Why Not Let Prices and Wages Fall?

Bernanke's sophisticated surgical tools keep making the patient worse

Here’s a sign that you may not have to worry about inflation for a while: The Los Angeles Times business page is warning that higher prices “have seeped from the gas pump into the broader U.S. economy in May, adding new hurdles for the sluggish recovery.” 

This is from the lede of an article that actually presents plenty of evidence that inflation is still a minor worry—at least relative to all the major worries in the American economy. The Federal Reserve Bank of Philadelphia reports that regional manufacturing is continuing a months-long slide. Unemployment is back up to 9.1 percent. Retail sales [pdf] are down. Traditionally, when nobody is hiring and nobody is buying, you can expect inflation to be anemic. 

In fact, we should probably expect a new round of mainstream news stories warning about the “risk of deflation” and “deflationary shocks” and other fanciful terms describing the agony of being able to buy stuff cheaper. 

Who’s right? 

For reasons I have described at length, I advise skepticism of any inflation claims that are based on the “core” consumer price index (CPI). I also marvel that the Federal Reserve’s massive creation of new dollars has resulted in a deep and lengthy economic crisis during which we’ve seen only one fiscal quarter of price deflation and a 17-month period of sharp wage inflation. The latter—wages and unemployment paradoxically going up at the same time—is another lamentable feature the early part of the current crisis shares with the early part of the 1930s depression. 

The greater question is why deflation is considered such a toxic occurrence. We are not talking about a price rollercoaster here. The real estate market peaked in June 2006, which means we have had five years to adjust to reality. We have seen household net worth drop by $5 to $8 trillion dollars. American workers are competing with radically lower-paid counterparts in other nations. 

So why hasn’t the price of anything come down? More to the point, why is the concept of falling prices and wages considered so heterodox that our very language is biased against deflation? The term of art is “inflation adjustment,” but never “deflation adjustment.” 

Inflation hawks would say deflation hasn’t happened because the Fed created more than $2.9 trillion during two rounds of quantitative easing, the second of which is ending this month. But those folks may not be fully aware of the implications of the Fed’s interest-on-reserves program (IOR).

Interest on reserves, which as its name implies has the Fed paying banks interest on money they keep in their vaults, was a monetary tool that the Fed had been seeking for many years prior to the real estate correction. It was supposed to go into effect this year, but in a panicked response to a perceived threat to politically connected Wall Street institutions, the Democratic Congress and the Bush Administration accelerated the program as part of the Emergency Economic Stabilization Act of 2008. 

Although IOR has been connected to the late Milton Friedman, Friedman only advocated paying interest on reserves that banks are legally required to keep. Federal Reserve Bank Chairman Ben Bernanke has gone far beyond this proposal to pay banks interest on their excess reserves as well. Right now banks are sitting on $1.6 trillion in excess reserves, the largest reserve level in American history. 

Why is Bernanke plying this tool as the American economy continues to dissolve? More important, why does the Fed claim simultaneously that the IOR program is not depressing bank lending while also claiming it is an effective brake on inflation? As I wrote in November

The Fed wants us to believe mutually exclusive stories: Paying interest on reserves is an important deflationary tool that allows the creation of trillions of new dollars; and paying interest on reserves has nothing to do with the fact that banks are not lending out a historic excess of reserves.

The second explanation may be less incredible than it sounds. The U.S. economy continues to work its way back through at least 10 years of asset, credit, and wage inflation. It’s possible that this long-overdue deflation could eat up an additional $600 billion, that the rate of IOR could remain nominal through another few years of frost in the climate for lending, spending, and hiring.

Bernanke’s monetary strategy, which in the end owes less to Friedman than to the old lady who swallowed the fly, ensures that we will find out. By issuing this enormous pile of funny money, the Fed more or less guarantees it will at some point have to use IOR as an inflation rein. Bernanke might have gotten the same result—and a lot less heartache—if he’d just stopped paying the interest in the first place.

San Jose State University economist Jeffrey Rogers Hummel has a theory that goes a long way toward explaining both Bernanke’s behavior and his academic writings. Bernanke famously signaled his agreement with Friedman and Anna Schwartz’s view that excessive monetary tightening spun the 1929 stock market correction into what is now called the “Great” Depression. But there is a subtle distinction: Friedman believed the problem was that not enough money was on hand. Bernanke, despite his popular moniker “Helicopter Ben,” thinks the problem was that the banking system—a portion of the economy he believes is important enough to merit special treatment—needed to be supported. Thus Bernanke isn’t interested in monetary easing so much as a perverse strategy of targeted bailouts. 

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  • ||

    The greater question is why deflation is considered such a toxic occurrence.

    Deflation disproportionately hurts the parties that get their hands on money first, ie the big banks.

  • Southerner||

    Isn't that the exact opposite of how things would be in a deflation? The parties that get their hands on the money first would benefit the most since their money will have more buying power for them the longer they keep it. Inflation is what would hurt them most.

  • Name Nomad||

    Not at all. To put it succinctly (and possibly too simplistically): if you're able to gain wealth just by sitting on money, then you don't have to invest it. If you don't have to invest it, then there's less impetus to buy CDs and take out loans. Furthermore, there's less of a reason to even keep money in banks since you won't be getting interest anyhow.

  • rather||

    NN, If you choose not to invest it in a profitable venture, you won't be gaining wealth, just 'buying power'.

  • ||

    Same thing.

  • ||

    They have to pay interest to the Fed on the money they get, and getting extra money in a deflationary scenario is hard.

    In an inflationary scenario, the people who get the money first have the advantage because they get to spend it before the rest of the market "realizes" there's extra money floating around.

  • Tncm||

    In an inflationary scenario, the people who get the money first have the advantage because they get to spend it before the rest of the market "realizes" there's extra money floating around.

    I'd be careful with that line of thought ("the market 'realizes'"). Remember, money is most definitely not neutral.

  • Southerner||

    Ah, you mean people who get their hands on the newly printed money first, because the stuff doesn't get printed and therefore they don't get to get their hands on it.

    Your phrasing was a little confusing.

  • An Economic Carbuncle||

    Also, it should be noted, deflation doesn't happen evenly; prices rarely fall in lockstep with wages, and some prices are fairly insensitive overall to monetary effects.

    At the end of a deflation cycle one might expect everything to have evened out and with the added bonus of more purchasing power per dollar, but while it's happening, the effects are not so rosy.

    This is not to mention that powerful interests like banks can manipulate regulations more effectively (and put off costs just plain longer) than the average consumer to reduce their relative burden. Two guesses where that displaced burden ends up.

  • ||

    I don't think this is as big a deal for the banks as it is for commodity producers--especially politically powerful lobbies like the farmers.

    Farmers have been making money hand over fist since just before the Arab Spring started. Fighting deflation is what farmers are all about.

  • A Historical Echo||

    "...crucified upon a cross of gold..."

    You make a good point, Ken.

  • Tncm||

    That is only true when deflation is created through contractions in the money supply. Gradual deflation through increases in consumers good and producers goods, a natural part of the market process, does not have these pernicious effects.

  • yonemoto||

    or through technological improvement.

  • ||

    Deflation is advantageous to savers and disastrous to debtors. If Uncle Sugar had to pay back $10 trillion with interest in 'real' instead of diluted dollars, game over.

    Frankly, the gov as an abstract entity would benefit from five or six years of stagflation long-term, even if a few politicians got thrown on the blame-pyre by such events they never really controlled or understood (Carter + Obama -> Obarter? Cartbama? Carbama? Obter? Carama?).

  • A Meandering Memory||

    Carter...hey, wasn't he that guy that hired Volcker? That anti-inflation Fed Chair that somehow Reagan gets all the credit for?

  • ||

    Volcker's paws are all over 'modern' money more than any other dude. He was significant operator in Nixon's closing of the gold window; was actually there scheming with Nixon and his cronies at Camp David that infamous weekend if my memory serves.

    Bush dumped Bernanke on Obama, who then re-upped him. And Reagan doesn't get the credit for hiring Volcker, he gets the credit for sticking with him during the harshest measures (prime rate >20% in 1981) when everyone wanted his head and he had no friends.

  • ||

    Best answer, methinks. They are gonna' flee it like vampires from sunrise.

  • Jim||

    We have seen household net worth drop by $5 to $8 trillion dollars.

    Someone's household net worth dropped by five bucks? How was that measured?

  • sevo||

    "We have seen household net worth drop by $5 to $8 trillion dollars."

    Every time I've seen this sort of claim, the 'loss' is calculated from the bubble value of real estate just prior to the collapse, which was obviously a very temporary valuation.
    So, no, actual net worth didn't drop by anywhere near that amount.

  • Jim||

    Yeah I was more making a grammatical joke that the way it's written makes it look like his range is from five dollars, to eight trillion.

    But you're right, the way these "losses" have been calculated is a supreme exercise in statistical bullshitting.

    I see short-sales every day in my line of work, and I see the BPOs that were done at the time of purchase, v. present value. It's an ugly, ugly thing.

  • sevo||

    "Yeah I was more making a grammatical joke that the way it's written makes it look like his range is from five dollars, to eight trillion."
    Ooops. (embarrassed face icon)

  • Jim||

    If I could fix any single problem afflicting the earth, drug war, pollution, anything at all, it would be to make humor and sarcasm more readily apparent when typed on the internet. That is the supreme hinderance to my life.

  • Binky||

    You're being sarcastic, aren't you?

  • CptNerd||

    No, really?

  • Comment Tater||

    make humor and sarcasm more readily apparent when typed on the internet

    You want a new generation of emoticons?
    I kill you!

  • rather||

    But you're right, the way these "losses" have been calculated is a supreme exercise in statistical bullshitting.


    I thought the loss was calculated on the 2nd mortgages/line of credits that were derived from the bubble value?

  • ||

    A lot of techies have talked about a Sarcasm Font for a long time.

  • ||

    "Every time I've seen this sort of claim, the 'loss' is calculated from the bubble value of real estate just prior to the collapse, which was obviously a very temporary valuation."

    I think I'm on the other side of this one.

    There's no such thing as a paper loss--that's what margin calls are all about.

    Whatever the contract price of those houses were--houses that changed hands--somebody lost that money off the contract price.

    Even if it was the bank that lost that value--after the buyer renegotiated his loan or whatever... Even if it was the taxpayer who took the hit?

    That loss is real.

    Even houses that didn't change hands--they don't have as much equity in them as they did and that's real money down the drain.

    If you bought New Century stock back in 2007--or any one of a dozen bank stocks that went under? That money is gone. Even if your stock didn't go all the way to zero, it just dropped? That was real money--and it's gone.

  • sevo||

    "Whatever the contract price of those houses were--houses that changed hands--somebody lost that money off the contract price.
    That loss is real."

    Nope.
    If I bet on Beetle Bomb in the 8th, and Sea Biscuit beats him at the finish, I haven't suffered a 'loss' other than a bad bet.
    You could make the point if it were an investment rather than an arbitrage, but housing at that time was simply a speculator's bet.

  • ||

    That is utterly and completely false.

    Even if you're betting on horse race--the money you lose is real.

    If you ever get a margin call, call up your broker and tell him you don't have to meet it because it's only a "paper loss"... See what they say!

    If the house was sold? The builder got the full sale price.

    If the mortgage was sold by the lender? The lender got real money from investors for that loan.

    If the borrower defaulted, and the investor didn't get paid back? That's real money that's gone. He can't resell that instrument for what he paid for it.

    That's money that was spent--and is now gone.

    If the government took over the mortgage, and the taxpayers are eating the difference between what we paid for the mortgage--and what we can resell it for?

    Then that loss is coming out of your paycheck!

    But there is no time anywhere ever that a loss in value doesn't translate into a loss--to someone.

    If the other houses in your neighborhood are selling for less than you paid for yours? That is lost equity in your home.

    There is no magic shell game that turns losses into nothing.

    If your stock, bond, house, car, baseball card or widget loses value? You are out money.

    Every time. Always.

    Houses were worth what the market was paying for them when they were sold. And now they're worth less--because? Because this is what the market is paying for them now...

    It is possible to pay more for something than it's worth--but that just means you lost the money the moment you bought it! That's where people get confused about this stuff. You don't lose the money you paid for a stock after it goes down. You lost that money the moment you overpaid for it.

    And if you paid more for a house than what it's worth now? Somebody lost that money. Maybe it was the builder. Maybe it was the bank. Maybe it was the investor. Maybe it was the taxpayer--but that money came out of somebody's pocket. As sure as the sun will rise tomorrow.

  • JoshInHB||

    No it's not.

    Not anymore than the appreciation was real money.

    They weren't paper gains or losses they were potential gains or losses.

    And that potentiality isn't realized until a trade is executed.

    Claiming otherwise is like claiming that a stick of dynamite is a perpetual explosion.

  • Rrabbit||

    The money is not gone. It only is not your money anymore. For example, when somebody buys a house at some highly inflated price, that money is now with the seller of said house.

  • ||

    The lender may have lost the money the moment they paid for the house--but the money is still gone.

    If the investor who bought the mortgage got to give it back to the bank at par? Then there's more questions as to when the money was lost--but the money is gone.

    Somebody is out that money.

    If homes can fluctuate in value--and people can pay more for homes than they can sell them for? Then there is no loss that isn't a loss to somebody.

    Somehow? A lot of the American people have come to believe that Barack Obama somehow made it so all that lost money wasn't really a net loss to anybody.

    That's impossible.

    If we want to get rid of Barack Obama and his cronies in Congress? We'll to need to explain to people that Barack Obama did not miraculously make hundreds of billion in losses disappear.

    Between TARP and FHA and Fannie and Freddie and what the Fed did--and everything else? The only thing that was done in terms of losses was shift some of the losses from the homebuyers, the banks and the investors--to the taxpayer.

    Some people might argue that acting when and how he did, Barack Obama helped keep the housing market from collapsing even further--which might have kept the American economy from sustaining even more net losses.

    ...not that the housing market has definitely stopped imploding and found the bottom yet, mind you. ...he may well have simply put off the inevitable for a short time.

    But nobody who knows what they're talking about thinks that anything the government did--made the losses somehow disappear?!

    That's absurd.

    If I buy House A at market for $100,000 cash. The seller gets $100,000, and the buyer gets a house worth $100,000. That means there's $200,000 in value.

    If the housing market drops the next day so that the house is now only worth $80,000? There isn't $200,000 worth of value anymore. There's only $180,000--somebody lost $20,000.

    And it's gone.

  • ||

    see Stratford on inflation...

  • Rrabbit||

    If I buy House A at market for $100,000 cash. The seller gets $100,000, and the buyer gets a house worth $100,000. That means there's $200,000 in value.

    Disagree. There is a house, and there is $100,000 in cash. Those change hands. That does not in any way imply that the house is worth $100,000.
    The total value simply is "one house, plus $100,000".

    That $100,000 "value" of the house? That is fiction. A fiction which at some point in recent history was shared by many people, but still a fiction.

    Just like the thousands of guilders the Dutch attributed to tulips way back in 1637.

  • ||

    This is absurd.

    Let me put it this way.

    If I raise $1.5 million from investors? And I buy a ten acre parcel for $1 million. And then I spend $500,000 on getting plans approved?

    Then I've spent $1.5 million on the land. ...but the land probably isn't worth $1.5 million.

    The market price for that land--could be worth less than what I paid for it. ...in which case, I have lost very real money.

    If I want to build on that land? Then I need to go to a bank to get a construction loan. The first thing the bank wants to do is appraise the land. So that if they need to seize it for non-payment? They know how much the land is worth.

    But either way, all my money is in the land now. If they appraise the value of the land at $2 million after I map it and get it approved? Then that's affects how much equity I have in the dirt. If they appraise the value of the land at $1 million--then I have lost $500,000 in equity.

    And that's real money.

    On any construction loan, the bank gives you the appraised value of the land--minus any liens or outstanding debt on the land. And that's your equity in the construction loan.

    If you don't have enough equity in the dirt to justify the required loan to value ratio? Then you have to go raise more--very real money. ...but the bank doesn't differentiate between equity in the dirt and cash.

    Why would they?! Why wouldn't they treat the value in my dirt as if it were cash for equity purposes?

    There may be a lot of people out there who never tap the equity in their homes, but that doesn't mean they don't lose very real money when their homes drop in value.

    In other words, your basic idea about what constitutes a loss is horribly misconceived. And if you don't get that misconception straightened out? It may cost you or somebody who depends on you a lot of very real money someday!

    So figure it out.

  • Rrabbit||

    Ken, you are still confusing expenses and value.

    The value of that land or house is the same regardless of whether you pay one million for it or two million. It is the same house. "I paid one million for this house, and thus it is worth one million" is simply not true.

    Yes, you can incur financial loss in such a transaction if you pay some fictional inflated price, rather than something close to the actual value of the land. But that is a financial loss incurred by a poor investment decision, not a loss of value. The value is still the same, it is only distributed differently - the seller now has the money, and the buyer has the house.

    An actual loss of value would be, for example, if the house burns down (and you have no insurance). Then it's not a zero sum game anymore.

  • ||

    "Yes, you can incur financial loss in such a transaction if you pay some fictional inflated price, rather than something close to the actual value of the land. But that is a financial loss incurred by a poor investment decision, not a loss of value."

    There is no value apart from the market price.

    This is absurd.

    I'm a commercial real estate developer. I've also worked on residential projects--mapping land for resale to home builders.

    What you're saying is absurd and wrong. ...and is the very misconception behind why millions of people got themselves into financial trouble.

    The value of existing homes drops dramatically with the market price.

    We've bought buildings at a fraction of their replacement cost--what it would cost to rebuild the building now. ...it's possible to both buy buildings below replacement cost and at the market price.

    What you're saying is both absurd and a common misconception.

    The value of the underlying homes is what drove down the value of mortgage backed securities--the owners of those securities can't make all their money back by foreclosing and reselling the homes. Those homes lost their value.

    The assets behind performing loans aren't worth as much on a bank's balance sheet as they used to be--this is a substantial part of the reason why so many banks can no longer extend credit the way they used to...

    The assets backing up their loan portfolios aren't worth as much as they used to be.

    The value is gone. Given demographic growth and a growing economy, the market price may come back some day--and restore that value. But until then?

    That value is gone.

    Homes are only worth what you can sell (or lease) them for.

  • Paul||

    Green shoots! Shrike told me the S&P was up over 90%... as long as you started counting at 2008.

  • Fatty Bolger||

    Shrike is eyeing his office window and wondering how hard it would be to get open, so he's unavailable for comment just now.

  • JoshInHB||

    Don't even try to open it Shrike.

    Use your chair to break. It may take a couple strikes but you can do it. Added bonus points if the momentum from the final swing carries you out.

  • JoshInHB||

    Don't even try to open it Shrike.

    Use your chair to break. It may take a couple strikes but you can do it. Added bonus points if the momentum from the final swing carries you out.

  • The Truth||

    The solution is simple--total nationalization of banks under a regime of rationalized central planning to get the economy moving again.

    Run the country like Singapore and China--total cooperation between capitalists and politicians for the betterment of the national good.

  • DJF||

    We have had lots of cooperation between Politicians and the Bankers in the USA and they only cared about their own good.

    How about instead a “Wall of Separation between Politics and Business“.

  • The Truth||

    The problem is we have politicians doing the banker's bidding rather than the other way around like in Singapore and China. Selfish interests of the market must sometimes take a backseat to the interest of the national will.

  • sevo||

    "Selfish interests of the market must sometimes take a backseat to the interest of the national will."
    Hand over your money.

  • JoshInHB||

    You know who else believed in the national will uber alles.

  • Jim||

    National will. Hmm...Green Lantern's power comes from the concentrated essence of willpower, so national will must produce exponentially larger Green Lantern powers?

  • ||

    Triumph des Willens?

    I think you want the Christie = Nazi thread below.

  • ||

    Selfish interests of the market must sometimes take a backseat to the interest of the national will.

    Fuck off, slaver.

  • ||

    Singapore is being flooded (along with Hong Kong) with offshore money fleeing Switzerland after the IRS/UBS sellout. They are rapidly becoming THE tax shelter in Asia for 'sophisticated' financial vehicles. And they're doing it precisely because of their low-tax environment and excellent bank secrecy laws. Look it up.

    And second, China has something the Germans have going turbo per-capita: The world pays them more money than they pay the world. Its called a 'trade surplus.' And virtually all their sovereign debts are internally owned, making them ultimately an internalized risk they control.

    On all those counts USA has gone from relative Hero to Zero as a nation in past forty years, since the gold window closed.

  • Libertarian Jefferson||

    We have built a wall of separaton between commerce and the federal government.

  • Tncm||

    The solution is simple--total nationalization of banks under a regime of rationalized central planning to get the economy moving again.

    Our banks are already de facto nationalized. Their primary functions are coordinated by the Federal Reserve and they're party of the financial sector, the most heavily regulated industry in the United States. Private coinage definitely doesn't exist. Metallic backing of money-substitutes has been replaced entirely with fiduciary media, meaning that banks don't have the typical currency drainage break on inflation that they do under a gold standard or gold exchange standard. How exactly is any of this even remotely like a free market?

    Run the country like Singapore and China--total cooperation between capitalists and politicians for the betterment of the national good.

    What's "the national good"?

  • Hugh Akston||

    What's "the national good"?

    Whatever the politburo says it is.

  • Butts Wagner||

    No Gum Chewing you pusillanimous slob!

  • JoshInHB||

    What's "the national good"?

    De Fuehrer will inform you at the appropriate time.

  • GSL||

    Well, it depends on what goods you're talking about. Most people have no problem with deflation when it comes to gas, food, airline tickets, or rent. It's only when they have the experience of owning something that deflation becomes a sin against nature.

  • Hugh Akston||

    Asset inflation is one of our most sacred Constitutional rights.

  • yonemoto||

    Wrong! Nobody cares much that computers and cars depreciate in price over time, it's an accepted fact, and these items have utility. So does a house.

    People care when they own an asset that they're taking a LOAN out on, or when they are borrowing tons of money and they're rich. Deflation hurts rich borrowers; Inflation hurts poor owners. No wonder why the political class hates deflation. We have seen this story before. Bourbon France, Feudal Japan...

  • Butts Wagner||

    It's only when they have the experience of owning something that deflation becomes a sin against nature.

    This. Without going into detail, this is my dad in a nutshell. He's all about the Tea Party, paying down the government debt, etc. But he is adamantly against deflation because of the fear of it negatively affecting his business(and by extension, his personal wealth). Especially because my parents are so close to retirement.

    People care when they own an asset that they're taking a LOAN out on

    And this. Except that people with loans are not necessarily rich. Small businesses rely on loans to grow. And society has been taught that it takes money to make money. And the government has indulged this idea by making money easily available. People have been taught that they can afford anything they want because they will always make more money tomorrow than they did today. The idea that one's personal value is ever increasing is a terrible lesson. The lesson to teach is that relative value is what matters. But when people are getting 2% raises every year, they feel like they are worth more and feel better about themselves. This is what the government is selling when they make inflation part of their program. It's all about making people feel good.

  • yonemoto||

    why is he afraid it will hurt his business? If he's a SBO that's actually selling stuff then it will be great for business, because more people would be able to afford what he's selling (unless he's a former). If he runs an SBO that's selling a service to a bigger company he might be screwed, but it's also possible the bigger company will have other costs go down and be able to afford more of what he offers.

    Basically, there's no sin in being pro-deflation, unless you believe in deflationary spirals - but deflationary spirals are merely the clearing out of obsolete technology and business models; in the antikeynesian world you you have to be okay with the fact that in the end you will be useless, so save up to be able to enjoy that time in liesure. It's a far more honest outlook than constantly incurring debt and having to be paid (nominally) more and more to keep up.

  • ||

    Why is deflation considered toxic?

    Everyone watches unemployment and considers it a barometer of the economy.

    Deflation has the effect of raising minimum wage. This has the effect of increasing unemployment as more people are unemployable.

    I believe a major reason Obama supported QE2 is he knows that inflation will decrease the effective minimum wage which will decrease unemployment.

  • Tncm||

    That is an excellent point J Dog, and I'm surprised no one's responded to it.

    Under deflation real wages rise, but minimum wage laws are tied to nominal wages. So when nominal wages fall below that price floor but real wages are rising unemployment will increase. If we had a free market in labor, of course, this wouldn't be the case.


    I believe a major reason Obama supported QE2 is he knows that inflation will decrease the effective minimum wage which will decrease unemployment.

    However, inflation has adverse effects in the long run which cause unemployment to increase (the destruction of profits, capital consumption, the constancy of the disutility of labor, etc).

  • hazeeran||

    I doubt he (O, not J Dog) cares about the long run.

  • ||

    Have we ever had long-term deflation during the era of minimum wage laws? It would be interesting to see what the interplay would be. Most studies and thought on the topic assumes that only "fringe" workers (eg, janitors, security guards) are affected and focuses on unemployment, but if deflation is severe enough, it could get to the point where some industries couldn't even afford to hire core workers. So GDP could be affected too.

  • Butts Wagner||

    if deflation is severe enough, it could get to the point where some industries couldn't even afford to hire core workers.

    Which is why many of us who comment on this website are against minimum wage laws.

  • MJ||

    It would be interesting if this was the reason for the administration's being against deflation. It would mean that the Dem's support for "living wage" laws is giving with one hand and taking with the other. The only purpose for initiated Dems is to agitate the proles.

  • Jordan||

    The Keynesian fear of deflation is superstitious idiocy with a dose of malice.

  • yonemoto||

    Yes but the Phillips curve is DIVINE WORD. The only way out is to trick poor people into accepting lower wages without honest negotiation.

    The notion that increasing commodity prices put pressure on employers to reallocate money away from labor costs is absurd! Keep inflating; the jobs will come! You have to lower the price of labor at all costs to beat out foreign nations that are also inflating!

  • yonemoto||

    yeah but inflation increases the cost of commodities. In other words if you inflate the only profitable businesses will be service sector businesses where the lion's share of costs go to raw materials over labor. Oh wait, that's happened hasn't it? In the end, when you overinflate, all businesses get screwed because we. all. use. fuel.

  • ||

    Inflation is necessary to keep the economy moving.

    It is!

    Krugman says so!

    It is! It is! It is!

    /Tony mode

  • ||

    [WWIII] WORLD WAR THREE – The Theaters of Offensive Operations.

    [WWIII] World War Three is in progress, under the code name of War on Terrorism, which is nothing more than a War by of American – Israeli Military Industrial Complex – the [Empire] of Economic Stimulus, to ensure the Status Quo, being carried on by the combined forces of the Theocratic [Pure Jewish State] supported by its political arm in the Plutocratic State [AIPAC/AZC] the American Israeli Political Action Committee / American Zionist Committee, a combination of Religious and Corporate Interests. A war of Secretly Funded Covert Actions, complete with High Tech versus Low Tech engagements, Killer Teams, Black Op Torture facilities run by [{CIA} Central Intelligence Agency /Mossad] Agents, and Diplomatic Embassies turned into operational Spy Agencies, including the longest attempted naval blockade ever attempted in history running from the Black Sea to the Asia Pacific Arctic Ice Cap, and this does not include the off the grid Warfare taking place on the Sub-Sahara African Continent, and Monroe Doctrine Latino Nations of the Western Hemisphere, and Pacific nations.To suggest that what is happening is anything less than [WWIII] that is fast spreading across the globe from one Hemisphere to the other is not reality.

    [THE THEATERS OF WAR]

    [AFGHANISTAN]: The Graveyard of Empires is and has been an on going war, about running a pipeline across that country into Pakistan and India, which continues to be a full – scale war of Special Counterinsurgency operations with the [CIA/Mossad] running the show, with the use of high tech that has failed against low tech determined fighters. Afghanistan [ARAMCO] a consortium of Texas oil companies, the same that control Saudi oil plan to construct a pipeline thru Russian Central Asian scheduled to run from Turkmenistan through Afghanistan to Pakistan, and into India,which is rich in hydrocarbons and the building of the Central Asian Pipeline system transporting (NG) across Afghanistan to the ports of Pakistan, Karachi, and round the globe in (LG) Liquid Gas from, to waiting markets, with a branch line to supply the needs of India offering generous cut of the profits of the oil and gas pumped through a [$2B/€1.3B] Two-Billion-Dollars/One-Point-Three Billion- with an emir to be put in place with lots of Sharia law, which the Oil companies are more than willing to live with.

    [CHINA] : The [PDRC] Peoples Democratic Republic of China is increasing its sophisticated nuclear submarine fleet size and deployment, modernizing its ballistic missiles systems while deploying its Carrier Killer missile system, and [GPS] Ground Positioning Satellite – blocking technology, to end [EMPIRE] regional hegemony in the South China Sea, and Indian Ocean, and break the Blue and Gold Trident Submarine Chain, ending any hopes of [EMPIRE] companies ability to drill in the region, and will have to purchase the regions resources at market prices, forcing the [EMPIRE] to take measure to secure its interest in [ME] Middle East oil, at all costs.

    [PAKISTAN]: A secret off the books [CIA/Mossad] covert shadow war, running the show, with no popular or congressional oversight and therefore no accountability. Pakistan has invited the [PDRC] Peoples Democratic Republic of China to build a naval base at the strategic port of Gwadar predominantly Chinese-funded commercial port located about [500 km] from the Strait of Hormuz and is meant to break the Nuclear Choke Chain Necklace of the [EMPIRE] along with its hegemony of the sea lanes of the regional area, in their growing regional struggle for regional control and resources.

    [LIBYA]: An [EMPIRE] run and funded [NATO] North Atlantic Treaty Organization fiasco fronting the operations, it may be in print [NATO] but in reality it's the [EMPIRE]. The best that can be expected is a stalemate and a partition of that country, which will not hold, and the real deal is that the [EMPIRE] is supporting its so called enemies Al Qaeda, against a dictator who had to that point held them in check, but now have surface to air missiles from various arms depots being spread across the [ME] Middle East.

    [OKINAWA]: The [EMPIRE] has demanded a meeting on June [21st] with the Japanese Central Government and wants an as early as possible start date for construction of its [V] pattern two-runway Okinawa over the objections of the citizens of Okinawa, as in the middle of a crisis socially and economically have to pay an [Extortion Sympathy Tax] to support unwanted [EMPIRE] troops of occupation upon Okinawa, along with [220+] illegal nuclear weapon on Okinawa against Japanese Laws.

    [RUSSIA]: Without notice the [EMPIRE] began the first part of a decade long four part phased plan to place land, and sea based radars and interceptors [AMB] Anti – Ballistic Missile Systems into the backyard of the Central Russian Federation, into Belarus, Bulgaria, Georgia, Hungary, Poland, Romania, Ukraine, and Poland, to control the Europe, Eurasia, Caucasus, Middle East, and Central Asia, by sending the guided-missile cruiser USS Monterey, which is capable of detecting and shooting down ballistic missiles, from its home port in Norfolk, Virginia, into the Black Sea just off the shores of the Russia Federation, a planned system, which it would threaten the Russian Federations own nuclear missiles while undermining its deterrence capability. This was done without, having meditated the terms of a treaty of clear legal guarantees, for possible joint cooperation missile system, which was rejected by the [EMPIRE] and its surrogate [NATO] without any compromise offered but based solely upon verbal assurances alone that the Russian Federation was not being targeted, with the intent to under mind the nuclear deterrence of the Russian Federation, a direct threat to its security. While at the same time the [EMPIRE] on a continual bases performs [C-5M]over flights of the Russian Federations strategic Arctic / Afghanistan supply routes air space, using [C-5M] military aircraft, within the Russian Federation [CSTO] Collective Security Treaty Organization and [CRRF] Collective Rapid Response Force regional security alliance of Armenia, Belarus, Kazakhstan, Kyrgyzstan, Russia, Tajikistan and Uzbekistan.

    [TURKEY]: Under the [1936] Montreux Convention an international agreement on the status of the Black Sea straits, only Turkey possesses sovereignty over the Black Sea straits, with the right to admit or bar sea borne traffic entering the Black Sea after transit thru the Bosporus, the [EMPIRE] USS Monterey is within the limits of the convention, as she displaces less than [15K] metric tonnage and has no large offensive guns, and is within the convention limitation stating that no more than [9] warships of non-coastal states of the Black Sea may be simultaneously present in the Black Sea and their maximum total tonnage must not exceed [45K] metric tonnage, but the [EMPIRE] has in fact broken even this convention during the Georgia-South Ossetia conflict of August [2008], as both provisions were broken as [10] [NATO], warships entered the Black Sea with a total tonnage of [48.7K] metric tonnes, causing mistrust and apprehension on the part of The Russian Federation, concerning Turkey and its selective enforcement of the Montreux Convention, turning its back on the agreed Black Sea for and Black Sea Harmony security structures of the Black Sea coastal countries, long considered enough to guarantee stability and security within the region. As the [EMPIRE] and its surrogate [NATO] are equipped with warships and submarines of nuclear long range nuclear capability [5K/km], the [EMPIRE] has substantially succeeded in the revocation of the Montreux Conventions having replaced it with the [OSCE 1999] summit in Istanbul, and by
    Turkey being a member of [NATO] and seeking to become a member of the [EU] in its straddling of the fence has ended Ankara's influence in the region.
    Turkey and the Nabucco pipeline versus the South Stream Bypass, the Nabucco pipeline was an "Empire" plan to pump Central Asian which is rich in hydrocarbons, (natural gas) to Europe, the pipeline was to have been laid through the territories of Azerbaijan, Georgia, Turkey, Bulgaria, Romania, Hungary and Austria to connect Europe with Central Asia, a distance of (3,300 Km.), Three-thousand-three hundred kilometers. The Nabucco pipeline was meant to bypass the Gazprom Russian Federations Gas Monopoly, South Stream gas pipeline designed to annually pump (31Bln.Cu.Mtr.), Thirty-one-billion, cubic meters of natural gas from the Russia Russian Federation, and Central Asia via the Balkans to Europe. Bulgaria, Serbia, Hungary, Italy and Greece which have already agreed to participate in the project. The interest in building it was caused by the dispute between the Former Soviet Republic of the Ukraine, in which hydrocarbons, (natural gas) to the Ukraine and Europe had been cut, stopping the flow to Europe over money owed, and the stealing of pipeline hydrocarbons, (natural gas) by the former Soviet Republic.

    HERCULE TRIATHLON SAVINIEN

  • Fist of Etiquette||

    Meanwhile, the [REBEL ALLIANCE] has moved its secret base of operations to an ice planet in the Hoth System.

  • ||

    What did you say?

  • hazeeran||

    Timmy's stuck in the well?

  • Garfield||

    He says he's hungry.

    He says he wants pizza.

  • ||

    [TIMMY] is stuck in the [WELL] and wants [PIZZA].

  • Fist of Etiquette||

    The real estate market peaked in June 2006, which means we have had five years to adjust to reality.

    That's like saying Joan Rivers has had 20 years to adjust to old age.

  • ||

    I adjusted to reality once.

    It is definitely over-rated.

  • SIV||

    Even Bernank knows he can't reflate the real estate bubble.I think everything the Fed and Treasury has done is too keep the primary dealers actively engaged in pushing and shuffling our debt paper.

  • JoshInHB||

    This

    Creating a market for government debt is the core function of all central banks.

  • DLM||

    Propping up real-estate prices to give the banks time to unload their inventory on us plebes.

  • Tncm||

    As much as it pains me to say this, you can blame Milton Friedman and the monetarists on this, particularly his plucking model of recessions.

    Standard disclaimer being, of course, that Milton Friedman wrote a lot of that stuff in his younger years, i.e. when he was much more statist. I know he began to backtrack from positivism and interventionism as he got older, becoming almost an Austrian by the time he died (for example, many of his theories hinged on the idea that the Federal Reserve can manage the money supply to stop the economy from "overheating" in booms and prevent busts. Later he called for a freezing of the monetary base, and he eventually advocated for total free banking). But to say that modern central banks don't base their actions on monetarist policy prescriptions is flatly wrong. Indeed, neoclassical monetary theory (the neutrality of money, the mechanical quantity theory of money, etc.) is based almost entirely on monetarism.

    But I'm sure Tony will come along to explain to us how expansion of the money supply, that is, printing money can create economic prosperity. It'll be just as hilarious as it sounds.

  • ||

    But I'm sure Tony will come along to explain to us how expansion of the money supply, that is, printing money can create economic prosperity. It'll be just as hilarious as it sounds.

    It was funny the first 15 times. After that, it's like watching a Woody Allen comedy.

  • MNG||

    Saw Midnight in Paris this week and it is pretty good.

  • Middle Age Crazy||

    Dammit, I keep getting talked into these new Woody Allen flicks, only to come away unimpressed, even with the one that had Scarlett Johansson in it.

    This time I'm going to hold you personally responsible.

  • Troll||

    I saw that one, and was VERY impressed with her...

  • ||

    This is an extremely interesting comment but it would profit by including a couple of citations/references.

  • Tncm||

    delfied,

    Thanks for the compliment. What would you like me to cite/want additional information on?

  • Tim Cavanaugh||

    I only blame Milton Friedman for automatic payroll withholding. I think IOR has been unfairly pinned on him: He only advocated IOR on reserves banks are required to keep, as a matter of fairness. I don't know that he ever made it a constitutional argument, but I think requiring banks to hold non-performing assets is a taking under the Fifth Amendment and requires compensation.

    What Bernanke's doing is the horse of a different color you've heard tell about.

  • Middle Age Crazy||

    Thanks for the article Tim. I found it very thought-provoking.

    We tend to think of the Fed Chairman as some sort of economic demi-god, but really he's just the nation's top banker. As such, his primary concern is for the health of the banking system, not the health of the economy. This explains the apparent self-contradiction of pumping massive amounts of liquidity into the system, then allowing it to sit in reserve accounts.

    The problem now is: how to drain the reservoir before the dam bursts?

  • Middle Age Crazy||

    I hope you're wrong about pumping it back into the Real Estate market. He can't be that stupid.

  • Tncm||

    The problem now is: how to drain the reservoir before the dam bursts?

    They could literally just delete the reserves if they wanted too, but they're not, which is worrying. Could he be preparing for the situation where he'll inject massive amounts of liquidity into the economy in a bank run?

  • Middle Age Crazy||

    We're going into Zero Hedge mode here, but I doubt the Bernank is that tricksy. Seems to me the Fed is positioned for another "lost decade": the Fed owns the Treasuries, the banks own the dollars.

    But what happens if the economy recovers? Interest rates rise, the Treasuries are suddenly worth less, and the Fed can no longer soak up all those excess dollars by selling them. Can the Fed can simply repudiate its debts, i.e. eliminate the reserve accounts? I don't think so. If not, the result will be uncontrolled inflation. In other words, yet another failure of central planning.

  • ||

    Sticky wages! Poor people are entitled to be tricked into accepting lower real wages!

  • sevo||

    Tncm,
    Happen to be reading "Capitalism and Freedom" (1962), and his take on the GD is the same as in "A Monetary History...".
    He points out that the Fed was established to stabilize the economy, but never has, largely as a result of the 'knowledge problem' inherent in centralized planning.
    As regards the GD, his gripe about the Fed is that failed once again, allowing the money supply to fall when to accomplish its job, it should have simply kept the supply stable.
    I don't see any defense of the Fed, more like a grudging acceptance of the status quo.

  • Tncm||

    Happen to be reading "Capitalism and Freedom" (1962), and his take on the GD is the same as in "A Monetary History...".

    I always loved that about Friedman (and to some extent Rothbard); he's a very readable economist and can explain theories in a few pages that would take other economists entire chapters. In contrast lies Ludwig von Mises who, though brilliant, is neigh unreadable in some of his books, especially the earlier ones; I'm currently reading The Theory of Money and Credit and the man seems to assume that the reader already has a PhD. economics, so a lot of that book is going over my head and will have to be reread at a later date. It just goes to show that I'm still very much a novice at the science of human action.


    He points out that the Fed was established to stabilize the economy, but never has, largely as a result of the 'knowledge problem' inherent in centralized planning.

    But he believed it could and formulated a lot of theory around that. For example, he thought that near-total price stability could be achieved by having the Federal Reserve hold inflation at around 3% or 4% to keep abreast with increases in aggregate output. Much of his macroeconomics is grounded in the Keynesian positivist framework, which I believe is why so much of his monetary theory is flawed, at least the monetary theory of his which I've read (or in some cases "watched"). But not to speak ill of the dead, as I've stated, he called for free banking in his later years; it's just that no monetarist I've ever talked to seems to remember that.


    As regards the GD, his gripe about the Fed is that failed once again, allowing the money supply to fall when to accomplish its job, it should have simply kept the supply stable.

    Which would've involved "solving" the bank runs by having the Federal Reserve engage in credit expansion to meet reserve withdrawal demands from consumers. In some sense the money supply had to contract and deflation had to happen; real savings had been stretched thin with the rampant credit expansion that occurred during the '20s (the Federal Reserve came close to doubling the money supply in that decade), the lengthening of the structure of production was untenable, and inflated wages and resource prices had to fall so that the market could clear and the capital structure could once again align to consumer time preference.

  • sevo||

    "But he believed it could and formulated a lot of theory around that."
    Can you give me a cite on this? I haven't seen this in what I've read by him.

    "Which would've involved "solving" the bank runs by having the Federal Reserve engage in credit expansion to meet reserve withdrawal demands from consumers. In some sense the money supply had to contract and deflation had to happen;..."
    I'll disagree here. Again, referring to Capitalism and Freedom, he didn't presume a contraction wasn't required and would have occurred under any circumstance. His gripe was that the Fed made it worse, and (along with FDR's policies) made what should have been a recession into the GD.

  • Tncm||

    Can you give me a cite on this? I haven't seen this in what I've read by him.

    I have a cite for him saying he wanted the Federal Reserve to be replaced with an automated computer, and I'm trying to track down the exact quote where he says that he wants to keep inflation tailored to the output of the American economy. Would you like me to post what I've found?

    I'll disagree here. Again, referring to Capitalism and Freedom, he didn't presume a contraction wasn't required and would have occurred under any circumstance. His gripe was that the Fed made it worse, and (along with FDR's policies) made what should have been a recession into the GD.

    One of the central planks of monetarism is that the aggregate supply of money must be kept equal to its aggregate demand to prevent inflation on the one hand and deflation on the other. He famously called the Great Depression the "Great Contraction" in reference to what he believed perpetuated the economic downturn of 1929; the fall in the nation's money supply. Apparently Rothbard claimed that the Federal Reserve actually increased the money supply and never let it decrease in his book America's Great Depression but I haven't read it so I can't really comment on that.

  • Butts Wagner||

    he says that he wants to keep inflation tailored to the output of the American economy.

    This is the make people feel good solution.

  • Tncm||

    Can you give me a cite on this? I haven't seen this in what I've read by him.

    I have a cite for him saying he wanted the Federal Reserve to be replaced with an automated computer, and I'm trying to track down the exact quote where he says that he wants to keep inflation tailored to the output of the American economy. Would you like me to post what I've found?

    I'll disagree here. Again, referring to Capitalism and Freedom, he didn't presume a contraction wasn't required and would have occurred under any circumstance. His gripe was that the Fed made it worse, and (along with FDR's policies) made what should have been a recession into the GD.

    One of the central planks of monetarism is that the aggregate supply of money must be kept equal to its aggregate demand to prevent inflation on the one hand and deflation on the other. He famously called the Great Depression the "Great Contraction" in reference to what he believed perpetuated the economic downturn of 1929; the fall in the nation's money supply. Apparently Rothbard claimed that the Federal Reserve actually increased the money supply and never let it decrease in his book America's Great Depression but I haven't read it so I can't really comment on that.

  • Tncm||

    I'd also like to add the caveat that I've only been seriously studying economics for a very short period of time, so if the conversation delves too deeply into monetary theory I won't be able to take part in it.

  • sevo||

    "Would you like me to post what I've found?"
    Yes, but by tomorrow this thread'll be buried ten-stories down.
    Save it for the next exchange, but I'd like to see it.

    "One of the central planks of monetarism is that the aggregate supply of money must be kept equal to its aggregate demand to prevent inflation on the one hand and deflation on the other."
    Again, I'll disagree *specifically*. It's not that the money supply *must* be kept equal; that is the ideal, hoped-for, condition. The Fed as a mechanism to accomplish that was not his choice, nor was it (in his opinion) effective in doing so.
    Now, I'm going to have to go back in the book to find what that was, dammit!

  • Butts Wagner||

    Yes, but by tomorrow this thread'll be buried ten-stories down.

    Nope, this is the weekend. There is 500 comment potential in this thread. I'm doing my part.

  • Tncm||

    Sorry about the double post.

  • Butts Wagner||

    It just goes to show that I'm still very much a novice at the science of human action.

    What's so hard to understand? If the relative value of everything remains equal(not accounting for efficiency gains), people who learn from their mistakes will save more and have more earning power as they age so that they may be able to support themselves in old age. People who don't learn from their mistakes will suffer and beg for mercy while also warning others not to end up like them. Those who don't fit into these two roles will be shunned by society and still serve as a lesson to others.

    /asshole

  • Amakudari||

    In contrast lies Ludwig von Mises who, though brilliant, is neigh unreadable in some of his books.

    I got through Human Action by making sure it was the only thing available on my commute. Probably couldn't have finished it otherwise.

  • Res Publica Americana||

    Do you guys support a free banking system? If not, then what? Interested to gather your opinions.

  • Tncm||

    I support free banking. Most people here seem to as well.

  • yonemoto||

    bitcoins.

  • sevo||

    There's a lot of history that suggests it's preferable to what we have.
    Shorter: Yes.

  • ||

    Sure. Free banking presupposes a stable, universal referent of value, IMO, so we'd have to go back onto some sort of specie standard as well.

  • alan||

    I don't know if comparisons to 1933 are quite apt. Can you imagine what it was like to live in a time when the government outlawed the private ownership and trade of gold?

    From Forex.com:

    We wanted to make you aware of some upcoming changes to FOREX.com’s product offering. As a result of the Dodd-Frank Act enacted by US Congress, a new regulation prohibiting US residents from trading over the counter precious metals, including gold and silver, will go into effect on Friday, July 15, 2011.

    In conjunction with this new regulation, FOREX.com must discontinue metals trading for US residents on Friday, July 15, 2011 at the close of trading at 5pm ET. As a result, all open metals positions must be closed by July 15, 2011 at 5pm ET.

    Okay. NOW its like 1933 all over again.

  • alan||

    And to the Keynesians who worry about deflation. How does this action NOT shrink the money supply?

  • Tncm||

    Because gold and silver aren't common mediums of exchange, simply commodities with a high market price. I can't go to Starbucks and buy a latte in gold ounces.

    And don't bait the Keynesians here. It's best that they stay in the shadows.

  • Binky||

    I can't go to Starbucks and buy a latte in gold ounces.

    Sure you can. I'll meet you there at 9:30 tomorrow morning and facilitate it.

  • alan||

    The new reg effects exchanges of metals against currency.

    Right about baiting those K-men though.

  • alan||

    Other words, if I want to get out of Yen and do a direct transfer to gold, I wont be able to under the new regime. If I was doing the reverse, the metal I had would no longer be an effective monetary cast transfer, hence my question about shrinking the monetary supply. Which under Keynesian theory would be deflationary though they are the ones who advocate policies of taking metal out of money markets. It's an intrinsic contradiction of theirs.

  • ||

    I'll sell you all the lattes you want for an ounce of gold each. I'll even throw in a nice china set.

    -jcr

  • chaussures air max ||

    cool babay!

  • adam||

    Here's another theory on why the banks aren't lending, even after QE2: http://www.zerohedge.com/artic.....c-economy-

    Apparently the vast bulk of the printed money went to European banks, to recapitalize them in advance of the inevitable Greek default.

    This version of events fits in nicely with the Germans' new intransigence in the continuing bailout negotiations. Now that their banks are covered, they don't need to play along with the ECB's plans.

  • ||

    The problem is reducing the salaries of retirees (pensions and social security) and government workers. So far Prichard Alabama is the only place in the western world to accomplish this.

  • ||

    After reading this thread, bartering seems like a better plan.

    I have two chickens, an old B&K power amplifier and a used 350 engine block. Will that be enough for a month worth of rent?

  • El Duderino||

    The ability to print money should not be left up to the government or the fed, it should be an open market of currencies. All currencies should be backed by real, non perishable commodities.

    This may have been difficult to do in the past, but we have the technology to track multiple currency exchange rates in real time and with a diversity of currencies comes stability.

    If gold backed bills lose value over oil backed bills, you make an exchange before you lose more value, or you demand your pay be in oil rather than gold backed currency.

    Retailers would be able to choose which currency they accept, or they can accept all of them. I woul bet they would accept all or most of the stable currencies, why shut out potential customers, especially if you can make a quick exchange I you need to bail on a particular currency before it loses value.

  • ||

    The solution is simple--total nationalization of banks under a regime of rationalized central planning to get the economy moving again.

    You're right. That IS "simple".

  • Troll||

    Every good hnr thread dredges up Mises or Friedman. Truth be told, no matter how much I read about it, I understand little of it.

    Wouldn't it be easier to simply eliminate scarcity at this point? I know that sounds like pie in the sky, but certainly there is a post-capital economy some day. Wouldn't that be a worthy thing to work toward, or at least explore?

  • Bill E. Gotzgruph||

    +0.75. (Too polite for a real Troll.)

  • Parker Brothers||

    That would upset my real world Monopoly game. And I sure as shit don't want any proles on Baltic St. renting from my hotels on Park Place or Boardwalk.

  • ||

    Thats ultimately what free market economics tries to do. Reduce scarcity by allowing us to create more stuff.

  • Troll||

    Agreed. So extrapolate that forward using something approaching a Moore's Law type of curve. It's hard to imagine debating money supply issues in the year 2200.

  • ||

    Wouldn't it be easier to simply eliminate scarcity at this point?

    By almost any historical standard, we have. There is no scarcity of food, clean water, shelter, clothing, etc.

    Doesn't seem to matter, because people's expectations always outpace available stuff. There will always be that kind of scarcity.

  • ||

    Someone was looking for a cite on Friedman's low, constant inflation rate.
    Chapter 4 "The Control of Money" From "Capitalism and Freedom" p54.
    "I specify that the Federal Reserve system shall see to it that the total stock of money rises... at an annual rate of X%, where X is some number between 3 and 5."

  • ||

    That isn't what people call constant inflation nowdays, its constant money supply increase. Inflation nowadays refers to price aggregate increases, only austrians use the old definition of increasing money supply.

  • ||

    I type corrected, thank you.

  • ||

    Mmmm zombienomics.

  • ||

    Thank you for this article. You have made it simple enough for those that can comprehend simple English. What we are told about all this 'funny money' is zip but we know there is something rotten in the Fed. Too many clever people being bone cold stupid with our lives and future.

  • ||

    Markets are not complete. Many contracts are written with implicit assumptions about future price levels. Deflation in simple economic theory isn't bad (Friedman rule), but in practice it is disastrous. The Fed should target a NGDP level target with 5% growth.

  • ||

    Markets are not complete. Many contracts are written with implicit assumptions about future price levels. Deflation in simple economic theory isn't bad (Friedman rule), but in practice it is disastrous. The Fed should target a NGDP level target with 5% growth.

  • DLM||

    The value of that land or house is the same regardless of whether you pay one million for it or two million.

    Isn't the 'value' of anything merely what someone else is willing to pay for it?

  • ||

    The value of that land or house is the same regardless of whether you pay one million for it or two million.

    I think who ever you are quoting is trying to say either homes have a fixed value or the dollar has a fixed value.

    Of course neither does.

  • DLM||

    I think who ever you are quoting is trying to say either homes have a fixed value or the dollar has a fixed value.

    Perhaps a fixed 'utility', which I don't believe is not the same as 'value' and can still fluctuate anyway.

  • ||

    Bernanke's a tool, and there's nothing sophisticated or surgical about him.

    -jcr

  • tee shirt abercrombie||

    cool !!!!

  • ||

    Austrian-school economist Jorg Guido Hulsmann wrote a great essay called "Deflation and Liberty", which combats the near-universal condemnation of deflation as something evil, and in fact praised deflation as an economic good. Read the whole thing at:

    http://mises.org/books/deflationandliberty.pdf

  • Kroneborge||

    Anyway, to answer the question why does the Fed not want inflation. It's because a majority of America has too much debt. Deflation makes it harder to pay back that debt. Therefore, inflation = bad for debtors.

  • ||

    Why not let them fall? Oh, my good man, you haven't read enough of the economic history - the real stuff, not what you gents pass on to us in colleges and universities. Since somewhere around the last decade of the 19th Century, the entirely purpose served by the legislation on economic and commercial matters in local, state and Federal legislatures has been to prevent any fall in prices. Wages were added sometimes right around the time that FDR 'rescued' - that's a euphemism for shot the shit out of - the economy. Follow the money, follow the pattern of regulations and laws, follow the consequences -----> all the tracks lead to the bank accounts of the already rich and famous, who have no desire in the slightest to return to the rags in which their great-grandfathers worked to build the family fortunes. Since around the end of WW2, the children and grand-children of those hard-working thieves have been running for office and bribing .. ahem .. supporting those of their fellows who run for office, to insure that the numbers of dollars which their trust fund investments return to them each quarter does not decline. It should come as no suprise that the economists and financial 'experts' who labor away at the day-to-day tasks associated with that protection should have little or no actual understanding of an economy or how it functions or what their foolish policy recommendations and enactments will actually create. So long as the money continues to flow as it has for three and four generations, then it is 'sound' policy. Why do you suppose that most of what these 'experts' say in public seems, beneath the jargon, to be nonsense?? Because it is nonsense!!

  • ||

    Why not let them fall? Oh, my good man, you haven't read enough of the economic history - the real stuff, not what you gents pass on to us in colleges and universities. Since somewhere around the last decade of the 19th Century, the entirely purpose served by the legislation on economic and commercial matters in local, state and Federal legislatures has been to prevent any fall in prices. Wages were added sometimes right around the time that FDR 'rescued' - that's a euphemism for shot the shit out of - the economy. Follow the money, follow the pattern of regulations and laws, follow the consequences -----> all the tracks lead to the bank accounts of the already rich and famous, who have no desire in the slightest to return to the rags in which their great-grandfathers worked to build the family fortunes. Since around the end of WW2, the children and grand-children of those hard-working thieves have been running for office and bribing .. ahem .. supporting those of their fellows who run for office, to insure that the numbers of dollars which their trust fund investments return to them each quarter does not decline. It should come as no suprise that the economists and financial 'experts' who labor away at the day-to-day tasks associated with that protection should have little or no actual understanding of an economy or how it functions or what their foolish policy recommendations and enactments will actually create. So long as the money continues to flow as it has for three and four generations, then it is 'sound' policy. Why do you suppose that most of what these 'experts' say in public seems, beneath the jargon, to be nonsense?? Because it is nonsense!!

  • ||

    sorry for the double post; don't know how to fix it.

  • Nolan Scheid||

    Hello Tim,
    The obvious answer to your question is a very painful one. This economy is so managed that it is nothing short of a rigged game.
    Successful solutions are much closer to home. Right down to things that can be touched and give value. Our first priority is making sure the children know how to grow their own food. Then we can move onto the next larger issue.
    Best regards,

    Nolan the stucco guy

  • paul smith||

    The U.S economy is so screwed up that I am willing to bet no one knows who is legit or not. After listening to Bernanke's last speech. He honestly dosen't know what is going to happen next. My guess is the 'sugar coated' mountain is finally going to fall. Revolution baby...Revolution

  • Ekim||

    Lower prices at the store are a blessing to consumers. Lower prices let consumers buy more. Printing is nothing more than theft from consumers. The bank steals people's pensions, savings, and wages by printing. The bank then uses printing to bail out member banks.

    Its a travesty.

  • air max||

    is good

  • قبلة الوداع||

    thank u

  • قبلة الوداع||

    thank u

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