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Peter Schiff Destroys The "Deflation Is An Ogre" Myth
Submitted by Peter Schiff via Euro Pacific Capital,
Dedicated readers of The Wall Street Journal have recently been offered many dire warnings about a clear and present danger that is stalking the global economy. They are not referring to a possible looming stock or real estate bubble (which you can find more on in my latest newsletter). Nor are they talking about other usual suspects such as global warming, peak oil, the Arab Spring, sovereign defaults, the breakup of the euro, Miley Cyrus, a nuclear Iran, or Obamacare. Instead they are warning about the horror that could result from falling prices, otherwise known as deflation. Get the kids into the basement Mom... they just marked down Cheerios!
In order to justify our current monetary and fiscal policies, in which governments refuse to reign in runaway deficits while central banks furiously expand the money supply, economists must convince us that inflation, which results in rising prices, is vital for economic growth.
Simultaneously they make the case that falling prices are bad. This is a difficult proposition to make because most people have long suspected that inflation is a sign of economic distress and that high prices qualify as a problem not a solution. But the absurdity of the position has not stopped our top economists, and their acolytes in the media, from making the case.
A January 5th article in The Wall Street Journal described the economic situation in Europe by saying "Anxieties are rising in the euro zone that deflation-the phenomenon of persistent falling prices across the economy that blighted the lives of millions in the 1930s-may be starting to take root as it did in Japan in the mid-1990s." Really, blighted the lives of millions? When was the last time you were "blighted" by a store's mark down? If you own a business, are you "blighted" when your suppliers drop their prices? Read more about Europe's economy in my latest newsletter.
The Journal is advancing a classic "wet sidewalks cause rain" argument, confusing and inverting cause and effect. It suggests that falling prices caused the Great Depression and in turn the widespread consumer suffering that went along with it. But this puts the cart way in front of the horse. The Great Depression was triggered by the bursting of a speculative bubble (resulted from too much easy money in the latter half of the 1920s). The resulting economic contraction, prolonged unnecessarily by the anti-market policies of Hoover and Roosevelt, was part of a necessary re-balancing. A bad economy encourages people to reduce current consumption and save for the future. The resulting drop in demand brings down prices.
But lower prices function as a counterweight to a contracting economy by cushioning the blow of the downturn. I would argue that those who lived through the Great Depression were grateful that they were able to buy more with what little money they had. Imagine how much worse it would have been if they had to contend with rising consumer prices as well. Consumers always want to buy, but sometimes they forego or defer purchases because they can't afford a desired good or service. Higher prices will only compound the problem. It may surprise many Nobel Prize-winning economists, but discounts often motivate consumers to buy - -try the experiment yourself the next time you walk past the sale rack.
Economists will argue that expectations for future prices are a much bigger motivation than current prices themselves. But those economists concerned with deflation expect there to be, at most, a one or two percent decrease in prices. Can consumers be expected not to buy something today because they expect it to be one percent cheaper in a year? Bear in mind that something that a consumer can buy and use today is more valuable to the purchaser than the same item that is not bought until next year. The costs of going without a desired purchase are overlooked by those warning about the danger of deflation
In another article two days later, the Journal hit readers with the same message: "Annual euro-zone inflation weakened further below the European Central Bank's target in December, rekindling fears that too little inflation or outright consumer-price declines may threaten the currency area's fragile economy." In this case, the paper adds "too little inflation" to the list of woes that needs to be avoided. Apparently, if prices don't rise briskly enough, the wheels of an economy stop turning
Neither article mentions some very important historical context. For the first 120 years of the existence of the United States (before the establishment of the Federal Reserve), general prices trended downward. According to the Department of Commerce's Statistical Abstract of the United States, the "General Price Index" declined by 19% from 1801 to 1900. This stands in contrast to the 2,280% increase of the CPI between 1913 and 2013
While the 19th century had plenty of well-documented ups and downs, people tend to forget that the country experienced tremendous economic growth during that time. Living standards for the average American at the end of the century were leaps and bounds higher than they were at the beginning. The 19th Century turned a formerly inconsequential agricultural nation into the richest, most productive, and economically dynamic nation on Earth. Immigrants could not come here fast enough. But all this happened against a backdrop of consistently falling prices.
Thomas Edison once said that his goal was to make electricity so cheap that only the rich would burn candles. He was fortunate to have no Nobel economists on his marketing team.They certainly would have advised him to raise prices to increase sales. But Edison's strategy of driving sales volume through lower prices is clearly visible today in industries all over the world. By lowering prices, companies not only grow their customer base, but they tend to increase profits as well. Most visibly, consumer electronics has seen chronic deflation for years without crimping demand or hurting profits. According to the Wall Street Journal, this should be impossible.
The truth is the media is merely helping the government to spread propaganda. It is highly indebted governments that need inflation, not consumers. But before government can lead a self-serving crusade to create inflation, they must first convince the public that higher prices is a goal worth pursuing. Since inflation also helps sustain asset bubbles and prop up banks, in this instance The Wall Street Journal and the Government seem to be perfectly aligned.
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I'd like to see some deflation, I just paid nineteen dollars and change for a gallon of Preston anti freeze at the super market. wtf
Full strength or premixed 50 / 50?
"and his voice is annoying. "
Deviated septum. He should see a surgeon about that. The shit's real cheap in Thailand.
Harry Dent is already wrong. Obama and the rest will mandate forced inflation through presidential mandated minimum wage increases.
Schiff is correct.
Obama and his gang are saying, "if inflation isn't happening I'm going to force and create inflation."
Welcome to the socialist central planning government.
What is so magical about the $10.10 they propose? If moar is good, wouldn't $20 or $30 be that much better?
I don't think a real deflationary event will be reflected in prices. There could be massive real deflation in velocity of money, movement of goods, primary production, imports, work force participation and everything else that matters but not prices or at least not in a way anyone would notice.
The mechanism would be simple, and in concert with observations and continued QE;
1) hot-money (QE) speculation in resource markets keeps the cost of raw materials high but that same money would not be at play in the retail sector because bankers don't speculate in finsihed goods, so finished goods prices don't change;
2) the high cost of materials translates into continued high cost of finished goods, leads to decreased sales without recourse for any price reductions because margins would become negative. Retail customers do not exist (broke, unemployed) and inventories go up;
3) any company that cannot survive decreased sales will quietly vanish (by any of a dozen mechanisms including market consolidation) and any company that does reduce prices for a while will almost instantly go bankrupt due to high costs of production colliding with vanishing small cash cushions.
It's just a mechanism to explane observations. I've got nothing to back it up. But it seems to follow from first principles.
"Thomas Edison once said that his goal was to make electricity so cheap that only the rich would burn candles. He was fortunate to have no Nobel economists on his marketing team."...
I'm sure Edison stole that quote along with the "Alternating Current" patent(s) that his rival Nikola Tesla developed if he could have.
Just ask the guys at Parc Xerox what they must have thought of Bill Gates and Steve Jobs after they stole all of their "candy" from the kitchen and developed it as their own?
It's so American!
"I don't think a real deflationary event will be reflected in prices"
Which prices? Stocks and real estate are extremely inflated right now. You can expect to see some deflation when they crash and burn.
Deflation is decreasing the supply of money and credit - not prices going up or down.
Stop creating new money and credit from thin air and prices fall because the money and credit left in the market assumes value from that lost.
Capital is saved production - can anybody explain how printing money and fiat edicts save production ?
While I'll admit that there is a difference between capital and money/currency, you are missing the only thing that matters. Energy available for consumption.
Without energy that you can consume nobody does shit.
I hear many people say "but there is plenty of energy" and they are correct in a sense.
The problem arises when one considers the amount of energy required to simple maintain things as they are now...
as far as printing goes, nobody said that masterbation wasn't fun.
good luck.
Do we really have clear pricing of energy. To your point, rising energy prices reduces waste and stymies mal investment.
Energy is subsidized - deflation and de-regulation through bankruptcy is a bad thing ?
From my seat deflation at its core is the real economy as whole rejecting fraud based debt / credit. Pay it off and quit - no new entries for the scheme to work. All those debt notes sitting in bank vaults with no real use. If they let em leave prices spike, if not they become irrelevant.
The banks fear deflation of overpriced assets like stocks, bonds and real estate (the stuff they inflated into a bubble). This is so easy to see coming - those assets deflate, the dollar weakens a lot, and everything that the average Joe needs to buy jumps up at a near hyperinflation level. Why is this so hard to see? Look at Hungary, Venezuela, Argentina, and any other place where the currency got slammed. And for a good example, look at Turkey today!
Deflation destroys Wall Street
Inflation destroys mainstreet.
Where do you live and work ?
The WSJ was instrumental in the genesis of the Fed, c.1913.......
Remember when saving was a virtue? When you were proud (at my age) to get the passbook account they'd stamp every time you made a deposit. And you'd watch it grow and were proud of the fact that you didn't piss it away on crap...
I do, the asians certainly do, but then again I also know the difference between capital and money.
Now's the Time to Fall in Love by Eddie Cantor, released in 1932:
Potatoes are cheaper
Tomatoes are cheaper
Now's the time
To fall in love
Why, the butcher, the baker,
And the candlestick maker
All gave their price
A downward shove
Grab yourself someone
To fry your eggs and bacon
Why, she can live just like a queen
On what you're makin'
'Cause this and that's a lot cheaper
And a flat's a lot cheaper
So, Honey, now's the time
To fall in love
I'd have to agree that deflation isn't good. When people withhold purchasing because everyone thinks things will be cheaper later on, this can turn into a negative feedback cycle, ever spiraling downward. On the other hand runaway inflation sucks too. Either way you're screwed.
Inflation is a given in the way this has to play out, so the economists are using their best Jedi Mind Trick to lull what is left of the middle class into further complacency. The same trick is being used with deflation in reverse, hoping the middle class will continue making purchases of long term debt somewhere near their mark to fantasy prices. That is all.
Bingo. I have to work to fight inflation while my wife (bitch) keeps fighting deflation.
Thomas Edison once said that his goal was to make electricity so cheap that only the rich would burn candles.
***
In the 1950's the Nuclear Energy marketers said that "Future Nuclear Electricity Plants Would generate 25 cents per home per year", making Electricity virtually free.
The reality is that nuclear plants bankrupted most Utility Company's.
**
BITCOIN promoters said that "Bitcoin person to person Transactions will be so cheap that banks will go away"
The reality is that you get a haircut when buying BTC, and you pay a road-tax to transfer, and then you have PAY even more to get back out BTC into USD, and wait months if not years. BTC is MORE expensive than WESTERN-UNION if you look at the total gross cost person2person.
oh you again.. yeah we rip off suckers like you
It sounds like you have been dealing with the Mt. Gox exchange. Coinbase transfers your money to you within a week (excluding holidays). I do agree that the initial costs for buying and selling bitcoins are way too high. Coinbase charges 1%. This sounds low, but last week I sold 10 bitcoins and the fee came to $88.00. Had I been trading 1,000 shares of Google on Ameritrade the fee would have been $9.99. Something is definitely out of line there.
So I learned my lesson. I no longer trade bitcoins. I own a few bitcoins and I am just holding them. Companies like Overstock have obviously worked out arrangements with exchanges for lower fees.
But interestingly, I heard an interview today between Liz Clayman and Vivek Ranadive at Davos. Ranadive owns the NBA team the Sacramento Kings, and the Kings are now accepting bitcoin. Liz Clayman asked Ranadive if he will be converting his bitcoins into dollars immediately as Overstock and others do in order to avoid volatility, and Ranadive said No. He plans to hold the bitcoins.
Food for thought.
Schiff is spot on (as usual).
*
The truth is the media is merely helping the government to spread propaganda.
***
Yes, this is the TRUTH, another TRUTH is that SCHIFF/ZH are also part of that MSM.
DEFLATION is here, as depression. We're in a depression that started in 2007, and it take 12-16 years to pull out.
TPTB don't want the REAL-ESTATE to go to ZERO, for if that happened then the DERIVATIVES would IMPLODE ( 600 trillion USD's ).
So, yes if its not SCHIFF pimping gold, or ZH pimping bitcoin, or wall-st pimping stocks, or main-st pimping real-estate, everybody wants the SHIT to go UP to the MOON.
***
The problem of course is that POST-BUBBLE, you always have a DEPRESSION, and a depression causes DEFLATION, and the law of DEFLATION say's.
1.) That which is needed goes up, OIL, FOOD
2.) That which is NOT needed goes down, bitcoin, gold, auto, real-estate and stock
**
99% of the non-bots here on ZH seem to be part of the circle-jerk to sell another human bicoin,gold,auto,stock, or real-estate, but nobody needs any of that shit, thus you MUST have tons of marketing to create the need.
Schiff is a MARKETING WHORE. What's he selling? "Euro Pacific Capital"
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Not schiff, not ZH, not OREO-OBAMA not anything will fix the post bubble-depression only TIME, and of couse QE only extends the depression. So now we have entered a JAPAN like permanent PUTRID-DEPRESSION, and slow deflation ( drop in price of non-essentials ).
SOLUTION? Run like hell from the USA, go live in an agrarian culture and live off the land free of fuel, ... learn to live without TV and auto's, and learn to love people.
The biggest problem with the USA and BIT-TARD's and ZH mirror image thereof is the love of 'money'.
you're mostly correct sir, inthe 1st D money disappeared, and no one had the thought to simply print more. gee we are so much smarter now, of course printing all the money kept the speculators in business. the result is really the same corporate america took private property, and they're doing it again. america missed the chance at a revolution, and now second time around its something of a bad joke. but gee you've got an iphone now, and then you were lucky if you had a telephone (on a party line, your neighbors could snoop!) and the right thinking people are throwing their iphones away andmoving off the grid. so you see bernanke is no worse or better than the first fed chief (forget his name) the result is the same actually we are back were we started.
Yes, get rid of the smart-phone ( nsa tracking device ), just one thing else.
If you want to live, get the fuck out of the USA, coming civil war, there will be no place safe to eat, fuck, or sleep.
Yet more rediculous tripe from satoshi101. Put the crack pipe down and step away.
SCHIFF IDIOT of the highest ORDER
" Get the kids into the basement Mom... they just marked down Cheerios!" - schiff
See this is the POINT, SCHIFF don't fucking understand DEFLATION.
Here we go again, so that maybe just maybe some bit-tards here can understand that SCHIFF is FULL of SHIT.
***
In DEFLATION stuff that you don't need collapse in price.
Bitcoin, gold, real-estate, stocks, auto's, toys ... stuff you can't eat, fuck, or drink,
BUT, stuff that you need to live FOOD, FUEL, HEAT, WATER, BOOZE, goes up,
***
The only time that FOOD went down in the depression was as now when the GUBMINT paid farmers to keep their shit off the market, and then farmer that was greedy SOLD and that led to price collapse, sure that could happen but that is separate from DEFLATION, which we have no.
***
The problem of course is the mercantile economy, the bankers, and wall-street, and the solution is always the same 'flood the banks' with money to prevent DEFLATION, but today everybody on earth is doing this, so it no longer works, Now GOOD money will HIDE, as we see now GOLD is fleeing to ASIA, where people SAVE.
***
This is all BORING shit, the problem is that SCHIFF too loves INFLATION and the printing of FIAT because it makes GOLD go up, no way in hell we'll ever have a benevolent government to run the economy, nor honest business, always been this way, since 1776 there have been dozens of depressions and crisis, and defaults, ... nothing new, and the USA hobbles along.
***
Talk about INFLATION, its the same stuff that you don't need goes down, but stuff that you need goes up ASTRONOMIC.
At the end of the DAY the PONZI scam by the SCHIFF's of the world is always the SAME,
Stuff you need goes up, and stuff you don't need always goes down. The problem for SCHIFF and HO's is keeping the bubble blown up.
Like Roger's always said "BE A FARMER", ... I think he's right, cuz FOOD will always go up, deflation or inflation food never goes away.
You are a very strange person satoshi101. Sometimes your comments are well thought out and sensible, and then you write absolute nonsense such as the above. Heavy drug/alchohol use maybe?
Ogre is... heheh - yeah... and ehm... blight me up, http://jasonbyrne.files.wordpress.com/2011/02/montgomery_scott_enjoying_...
I wish Tylers would stop posting drivel from these "deflation" idiots. We haven't had deflation in decades and it won't happen in the foreseeable future with 80 billion QE every month. The economy isn't expanding 80 billion a month to soak up that 80 billion expansion of the money supply. More like shrinking 80 billion a month, making QE doubly inflationary. Only reason prices are moderating anywhere is demand collapse from stagnant (or falling) wages, certainly not shrinking money supply (true deflation).
I don't think Schiff is predicting deflation. Rather, he is responding to Wall Street's fear mongering about deflation, and continually citing deflation fears as the reason for expansionist policies.
l-conq - Exactly. Schiff is trying to educate people on how they are being shafted
Hey Drifter......can you read?
BITCOIN FUCK
BUY $930
SELL $600 [ max $30 ]
Just for fun, I went to BITCOIN BUY/SELL and figured on average where I live,...
Here's what I found nobody would BUY more of my BITCOIN than $30 USD, which tells me the liquidity of the SELL market is huge.
If I wanted to BUY BTC right now its over $900 USD, but nobody will BUY my BTC for more than $600.
All this is kind of funny while on the SELL side the offer is $600 USD, nobody will buy more than $30 my my BTC. So I would have to find 20 guys to buy me 30, but every transaction would take a haircut of my USD.
So I ask again, how in the FUCKING hell on earth does one get out of BTC?
You wouldn't dare send your 'wallet' to an unknown and TRUST that he wire you real money?
Last time I looked at MT-GOX it had $1k/day max writhdrawl, and $5k/month max,... so if you had say $100k in BTC it would be impossible to get your money out.
All one in BTC can hope is some sucker sells you his shit for BTC.
It's clear that NEW money isn't coming in. It's clear that everybody wants to sell BTC, but nobody wants to BUY, .e.g. nobody wants to pay cash for BTC,
Thus all BTC players are CASH POOR, and BTC rich.
liquidity failure... but what does one expect of morons?
https://localbitcoins.com/ for local transactions. One of the exchanges for online (bid/ask spread is less than 0.5%).
Peter is right again, of course, but there is something in the article that is very disturbing to read, for it screams for correction:
"Thomas Edison once said that his goal was to make electricity so cheap that only the rich would burn candles. He was fortunate to have no Nobel economists on his marketing team"
To be fair, I do now know what Edison has said or did not say, what I know is what he DID. Well there were many things but if I have to put one in front of everything else is his fight with Tesla or also know "The War of the Currents"
Edison's DC system was so ineffective that he had to build a power station EVERY MILE in oder to bring power to his clients. Imagine how "cheap" his electrical power would have been for the masses, they would have been bankrupted just by using it. So do not look what a person says look what he does ( sound familiar, worlds are not far different after all, even after 120 years ... )
Tesla's AC system was cheap, it was transferring electrical power 500-700 miles at the same time when Edison can barely move it 1 mile. (Assuming) Everyone can make the calculation for efficiency. So what did Edison do. Well using his financial resources he fought Tesla's system (promoted by Westinghouse) for about 10 years. So much for a person who wanted "to make electricity so cheap" to the masses. Please, Peter do not make me laugh on this one ...
As, a point aside, for "make electricity cheap", to put in in prospective. Electricity ( "whatever it is" ) is cheap it is actually FREEEEEEEEEEEE. The ways our current industrial system transfers it in electrical vibrational power is EXPENSIVE. There was a time and a person named Tesla, who had the vision to see what the future will become, after developing his AC system and industrializing it, he went forward to propose a new ways of transfer electrical vibrations without usage of wires, but of course ( with so much money invested in the electrical cable business, as the entire world was to be cable-ized,) he had no chance.
So, Peter I like your other examples, and this comment ( if read ) is only to improve your ( and everyones ) else's knowledge about something so basic about the history of the first TRUELY economical electrical distribution system, without which, our current industrial civilization would not exist as we know it.
I'm still not too sure about the whole "wireless transmission of electricity" thing. If people worry about the radiation coming from their cell phones and their microwaves, how on earth could Tesla's wireless transmission idea be safe? And without worrying about the radiation - health effects, what about unintended consequences such as arcing? I can't imagine transmitting enough wireless energy to run a toaster without some serious side effects. Still, if you know of a safe way then share it around, or at least build one for yourself and your friends. I don't care how smart Tesla was, surely someone could have got something similar up and running by now. Can't they just read his patents?
Bitcoin users unaffacted.
Rather than get into the inflation vs deflation debate I will just recommend that interested readers do some diligent research on what these terms ACTUALLY mean. It is quite clear from the comments here that most of those commenting really have NO FUCKING CLUE as to what the actual real world meanings of these terms are .
There is no statistics that I know that says inflation is the best policy. French tried inflation centuries ago, same illusionary wealth effect. Many other countries tried inflation & didn't pan out to economic prosperity. Wall Street Journal by what I call pseudo-economist. Peter is right, falling prices don't cause a depression, they are simply a reaction to the falling real income levels of the economy that has suffered a mis-allocation of resources that didn't end up viable, thus resources have to be redeployed in a different manner that is viable & productive. The financial crisis of 2007-2008 wasn't caused by falling prices, it was caused by a credit bubble that turned into a credit crunch when the Federal Reserve started to remove the monetary punchbowl from the speculative mania that it created.
The 1800s saws deflationary economic growth, yes it had it's economic down turns, but prices still went down nevertheless & grew more than it contracted during those episodes which had nothing to do with falling prices. If people know better about what really causes depressions, or economic downturns, and keep the same argument, they are merely arguing for the behalf of government spending, because inflation is a by product of money printing to pay for government that can't be otherwise paid for with the exception of taxing directly the populations they rule over. Inflation as a economic policy is largely based on the belief of the individual as gospel than based on any hard facts. There is many cases in history where inflation has not coincided with economic prosperity all the way back to the ages of antiquity. It's myth perpetuated by pseudo-economist who work for the interests of government & ideology.
When people make such claims that deflation, more precisely that falling prices is a risk to employment, they don't know what they are talking about. Their elementary fallacy that also points to their ignorance of what prices are & what their purpose is. Certainly their purpose isn't to go high as to provide a postulated economic prosperity. It's a sad thing that there is "economist" who actually believe this, and funny at the same time, because one can realize why field of economics is laughing stock in the world of sciences. It's because of faulty assumptions that don't correspond with the basic laws of cause & effect.
Magic "they are simply a reaction to the falling real income levels of the economy that has suffered a mis-allocation of resources that didn't end up viable," - in the short term, 2-3 years years. over 10 years falling prices are due to human development ie providing products and services for less money and of better quality.
"& grew more than it contracted during those episodes which had nothing to do with falling prices." - if you are connecting "gdp-growth" with inflation you are mistaken. increasing money supply has nothing to do with increased wealth in the long term. the fruits of the increased money supply in the short term should be lower prices and an easier and better quality of life in the long term.
"inflation is a by product of money printing to pay for government that can't be otherwise paid for with the exception of taxing directly the populations they rule over. " - this is not correct. all government debt (except when you are in the banana republic stage where central banks destroy the currency) is paid for by the taxpayers. the government has no other revenue. inflation is caused by increased money supply yes.