Death Before Deflation

It's going to take a lot more than a trillion new dollars to bring the kind of inflation Ben Bernanke wants. The chairman of the U.S. Federal Reserve Bank thought he had the problem licked just a few months ago, but now, for the third straight month, the "core" consumer price index (excluding food and energy) has fallen. That 1/10th of a penny you're now saving on every dollar? Don't spend it all in one place.

The two big items not covered in CPI -- energy and food -- are both either flat or falling.

"Why am I surrounded by idiots?" Bernanke demands, deep in his undersea money lab. With inflation hawks questioning his every move and disloyal Fed underlings urging an interest rate hike, Bernanke finds himself unable to do the one thing he's spent his career preparing to do: save the world by throwing money at it.

Like many supergeniuses, Bernanke is in trouble because his plan is too brilliant. It really is possible to create inflation if you have the will. Just print another trillion or two, stop paying banks to keep that money in their vaults, and the country will be flooded with dollars. The problem is that the Fed keeps trying to micromanage the inflation, explode the monetary base without anybody noticing. But at some point you have to commit to devaluation of your currency. The moment to strike is now: Personal savings rates have been increasing for the last three months [all pdfs] measured. There are still millions of jobs to save or create. It's time to send a clear message: We're going to keep printing money until you stop saving it.

Comments

[rustedangel]

I lol'd heartily

[Hobie Hanson]

Whoa, you guys are finally making sense. I might faint.

[EC]

Overall consumer prices fell 0.1%. Core consumer prices, which exclude food and energy, rose 0.2%.

[Virginia]

By comparison, we don't look too bad.

They borrowed a total of ?126.3bn (?105bn) from the ECB last month, which was a 48pc jump compared with May and the largest amount borrowed according to Bank of Spain records since 1999.

Heck, California's deficit is only $19 billion. Spain just borrowed IN ONE MONTH roughly five times that amount.

[hmm]

They are planning to mount a Spanish Inquisition. And nobody expects the Spanish Inquisition.

[Fist of Etiquette]

Yes, but we don't want to print so much money that we get to the point that the paper and ink is worth more than end product. We don't want to go in the red here.

[Paul]

Red ink is too expensive, so we're going to just stick with black.

Debt problem solved.

[AA]

RACIST!

[Suki]

+1

[BakedPenguin]

Don't forget the cotton/linen paper with the embedded plastic strand. That stuff isn't cheap.

[prolefeed]

It actually IS cheap. The marginal cost of printing one more bill is just a couple pennies.

[BakedPenguin]

But they don't last. That's why Britain switched to coins for everything small than ?5.

[flataffect]

They must wear their pants pockets out real fast.

[d]

Which improves sales of pants coming from China.

Brilliant.

[hmm]

They will just start selling do-it-yourself printing kits w/o the supplies. This will have a multiplier effect as people rush out to buy the expensive paper and ink.

[hmm]

Oh, and they will tax the ink, paper, and mandate that all printers run of green energy. (or unicorn farts)

[Ebeneezer Scrooge]

The HHV of a unicorn fart is huge. We could power the world with them.

If only those unicorns would stop farting racist carbon.

[flataffect]

That's what happened, essentially, during the Depression. People around the country including some states started producing their own private currency.

[Van]

A Government Bubble == irrational exuberance for investing in Government and the power of Government to control or influence the economy.

[Freddie/Fannie]

Government value never goes down.

[Old Mexican]

Want to separate the quack economists from real ones?

Find out how they feel about "Deflation". Ask them to correctly define "Inflation" or "Deflation."

[Henry Paulson]

Deflation: A decrease in the general price level of goods and services.

AKA Market Failure.

[Old Mexican]

See?

[flataffect]

So point us to the "correct" one.

[roy]

Old definition:
"A decrease in the amount of money in circulation"

--- which, ceteris paribus, leads to the aforementioned decrease in prices--- thing is, in the real world, ceteris paribus is a rare thing...

[hmm]

You have to believe in an unstoppable deflationary spiral to believe it leads to market failure.

And that really hasn't happened. No the GD was not an unstoppable spiral.

[robc]

Every deflationary period has ended, proving it isnt unstoppable.

[hmm]

I wouldn't call that proof. I would say it's a pretty good argument for the case though.

[robc]

It is proof. If deflation caused an unstoppable spiral then every deflationary period would have spiraled without end. In fact, the existence of more than 1 deflationary period in history disproves it.

[Ice-Nine]

True, it isn't unstoppable. Unfortunately, what has generally been required to end major deflationary periods is major wars.

[hmm]

That's not entirely true either. =/

[Ice-Nine]

"Not entirely" - That's why I said "generally." It is certainly entirely true of the three major deflations in US history.

[Paul]

Jerry Webman, chief economist at OppenheimerFunds said 'It is not clear to me that the Fed could so anything at about it at this point. They don't have a lot of levers to pull.'

The Obama administration is creating more levers as we speak.

[Tulpa]

I'll give them a lever to pull.

[Atanarjuat]

Forgive my ignorance, I'm not but a simple lad. I (seriously) haven't taken Economics 101 or even read Henry Hazlitt, but aren't personal savings a good thing for job growth because banks will invest your savings?

[Paul]

There's an argument that the Banks aren't investing your savings... that they're merely holding onto cash to protect themselves from possible future market fluctuations, leaving their paper investments worthless, and thus rendering them over-leveraged.

While I believe this is generally true, I don't see it as a bad thing. There's nothing wrong with an economy waiting out uncertainty-- uncertainty the government is creating at breakneck pace-- before the waters seek a level and become more calm, before putting money back out on the street... so to speak.

[flataffect]

They can borrow from the Fed for next to nothing if not actually nothing. If I were a banker watching Fannie and Freddie and Congress pushing the same policies that created the housing bubble in the first place, I'd be kind of leery about making new home loans. Why should any business make a move until it's clear what the "reforms" of the past year and a half are going to do to their business costs. The Dems were so careful not to let it out what was in these bills that they created uncertainty eve as they were drafting the things. That should be illegal, especially for the most transparent administration in history, but Congress is so used to hiding pork and earmarks that it never gave a thought to how passing laws with no debate or even publications and excluding the opposing party from the drafting process might hurt jobs and investment. Thanks, Harry! Thanks, Nancy! And especially thanks, Mr. Smartest President since Clinton!

[Robert]

The whole point of Keynesian economics is that people save too much for the good of the economy. Savings aren't all invested -- that much is true, not some Keynesian flight of fancy. What Keynesians undervalue is the economic benefit of saving -- of holding assets out of use. People save, not just money, but actual assets, because they're uncertain how best to deploy them, and because they're not totally liquid. So, for example, an undeveloped lot is an asset that's being saved -- because it takes time to build, and costs money to tear down and rebuild. so you don't want to build on a lot until you're sure enough that the investment will be worthwhile rather than a white elephant, or rather than a more productive opp'ty that might come along in the meantime. (Saving is also speculation.)

But Keynesians think that in the aggregate we save too much, and that if we invested more we'd be more productive. So their policies are geared toward discouraging saving, diverting more resources into both consumption and investment.

[Yonemoto]

So their policies are geared toward discouraging saving, diverting more resources into both consumption and investment.

It's too bad we can't call liberals out on a monetary policy that encourages unsustainable growth, environmental destruction, destruction of the family, and using a virtual progressive consumption tax that funnels money to the bankers to increase the gap between the rich and the poor.

[flataffect]

Maybe we ought to have an economics test that everybody who wants to run for office above the county level must pass before being allowed to file.

[flataffect]

But doesn't deflation encourage more savings, since prices are dropping and purchasing power of savings is going up?

Or did I get that wrong.

[John]

To a certain extent, savings is a result of deflation. This was the central point of Keynesian economics. However, there is a point where that ends. If I had the choice of saving my last dollar, knowing that it would double in a week, or spending it on some bread to keep me alive for a week, I would do the latter. As more people make that decision, the market will return to equilibrium. Unless, of course, the government steps in to stop that process. Then a couple of nukes on civilians may help to get people spending again.

[Invisible Finger]

aren't personal savings a good thing for job growth because banks will invest your savings?

Not if the bank just buys government debt.

[d]

Savings are a display of lack of faith. Why would you save if you can depend on Social Security, Unemployment insurance, Stimulus creating jobs, Government guaranteed medical insurance, etc.

Such lack of faith must be punished by creating inflation which will devalue your savings and encourage you to buy an Ipad, creating what is called aggregate demand.

How dare you question the wisdom of our betters? Spend your money!

Dere

[Irresponsible Hater]

While we're at it, I'm a rube too. I think I understand some of the problems associated with super duper inflation: it seems like there's no upper limit to how worthless money can get, so prices can rise without limit, and planning and writing contracts becomes impossible(Weimar, Zimbabwe, etc).

But can someone point me to a link that splains in plain American-talk, what the worst case scenario is with deflation? Why are all the "serious" suits in DC always so concerned about it?

Splain it to me like I'm real dumb. Rick Sanchez dumb.

Thanks!

[ChicagoTom]

But can someone point me to a link that splains in plain American-talk, what the worst case scenario is with deflation? Why are all the "serious" suits in DC always so concerned about it?

Again, not an expert, but my understanding is that it can lead to a downward spiral.

Here is how the Financial Times describes it:

In theory, such deflation could be good for the economy, as it releases money for consumers to spend on other products. But... deflation can also take a malign form. "The risk is that people don't spend because they think prices will be yet lower in the future and that sets off a negative spiral..."

Temporary drops in prices are unlikely to have that effect. But Mr Brigden thinks the combination of falls in commodity and house prices with weak demand means that US headline inflation is likely to go negative next spring and stay that way for months, dropping as low as minus 3 per cent. "When deflation goes on for the best part of a year, expectations are more likely to become entrenched," he says.

Deflation over the long haul leads to lower home prices, lower prices for goods and services, lower wages and lower debt levels.

Here's an interesting link about it and here's an excerpt:

So who fears deflation? Debtors fear it. And who is the biggest debtor? The federal government - to an extent never seen before in the history of this country. It doesn't matter if the president is Bush or Obama, whether the congress is Republican or Democrat - every national politican wants the country to have an inflationary trend. They want to print or authorize more money so that the current godawful deficit can be "repaid" with inflated, cheaper dollars in the future - perhaps by this generation's children.

[Pro Libertate]

Well, that's the only way we can pay off our war reparation debts to the Allies.

[JW]

I'm getting on the bronze market before everyone else does.

[Tom Perkins]

And WTF do you think that is?

[Irresponsible Hater]

So who fears deflation? Debtors fear it. And who is the biggest debtor? The federal government - to an extent never seen before in the history of this country

Got it - that actually makes sense, dude, when u think about it (to quote the anonymitybot).

The shorter time horizons and uncertainty, and resulting inability to make plans, seem to be completely symmetrical to those of inflation. The gubmint-as-debtor seems a likely cause of their preference for inflation vs. deflation as any other I've heard.

[Yonemoto]

the other policy option is to just fucking nuke it all and default on our debt. Then never borrow again.

Of course, this will NOT be popular with politicians.

[Tulpa]

That's not really a solution. A lot of that debt is held by American banks, and having foreign banks go belly-up left and right isn't going to be good for our export economy either.

[Invisible Finger]

The gubmint-as-debtor seems a likely cause of their preference for inflation vs. deflation as any other I've heard.

Meanwhile, lenders (read: responsible lenders) would probably prefer neither inflation nor deflation - they can deal with small rates of either but large rates of either are hard to cover (which is why S&L's were in crisis during the late 70's/early 80's inflation).

Then think of state and local government pension funds. In these cases government is a lender - and the rate of asset inflation was known by nearly every responsible lender to be unsustainable. (Which is why they tried selling the "performing" loans to other sucker-lenders ASAP rather than keeping them on their own books as assets.) So you have a situation where government is both an irresponsible borrower and an irresponsible lender.

[Kolohe]

Actually, the S&L's got in trouble because (among other things) they were making heavily leveraged investments which worked out in the relatively high inflationary environment of the 70's early 80's but collapsed when inflation moderated during the mid and late-80's

[JoshINHB]

The gubmint-as-debtor seems a likely cause of their preference for inflation vs. deflation as any other I've heard.

Inflation, previously called currency debasement is the core competency of all governments.

[prolefeed]

But can someone point me to a link that splains in plain American-talk, what the worst case scenario is with deflation? Why are all the "serious" suits in DC always so concerned about it?

The worst case for the bureaucrats, or the worst case for citizens?

Bureaucrats hate deflation, because inflation acts as a hidden tax, and deflation thus prevents them from levying that tax.

Deflation can be a GOOD thing. We've seen massive deflation in the price of computers and TVs, for example. Is anyone here upset that a year from now you can buy a much faster and better computer for less money than you currently can?

The best goal, however, is to shoot for an extremely stable currency with an average inflation rate of 0.0%, since that will increase economic predictability and encourage investment and growth.

[Paul]

Or is a first-time homebuyer upset that their dream home is now $100k cheaper than it was five years ago?

[rustedangel]

On the other hand, anyone who was planning on using home equity loans to use their already-purchased house as a piggy bank will be sorely dissappointed.

[Chad]

No. But we are upset how much more expensive it is than it was in the early 90's (inflation adjusted).

The bubble is nowhere near fully popped. It will take 5-10 years of flat prices for inflation to eat away the remaining froth.

[Asscheeks of Saturn]

And the real question is how to sell a home to college grads with crappy jobs and a mortgage-sized school loan payment every month. Depressing. The housing market is dead.

[Chad]

Agreed. The housing market will decline (or stay flat and let inflation eat at prices) until young 20 and 30 somethings can buy homes. Everyone else is just playing musical chairs.

And if you think most 25-35 year old's can afford homes right now, pass me some of whatever you are smoking.

[Tulpa]

Deflation can be a GOOD thing. We've seen massive deflation in the price of computers and TVs, for example.

That's not really deflation in the macro sense. Deflation involves wages dropping at nearly the same rate as prices.

[JoshINHB]

The best goal, however, is to shoot for an extremely stable currency with an average inflation rate of 0.0%, since that will increase economic predictability and encourage investment and growth.

Why?

If you had a stable money supply, the prices of goods and services would drop over time, because of increased production chasing the same volume of money.

As noted above, persistent deflation has been part of the economics of technology for the last 50 years. That has not stopped investment and growth in those areas.

If anything the deflation has encouraged more investment and growth. The "downward spiral" that the couterfitters use to frighten the common folk is pure bullshit.

[Colonel_Angus]

"Deflation over the long haul leads to lower home prices, lower prices for goods and services, lower wages and lower debt levels."

All of these are good things. Even lower wages.

"The risk is that people don't spend because they think prices will be yet lower in the future and that sets off a negative spiral"

Much better than the consequences of inflation. And there will be a point where people simply can't put off spending.

"every national politican wants the country to have an inflationary trend"

The best case for deflation I can think of- because even with inflation the statists can't bring themselves to reduce debt. Clinton surplus was bullshit accounting games.

[Tulpa]

All of these are good things. Even lower wages.

How are lower wages a good thing?

Deflation is awesome for people who have money in the bank already and no debt. It's a disaster for people in debt or young workers just starting their careers.

[Tulpa]

It's also a disaster for people who invested in precious metals and such, btw. Where's the love for the gold bugs?

[Invisible Finger]

Lower wages are a good thing if you are buying labor, it is a bad thing if you are selling labor.

In a macro sense, lower wages are neither a good thing nor a bad thing, they are just a thing.

[JoshINHB]

Deflataftion benefits wage earners. Its the mirror image of inflation harming wage earners.

In both cases, wages are sticky and change in response to the change of money in the economic environment.

[Tulpa]

In the very short term, yes. But the problem is, wages aren't the only dollars in the economy -- there are also those held in savings or other dollar-denominated assets by the wealthy, which will cause prices to fall slower than wages do in the medium and long-term.

[JoshINHB]

The only long term low deflation that we have a record of is the 2nd half of the 19th century.

That was a 45 year period of increased living standards and purchasing power for wage earners.

Bryants "cross of gold" campaign for inflation resonated with farmers because the had asset(their land) declining in value, produced comodities(crops) that were also declining in value, which made their debt burden(mortgages on their farmland)ever more difficult.

Wage workers and many others benefitted from the deflation.

Bryant and his populist campaign for inflation was a serial loser after all.

Fiat currency and the resulting inflationary bias were achieved by WS elites with the establishment of the FED. Not as a result of populist action.

[John]

As stated earlier, 0.0% inflation/deflation is the best thing. Let's say that deflation gets to the point where I make 50 cents an hour, but that 50 cents buys the same amount that my current wage buys. I don't care, unless I borrow or save. If I borrow, then I want inflation of my wages. If I save, then I would like to see deflation. 0.0% allows people to make a rational choice about savings vs spending without the guess work.

[Brandybuck]

The Hayekian Structure of Production explains it. In the short term inflation benefits producers while deflation hurts them. In the long run both consumers and producers are screwed, but no on in the yammering class gives a rat's ass about the future. And so inflation is seen as good, and deflation as the ultimate sin.

Everyone's fingers are pointed at the early years of the Great Depression, when the Fed deliberately contracted the money supply by a third. There was a third way: doing nothing. But doing nothing is political suicide. When faced with a financial crisis, inflation is the only option because deflation is eebil and doing nothing is heresy.

[Tulpa]

The Smoot-Hawley tariff didn't help either.

And you KNOW the Dems are going to be itching to do something like that if this thing keeps going.

[hmm]

They won't go with a tariff. Maybe forcing China to untether its currency in a hope that the currency will rise and move jobs back to the US, but not a tariff. Either way imports will drop. The super smart morons running the show are just dumb enough to think this would be a good thing.

[Sidd Finch]

Sidd Finch|7.16.10 @ 2:30PM|#
They're sequestering CO2 emissions. I don't understand your question either.
reply to this

Brandybuck|7.16.10 @ 4:16PM|#
CO2 is CO2. Whether it comes from burning wood, buring oil, or plain old fashioned respiration, it's CO2. It is impossible to pick a CO2 molecule out of the air and say whether it was the result of Evil Big Oil, or the result of an Obama voter exhaling.
reply to this

Sidd Finch|7.16.10 @ 4:52PM|#
If you're picking off the stack, it's safe to assume it's a combustion product.
reply to this

Brandybuck|7.16.10 @ 6:55PM|#
Do you even know what CO2 is?

Who the hell let these pinheads in here? Shouldn't they be back on the set of Freaks?
reply to this

Sidd Finch|7.16.10 @ 8:27PM|#
You ignorant cunt, please explain why CO2 is 150,000 ppm higher than air if it's not combustion.

[John]

This has got to be the most irrelevant post I have seen here. You should get a gold star for that. Or perhaps a dollar star, and see what the value of that turns into. Or maybe a CO2 star, since that is what you seem to value.

[John]

Keynes said out loud, "In the long run, we're all dead." What he said to himself was "In the long run, they will realize how terrible my ideas are, but I will be dead, so I don't care."

[JoshINHB]

Deflation is bad for politicians, their masters and their sycophants because it transfers wealth from the rich to the middle class and makes expanding government impossible.

[flataffect]

If inflation is too much money chasing too few goods, then deflation is the opposite, too many goods and not enough demand (There's either no money or people are holding it due to uncertainty). People aren't buying, so sellers reduce prices in an effort to sell their products. If they can't sell their products, they don't need as many employees and so employment goes up. Since fewer people are earning, they can't buy even at lowered prices. And so on. That's a simplistic explanation, but I'm a simple guy. Any errors are mine.

[Hazel Meade]

That's the general idea, I think.

But right now with the stimulus money, the objective is to increase demand for goods. Problem is, people are producing too many of the WRONG goods.
I.e. GM cars, houses. So the government is artificially stimulating demand for the WRONG products to stop people from losing their jobs, producing the WRONG products.
if the economy were allowed to correct, prices for cars and house would deflate, as they should, fewer cars and houses would be produced, auto workers would get laid off, but eventually all the people having satisfied their needs for cars and houses for less money would spend their surplus cash on something else. Say, better health care. Auto worker goes to nursing school and becomes a nurse practitioner.

[ChicagoTom]

Forgive my ignorance, I'm not but a simple lad. I (seriously) haven't taken Economics 101 or even read Henry Hazlitt, but aren't personal savings a good thing for job growth because banks will invest your savings

Also not an expert on econ, but I would say no it isnt.

If everyone is saving, what exactly are the banks going to invest in? The banks loan your savings out, but there have to be people who actually want to take out loans.

If everyone is saving money, that means they aren't spending. Saving money isn't stimulative to the economy.

A company is going to borrow to expand their business, but if consumers aren't spending but instead sitting on their money, then suppliers of goods and services probably aren't going to be in a position to expand, thus not going to be borrowing money.

So the banks will have hoards lots of cash sitting around that they have to pay interest on, but that money wont be generating any revenue for them since there wont be enough borrowers.

Obviously the banks could invest them in Securities or hedge funds or what not. THat might be good for the banks to turn a profit but that doesn't really promote job growth or expand the economy in a meaningful way.

That's my simplistic explanation. Please feel free to correct me.

On a side note, with interest rates as low as they are right now, banks are basically able to borrow money from the fed for close to nothing. THey can then loan that money back to the government (by buying up bonds and T-bills etc) and pocket the money. Also not very stimulative. For the banks it's good cuz they make money on the spread with very low risk, but that means that they are less willing to loan to people who would want to borrow money.

[ChicagoTom]

THey can then loan that money back to the government (by buying up bonds and T-bills etc) and pocket the money

I should have been more clear here.

They (banks) can then loan that money back to the government (by buying up bonds and T-bills etc) and pocket the interest paid by those bonds and T-Bills.

[prolefeed]

If everyone is saving, what exactly are the banks going to invest in? The banks loan your savings out, but there have to be people who actually want to take out loans.

Net savings by consumers on average result in that money being invested in infrastructure and in capital goods that will increase future production, or allow increased leisure time with less work.

It is a GOOD thing when people eschew current consumption in order to make the economy more productive and thus produce future gains in economic efficiency. It is a good thing when people voluntarily act so that the future will be better than the present.

[hmm]

Someone is always willing to lend when when hurdles are removed. There are sites today that demonstrate that very notion. There's also a bit of historical reference like Amadeo Giannini and his card table and wheel barrow after the San Fran earthquake.

You can guess what the largest hurdle to lending usual is, or who it is.

[hmm]

Saving does not equal money under the mattress. It's usually invested in some form. Which is then used to generate goods.

[prolefeed]

Savings can also be used to generate such valuable things as more leisure time. If you spend money so that a factory produces the same output of goods, but at lower costs and with less worker hours, then those invested savings are being used to create more leisure time without a drop in the standard of living.

Ideally, an economy would consist of super-efficient robots that meet all but the most extravagant lifestyles without any human inputs, freeing people to work or not work, to spend their time on interesting and fun work or play rather than drudgery.

[hmm]

Yes I know. Just reducing the number of variables in the equation to make it easier. There are also at least two views to consider.

Ideally, an economy would consist of super-efficient robots that meet all but the most extravagant lifestyles without any human inputs, freeing people to work or not work, to spend their time on interesting and fun work or play rather than drudgery.

or Daleks.

[db]

This is how some people came to believe throughout history that slavery was ok. Just substitute an unfavored class of humans for robots.

[John]

Giannini was given a bad name when the Bank of America had troubles, but you are right, that he demonstrated what a good banker could do, without the current government regulations.

[Yonemoto]

If everyone is saving, what exactly are the banks going to invest in? The banks loan your savings out, but there have to be people who actually want to take out loans.

If too many people save, the banks will drop the interest rate to encourage people to borrow it out.

If everyone is saving money, that means they aren't spending. Saving money isn't stimulative to the economy.

You mean, it's not pro-growth. Well Yeah, but you can't keep growing forever. We do live on a finite planet.

[Chad]

If too many people save, the banks will drop the interest rate to encourage people to borrow it out.

We are zero-bound, Yonemoto. The market clearly rate is negative. Rates cannot drop significantly lower.

[Hazel Meade]

That;s the fed artificially setting rates low. Not the natural market rate.

The natural market rate would be quite high if banks were allowed to set it themselves. Due to all the bad loans and the lousy credit of most Americans.

[Invisible Finger]

So the banks will have hoards lots of cash sitting around that they have to pay interest on

No, they won't.

For starters, the interest is merely a price and the price is a function of supply and demand. If there is plenty of supply of deposits, they can take deposits with very low rates of interest.

In fact, since deposits are a liability to a bank, and an even greater liability if there is no loan demand, banks will merely discourage deposits or even refuse to take them. (The discouragement comes in the forms of lower interest rates on deposits and higher fees; the refusal comes in the form of not opening new accounts.)

In other words, if everybody saves and nobody borrows, a bank is merely a warehouse that charges rent for storage of cash. If everybody borrows and nobody saves, there isn't anyone to borrow from and instead of having "banks" you merely have servicers charging transaction fees to keep track of promises to pay; and the volume of promises shrinks over time as the promises are broken.

[Hazel Meade]

If everybody borrows and nobody saves, there isn't anyone to borrow from and instead of having "banks" you merely have servicers charging transaction fees to keep track of promises to pay; and the volume of promises shrinks over time as the promises are broken.

This sounds familiar.

[Paul]

it seems like there's no upper limit to how worthless money can get, so prices can rise without limit

Well, money can essentially be "worthless", so there's a bottom limit, if you will. However, prices can effectively rise without limit. But prices won't usually rise without limit without some background actor messing with either the supply or the demand.

As for deflation, in a country such as the U.S. with a 'fiat' currency which uses interest rates to either stimulate the economy, or slow down inflation, deflation can pose an interesting problem.

One economist once posed: "How does the Fed stimulate the economy when interest rates are at 0%".

And, this is not unprecedented.

The idea is that if your economy is working (which it's never supposed to not work with the Fed in charge... go figure) that situation should never occur.

Sort of like when economists-- especially the Keynsians claimed that Stagflation could "never" occur, yet it occurred in the 70's under Carter. A slowing economy coupled with rapidly rising inflation which begat sky high interest rates.

[Tom Perkins]

"One economist once posed: "How does the Fed stimulate the economy when interest rates are at 0%"."

It quits screwing with it.

[flataffect]

There's that Carter comparison again. Those of us who lived through that have been having deja vu ever since Obama won the nomination. A guy with a big grin and no understanding of Washington becomes president and then proves inept.

[Jordan]

Defaltion is here. Embrace it. Ask Japan what happens when you try to fight it.

[Jordan]

Deflation, even. Ugh.

[?]

But can someone point me to a link that splains in plain American-talk, what the worst case scenario is with deflation? Why are all the "serious" suits in DC always so concerned about it?

You don't need a link. Think about it.

Unproductive capital loses value ("value"), and the inflation-dependent pseudo-economy the serious-suit guys run disappears. Then we kill them.

It's all good.

[The Controller]

In order to control the economy all non linearity must be removed from the economic system to make the economy predictable.

Human beings, that is consumers, through the decisions they make are the primary source of non linearity in the economy.

Their behavior must be linearized.

Efficient central planning is crucial to a linearization of consumer behavior. Zero tolerance policies are one way of achieving this goal. Greater refinement in regulations, fines, fees, taxes, criminal penalties, and psychological counseling will produce the ideal citizen, the linear consumer.

A perfected economic state will then have been achieved. Each consumer will live in an economy that guarantees economic justice and fairness for all, there will be no more recessions or inflation, for ever and ever and ever.

[Van]

But Controller, when people start saving and paying off their debts as a response to unemployment or the threat of unemployment, aren't they behaving rationally?

How can it be bad for our glorious economy if consumers behave rationally and do what's best for themselves?

[Paul]

But Controller, when people start saving and paying off their debts as a response to unemployment or the threat of unemployment, aren't they behaving rationally?

Except that it's more complicated than that. Unemployed people don't save. They continue to spend. Often times at the expense of racking up increased personal debt.

They may reduce their spending, but most formerly employed people still spend. By employing people, you allow them to:

1. Spend more.
2. Reduce personal debt.

[Van]

I'm unemployed and have a bucket of money invested in an IRA.

But this is a tangential argument. The people who are reducing spending and saving whatever they can are both employed and unemployed.

How can an unemployed or underemployed person borrow money to spend in a tight credit environment?

The point I'm making here is that people ought to be trusted to be behave rationally or irrationally to do what's best for themselves and their families.

The idea that the public needs guidance from elites is what is evil. It is a violation of basic human rights to tell people how to behave economically.

[Paul]

How can an unemployed or underemployed person borrow money to spend in a tight credit environment?

I'm not sure I get you here. Often times, unemployed people run up credit card debt to make ends meet... hoping that they will become unemployed before the debt becomes untenable.

Other than that I agree with your entire premise.

[Van]

Ten Four.

There are irrational actors. Some even intentionally default knowing that after the statute of limitations runs out they are free and clear.

The people who are saving and investing right now are behaving rationally, but the "smart people" like Robert Reich think that's just awful, and think they should start behaving altruistically for the "Good of the Economy."

[Paul]

In the end, I believe what Robert Reich was saying is that Leaders with Plans would take your surplus dollars-- you know, those dollars you have lying around the house you don't really need-- through taxation policies, and spend it in an efficient and targeted way. Ways that you couldn't possibly understand, and could never duplicate yourself.

[Chad]

No, Van. It is not about being altruistic. It is about creating a situation where spending and investment are in more peoples' self-interesting. Right now, everyone is trimming their spending, leading to overcapacity and lack of investment. Since no one is actually investing, there is nowhere for the savings to go, and therefore we are getting paid zero for them. It's a lose-lose situation in every way.

[Van]

Fuck off Chad.

[Paul]

become unemployed before the debt becomes untenable.

Ugh.

[The Controller]

That is not good for the country or the economy. When consumers save more, they spend less.

Spending increases tax revenues and helps create inflation, this is what is good for the economy now. All consumers must be given negative feedback until they stop saving and start spending; for the good of the economy.

Paying off debt is bad for the economy because it reduces the money supply, creating deflation. No consumer should be allowed to contribute to deflation. They must be given negative feedback so their behavior will be linear.

[flataffect]

Gee, that was clear as mud. Non-linearity? Linearized? Please, no graphs in the comments!

You're obviously educated, but you need to learn how to communicate. (Not intended as a flame, just a plea for clarity.)

One more point: you refer to "efficient central planning." I don't believe there is such a thing. Central planning is the road to serfdom, because it lets people set goals that aren't based in the market. That's how we got the housing bubble. Central planners tried to increase home ownership by pressing for sub-prime mortgages with no down payments. That brought a lot of speculators in and housing costs ballooned. Then comebody had the bright idea of "collateralized" securities, tradable asset pools that had a lot of home mortgages. What could go wrong? Like all bubbles, this one broke and people found themselves owing more for their home(s) than they were worth. So they just quit paying the payments and let them go to foreclosure. That, in turn, made those funds unsafe because they now contained an unknown amount of failed mortgages, "toxic assets," and people holding shares in those funds suddenly had inadequate assets and that caused the financial markets, the commercial lending business, to freeze up. Businesses couldn't borrow money to keep their businesses running. Banks had large parts of their assets suddenly devalued and they couldn't lend money until they increased their reserves. So the Government passed the TARP bill. If that had been handled properly, it might have been all right, but it happened just as a new administration came in and it used the TARP fund as a slush fund, then passed over a trillion of deficit spending of its own.

At least that's how I understood what happened.

[The Controller]

flataffect you will need counseling to make yourself a better consumer. Please seek counseling at once.

If not, you face the unpleasant consequences of negative feedback.

[flataffect]

Controller,

I didn't pick up on your irony at first. My apologies.

[Jordan]

There's no better example than the Federal Reserve of just how much bullshit it is when Keynesians say they give a shit about the poor. It is the poor and those on a fixed income, i.e. the retired who are hurt most by inflation. Guess who benefits most? Government and evil bankers and filthy rich CEOs.

[prolefeed]

The government reporting a tentatively calculated 0.1% deflation for a single month is not deflation -- that's well within the margin of error for this calculation.

And stability in the value of a dollar should be the stated goal of the Fed. Their target inflation rate should be 0.0%.

[hurly buerhle]

If everyone is saving money, that means they aren't spending. Saving money isn't stimulative to the economy.

This is a priori contradictory. People don't save just to be dicks. They save against future consumption. This is the rationale for lending: expanding or creating markets to meet the demand for future consumption. In that sense, saving is vital for the health of the economy.

[Robert Reich]

This is a priori contradictory. People don't save just to be dicks.

Yes they do.

[prolefeed]

People don't save just to be dicks.

Depends on how you define dickishness. I don't consider a miser a dick, I consider them to be someone who is irrationally eschewing their own consumption, thus generating investment that benefits others.

[Invisible Finger]

The problem is using loaded words like "good", "bad", "miser", "growth", "stimulative", "rational", "irrational", etc.

If you want to know what happens when an economy saves more than it borrows or borrows more than it saves, it's best to leave the loaded words out.

[Lincoln]

I also have an economics 101 question:

How does one evaluate the impact of a country's debt? I get the basics of how to value a simple business, say a local pizza joint as opposed to an Enron. But aren't most of the 1st world countries essentially Enron*1000? I mean even before the recent real estate collapse we (the US) were deep in debt and creating complex derivatives in a global marketplace comprised of other countries who were also deeply in debt.

Perhaps a better way to ask it this: you've got X billion and can only invest and live in one country. Who ya got?

[prolefeed]

Depends on what that debt was incurred for.

Private debt can be a good thing, such as Bill Gates borrowing money to found Microsoft, or Sam Walton borrowing money to allow a rapid growth of WalMart stores.

Public debt tends to be squandered on things people don't value nearly as much, due to the coercive nature of taxation misallocating resources into things people don't want as much as things private investment would be directed toward producing, and thus public debt almost always is a bad thing.

[Lincoln]

I should have specified public debt.

Given that we live in a world where most countries are in massive amounts of public debt and that debt is effectively monopoly money owed by the debtor to the debtor or to other debtors when does anyone have to pay up?

Look at Japan. They're in a shitload of debt and have been for awhile. On the public debt as % of GDP list they only beat out Mugabe. This is pathetic and we should make fun of Japan for it. Yet I think you agree if you were forced to spend the rest of your life living, working and investing in one country Japan would be in the top 20 no? Top 50 then? When does Japan have to pay up? Can't they keep stringing this thing along indefinitely?

I guess given the doomsday talk I expect us to have to fellate China in the next 10 years when our pal Japan has already been in worse debt and they're doing alright. I could totally stand to be Japan. I'm not much of a hentai guy but I could put up with it.

[Joshua Corning]

I have the privileged and honor of sitting in Douglas County's staff meetings every Tuesday in witch the Commissioners touch base with their various departments. Mostly it is the planning and transportation department.

A recent bid for work on a bridge project got a low bid of about 7 hundred thousand and change. The engineers estimate was 1.4 million and change.

All other bids were in the range of 1 million to about 800 thousand. The contractors bid this low by not counting discounting of their equipment. Essentially they run their equipment into the ground then go buy other equipment on the cheap because right now there are literally thousands of pieces of iron sitting idle all over the county.

Also one should note that prices changes are not changes in the value of the currency they are a change in value of goods.

You can have dropping prices and still have inflation and you can have rising prices and still have deflation.

[David E. Gallaher]

According to CNBC (which I watch a lot--as a retired fart), the FED knows it not accomplishing either of its mandates, but it is just throwing up its collective hands: "not my job"???

[Princess Leia Obama]

Ben Bernanke, you're my only hope.

[Chad]

We're going to keep printing money until you stop saving it.

For a moment I thought "Ha! I libertarian finally understands recessions". Then I realized you were being sarcastic.

Oh well.

[Mr Whipple]

Can someone explain to me the difference between asset deflation and price deflation?

(Rhetorical)

The assets are already deflated, they are just marked-to-myth. Does Bernanke really believe that investors don't know this?

[Mr Whipple]

The Fed is not going to increase interest rates. If rates go up, the rate in Treasuries will go up. China holds a shitload of short-term Treasuries. They will need to be refinanced, at the higher interest rate, of course. Higher interest rates on Treasuries means higher interest payments for the Treasury, which means a higher budget deficit.

No, I predict interest rates will stay low until the Fed can no longer "hide" CPI and PPI inflation. (I just heard Ron Paul say that if they used the old method for determining inflation, it would be more like 6% than 2% annual.) At that point, they will raise taxes, because taxes are a curb on CPI inflation. But it will be too late. The Fed and Treasury will need to make a serious decision, at that point. Continue on to galloping, or hyper inflation, or substantially raise interest rates and default on short term Treasuries. Either way, we are fucked. It's coming. The longer we "Extend and Pretend", the worse it will be. I give it 2-3 years, but I'm no expert.

[Van]

Tax rates will go up on 1/01/2011 when the Bush tax cuts expire. The Administration need do nothing.

If inflation had been determined honestly over the past thirty years, cost of living increases for federal workers salaries would have increased at a proportional rate and the federal budget would have ballooned sooner.

Realistic interest rates would have also made it more expensive for Bush et al to increase federal spending.

[flataffect]

People are just like businesses. In this state of uncertainty, they're holding of buying or investing until all the Obama's wonderful reforms shake out and we know how screwed we are. Nobody is really sure whether they'll even have health insurance in the future, because their employers may drop it as the costs of Obamacare become clear. Or businesses could keep the benefits and just hire fewer workers. Remember that the Bush tax cuts turn to pumpkins next year and who knows how much Obama will want in additional taxes so he can claim to be "fiscally responsible." It's the second part of the Keynesian ratchet.

He doesn't understand any of what he's done, which is why he thinks he can send Clinton out to talk to businesses and persuade them to hire more people. He doesn't understand what creates jobs, which is a sense of predictability in the economy. That translates to profit opportunities and investment in jobs and property follows. But if the president is ranting about how evil and greedy business is, and pushes for new financial regulations to put more bureaucrats in their hair, along with health care reforms that do the same thing (Both include regulations that are still being written), coupled with absolutely scary deficits and the near certainty of new taxes--well it would be stupid not to save and wait until some clarity and certainty emerges. Businesses take risks to make money, but they understand those risks and calculate them in their planning. When they get them wrong and lose their shirts, they should fail. That's what bankruptcy is for, protection from creditors until they get their business profitable again, or for the orderly liquidation of the assets of the company. That may hurt employees, but those assets will go to others who will presumably make them productive again.

There's a boatload of cash being held back until uncertainty is resolved. The WaPo and Paul Krugman ascribe this to how greedy and unpatriotic bueinessmen are, but I think businessmen just do what is in the interest of the businsss. If they're successful they pay taxes, which as Joe Biden tells us, is patriotic. The most unpatriotic thing they could do is run their business into the ground and then ask for a bailout.

Republicans need to pick up on the issues that fire up tea partiers and stay on message. Make the argument for smaller government, lower taxes, and repeal of Obama's attempt to remake the country in his own image. They've got to breath fire and get their message straight: no more secret earmarks and pork barrel amendments, no more logrolling, promise to fight Obamaism at every step. When he attacks them, they should turn it into a badge of honor and point out that if he can't control his Democrats it's not the Repub's fault. Swear that until the national debt is paid off, there will be no additions to it (except in case of war). They should take on entitlements boldly and make it clear that we won't let anyone who needs help go without, but make all programs means tested. Reduce subsidies, including corporate welfare in all its forms. Pass a nation-wide right to work law and dump all the subsidies to labor unions.

And do it in the name of national security, because we can't be secure so long as we need foreign governments to finance our debt.

Americans need to show some spunk and quit looking to government for everything.

(Maybe I shouldn't have taken that Adderall this morning.)

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