be a Crook

https://www.youtube.com/watch?v=2oHbwdNcHbc

A Tribute to The Automatic Earth

https://www.youtube.com/watch?v=v-geWu-E9ys

Isn't this elementary?

I guess the Rockefeller Foundation wouldn't have funded Mises if he had all the truth that exposed the Rockefeller criminal syndicate.

"The best way to control the opposition is to lead [finance] it."
~Vladimir Lenin

Sat, 06/29/2013 - 14:05 | 3706174 The Mist
The Mist's picture

You don't need inflation to pay back the 21.

You pay 10 (the first part) to the IBC, the IBC spends the money, and the 10 flows back into your coffers and you can pay back another 10. You can repeat this over and over, so no, inflation isn't needed to cover debt. However, it makes it a whole lot easier since it doesn't require working for it...

Sat, 06/29/2013 - 19:54 | 3706691 All Risk No Reward
All Risk No Reward's picture

Hi Mist,

You are technically correct.  There are two basic options:

1. Sell your labor to the IBC in order to earn that $1 in interest back.

2. Sell your stuff to the IBC in order to earn that $1 interest back.

However, we have to note a few things:

1. The IBC is in total control and can bankrupt the "nation" anytime they chose.  They DO NOT have to allow the nation to earn any of the money back.  The IBC is sovereign (like a child's parent), the nation is subservient (like the child dependent on it parents for money).

2. The IBC's monetary wealth *IS* (can't define this away Clinton!) society's UNPAYABLE DEBT.  Not only is the IBC not spending all their money back into society they, along with their corporate fronts, are hoarding money via bailouts and other mechanisms.

3. A "bailout" is equivalent to the IBC issuing $20 in new debt money, pocketing the money for itself and then billing society $21 in a year's time.  Yeah.  This is third grade math, people.  Anyone who thinks the media is real while not exposing this fraud or the criminals running this fraud must be in a world of nothing but bliss.

 

Sun, 06/30/2013 - 10:05 | 3707533 Marco
Marco's picture

The top creditors don't spend all their income ... only the consumption class spends all their income.

The only way to get money away from the creditor classes is theft. Whether it be by true money creation while there is still substantial debt in society (ie. gold revaluation under FDR, devaluation under Bretton Woods or platinum coin type printing under the modern system), taxation or government independent theft.

This is the problem of rent seeking ... a problem not dependent on government (although government is good at speeding up the creation of the wealth imbalance which leads to it when starting from a relatively wealth egalitarian society).

Feudalism is the stable end state of capitalism.

Sun, 06/30/2013 - 13:42 | 3707906 All Risk No Reward
All Risk No Reward's picture

Marco, and the biggest threat to these financial art of war criminals is...  government.

That's why they seek out to control governments.

“When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.”
? Napoleon Bonaparte

Fri, 06/28/2013 - 19:05 | 3704967 Martial
Martial's picture

"This is why central banks have been so generous supporting economic research in so many academic institutions that serve to theoretically justify the central bank’s current inflationary policies."

 

Bernanke and company are like an internet troll who FIRST has a conclusion, then googles around trying to find something, hell ANYTHING, to support it. 

Fri, 06/28/2013 - 23:59 | 3705549 Tabarnaque
Tabarnaque's picture

How about the fact that a factional reserve monetary system where money is created out of debt, collateral is the anchor of everything. In a deflation, the value of collateral drops. This cause all sorts balance sheet of problems such as margin calls eventually leading to bankruptcies. This problem is especially acute in European Banks that are leverages up to 50:1!!!!! The Deutche Bank, I believe, is leveraged around 40:1. In a case like that, a 3% drop in the value of their assets can completely wipe out their equity capital... By this standard, most European Banks are already bankrupt (just like most Western World Banks too). 

 

This is why they can not allow deflation to take place. If deflation takes place then the whole financial ponzi scheme collapses. 

Sat, 06/29/2013 - 17:40 | 3706449 khakuda
khakuda's picture

Exactly right. Deflation causes asset values to decline and the banking system to collapse. It has nothing to do with people postponing purchases. That is total BS and a lie the central banks have concocted to hide the true purpose When prices decline, I am MORE likely to buy, not less likely. Great, cheaper gasoline, I will take a trip or start a delivery service for my laundromat. Higher prices rising faster than my wages means I CAN'T spend.

Sat, 06/29/2013 - 01:04 | 3705589 Dingleberry
Dingleberry's picture

Deflation is the natural consequence of productivity. Prices fall in goods and services and the standard of living rises.

Bernanke fears deflation in assets since his buds are leveraged to the hilt and can't really afford too much loss in the opposite direction.

 

Sun, 06/30/2013 - 10:27 | 3707558 Marco
Marco's picture

His pals may be leveraged, but his puppet masters aren't ... the people at the very top aren't leveraged, they're simply filthy filthy rich. Will their paper worth drop in a deflationary environment, sure ... do they really care? Only in as much as an inflationary environment makes it easier for them to acquire more true wealth (ie. land, productive capital, mining rights, IP, dirty secrets on government officials etc).

Once they own close enough to everything for their liking the people who are leveraged will be thrown under the bus.

A deflationary collapse of living standards is coming, the only question is what will TPTB use to deflect blame from themselves when it does (they only need to distract the masses for a short time, sheep have short memories after all ... they'll settle into the new normal fast enough).

Sat, 06/29/2013 - 16:29 | 3706311 RKDS
RKDS's picture

You and the article writer are idiots and here's why:

People have long-term debt with a positive interest rates.  Mortgages, car loans, school loans, etc.  Yes, it sucks having to keep up with it.  I just got out of a 5 year pay freeze so I believe me I know.

Now enter deflation.  You say the cost of living is lower.  First of all, you're wrong, because a house payment (or rent that makes somebody else's house payment) is a huge part of the cost of living and it won't fall.  Same for school and car loans but the light at the end of the tunnel is alot closer for them.

But let's say you're right.  Ever think about why that is?  Oh, that's right, because paychecks shrink.  You know, paychecks you might use to pay for all of this supposedly cheaper stuff.  For fuck's sake, a pay freeze during general inflation was bad enough but a pay cut while my biggest bill maybe stays constant if it doesn't keep going up?

Let me put that in simpler terms for the simple folks to understand.  A house payment could be $1000 of your $2000 monthly income.  If deflation pushes your wage down to $1000, the house bill is still $1000.  How the hell are you better off?  Unless food and electricity are suddenly fucking free, you'll starve in the dark.

You can't even get ahead of the mortgage because your income shrinks every month.  I didn't even get to revolving debt like credit cards that we can only keep up with because wages inflate a little too.  What do you suggest, walk away from our homes and let debt collectors and rating agencies fuck up our employment prospects?  But you don't understand why homelessness and joblessness frighten people?  Think, man!

Fri, 06/28/2013 - 17:53 | 3704826 buzzsaw99
buzzsaw99's picture

the trade deficit must be fed with scads of freshly printed greenbacks or else the usa might be forced to, gasp, live within its means

Fri, 06/28/2013 - 18:09 | 3704831 THE DORK OF CORK
THE DORK OF CORK's picture

Deflation is destructive because the flow stops......

 

You get spare capacity all over the shop.

 

On a practical level in Ireland you get empty buses but people still buy 70 or 80 thousand new car a year.......despite seeing the biggest % drop in oil consumption since Cuba was dumped by the Soviet.

 

GDP is a Flow

Wealth claims is a stock.

 

Its as simple as that baby.

 

If what happened to Ireland happened globally you would get a general breakdown of real physical global life support systems.

But because Ireland is globaized it can import stuff from places where the flow continues.

 

Deflation is not a option for a large & more closed (see real) economy such as the US of fucking A.

 

Besides the lost credit money of banks can be replaced by Greenbacks one for one within causing catastrophic inflation as that money cannot be leveraged and thus capital can be preserved for another day.

 

The more a state does not replace the lost credit money of the banks the less of a state it is.

 

Ireland is a very extreme market anti state....perhaps the most extreme.

It did not replace the lost credit of the banks with Punts.

Almost all rational local production has stopped since about the year 1980 ~

If the world depended on Ireland to produce and thus consume people would be in a spot of bother.

 

The European council does not even refer to the place as a republic and are indeed quite right as it is not.

The supposed leader of the country asked our good selfs to rally around the republic tonight  (we were supposed to be ashamed of ourselfs because bankers create credit money and not for other reasons......) but even the dimmest Irishman knows in his heart of hearts that this is a sick joke of the elites.

 

Fri, 06/28/2013 - 19:07 | 3704970 GreatUncle
GreatUncle's picture

Changed my perspective a while back. Look at the money supply as a flow, the QE is to try and keep it all flowing.

Fri, 06/28/2013 - 19:11 | 3704980 auric1234
auric1234's picture

How's that central planning thing working for you?

It seems you're obviously smarter than the combined intelligence of millions of people, and prepared to tell them what to do with their lives.

So tell us, do they need more money or less money? Please enlighten us.

 

Fri, 06/28/2013 - 19:43 | 3705051 THE DORK OF CORK
THE DORK OF CORK's picture

All banks centrally plan because they have the credit power to do , they also control most states on this planet.

 

There is different types of money but pure military fiat is not the bankers friend.

 

Try to divorce yourself from the concept of money as a interest bearing debt and pure token money.

 

its easy.

http://en.wikipedia.org/wiki/United_States_Note

 

 

Fri, 06/28/2013 - 19:55 | 3705077 grid-b-gone
grid-b-gone's picture

Deflation does not create spare capacity, it reveals it. Spare capacity reveals lower demand. The problem with trying to hide lower demand is

that demand change often signals systemic change. Trying to keep the previous flow going only creates malinvestment. This is why truly free markets

are so valuable and efficient.

 

There may be some value in slowing destructive panics such as we witnessed in Oct 2008, but other than setting a floor of support, the market should be

left to heal itself.

For instance, our national emphasis on housing may be delaying the realization that the post WWII housing boom has plateaued. Builders got over $40 billion in retroactive tax breaks, mortgage derivatives are still getting support today, and yet, companies and institutions supporting housing may not be needed at all.

Any replacement units or slow population growth could easily be handled by the private sector. No mortgage deduction, no support of home builders, no Freddie and Fannie to backstop home buyers with questionable credit. 

Deflation up to 2% can probably be handled by this economy and would bring the U.S. back in line quickly with low-wage countries like China with their 7-10% inflation. At those rates, the advantage of exporting jobs shrinks by about 10% per year.

Compounded since 2008, the jobs would be rushing back to the U.S. if the Fed had done little more than stop the S&P panic with a 700 or 800 floor and let the market heal itself from that point.

 

Fri, 06/28/2013 - 20:05 | 3705119 THE DORK OF CORK
THE DORK OF CORK's picture

Again as I said previosly there is different types of money....

 

A production of greenbacks outside the banking system WILL NOT CREATE A HOUSING BOOM.

 

Deflation is theft.

You can see this in Ireland right now.

banking credit is the means of exchange in the eurozone..........when the banks reduce credit the money supply declines.......people are unable to pay for their mortgage.

The bank seizes the house........as banks are the government when they finally gain the physical asset they will instruct their minions to inflate - thus seizing the value held within fiat using conduit "assets".

 

Please remember the asset itself is of no value............its a means to a end .....a means of extraction using the double entry system.

Greenbacks don't care about banking assets.......

You must divorce the concept of pure fiat from banking assets be this sov debt , mortgages , gold or an anything else.

Fri, 06/28/2013 - 20:26 | 3705172 blindman
blindman's picture

deflation is theft? what is fraudulent induction?
prosperity?

Fri, 06/28/2013 - 20:34 | 3705190 robertocarlos
robertocarlos's picture

Then get rid of the bus system.

Sat, 06/29/2013 - 08:12 | 3705783 caShOnlY
caShOnlY's picture

GDP is a Flow

it is indeed but you contradict yourself:

Deflation is not a option for a large & more closed (see real) economy such as the US of fucking A.

The US of fucking A is a "middle man" economy or called "service economy" and not even close to being closed.  In fact it is one of the most open markets in the world.  Money is created out of thin air, given out through social programs and exported to manufacturers world wide while support middle men at the same time.  No productivity, all flow.   Stop the money printing and you stop the flow and the manufacturers deflate.  Trouble is so do the "servicers" and "distributors".  We lose Walmart jobs, oh well.  

Deflation was an option, as the manufacturing nations would have had to continue to buy our debt or suffer the consequences of much lower exports.   It is interesting we hear the adage "owe the bank a million it's your problem, owe them a billion it's their problem".  Why didn't we leverage it into their problem then?  Deflation would collapse the stock market and if you haven't figured it out yet everything about money printing is about the stock market - the store of wealth of the elites.  Expect a good dose of hyperinflation or a massive dollar revalue as soon as the elites have purchased their share of gold and silver. 

Fri, 06/28/2013 - 17:56 | 3704832 linniepar
linniepar's picture

Tu ne cede malis.

Fri, 06/28/2013 - 17:57 | 3704835 BigInJapan
BigInJapan's picture

If you're holding gold, deflation is the worst possible thing.

Ask Japanese people who'd held gold from their Bubble Era and then ask yourself if you've got 20 or 30 years to wait.

Fri, 06/28/2013 - 19:08 | 3704974 auric1234
auric1234's picture

I would happy if sanity came back to western governments and they stopped debasing their currencies, and balanced their budgets, and real interest rates rised again to a decent level in positive territory. In fact I would be so happy, that I wouldn't give shit about my gold holdings, because I would be in a better world for my children to live in.

BUT, I didn't drink the kool-aid, so I don't see this coming. This is why I spend my earnings on something that will protect myself when the ponzi scheme collapses.

And believe me, I would LOVE to be proven wrong.

 

Sat, 06/29/2013 - 08:29 | 3705792 Snoopy the Economist
Snoopy the Economist's picture

You would be happy if real interest rates rise? This would cause a depression because USSA would default on the $17T debt since they could no longer pay the interest on it.

Mon, 07/01/2013 - 16:20 | 3711245 auric1234
auric1234's picture

Fuck them. Then the people who actually create wealth can work on making a better society instead of bailing out the vampire elite.

 

Sat, 06/29/2013 - 01:49 | 3705632 IllusionOfChoice
IllusionOfChoice's picture

Personally, I do see gold as a long term savings / investment mechanism versus a short term gain mechanism. It's something I can own and pass on that will not be debased.

I'm not saying it doesn't warrant some thought about where the price has been versus where it is now (and what that means for future investment), but am I going to sell gold and take a loss? Certainly not, PMs act as insurance against major financial issues and as a rock-solid long term value store. It will be there no matter what (barring confiscation). With two major market corrections and all the inflation in just the last 15 years, where else should long term savings reasonably go?

The only thing I can come up with are productive businesses.

Sat, 06/29/2013 - 10:29 | 3705907 Mike7.62
Mike7.62's picture

@BIJ

Really? What should you hold then? "Cash" which is nothing but a claim on national bonds such as the JGB and the 10/30 US Treasuries? What happens when the "collateral" upon which this "cash" is based becomes increasingly valueless because the issuing authority continues to create more and more of it, but it goes no bid because it is backed by nothing? Cash would be a great thing to hold IF the collateral upon which it was based was real, such as gold/silver etc., but it's not and hasn't been since 1933.

The only people hurt in a deflation are those who cannot service their debts. Since that includes ALL banks and governments, they will not allow it to happen and will hyperinflate their way out of their problems, or as was stated earlier, reset the monetary system using some form of commodity basis.

Deflation is actually the best outcome for those who save in gold/silver, because they are real money, not some chimera put in circulation by a national government or central bank that can issue unlimited quantities of it. They are the last man standing and will be the final settlement of a trade. ALL unbacked/debased fiat currencies have failed. That's a historical fact. It is happening again, it's just a matter of when.

Fri, 06/28/2013 - 18:01 | 3704843 David Wooten
David Wooten's picture

"The main argument against deflation is that when prices are falling, consumers will postpone their purchases to take advantage of even lower prices in the future."

I am not sure if that really is what the Fed and the government fear about deflation.  What about the fact that it punishes debtors (and the government is a big debtor)?  It can even punish lenders if debtors are unable to repay them.  A 30-year fixed rate mortgage is awful if one's nominal wages are falling. It would be better not to have long-term mortgages in the first place but they're there now.  And those student loans...

Fri, 06/28/2013 - 18:21 | 3704881 buzzsaw99
buzzsaw99's picture

exactly. the article is overly simplistic. if the usa hadn't debauched the currency all over the world they'd be happy to allow deflation.

Fri, 06/28/2013 - 19:58 | 3705094 disabledvet
disabledvet's picture

deflation has been unheard of in the USA post World War II for a reason. First the size of Government. simply put "the government can simply print a program" thus getting money out into the economy. second the Government through the awesome power to tax can/used to keep banks and financial institutions too small to really create the circumstance in the first place ("first to wail, first to bail"). third while the Fed has the printing presses those printing presses are in Washington DC not New York. fourth the USA is no longer a massive and unpopulated piece of real estate. fifth there is no gold standard. sixth there is a standing army. the list goes on and on and on actually. and yet there we see...through the price of gold and silver, of debt, of perhaps a dead cat bounce in real estate...what has all the markings of if not a outright deflation certainly a "deflating." this is in spite of having a Fed who having divined the lessons of history created a policy designed to prevent such a thing. indeed until recently they claimed a MISSION to create inflation. hmmm. well...to discover why "the sudden change" i went right into the belly of the beast--WALL STREET--to discover "the secret sauce" of what could easily be the greatest bubble ever created in human history(in 2008 here's the book: http://www.amazon.com/The-Big-Short-Doomsday-Machine/dp/0393338827) that the Fed burst. to create something this massive requires something so full of bullshit it has to be have something "quantifiable"...and yes, that means MATHEMATICIANS. http://topdocumentaryfilms.com/quants-alchemists-wall-street/ well, "obviously if a bunch of total lunatics can create this crisis we better have another of these guys to get us out" right? and of course that means a "QUANTITATIVE EASER." hmmm. i don't know. something tells me this might be a bad idea too. "and sure enough...all the money that we gave to Wall Street turned out to be part of their profit plan." diabolical indeed. pure evil. surprisingly "the Government only now is wising up to this fact." nay, veerily..."we are deflating." interestingly "as the prices of commodities have totally collapsed this was deemed a good time to launch a surprise attack on the bond market." only the Fed would feign surprise at the "market response" of "suddenly higher interest rates on every American and every person on the planet too" after stating for years on end "the goal was to create inflation." we as Citizens of Earth await with bated breath for an apology. (insert sound of crickets chirping here.) hmmm. if they hadn't been doing this for the entirety of their historical existence i myself would be surprised by their so called surprise. problem is this is what the Fed always does..."creates bubble...tells buddies (or is told by buddies) "time to pop" then pops said bubble" thus leaving them in possession of every valuable thing on the planet "at exceedingly low price." rinse, repeat. to be respected indeed. it's amazing there's even an ounce of gold left on the planet that hasn't been completely "relocated" to Wall Street as a consequence. (i'm sure there's someone tracking that last ounce of gold even as i write this however.) how DO they do time and again you ask? well...it's really simple and that's the beauty of it. here's the movie version: http://www.youtube.com/watch?v=V0l9S_MGCCg trust me...you cannot say no "and that's just soda pop." hmmm. imgaine what happens when you combine "really crazy math formulas" and "gold bugs." the stock market should be at 20,000 right now. i'm disappointed. "all without almost no growth in the economy whatsover" but without a doubt a recovery as i have so often declaimed to all you newbies here. now obviously i'm a big believer in "yinning" when others are "yanging." you all "do your thing" of course. i am more than a bit flabergasted that using BUT pure paper that where we are is the result. but using paper for these matters has consequences and one of them is that the paper is INDEED worth the paper it is printed on. this by no means means i'm turning bearish on equities here. but if the USA starts to see a generalized price decline then obviously gold has put in its bottom and should be bought. the same goes for treasuries. this is the USA...a country with a history of SPECTACULAR deflations. "the miracle worker" Chairman Bernanke is clearly done. (unfortunately in my view.) we shall see the result of what has just transpired these past six weeks however. my first impression is that the response will be OVERWHELMINGLY "of a political nature"...but we shall see.http://www.clausewitz.com/readings/Principles/

Fri, 06/28/2013 - 19:43 | 3705032 MagicMoney
MagicMoney's picture

Exactly, fiat currency encourages debt, and discourages savings. And debt is priced according to future expectations, much like expectations of inflation. Interest rates were lower nominally during the gold standard without any easing of sorts. The article is highly correct, inflation is wealth redistribution. Human history shows it as wealth redistribution. Governments who wanted bigger military than they can pay for resort to inflation. Rome did this, Lincoln did this, Zimbabwe did this, etc, etc. It's a scam. Basically irrelevant rebutal. A little inflation benefits certain groups, but does not benefit the economy as a whole. It's a perpetual fraud basically.

 

Really the reason why economist do not like the gold standard is because they want to play witch doctors, and they make error conclusion that lower prices creates depressions. This is not true at all. Depressions are caused by bad investments in large scale, or poorly allocated resources in large scale that has a significant impact on the economy, not falling prices. Governments like inflation, because it allows them to steal indirectly purchasing power from other classes, and sectors of the economy including wealth generators. This is ample in human history.

Fri, 06/28/2013 - 18:02 | 3704846 PiratePawpaw
PiratePawpaw's picture

Inflation guarantees that you as a worker will always need more, and therefor work. which produces the profits off of which "they" live.

lack of inflation would allow you to one day have enough and stop working, star ing them of profits.

Deflation would make "one day" come sooner.

Fri, 06/28/2013 - 19:05 | 3704968 Caggge
Caggge's picture

Deflation leads to freedom.

Fri, 06/28/2013 - 18:04 | 3704849 johny2
johny2's picture

deflation means end.

Fri, 06/28/2013 - 19:45 | 3705053 johny2
johny2's picture

is it really necessary to write what does deflation means to the present exponential ponzi scheme we have? bank failures, business collapse, mass unemployment followed by blame game to get patriotic spirits up? it means end of the system and for you who think that is going to be fun, go and take holiday in Syria to see what is likely facing you.

Sat, 06/29/2013 - 10:40 | 3705922 Mike7.62
Mike7.62's picture

As opposed to a hyperinflation such as has occurred in so many countries in the past? Syria is more about geo politics and religion than anything else, and the only reason that it continues is because of unlimited quantities of "money" supporting it, and because of its alliance with Iran and their perceived threat to our "ally" Israel.

Fri, 06/28/2013 - 18:07 | 3704856 walküre
walküre's picture

Deflation with ficticious trillions from thin air floating on balance sheets?

If our population would double every 10 years - maybe.

In this case a big fat NO to that one. Deflation ain't possible unless major debt restructuring happens and haircuts get taken.

One man's debt is another man's wealth.

Sat, 06/29/2013 - 04:28 | 3705697 Village-idiot
Village-idiot's picture

Wanna bet? Check out the money velocity. It's now at lowest level ever recorded (since the late 1950s).

This is because of the baby-boomers retiring and reducing their spending. This started around 1993 and is now accelerating as the boomers actually retire. It probably won't bottom for at least another 15 years.

Sat, 06/29/2013 - 07:06 | 3705747 NidStyles
NidStyles's picture

Deflation is the a shrinking of the money supply, not lack of velocity.

Fri, 06/28/2013 - 18:09 | 3704860 fonzannoon
fonzannoon's picture

This is a good example of when the extasy of QE is overcome with deflationary deleveraging forces of gravity.

http://www.thesun.co.uk/sol/homepage/news/4988091/couple-died-having-sex-against-window-which-broke.html

 

Fri, 06/28/2013 - 18:13 | 3704864 Unknown Poster
Unknown Poster's picture

It,s Krugmans' broken window theory in action.

Fri, 06/28/2013 - 19:01 | 3704960 auric1234
auric1234's picture

The broken window is just peanuts. Two people died! This means society will have to spend the resources to raise two more of them all the way to high school. Just think of the multiplier of THAT.

Krugman must have had quite a time when he read this. It won't be long until he finds some way to justify murder of civilians in order to boost the economy.

 

Fri, 06/28/2013 - 18:26 | 3704895 Unknown Poster
Unknown Poster's picture

Being nostalgic about Bretton Woods, meh. Preferable to pure fiat, but inflationary none the less. In a few months we might be yellen for the good old days of Bernanke.

Fri, 06/28/2013 - 18:27 | 3704897 are we there yet
are we there yet's picture

It is hard to back out of a minefield you sleepwalked into.

Fri, 06/28/2013 - 18:27 | 3704899 THE DORK OF CORK
THE DORK OF CORK's picture

Deflation is a method to hollow out a country .........outsource production elsewhwere.......it leads to longer more fragile supply chains.

 

Ireland lost most of its rational internal industry in the 80s......

We had a mini depression back then.......the biggest in Europe at the time.

 

Europe went through a deflation series of events in the 80s.

Its supply chain is now absurd .......and is breaking down.

 

Pre 1970 /80 internal goods were cheap relative to cash flow and external goods expensive.

Post 1980 internal goods became expensive relative to cash flow and external goods cheap.

Now both external and internal goods are expensive...........

Now that the external world (oil supply) is breaking down it has no internal capacity to fall back on............que breakdown crisis.

 

Deflation is in fact the banking system wishing to scale up...........but it cannot without major carnage and perhaps the return of the dark ages.

 

 

Fri, 06/28/2013 - 18:28 | 3704900 akak
akak's picture

I see no reason to fear that which does not exist.

Yes, deflation has been seen, in a few certain rare circumstances, in the past, but ONLY under hard-money (i.e., gold and/or silver-backed monetary) regimes.  It has NEVER been experienced under a purely fiat currency regime such as the entire world "enjoys" today, nor does common sense lead one to expect it to ever occur in such a fraudulent, unsustainable and government-dominated monetary environment.

We have nothing to fear but currency debasement itself --- NOT some putative and never-before-seen fiat currency appreciation.

Fri, 06/28/2013 - 18:34 | 3704907 Bam_Man
Bam_Man's picture

What's so scary about deflation?

In a financial system that is levered about 50-to-1 (or more counting "shadow" assets) do you really need me to answer that question for you?

Fri, 06/28/2013 - 18:48 | 3704941 blindman
blindman's picture

anything that puts the truth to a well established
systemic lie is problematic, no? yes!
.
Nick Lowe - (What's So Funny 'Bout) Peace, Love and Understanding (Joy
http://www.youtube.com/watch?v=zUXxjMlY5bE

Fri, 06/28/2013 - 18:59 | 3704957 Buckaroo Banzai
Buckaroo Banzai's picture

That song made Nick Lowe a rich man. It was covered on the soundtrack of "The Bodyguard" which sold something like 15 million units.

Fri, 06/28/2013 - 19:13 | 3704988 blindman
blindman's picture

it also made him a spiritual genius for the 21st
nuclear century.

Fri, 06/28/2013 - 18:51 | 3704945 THE DORK OF CORK
THE DORK OF CORK's picture

What happened to the US of Fucking A when Big Paul overturned the usury laws and jacked up rates creating a deflation........US industry moved elsewhere.

 

Energy is not destroyed .......it gets transformed.

 

The further production is from the consumer the less net stuff can be consumed.

 

The action was just about banks scaling up and extracting a bigger surplus from a smaller pie.

 

Sorry about that folks....but them there are the facts.

Fri, 06/28/2013 - 19:43 | 3705041 Bam_Man
Bam_Man's picture

There was no deflation in the 1980's. Core CPI (and more importantly WAGES) never went negative for more than a month or two. There was disinflation. There is a BIG difference.

Fri, 06/28/2013 - 19:56 | 3705085 THE DORK OF CORK
THE DORK OF CORK's picture

FUCK CPI.....BESIDES ITS A NATIONAL MEASURE FOR A GLOBAL ECONOMY THEN UNDER CONSTRUCTION.....i.e a flawed metric.

INDUSTRY WENT  ABROAD (or to the southern states) FOR MONETARY AND NOT PHYSICAL ECONOMY REASONS.

 

DETROIT DEFLATED SO THAT BANKERS COULD MAKE ARBITRAGE RETURNS.............net wealth was destoyed because from a physical economy perspective its best to have heavy industry near the great lakes.

industry simply moved so that credit could replace wages.........pure greedy badness

Sat, 06/29/2013 - 10:56 | 3705942 Mike7.62
Mike7.62's picture

I suppose that taxation and regulation had nothing to do with it, nor did unsustainable wage structures, or the increasing costs of energy? All of those were essentally blowback from the 1971 default when the US dollar became a floating pure fiat currency, as opposed to something that still retained some semblance of value. There was never any deflation in the 80's, just increases in debt and credit and hence money supply, which is by definition inflation.

Fri, 06/28/2013 - 18:56 | 3704950 involuntarilybirthed
involuntarilybirthed's picture

or is it 20% instead of 25% rate of return on the pencil???

Sat, 06/29/2013 - 01:54 | 3705636 IllusionOfChoice
IllusionOfChoice's picture

Make for $.80, sell for $1 is a $.20 gain on $.80 invested, hence the 25% return.

Fri, 06/28/2013 - 18:59 | 3704956 blindman
blindman's picture

Wilco, Nick Lowe & Mavis Staples rehearse "The Weight"
http://www.youtube.com/watch?v=2WmlUXsjSv8
.
"cool." mavis staples

Fri, 06/28/2013 - 19:12 | 3704981 scrappy
scrappy's picture

From my esteemed economic writer at Liberty Revival...

Deflation is Theft

https://libertyrevival.wordpress.com/2012/12/01/deflation-is-theft-simpl...

Fri, 06/28/2013 - 20:58 | 3705006 blindman
blindman's picture

.
no. sovereignty in the form of collective government is
law and a claim to omniscience and omnipotence when enforced
upon the individual. deflation is a relative conceptual
construct, like inflation, the theft occurs upon enforcement
if at all.
of course the goal is voluntary compliance and "order",
(self defacing and enforcing).
here the "value" of marketing and advertisement, culture
and all that, you can see here how it works and how the
lemmings so desire to jump.

Fri, 06/28/2013 - 19:15 | 3704994 Wanton1
Wanton1's picture

Deflation in terms of pencils in one thing.

Deflation in terms of gold quite another.

Fri, 06/28/2013 - 19:26 | 3705022 SilverFish
SilverFish's picture

No matter which side of the argument you are on, the truth is, people will buy what they need and want, if not now, later on. An economy that tries to sustain itself in opposition to this simple fact is setting itself up for failure by eating itself alive.

 

In other words, if your economy relies on having to continue to consume at an ever increasing level, it was always based on bullshit to begin with.

Fri, 06/28/2013 - 19:35 | 3705031 GreatUncle
GreatUncle's picture

What is not mentioned in the article is that deflation does not reduce the existing level of debt.

If prices collapse you still have the same amount of debt to pay and how would you do that on smaller incomes and revenues? You don't! If there is any talk of tapering then value of the current QE will still remain to prevent the deflation "you were conned" it just gets moved back under the control of the banks and leverage on the loans. The 85 billion monthly will still be injected into the system though through loans and leverage and not direct central banker printing so you will not see it.

About where the UK is right now trying "not" to use QE and generate the save level of value in the leverage instead.

http://www.telegraph.co.uk/finance/economics/10143049/BoE-softens-rules-for-banks-to-give-economy-70bn-boost.html

Net money creation change = ? It's the same. For Bernake, to taper (exit QE, reckon the only one too) and use this mechanism it will rely on people to borrow this money. Will they? When everybody is under the cosh financially? Doubt it because in effect since 2008 they fleeced so many that far fewer will sign up to the loans than they would like.

In 2008 when QE became visible you just got a glimpse of the level of money being created to maintain the economy before it silently vanishes from view once more.

Sat, 06/29/2013 - 04:18 | 3705696 Village-idiot
Village-idiot's picture

Deflation indirectly reduces the level of debt because much is defaulted on, written off.

Sat, 06/29/2013 - 09:51 | 3705872 Winston Smith 2009
Winston Smith 2009's picture

Which in a money as debt system is what should be allowed to happen to reset the exponential debt curve as needed.  Trouble is, central banks have now been suppressing this for decades and we've gotten to the point where allowing that will be systemically destructive.  But it will happen no matter what they do.  Their choice is defaults (bankruptcy) or destruction of currencies via inflation.  Bankruptcies can be Darwinian while devaluation of currencies punishes most everyone.

Fri, 06/28/2013 - 19:38 | 3705038 dcb
dcb's picture

God, for seven years I have been writing about deflation, and it aint bad. there (as far as I can tell) looking back on 70 years of research not a single god evidence based study on deflation. I looked for three weeks. It's all voodoo based on false assumptions.

Fri, 06/28/2013 - 19:54 | 3705075 razorthin
razorthin's picture

When you are self-reliant and unlevered, you welcome it.  Among the true economists are underclass savers.

Fri, 06/28/2013 - 21:17 | 3705272 Unknown User
Unknown User's picture

There is no need to close the central banks because they are private corporations. Besides, central banks have no function without the fractional reserve scam, so governments only need to outlaw this distractive practice of counterfeiting money.

 

Fri, 06/28/2013 - 21:18 | 3705285 Z_End
Z_End's picture

Deflation = Theft

Inflation = ???

Fri, 06/28/2013 - 23:27 | 3705508 blindman
blindman's picture

sovereignty = a claim.

Fri, 06/28/2013 - 22:12 | 3705395 sbenard
sbenard's picture

I LOVE deflation because it rewards savers and punishes the indebted!

Sat, 06/29/2013 - 04:15 | 3705695 Village-idiot
Village-idiot's picture

For some reason this article implies that stuffing your cash in your matress is not saving.

If I take cash out of the banking system and have it in a safe place I consider it as savings.

Sat, 06/29/2013 - 06:53 | 3705740 frank H
frank H's picture

It is important to distinguish between savings and hoarding. This was one of Keyne's main problems in the general theory, he kept calling hoarding savings, and savings hoarding. Hoarding is stufing your mattress, keeping the claim on goods and services to yourself. Savings is transfering that claim on goods and services to someone else who will use it, usually to buy capital equipment. The author basically says that the solution is not to allow the hoarding of the  5$. You do that by ending the fractioanl reserve banking system, and therefore the need for a central bank. Without fractional reserve banking you could not "increase your hoarding by $5".

Sat, 06/29/2013 - 07:01 | 3705743 SlipperyPete
SlipperyPete's picture

why is deflation bad?

 

when you are levered upto your eyeballs, certain prices CANNOT go down.

(like oil, MBS, or even the market as a whole)

 

If they do, you are done

 

Deflation for you and me is ok.  For the levered financial system its murder

Sat, 06/29/2013 - 09:53 | 3705875 Winston Smith 2009
Winston Smith 2009's picture

"Deflation for you and me is ok."

It's much more than just OK if you're a saver.

Sat, 06/29/2013 - 10:49 | 3705935 LongBallsShortBrains
LongBallsShortBrains's picture

Up to your eyeballs in debt?

Or living off of income (interest) from money you have loaned?

It depends who you are..... The debtor cant like deflation. The lender can't like inflation.

I'm not in debt. I own farms, ranches and have no money loaned out. I don't care. Ramp it or dump it. Just leave ME alone..

Sat, 06/29/2013 - 12:07 | 3706031 moneybots
moneybots's picture

"The direction of causation is clear: deflation causes depressions. You can find this argument in almost all introductory economics textbooks."

 

This is really funny.  These academics think that the bust causes the bust.

How many cycles can you find in a flat line?  ZERO.  What does EVERY cycle have?  An UP phase and a DOWN phase.  What has to happen before the down phase occurs?  An up phase.  Home prices didn't deflate until they were inflated.

The bigger the boom, the bigger the bust- depression. 

Sat, 06/29/2013 - 17:14 | 3706402 jeditolstoy
jeditolstoy's picture

Deflation, in a free market, is a good thing, and reveals productivity and a healthy currency. But in the context of a centrally planned economy, ie the Fed, is dangerous. Damn the Fed, they've taken a positive thing like deflation and turned it into something to fear.

Fri, 07/05/2013 - 13:25 | 3723956 jeepndesert
jeepndesert's picture

There is so much wrong with this article that I don't know where to begin. I'll just say conflating microeconomics with macroeconomics is a great way to discredit yourself as an economist. Defining money as a commodity rather than define the different types of money is a great way to discredit yourself as a scientist.

Even if the professor was teaching at Auburn, this author would get a big F on the essay question for trying to bs his way through answering an question. This is also what is wrong with praxeology. The author started with a conclusion and tried to b.s. his way into reaching the conclusion. Anyone can write b.s. to try to justify a conclusion. Trying to explain why Rome fell after it went on a gold and silver in 50 bc after 230 successful years of a bronze and silver standard and explaining the numerous busts since that time throughout history would be the work of a scientist.

Inflation does not hurt the poor and wage earners. This is the biggest lie. Inflation makes their debts cheaper and creates more jobs for them and increases their wages. Deflation does hurt the poor because it causes them to go bankrupt and lose their jobs.

If there are unemployed, there is a lack of money to put them to work. If there is one truth, there an infinite number of human wants with plenty to do to keep everyone employed if there isn't a barrier to employment. And stagflation is deflation in the domestic economy in a global market. Prices rise because other nations are filling the demand.

Figure out the basic supply/demand curves of money and figure out the consequences of each. Then, you get a better understanding of what you're talking about and won't receive an F on writing an article where you try to b.s. your way into reaching conclusion that matches the conclusions of propagandists funded by the rockefeller foundation.

Fri, 07/05/2013 - 12:58 | 3724024 jeepndesert
jeepndesert's picture

inflation only hurts people with idle money and even then it is a minimum "tax." i put it in quotes because it could only be construed as a tax if the government actually originated the supply of the legal tender (washington to fund the american revolution and lincoln to fund the american civil war) and didn't privatize it so that usurers or commodity owners could profiteer off a natural public utility.

and i will recognize that the federal reserve does originate money supply when it provides for public revenue in excess of bonds sold and taxes colleccted... and thank god they are allowed to do that, especially since our legal tender is used internationally.

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