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Deflating the Deflation Myth

Tyler Durden's picture




 

Submitted by Chris Casey via the Ludwig von Mises Institute,

The fear of deflation serves as the theoretical justification of every inflationary action taken by the Federal Reserve and central banks around the world. It is why the Federal Reserve targets a price inflation rate of 2 percent, and not 0 percent. It is in large part why the Federal Reserve has more than quadrupled the money supply since August 2008. And it is, remarkably, a great myth, for there is nothing inherently dangerous or damaging about deflation.

Deflation is feared not only by the followers of Milton Friedman (those from the so-called Monetarist or Chicago School of economics), but by Keynesian economists as well. Leading Keynesian Paul Krugman, in a 2010 New York Times article titled “Why Deflation is Bad,” cited deflation as the cause of falling aggregate demand since “when people expect falling prices, they become less willing to spend, and in particular less willing to borrow.”

Presumably, he believes this delay in spending lasts in perpetuity. But we know from experience that, even in the face of falling prices, individuals and businesses will still, at some point, purchase the good or service in question. Consumption cannot be forever forgone. We see this every day in the computer/electronics industry: the value of using an iPhone over the next six months is worth more than the savings in delaying its purchase.

Another common argument in the defamation of deflation concerns profits. With falling prices, how can businesses earn any as profit margins are squeezed? But profit margins by definition result from both sale prices and costs. If costs — which are after all prices themselves — also fall by the same magnitude (and there is no reason why they would not), profits are unaffected.

If deflation impacts neither aggregate demand nor profits, how does it cause recessions? It does not. Examining any recessionary period subsequent to the Great Depression would lead one to this conclusion.

In addition, the American economic experience during the nineteenth century is even more telling.

Twice, while experiencing sustained and significant economic growth, the American economy “endured” deflationary periods of 50 percent. But what of the “statistical proof” offered in Friedman’s A Monetary History of the United States? A more robust study has been completed by several Federal Reserve economists who found:

    ... the only episode in which we find evidence of a link between deflation and depression is the Great Depression (1929-34). We find virtually no evidence of such a link in any other period. ... What is striking is that nearly 90% of the episodes with deflation did not have depression. In a broad historical context, beyond the Great Depression, the notion that deflation and depression are linked virtually disappears.

If deflation does not cause recessions (or depressions as they were known prior to World War II), what does? And why was it so prominently featured during the Great Depression? According to economists of the Austrian School of economics, recessions share the same source: artificial inflation of the money supply. The ensuing “malinvestment” caused by synthetically lowered interest rates is revealed when interest rates resort to their natural level as determined by the supply and demand of savings.

In the resultant recession, if fractional-reserve-based loans are defaulted or repaid, if a central bank contracts the money supply, and/or if the demand for money rises significantly, deflation may occur. More frequently, however, as central bankers frantically expand the money supply at the onset of a recession, inflation (or at least no deflation) will be experienced. So deflation, a sometime symptom, has been unjustly maligned as a recessionary source.

But today’s central bankers do not share this belief. In 2002, Ben Bernanke opined that “sustained deflation can be highly destructive to a modern economy and should be strongly resisted.” The current Federal Reserve chair, Janet Yellen, shares his concerns:

    ... it is conceivable that this very low inflation could turn into outright deflation. Worse still, if deflation were to intensify, we could find ourselves in a devastating spiral in which prices fall at an ever-faster pace and economic activity sinks more and more.

Now unmoored from any gold standard constraints and burdened with massive government debt, in any possible scenario pitting the spectre of deflation against the ravages of inflation, the biases and phobias of central bankers will choose the latter. This choice is as inevitable as it will be devastating.

 

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Fri, 04/04/2014 - 18:15 | 4626627 Seasmoke
Seasmoke's picture

Why are lower prices bad ????? I've been asking why since 1989 !!!!!!

 

I've come to understand the question is WHO are they bad for ??

 

Anyone who likes Netanyahu !!! 

Fri, 04/04/2014 - 18:22 | 4626640 McMolotov
McMolotov's picture

Last time I went to the store, I bought two bottles of whiskey instead of one because it was on sale. That was bad for my liver.

Fri, 04/04/2014 - 18:47 | 4626711 Beam Me Up Scotty
Beam Me Up Scotty's picture

Deflation is only bad for idiots who are in massive debt.

Fri, 04/04/2014 - 18:53 | 4626730 NOTaREALmerican
NOTaREALmerican's picture

Meaning, most people.

Fri, 04/04/2014 - 18:59 | 4626747 Beam Me Up Scotty
Beam Me Up Scotty's picture

Yup. And of corse, Uncle Sam.

And a lot of those " most people" are in massive debt due to piss poor decision making.

Fri, 04/04/2014 - 19:07 | 4626769 negative rates
negative rates's picture

The theory seems right, but the numbers just don't add up.

Fri, 04/04/2014 - 19:52 | 4626861 Kitler
Kitler's picture

Deflation is to fractional reserve banking what Muppet withdrawals are to Ponzi schemes.

Fri, 04/04/2014 - 20:17 | 4626915 Againstthelie
Againstthelie's picture

Wow.

Sat, 04/05/2014 - 02:38 | 4627569 All Risk No Reward
All Risk No Reward's picture

The ignorance is astounding...  no wonder the Rockefeller Foundation funded Mises...

1. People are in debt because they have to be in debt to have money.  Money **is** debt. Ruminate on this fact as long as it takes to understand.

2. Central bankers work for the debt pushers NOT the government.  BTW, so do the politicians.  The polititions are gutting this country because it is a Bankster agenda, not because they are stupid.  This process is accelerated because the people believe they are stupid and not evil.  Now that's stupid.

3. The Fed's decisions benefit the Banksters - you know the guys who OWN/CONTROL TRILLIONS IN CASH AND TRILLIONS IN DEBT PAPER.  Yeah, they are going to inflate their criminal, ill-gotten wealth away while bailing out the morons who allow them to inflect Debt Money Tyranny them.  Was Mises this dumb?

4. The government isn't paying down debt with cheaper dollars...  do some math...  the government is going into more debt...  the government's debt doubles, but monetary (as opposed to price) inflation is only a couple percent.  The math doesn't work - and the government doesn't control money, anyway.  Private sociopathic Banksters do - and no the government won't take it back because they are Bankster operatives.  If the government was actually sovereign, THEY'D RUN THE MONEY.  They aren't, so they don't.  Capiche?

5. The Bnaksters leverage up and inflate to make trillions for themselves.  When that exponential function breaks, they offload trillions in debt on the stupid people (society, not them - only stupid people think otherwise) and loot trillions in money and debt obligations they conjure out of nothing...  they get the money and the dumb*sses get the debt.  When that game ends, they will, very predictable, call in the debts, bust the economy (they are TBTF&Jail and the stupid people put up with it), spend their trillions in loot BUY UP ALMOST ALL THE REAL CHIT and then, AND ONLY THEN, will they consider driving money into the ground as they will then own much of the planet.

This is so elementary.

Sat, 04/05/2014 - 03:53 | 4627627 A Nanny Moose
A Nanny Moose's picture

Nice!

It's a shame that people don't stand in lines long during Satan Clause Season, to buy a Flat panel TV, iThingy, DSLR, or computer, or other electronic device, because they will be able to buy it for 20% off in January, or for half price the following Satan Clause Season.

This is not the underconsumption you are looking for. Keep moving along.

Fri, 04/04/2014 - 19:25 | 4626806 Gaius Frakkin' ...
Gaius Frakkin' Baltar's picture

Most are in debt because prices never go down; they are forced to buy inflated prices because they can't wait forever.

The whole point is to be a debt slave to the bankers. Why is this so hard to understand?

Fri, 04/04/2014 - 19:29 | 4626823 daveO
daveO's picture

Damn right! The ultimate goal is the same as Soviet Russia. It's just incremental slavery, instead of wholesale takeover. 

Fri, 04/04/2014 - 20:05 | 4626884 Beam Me Up Scotty
Beam Me Up Scotty's picture

Oh Baloney.  Lots of people make themselves debt slaves, not the bankers.  Have a kid at age 17?  DEBT SLAVE.  Buy too much house?? DEBT SLAVE.  Have 4 kids instead of 2?  DEBT SLAVE!!  Buy the brand new shiny red truck instead of one with 100k miles on it?  DEBT SLAVE!!  STill working at McDonalds at age 38?  DEBT SLAVE!!  Using your $5K credit limit on your credit card to buy ice cream?? DEBT SLAVE!! Who can afford to pay 18% (or more) interest for ice cream?

DO I NEED TO GO ON?  Most idiots are DEBT SLAVES because they make themselves DEBT SLAVES!!

Just another example of lazy assed 'Mericans blaming someone for their own shitty decisions.  I'm tired of it.

Fri, 04/04/2014 - 20:46 | 4626937 Beam Me Up Scotty
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Love down arrows and no rebuttals.  You idiots know I am right.  Lots of people waste lots of dollars on lots of shit.  And if they didn't they wouldn't be in debt, or wouldn't be in debt as bad as they currently are.  The truth hurts sometimes.

To those of you who have made piss poor decisions......piss off.  I am not your parent.  I'm not helping you when TSHTF.  You are the future zombies of america.

Fri, 04/04/2014 - 21:18 | 4627063 Gaius Frakkin' ...
Gaius Frakkin' Baltar's picture

The system is devised SO that you are a debt slave from day one, regardless of whether you're an idiot or not. How many people are able to pay, in full, for their house, car, education, and healthcare? Please tell us how you save(d) for these things with rampant inflation.

In this fucked up system, one could argue that "idiots" actually do better, since they clamor for assets, while "smart" people try to save in a currency not meant for saving.

Fri, 04/04/2014 - 21:24 | 4627092 Beam Me Up Scotty
Beam Me Up Scotty's picture

Right.  I see people who make less money than I do who have nicer homes, nicer cars, all kinds of toys.  Don't tell me everyone is a debt slave because of the system.  Some people might be, but the vast majority of Americans are debt slaves because they ALLOWED themselves to be.  I could have bought a BMW 20 years ago, yet I never have.  Why?  Because I didn't want to OWE THE BANK.  Instead I bought an old 2005 Bonneville with 100,000 miles on it for $9K.  That was 2 years ago, and I still have that car, now with 170,000 miles on it.  Please quit making excuses.  You are part of the problem.

When everyone is using their credit card to eat food, then I will agree with you.  In the meantime, there are millions of Americans who waste their hard earned dollars on USELESS GARBAGE.

Fri, 04/04/2014 - 21:28 | 4627107 Gaius Frakkin' ...
Gaius Frakkin' Baltar's picture

I doubt many people have $9k sitting around. It usually takes a loan just to get a car capable of traveling from point A to point B.

Fri, 04/04/2014 - 21:39 | 4627133 bigkahuna
bigkahuna's picture

yer both right to an extent - Scotty has it with the fools who go out and buy the German car and house they dont need regardless what the monetary system is doing. Unfortunately those who manage debt properly (ie buy the right price house and ride the bus if they cant buy a good old Honda outright) are going to be harpooned by the fools who have no clue.

Fri, 04/04/2014 - 21:47 | 4627156 Beam Me Up Scotty
Beam Me Up Scotty's picture

Yup. When I was 25 years old I had to take out a loan for a car too.  And I worked my ass off to pay it off.  And now that I am 45, I am smart enough to go buy the $9K car.  And yet now, I see 25 year olds driving much newer nicer cars than I ever drove when I was 25, much less what I drive now as a 45 year old.  Funny how they can't afford $9k for an older car to buy it outright and not be in debt, but they can afford to get a $25K or $30k loan for a BRAND NEW CAR.  Quit enabling these people.

Fri, 04/04/2014 - 21:57 | 4627175 Gaius Frakkin' ...
Gaius Frakkin' Baltar's picture

If you believe the system is more or less fair, and all a person has to do is work hard and save, then why are you here?

Fri, 04/04/2014 - 22:12 | 4627212 Beam Me Up Scotty
Beam Me Up Scotty's picture

I didn't say the system was fair.  Its not.  But there are ways to minimize your exposure TO the system.  Why would you work for $10 an hour if you could get $10 an hour from your fellow taxpayer and go fishing all year long?  .Gov wants to raise my taxes so someone can stay home.  Fuck that.

Fri, 04/04/2014 - 21:51 | 4627163 Gaius Frakkin' ...
Gaius Frakkin' Baltar's picture

There are many people out there who are frugal, but still can't stay out of debt because the system is rigged to keep them in debt.

It's like blaming a steer for its own slaughter. Yeah, it should have planned for an escape, but really, fate is stacked against it.

Fri, 04/04/2014 - 22:10 | 4627208 Beam Me Up Scotty
Beam Me Up Scotty's picture

Like I said, people who use credit cards to pay for food, I have sympathy for.  People who use debt to "keep up with the Jones's" I don't.  Simple as that.

Sat, 04/05/2014 - 10:08 | 4627865 franciscopendergrass
franciscopendergrass's picture

That is not true.  Tell me how an illegal immigrant from let say Mexico is able to work for less than minimum wage, have little or no access to credit, is still able to send money home to mrxico.  Please explain that one to me.  The problem is many Americans or those in Western Civilizations are not welling to sacrifice anymore.  The need for unproductive material goods mostly from foreign countries is so great that it is sending the government and it's people to debt.

Sat, 04/05/2014 - 12:01 | 4628029 Tegrat
Tegrat's picture

I have three times that just counting my checking account simply because i dont do debt and im saving up for a cash purchase soon. 

Fri, 04/04/2014 - 21:35 | 4627125 FredFlintstone
FredFlintstone's picture

Right on, brother! Frugality is currently not in style. People just can't take the baby steps, too impatient. People who gorge on debt will eventually choke.

Fri, 04/04/2014 - 23:42 | 4627373 NickVegas
NickVegas's picture

Save up to buy a house with cash, fucking pipe dream idiot. Save up to go pay for college with cash, fucking pipe dream idiot. They control the money supply, they push the bubbles. The FED has a perfect track record of inflating the dollar since it's inception. They helicopter cash in to their friends, derive the first use benefits, and deflate my Mom's retirement savings. Your 2% raise, if you have a job, doesn't cover the shrinking food packaging. It's called debt slavery, and the whole fucking country is basically a debt slave to foreign banking interests. Look around, your argument might of held water before Nixon.

Sat, 04/05/2014 - 02:54 | 4627577 All Risk No Reward
All Risk No Reward's picture

Yes, people make bad decisions and this leads to marginally worse outcomes.

However, DEBT IS MONEY.  This is fraud.  This is what any thinking person focuses on first and foremost.

Debt Money Tyranny
http://www.keepandshare.com/doc/4768883/debtmoneytyranny-6-1-pdf-60k?tr=77

Your approach is the mental equivalent of blaming the rape victim for wearing a short skirt.

Poverty is NOT a Choice
https://www.youtube.com/watch?v=juQc0rLdB-E

Think this through and you'll notice that debt / money is an artifical zero sum game that is enforced on a nescient or ignorant society of gullible chumps.  For every net $1 of money someone has, someone else has to, BY DEFINITION, have $1 of inextinguishable debt.  They can pass the debt to someone else, BUT THE DEBT CAN'T BE EXTINGUISHED UNLESS THE ORIGINAL $1 IS ELIMINATED BY EXTINGUISHING THE DEBT.

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."
Henry Ford

"The one aim of these financiers is world control by the creation of inextinguishable debts."
Henry Ford

How to be a Crook
https://www.youtube.com/watch?v=2oHbwdNcHbc

Do you know why coinage was designated as non debt money?  Because they Debt Money Tyrants know that a certain amount of cash is lost throughout the year so they use coinage as a type of "control rod" to feed money into the system to cover some of the lost or burned up debt receipts the indentured servants consider only to be money.

Federal Reserve Debt Money Notes are, first and foremost, A SOCIETAL ASSET STRIPPING MECHANISM.

They aren't a government bailout mechanism...  governments will be burned down after handing all their resources over the Banksters... electric plants, water plants, roads, national parks...  it will all be handed over to Rockefeller types who conjure debt money from the ether like a Sun Tzu inspired Machiavellian sorcerer.

I'm not a rhabdomancer, this is basic human nature, basic Econ 101 and some 5th grade math.

In 1984 they had to torture Winston Smith to believe 2+2=5.  In 2014, everyone demands to believe it without even being tortured!

Let me repeat, THE DEMONIC BANKSTERS WON'T BAIL OUT DEBTORS WITH INFLATION BECAUSE BAILING OUT DEBTORS WILL COST THEM THEIR WEALTH.

Duh!  Double Duh!

Sat, 04/05/2014 - 09:31 | 4627832 Wahooo
Wahooo's picture

You forgot the most important part: people become debt slaves because there are no consequences for it.

Sun, 04/06/2014 - 01:07 | 4629381 All Risk No Reward
All Risk No Reward's picture

Hang around a bit longer and you will witness THE BIG CONSEQUENCE with your own eyes.  Taxes are for little people, as well as consequences.

The Gang Banksters blew a bubble and siphoned off all the mass murder technology they could ever desire, if their desires could be limited, and now it is time to save the remaining resources for themselves...  and out of hands like yours.

Fri, 04/04/2014 - 19:26 | 4626814 daveO
daveO's picture

Debt Slaves on the Bankster Plantation. They be homeless without Massa's Hospitality.

Fri, 04/04/2014 - 20:18 | 4626920 lotsoffun
lotsoffun's picture

scotty - TBTF is actually in massive debt, owed to the taxpayers, held by the FED.

and i think that debt trumps the fear of the banks for the loans that they make, because the banks

are now much larger borrowers than they are lenders.

the traditional 'banking' syndrome has gone in reverse, the banks haven't been lending to people or private entities since 2009.  they've been borrowing from the taxpayers, via the fed/tsy game and gambling in stocks and derivatives, to the tune of trillions.

they've bought up all the assets possible, stocks, homes, cmbs, art work, land. everything in sight.

if the lenders ever dared asking for the cash back, they can only get the cash by selling those assets.  which wouldn't be possible to pay back the loan, since they themselves artificially pumped up the price.

it's a vicious circle.

we are the losers.  they have to keep inflating.

 

 

 

Fri, 04/04/2014 - 19:12 | 4626785 negative rates
negative rates's picture

Yea, but it wasn't until the mirror spit back at ya before you relized that. 

Fri, 04/04/2014 - 19:14 | 4626791 kurt
kurt's picture

Southern California 

Food for Less

1.5 Litre (big bottle) $10.00 Whiskey, Rum, Gin, Vodka, Tequila!

This is an unsolicited endorsement from an appreciative customer

 

I came from a family of long livers: about 22 inches.

Fri, 04/04/2014 - 18:24 | 4626641 Stackers
Stackers's picture

Lower prices are not bad, but deflation - i.e. a collapse of the money supply - through a collapse of loans or fractional reserved banks is bad, IN THE FRACTIONAL RESERVE FIAT DEBT MONEY SYSTEM WE OPERATE UNDER. There are two types of deflation, falling prices through increases in productivity, and a collapse in the money supply of fractional reserve bank system due to non performing loans and bailins. This article is somewhat disingenuous. The Fed is right to fear deflation under the current system. The fix is changing the system.

Fri, 04/04/2014 - 18:27 | 4626660 Bay of Pigs
Bay of Pigs's picture

We dont have falling prices or a collapse in money supply. WTF are you talking about.

The FED is the problem, and always has been.

Fri, 04/04/2014 - 19:01 | 4626755 Beam Me Up Scotty
Beam Me Up Scotty's picture

We don't have lower prices, we just have smaller package sizes.

Fri, 04/04/2014 - 19:08 | 4626759 Stackers
Stackers's picture

When debt = money and debt goes bad that = collapsing money supply. Fed tries to offset this by printing. I'm not saying it is right, what I'm saying is it's built into the system. The Fed in and of itself is really not the problem. The problem is the debt money fractional reserve banking / credit money system that the Fed operates under

 

You need a currency supply that can expand or your economy can't expand. This is possible to do with a "hard money" system.

Fri, 04/04/2014 - 19:16 | 4626792 negative rates
negative rates's picture

The Feds problem is that they simply can't raise rates, it was a doomed experiment, bound to fail and be taken over by the markets.

Fri, 04/04/2014 - 18:49 | 4626643 socalbeach
socalbeach's picture

Lower prices for assets are bad for banks if those assets collateralize loans on the asset side of their balance sheets.  And lower prices would be bad for the US government since they would collect less tax revenue. For example, lower asset prices would mean less capital gains taxes, and lower nominal wages would mean less social security and income taxes to service their debt. And the NY banks and the US government just happen to be the 2 constituents the Fed was created to help.  Read G. Edward Griffin's book The Creature From Jekyll Island for details. 

In the current instance QE has bailed out both the big banks and the US government at the expense of dollar holders and those on fixed incomes, through currency depreciation or foregone price deflation.

Fri, 04/04/2014 - 18:52 | 4626724 dutchTender
dutchTender's picture

one additional point, since our economy is based on finacing, deflation also increases the real value of debt ....

Fri, 04/04/2014 - 19:01 | 4626753 socalbeach
socalbeach's picture

True. Poster Salah made that point below in regards to banks when he said "the loan's life-cycle cost goes up and up" (ie, their deposit liability).

Fri, 04/04/2014 - 18:50 | 4626719 dutchTender
dutchTender's picture

i hate paying less for stuff ... really cramps my style

Fri, 04/04/2014 - 19:11 | 4626778 negative rates
negative rates's picture

They are bad because of hyperinflation, (other country's having many more dollars than American citizens). Which would lead other country's simply buying up our resources on the cheap for themselves, leaving the middle class to fight over the scraps. Big mistake sending those contracts overseas, now wasn't it.

Fri, 04/04/2014 - 19:23 | 4626809 daveO
daveO's picture

Bankers are stealing all productivity gains!!!

If prices are falling in the face of level(or rising) money supply, then productivity is rising. In the name of saving the economy the banksters want to capture every bit of productivity gains and then some(2%). It's outright theft of our living standard. It's not our responsibility to bail out crooked banksters when they make horrendous decisions. 

Fri, 04/04/2014 - 19:51 | 4626863 SilverMoneyBags
SilverMoneyBags's picture

It comes down to a matter of perspective. If you are a venture capitalist you probably don't like deflation because its harder to pay back loans. If you are the average person, you love lower prices.

Fri, 04/04/2014 - 18:15 | 4626629 RiverRoad
RiverRoad's picture

Whatever happened to the Fed worrying hard about all those Yankee dollars out there floating around?

Fri, 04/04/2014 - 19:19 | 4626799 negative rates
negative rates's picture

You mean the failed Fed rate rise experiment.

Fri, 04/04/2014 - 18:19 | 4626636 Berspankme
Berspankme's picture

They want the deflation meme to take hold all the while ass fucking you with inflation. Inflation is good for debtors and since we have many more debtors than savers, savers are being sacrificed in favor of the irresponsible. Not complicated

Fri, 04/04/2014 - 18:22 | 4626638 Bay of Pigs
Bay of Pigs's picture

Most of the hard core deflationists have been dead wrong for decades, and make no sense whatsoever when it comes to economics and Central Bank actions of today.

Inflation is rampant worldwide right now, yet they will say the exact opposite. Bunch of dummies if you ask me.

 

Fri, 04/04/2014 - 18:51 | 4626723 NOTaREALmerican
NOTaREALmerican's picture

Aren't they saying: deflation is good?   Not that it's happening, but it should be allowed to happen? 

Fri, 04/04/2014 - 18:23 | 4626645 Salah
Salah's picture

In 'classic banking' the banker can only profit from his asset, the loan.  A deposit is his liability.  Ergo, for "bankable clients"...i.e. those with acceptable collateral, gradual inflation is a godsend.  Deflation is a double whammey: the collateral is impaired, while the loan's life-cycle cost goes up and up.  

The problem as Nassim Taleb warns us, is that 'black swan event' in the midst of an abnormal period (like now); something's up with the Grand Cardinal Square (first in many, many decades) later this month, May, June and on into 2025.

Get ready, Buckaroos.

Fri, 04/04/2014 - 19:37 | 4626833 daveO
daveO's picture

We're so far removed from 'classical' that they now talk of bail-ins(did in Cyprus). When the bank's liabilty becomes the depositor's liability, then said depositor better wise up fast! The banker's taking from both sides of the ledger.

Fri, 04/04/2014 - 18:24 | 4626647 free_lunch
Fri, 04/04/2014 - 18:25 | 4626650 NoWayJose
NoWayJose's picture

We will have deflation - following the economic collapse. Normal people cannot afford homes, and prices are exceeding the available paycheck. That condition cannot last. The Fed wants wages to increase to keep up, but as we see in Japan, global workers prevent companies from paying higher wages. Just walking through a grocery store reminds me so much of 2007-2008...

Fri, 04/04/2014 - 19:39 | 4626837 daveO
daveO's picture

As long as banksters control DC we will not have deflation, even if the economy collapses. It will be Zimbabwe.

Fri, 04/04/2014 - 18:29 | 4626663 free_lunch
free_lunch's picture
Clarke and Dawe - The Global Economy: https://www.youtube.com/watch?v=rrZbXkaW2Xg
Fri, 04/04/2014 - 18:34 | 4626678 americhinaman
americhinaman's picture

technology is the simplest counterpoint to "deflation is bad".  the US CPI methodology basically declares that anything that advances in functionality or efficiency per price (i.e. that deflates in price) falls outside the realm of the normal CPI calculation.

i don't believe that many people (even on this site) realize that this is their tacit admission that deflation is so good that they have to remove it from the official calculation.  arguably, most of the quality-of-life and macroeconomic advances in the late 20th and entire 21st centuries have been due to computer/information technology advances, which are deflationary in nature.

if deflationary technology has been driving the entire world economy for the better part of 50 years, how exactly can it be claimed that deflation is bad?  deflation is amazing, if it is in the context of increasing efficiency and functionality in the aggregate.  in other words, if a new cellphone/device is 10x as powerful as last year but costs only 10% more, the power per price ratio has improved dramatically, yet companies most prone to this (lately apple and samsung) thrive because it drives them to improve the product even more.  consumers will buy great products that decrease in price each year, obviously.

Fri, 04/04/2014 - 18:46 | 4626702 NOTaREALmerican
NOTaREALmerican's picture

Or, perhaps, the real question is then:

If defaultion is happening with technology who is keeping the rewards of deflation?  And is - perhaps - the perpetual inflation model just a way to hide the rewards of deflation resulting in (Yet) another way the smart-n-savvy people screw the dumbasses?

Fri, 04/04/2014 - 19:42 | 4626846 daveO
daveO's picture

Exactly! You got 2 down votes for telling the truth. The banksters wish to steal all productivity gains and more(at least 2% a yr). 

Fri, 04/04/2014 - 20:11 | 4626903 khakuda
khakuda's picture

I would add that in addition to technological advances, the billion or so Chinese workers with low wages helped a lot, too.  The downside was the job loss in the developed markets that resulted and continues.

Fri, 04/04/2014 - 18:43 | 4626696 NOTaREALmerican
NOTaREALmerican's picture

Yeah, but, all fine and dandy...

Did a Libertarian economist ever try to turn the crank on the economic machine counter-clockwise?

HA, thought so.  And who has the wisest looking beards?   "Kesnesian" or Libertarian economists?

I rest my case.

Fri, 04/04/2014 - 18:44 | 4626699 Exponere Mendaces
Exponere Mendaces's picture

Bitcoin is deflationary, and will kick the living shit out of every inflationary currency on the planet. But of course, everyone will agree in hindsight, and argue up to the very end that inflation is "better".. (Until it is obvious it isn't.)

Fri, 04/04/2014 - 18:53 | 4626716 LetThemEatRand
LetThemEatRand's picture

If I had a printing press and could pay myself in printed dollars, and simultaneously I could convince the population that the resulting decreased purchasing power of those dollars (which I more than offset by giving myself more of the printed dollars than the resulting deflation) is a good thing -- by say buying all MSM and politicians to drive that message home to the population every single day -- I'd be all for inflation too.  I pay myself twice in printed dollars what I paid myself in printed dollars last year, and inflation rises by 2%.  I am up 98% for the year and all I did was run the printer.   I pay another few percent to own all media and politicians.  I'm still up 90+%. Pretty clever these guys.

Fri, 04/04/2014 - 18:52 | 4626725 seek
seek's picture

Nothing inherently dangerous about deflation?

If you're a fiat-based fractional reserve bank, there's a fuck-ton of danger! Saved money become more valuable even without interest, and no one wants to borrow money that you create out of thin air because direct investment pays off better!

No, deflation is terrifying... if you're a fiat-based fractional reserve bank.

Guess who is making the decisions here, and everything is explained.

Fri, 04/04/2014 - 20:08 | 4626894 khakuda
khakuda's picture

And this is why the economy is screwed.  To fix main street and the real world economy, you needed prices to drop so that things were once again affordable.  Too many years of CPI/PCE whatever running beyond wage increases and nothing becomes affordable without consumers taking on more debt or counting on rising asset prices and the house is my ATM effect.  To fix the real economy, you needed the CPI/PCE to drop to levels where people weren't in debt for 50 years to pay off houses, college, etc.  We had a debt created inflation during the boom and needed a deflation to bring prices back to reality.

But, as you correctly point out, asset values drop in that scenario, too, and that is too painful for a fractional reserve, shadow banking debt/credit based system to survive.

So, we print and we zirp and we stagnate.

Fri, 04/04/2014 - 18:54 | 4626734 The Abstraction...
The Abstraction of Justice's picture

Neither Frideman nor Keynes understood economics. for they divorced its study from that of crime and corruption. The things are not separable, a study of economics is a study of the master schemes of the Great Villains.

Fri, 04/04/2014 - 19:00 | 4626751 NOTaREALmerican
NOTaREALmerican's picture

+100

The magic of modern economics is the separation of morals from the policies.

Turn the debt crank and growth will come out.   No mention about who has been winning because of the debt.

Oh well,  that's a feature really. 

Fri, 04/04/2014 - 19:02 | 4626758 kurt
kurt's picture

Excellent.

So mattresses?

Fri, 04/04/2014 - 19:07 | 4626770 Waterfallsparkles
Waterfallsparkles's picture

2% a year on an already depreciated Dollar.  Soon the Dollar will be worth 0.  How are you going to pay off any debt with a Dollar worth 0?  Or is that the plan?

Fri, 04/04/2014 - 19:48 | 4626854 daveO
daveO's picture

No, the ignoramouses at the FED are working out of an outdated play book. In this book, they print more money and, voila, the debt slaves get a higher paycheck. That hasn't worked since Free Trade come along. Now, the FED prints more and another Chinese Billionaire is born. The American slaves just faller farther behind. 

Fri, 04/04/2014 - 20:49 | 4626954 socalbeach
socalbeach's picture

2% inflation per year means the dollar has 100/1.02Y percent of its original purchasing power in Y years (so for example in 10 years you'd have 82% of your original purchasing power). That will never get to zero. If the nominal debt amount stays constant it will depreciate at the same rate.

Fri, 04/04/2014 - 19:10 | 4626775 Fix-ItSilly
Fix-ItSilly's picture

"Falling Aggregate Demand" - you mean like that brought on by baby boomers retiring?  That's good?  bad?  ...  or just the give and take of reality that economists are supposed to observe and plan for?

Fri, 04/04/2014 - 19:13 | 4626790 RaceToTheBottom
RaceToTheBottom's picture

Inflation results in a financial economy where debt is the goal.

Deflation results in a technology economy where increasing functionality is required for market leadership.

 

Time to give a Deflation economy a chance...

Fri, 04/04/2014 - 20:01 | 4626872 Ghostdog
Ghostdog's picture

Deflation is coming and deflation is good for the average person who doesnt have tons of debt. Even if they do have debt its better that rampant  fake FED inflation. The only question is whether a fast but short lived inflationary mess occurs if they lose control of the bond market, which collapses everything first or we just sink into it. I know most people here are looking at inflation but I dont think it willl happen.. initially anyway.. That being said, I have my share of metals just in case Im wrong.

Fri, 04/04/2014 - 22:21 | 4627235 Seeking Aphids
Seeking Aphids's picture

The Fed is laser focussed on raising inflation in order to reduce the debt.....that is their unspoken mandate. They don't care about fixed income people or savers. They don't care if inflation will make life harder for most people. Inflation will allow the US to continue to operate as it does...living off future fantasy taxes that will never be adequate to pay down the debt. With inflation the fiction can be prolonged and the emperor can continue to stroll in his b-day suit. More importantly, the Washington elite can continue to exploit the masses and maintain the pretense that things are just fine....I really wonder how long they can maintain the 'recovery round the corner meme' via the media and official statements....I guess as long as people can maintain a semblance of their former lifestyles......plastic cups for crystal, grape juice for wine......

Fri, 04/04/2014 - 22:41 | 4627280 Mrs. Haggy
Mrs. Haggy's picture

It would be cool if my annual raise meant that I could afford more stuff rather than almost keep up with inflation.

Fri, 04/04/2014 - 23:59 | 4627403 fzrkid
fzrkid's picture

Prices will only fall to the point of cost-of-manufacturing + margin. There may be liquadations but those lower prices are only temporary and are not likely to occur as long as distribition channels were not leveraged. I dont know about you but I have never seen a sign that says 35% higher prices this weekend only to attract customers.

Sat, 04/05/2014 - 00:04 | 4627407 mumbo_jumbo
mumbo_jumbo's picture

"and in particular less willing to borrow"

 

and there's the rub, how can the bankers get richer if no one borrows and consumers rely on savings to purchase things.

so now we know who that nutcase works for, as if.

Sat, 04/05/2014 - 10:43 | 4627906 fzrkid
fzrkid's picture

I like paying more when I go shopping for 'stuff'

Sat, 04/05/2014 - 11:13 | 4627945 Village-idiot
Village-idiot's picture

Personally, I'm looking forward to a some deflation; it'll be good for me.

But then, I have no debt, I pay cash for everything, I have assets that are not in the banking system and I grow some of my own food.

Yes, a little deflation would be just fine.

Sat, 04/05/2014 - 12:02 | 4628027 David Wooten
David Wooten's picture

Deflation is painful to those who are in debt, including those whose debt is collateralized by assets whose price is falling.  A 30-year fixed rate mortgage is a disaster during deflationary periods.  Of course, 30-year mortgages are not a good idea anyway but they were promoted by government and there are a lot of them out out there.  Then there are minimum wage laws that  cause unemployment which would be worse if wages fell significantly.  Also, there are political problems.  FDR might never have become President if not for the Depression.  Political change is needed but will it be the right change?

Sun, 04/06/2014 - 03:49 | 4629462 MeelionDollerBogus
MeelionDollerBogus's picture

No, deflation is painful for those who print money. Deflation is good, in absolute terms, for everyone else - even those in debt. Debt means temporary boost in funds & lower prices means more purchasing power.

"Then there are minimum wage laws that  cause unemployment"

That effect is debatable but even when it is true a counter-balance can exist: immigration. If you can leave you can find employment. You can leave but government restricts it so it's difficult. That's not to be forgotten.

"Political change is needed but will it be the right change?"

If it's erasure then yes, otherwise: no. Politicians don't solve math problems, they make more of them. This is a math problem.

Sat, 04/05/2014 - 13:01 | 4628142 slightlyskeptical
slightlyskeptical's picture

If the Fed wanted real inflation all they need to do is raise interest rates. Fed raising interest rates leads to every high inflation episode in the last 100 years. So following some of the ideas expressed so far, once the Fed starts raising rates we will know that the PTB haver accumulated sufficient assets.

In an ideal world every inflationary episode would result in a soon to follow deflationary episode. The fact that is not allowed to happen shows how rigged the game really is.

Sat, 04/05/2014 - 14:53 | 4628365 franciscopendergrass
franciscopendergrass's picture

Are consumers willing to buy when there is a sale of 40% increase from asset price or 40% of the original price.  Imagine if Macy's, Walmart, or insert your favorite retail store said, "Come in and buy at 40% more than last year's price!"

Sun, 04/06/2014 - 03:42 | 4629451 MeelionDollerBogus
MeelionDollerBogus's picture

“when people expect falling prices, they become less willing to spend, and in particular less willing to borrow.”

Never were more dangerous or dishonest words spoken in finance.
Responsible spending means minimal spending, not exceeding a minimum. Responsible pricing means minimal prices, not rising prices.

Inducing excessive prices & excessive spending is the one true death of an economy, as surely as a person gradually poisoned is still poisoned and will be harmed & perhaps killed by such poison.

Any person with common sense can figure this out: do you buy more with rising prices or dropping prices? The answer is DROPPING prices. You can afford less with rising prices so you get less. If something's price rises too high you may never buy that thing again. It's been at least 8 weeks since I bought bacon. It's not critical to my diet, prices are up & that means if the price never drops I'll never buy any ever again. Ya, that's right, bacon is scrapped for good from my grocery list. That's what inflation does.

Computers on the other hand keep dropping in price. I'm floored at the size of the new 23 inch wide-screen monitor I got. All taxes included paid $206. It's stupidly massive and considering what I got in years past for the same inflation-adjusted dollars it is the best value I've ever hard based on the work-hours it took me to pay for it. I had zero hesitation to go buy one because my previous monitor died for good & I can't use my desktop computer without one. Need + deflation + value = purchase without delay. By all means I shopped around for a low price of what was available & was willing to avoid anything that made me suspect a price was "too low to be good value" but that took all of 10 minutes of research.

These voodoo-economics assholes want only one thing: to steal our work-value. The only reliable way to do so is inflation with the singular legal power (backed by government guns) to issue the currency, thereby forcing everyone else (non-issuers) to feel the pain of inflation.

It's economic terrorism.

Addendum: I did find how to get rid of the annoying side-bar zh page rendering

finding div id="middlecontainer" and removing the div's that follow it for sidebar-right and sidebar-left and then finding

body.sidebars #squeeze {
margin-right: 350px;
}

and changing it to -100px, but as it happens the new monitor is so fucking wide it doesn't even matter anymore. I wouldn't buy one just to get around this nonsense but since I had important reasons to get one, it's a bonus.

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