The Fear of Deflation

[ICantSpellDawg]

I've been reading Krugman for months now and I've come to the conclusion that deflation is inevitable and is just what we need.

Obviously the Nobel laureate disagrees and I don't compare, but we keep hearing that Japan's economy is something we desperately need to avoid. Why? Sure, real wages have gone down over the past decade and unemployment is high, but maybe that created an environment for technology that actually makes their lives more affordable. Growth is in technology that lowers our cost of living, rather than technology that increases it. If I'm making less and less every year and I'm able to do more and more with the smaller amount of money I have, is that so bad?

Sure jobs are lost, but at the same time, more useful, lower paying jobs are being created.

All of this as we approach a parity with other economies, which is the end goal of globalization. A painless deflation is what we need, there is no alternative, and it will tide us over until developing economies begin to fill the gap of consumers and bring about an inflationary growth that more and more hard working human beign can partake in.

What do we all think?

[Tuuvi]

I don't know very much about economics beyond a high school course but I think I agree. I'd like my money to become worth more, not less. I also think that our economy needs to reach a point where people who work lower tier jobs can still live and raise a family quite comfortably without government help. Society won't be able to function if one has to choose between getting a college degree or living in poverty, but unfortunately to me this seems to be where our society is heading.

[Tellos Athenaios]

If you consider the value of a unit of money (e.g. 1 $) roughly equivalent to the unit amount of wealth of a monetary unit (e.g. a dollar represents a real part in the total wealth of the USA); then for instance deflation of the dollar means that -unless people started destroying dollars faster than printing presses can keep up with- a deflation of the USA' wealth as a whole and by extension it means that on average everything bought and sold in the USA is worth less than what you pay for it.

You think you had it bad with all the foreclosures? Deflation of house prices means that the greater value of a house compared with the attending mortgage contract is rapidly eroded away to the point of the loans exceeding the value of the mortgaged property.

[Beskar]

If you consider the value of a unit of money (e.g. 1 $) roughly equivalent to the unit amount of wealth of a monetary unit (e.g. a dollar represents a real part in the total wealth of the USA); then for instance deflation of the dollar means that -unless people started destroying dollars faster than printing presses can keep up with- a deflation of the USA' wealth as a whole and by extension it means that on average everything bought and sold in the USA is worth less than what you pay for it.

They don't usually destroy dollars anyway. So the value of the dollar includes all those pennies at the bottom of the fountain. Also, printing money doesn't inflation either, in todays economics, there are other factors involved.

Only way to "solve" the issue would be to use currency based on the "labor theory of value", "Marginal utility" or "voucher" economy.

[ICantSpellDawg]

You think you had it bad with all the foreclosures? Deflation of house prices means that the greater value of a house compared with the attending mortgage contract is rapidly eroded away to the point of the loans exceeding the value of the mortgaged property.

I don't own a home. I'm psyched about a collapse. No debt, a degree and and I live in an overpriced area of the country. We need a few hundred thousand dollar correction. Let the chips fall where they may.

[Slyspy]

There is a certain appeal to the whole collapsing house of cards type scenario, but I can't help but feel that the consequences could be rather more extreme than you think. Certainly more unpredictable, and therein lies the danger. Having a degree is no guarantee in times of significant unemployment. Neither is a decrease in house prices if the relative spending power of your income (if any) is also plummeting. Also consider that even those living in rented homes are at risk in such circumstances since someone, somewhere must own the property and probably have mortages or other loans secured on it.

[rory_20_uk]

Japan has massive government debt, the highest in the developed world. Japan's populace have a great appetite for government debt, which keeps interest rates low
Their use of technology predates the deflation, and is their major export for foreign capital. This might help them in other ways, but I don't think that it is a model that can be used worldwide. Their population is ageing and so require either more people or more assistance to undertake tasks. Many countries have people that require jobs.

[gaelic cowboy]

I don't own a home. I'm psyched about a collapse. No debt, a degree and and I live in an overpriced area of the country. We need a few hundred thousand dollar correction. Let the chips fall where they may.

I take it you have not lived through a recession from your statement so I let you away with this silly idea. A degree is standard my friend and all those guys who got sacked during the recession have a degree and experience to boot. The key to a recession is to be an insider you must know someone who can give you the nod for a job or chance to give your pitch to whoever trust me the 1980s in Ireland was ten times worse than this I know what I talking about.

[gaelic cowboy]

Obviously the Nobel laureate disagrees and I don't compare, but we keep hearing that Japan's economy is something we desperately need to avoid. Why?

Japan imports very little manufactured goods from abroad and it has an aging population which encourages investment in robotics and in joint ventures abroad. Japan basically saves and they will continue to do so unlike America where it will be a temporary moment of saving USA is highly unlikely to be able to replicate any of this long term like Japan. This means USA would only end up with the bad parts of Japans current situation.

Sure, real wages have gone down over the past decade and unemployment is high, but maybe that created an environment for technology that actually makes their lives more affordable. Growth is in technology that lowers our cost of living, rather than technology that increases it. If I'm making less and less every year and I'm able to do more and more with the smaller amount of money I have, is that so bad?

You forget that ROBOTICS and QUALITY are the two key features which Japan has which America will find extremely hard to replicate. Robotics is a feature of industry which is the first real substantial attempt at removal of the worker from the workplace this is fine in aging Japan not in 300 million people and rising USA. Quality is the next problem you have US goods are in the main crap and there is no two ways about you gave up good quality production in the 60s.

Sure jobs are lost, but at the same time, more useful, lower paying jobs are being created.

Unless the inputs and outputs are cheaper then this statement will fail.

All of this as we approach a parity with other economies, which is the end goal of globalization. A painless deflation is what we need, there is no alternative, and it will tide us over until developing economies begin to fill the gap of consumers and bring about an inflationary growth that more and more hard working human beign can partake in.

What do we all think?

There is no such thing as a painless deflation just as there is no such thing as a painless inflation either.

[Vladimir]

You forget that ROBOTICS and QUALITY are the two key features which Japan has which America will find extremely hard to replicate. Robotics is a feature of industry which is the first real substantial attempt at removal of the worker from the workplace this is fine in aging Japan not in 300 million people and rising USA. Quality is the next problem you have US goods are in the main crap and there is no two ways about you gave up good quality production in the 60s.

I take it you mean the 1660's. American's long since realized that we couldn't compete with the standard of quality Europe had. Instead we focused on lesser but more broadly avaliable products; the Wal-Mart of it's time. This worked out in the long run. Not everyone can affort an Astin Martin but most people can buy a Ford. I believe you're thinking of Chinese goods.

[rory_20_uk]

Although current Ford construction is rather good - a much better name than many Italian or French cars. German brands are almost always thought of as well built.

[gaelic cowboy]

I take it you mean the 1660's. American's long since realized that we couldn't compete with the standard of quality Europe had. Instead we focused on lesser but more broadly avaliable products; the Wal-Mart of it's time. This worked out in the long run. Not everyone can affort an Astin Martin but most people can buy a Ford. I believe you're thinking of Chinese goods.

No China is low price while Japan has always meant high quality since the 60s even if we did not realise it. Despite the rather large mistake Toyota made lately this still holds generically true and should continue to hold true. America also had its own low price period which is now long since gone, then it had a brief period of high quality after WW2 mainly due to it being the bigger innovator in industrial techniques during and after the war ZERO DEFECTS and other ideas and innovators who I can't remember now.

The price of a Ford is irrelevant when it may breakdown quicker than it's competitors and still not be cheaper in price or running costs to the average consumer.

US firms made that mistake way back when they thought they were competing on price when quality was the real driver. Japans later problems stem more from a hyperbubble in real estate than any other problem

[rory_20_uk]

Their innovation being in no small part having access to all of Great Britain's patents and the money to use them.

[Viking Prince]

Deflation is nasty business. It means the financial system simply dries up. It becomes impossible to borrow lonterm money secured with assets. How much down payment is going to be required to have a secured mortgage on a home when the asset value keeps dropping? How are new bsinesses going to get started? How will an existing business borrow to expand with new plant and equipment?

Nearly every economist will advocate a bit of inflation to simply avoid the nasty effects of deflation.

[gaelic cowboy]

The thinking is probably that if money deflates then it would be better to invest it or spend it on something that give a later return. The hoarding of government capital injections and of stimulus money by banks is killing SME's and private individuals who wish to open a business. This would appear to encourage lending to the correct people as property investment in a deflating market would be unwise however it ignore the fact that the money owed presently will have to be paid back with useless monopoly money.

[ICantSpellDawg]

Their IS such a thing as "painless" inflation and deflation. If it is a controlled descent or ascent we should be able to cope with the adjustment. My point is that all of our heads should be able to figure out a way to make deflation work in the short term since it seems like it is inevitable on the global scale. Everyone has known that as economic security and education increase in the developing world there would come a time when we would reach a relative parity. We had all hoped that the parity would come in the form of mutual inflation and economic growth, but it seems rather sensible that it would, instead, come from our economic faltering while the guys behind us caught up.

We've come to a point where the distinction between a white collar job in the U.S. and India is negligible, except for the massive savings India provides. Often, the help I would get from Americans in the South or inner cities will be sub-par to the help I get from India or the Phillipines. Years ago this wasn't the case. There is no future but to lose service jobs abroad until we reach parity. We are in for a long haul of job losses and we need to realize it. Bright human beings will eventually hold the better jobs no matter where they are in the world and no matter what their background is. Honestly, have we not seen this coming? There has always been a choice - embrace globalization for long term exponential growth and equal opportunity (which would come with a loss of purchasing parity, job losses and a reduction in rampant consemerism in developed countries) or close off from global trade using protectionist/imperialist policies that subjugate global upstarts and potential opponents. The US polity doesn't have the stomach to step on the necks of those less fortunate than us, and so the former way is inevitable, unless we revert to our more base natures.

My point is that we need to embrace a highly stingy and cost-saving mentality and extreme technological innovation that will allow us to lose pay, lose jobs while increasing our quality of life. I think it is possible.

[a completely inoffensive name]

When it comes to the economy, any changes somewhere, somehow, hurts someone. If you mean painless in that the majority of people will receive a neutral or positive economic influence due to the shift then say that.

[ICantSpellDawg]

Every time you touch something, skin cells around your hand die. I would call that painless. If a small enough number of people are hurt, that is the name of the game.

[a completely inoffensive name]

Every time you touch something, skin cells around your hand die. I would call that painless. If a small enough number of people are hurt, that is the name of the game.

That is a terrible analogy. You are comparing the financial stability of people for years to come when the economies money supply shifts from expansionary to contraction to the top layer of skin cells dying without triggering pain receptors in your hand?

Also, define small enough.

[Tellos Athenaios]

That is a terrible analogy. You are comparing the financial stability of people for years to come when the economies money supply shifts from expansionary to contraction to the top layer of skin cells dying without triggering pain receptors in your hand?

Also, define small enough.

Especially considering that the cells were dead to begin with: all top-layer skin is like dandruff waiting to peel/fall off. For a lighter note, consider that the next time you look upon your beloved ones: (most of) the features that inspire your emotions are dead.

[Slyspy]

Every time you touch something, skin cells around your hand die. I would call that painless. If a small enough number of people are hurt, that is the name of the game.

Would this be a Five Year Plan?

[ICantSpellDawg]

100 year plan.

[edyzmedieval]

Deflation must be avoided.

It drives down prices and it creates a so called deflationary spiral which the Japanese still did not manage to eradicate after more than ten years of dealing with it. The "animal spirit" as pioneered by Keynes, or the expectations of the consumer, are acting against the interests of the country - they expect the price to decrease so they put off spending for the future. Problem is, prices go down and down until they are no longer sustainable, and so companies collapse and Aggregate Demand in an economy falls below any sustainable level.

That is the main reason why we should avoid deflation. Not too mention it causes a severe shock in the financial markets, the loans suddenly become more expensive and before corrections are made it can take years, even tens of years.

Avoid deflation at all costs.

[a completely inoffensive name]

Deflation must be avoided.

It drives down prices and it creates a so called deflationary spiral which the Japanese still did not manage to eradicate after more than ten years of dealing with it. The "animal spirit" as pioneered by Keynes, or the expectations of the consumer, are acting against the interests of the country - they expect the price to decrease so they put off spending for the future. Problem is, prices go down and down until they are no longer sustainable, and so companies collapse and Aggregate Demand in an economy falls below any sustainable level.

That is the main reason why we should avoid deflation. Not too mention it causes a severe shock in the financial markets, the loans suddenly become more expensive and before corrections are made it can take years, even tens of years.

Avoid deflation at all costs.

This guy knows what he is talking about.

[ICantSpellDawg]

Yes, that is conventional wisdom and it is the likely outcome sooner or later. Sometimes you need to drain a dirty pool, clean it and fill it up again. You can't just start filling it up with muck, bacteria and debris. That is what our economy needs; a natural scaling down for a time, accompanied by growth in technological cost savings so that we have a healthy and vibrant economy. Eliminate more and more jobs until companies are on a solid foundation again and are not suffering from the dead weight of previous employment agreements. If the cost cutting is faster than the loss in income or net worth it might not be as painful for consumers. With the clean base we can grow a new economy. Pretty much chapter 11 on a national scale, the debts being pension funds and failed company/employee agreements.

Sure, Keynesian velocity and inflation is needed, but when is the FED going to increase the target rate and get the party started? It can't hurt to talk about alternatives when the value of the American worker seems to be equal to dirt. You'll get a better work ethic, a brighter mind, higher potential for growth and a better bottom line setting up shop in any developing country, following the incentives our current system gives. American is only as strong as its consumerism, without that, what is the point of investing here? We are, collectively, "the fat of the land."

[a completely inoffensive name]

Yes, that is conventional wisdom and it is the likely outcome sooner or later. Sometimes you need to drain a dirty pool, clean it and fill it up again. You can't just start filling it up with muck, bacteria and debris. That is what our economy needs; a natural scaling down for a time, accompanied by growth in technological cost savings so that we have a healthy and vibrant economy. Eliminate more and more jobs until companies are on a solid foundation again and are not suffering from the dead weight of previous employment agreements. If the cost cutting is faster than the loss in income or net worth it might not be as painful for consumers. With the clean base we can grow a new economy. Pretty much chapter 11 on a national scale, the debts being pension funds and failed company/employee agreements.

Sure, Keynesian velocity and inflation is needed, but when is the FED going to increase the target rate and get the party started? It can't hurt to talk about alternatives when the value of the American worker seems to be equal to dirt. You'll get a better work ethic, a brighter mind, higher potential for growth and a better bottom line setting up shop in any developing country, following the incentives our current system gives. American is only as strong as its consumerism, without that, what is the point of investing here? We are, collectively, "the fat of the land."

I don't get it. He is citing a well known economic phenomenon and you are dismissing it completely and instead advocating that we treat the economy like a pool "drain it and filler up again". Why should I be trusting what you are saying?

[Ironside]

Eliminate more and more jobs until companies are on a solid foundation again and are not suffering from the dead weight of previous employment agreements. If the cost cutting is faster than the loss in income or net worth it might not be as painful for consumers. With the clean base we can grow a new economy. Pretty much chapter 11 on a national scale, the debts being pension funds and failed company/employee agreements.

Sure, Keynesian velocity and inflation is needed, but when is the FED going to increase the target rate and get the party started? It can't hurt to talk about alternatives when the value of the American worker seems to be equal to dirt. You'll get a better work ethic, a brighter mind, higher potential for growth and a better bottom line setting up shop in any developing country, following the incentives our current system gives. American is only as strong as its consumerism, without that, what is the point of investing here? We are, collectively, "the fat of the land."

...So after cutting down employment and worker salaries, exactly who is going to buy that new goods of yours?`

And is this new economy you speak of based on an industrial base and not services? If it is, good luck with that.

[edyzmedieval]

Yes, that is conventional wisdom and it is the likely outcome sooner or later. Sometimes you need to drain a dirty pool, clean it and fill it up again. You can't just start filling it up with muck, bacteria and debris. That is what our economy needs; a natural scaling down for a time, accompanied by growth in technological cost savings so that we have a healthy and vibrant economy. Eliminate more and more jobs until companies are on a solid foundation again and are not suffering from the dead weight of previous employment agreements. If the cost cutting is faster than the loss in income or net worth it might not be as painful for consumers. With the clean base we can grow a new economy. Pretty much chapter 11 on a national scale, the debts being pension funds and failed company/employee agreements.

Sure, Keynesian velocity and inflation is needed, but when is the FED going to increase the target rate and get the party started? It can't hurt to talk about alternatives when the value of the American worker seems to be equal to dirt. You'll get a better work ethic, a brighter mind, higher potential for growth and a better bottom line setting up shop in any developing country, following the incentives our current system gives. American is only as strong as its consumerism, without that, what is the point of investing here? We are, collectively, "the fat of the land."

You are more or less advocating for the dumping of all useless jobs and make companies live off only with the people they really need and take it off from there. Well, let's say 50% people leave. In the next 3 months another 10% are added, so its 40% unemployment. Companies are perfect right now, with huge profits.
But there's one problem - what do you do with the 40%? Back in the Middle Ages, you would either kill them or starve them. Or even better, the Plague.

The thing is, the Plague was the single best disease ever done to humanity and it was the horrible impact that led to the Renaissance. Fewer people, more food, more money to them. Back then, there was no medicine. But now there is - and today killing people doesn't go well.

So what are you left with? Try and manage the economy as much as you can so it can come to 3-4% unemployment. Right now you can't just clear the pool without having a communist revolution or a downright civil war. And in the end, who is going to buy all of the goods and services that the companies produce once there is no money available for more than 40% of the population?

Your idea doesn't stand, economics is a complex social science and you need to balance. Going to the extremes will only destabilise the system and bring it to collapse.

[Slyspy]

100 year plan.

My Five Year Plan comment was a reference to Stalin's economic reforms. For some reason your comments remind me of early soviet rhetoric.

[rory_20_uk]

There are a growing number of people who, economically, culturally and from a perspective of furthering the human species serve no useful function. But they want to be fed, entertained and breed.

Inflation helps deal with this problem better than deflation does.