Loren Pechtel

Please explain?!

Less goods, same money = more money chasing the same goods = inflation!

Loren Pechtel

That's the trap that Japan has fallen into. They drove interest to basically zero and it wasn't enough.

Bill

Your first paragraph, about increased money supply chasing the same goods and services being inflation is exactly correct.

Your second paragraph, claiming that a constant money supply chasing fewer goods and services being deflation is entirely wrong.

Deflation means that, for the same goods and services, prices go down, which is exactly the opposite of inflation, where prices go up for the same goods and services.

We haven't had a large deflation since the "Great Depression" of the 1930s. The primary reason we have avoided a major deflation is the huge "safety net" erected by FDR as part of the "New Deal." Among other things, people get unemployment payments now when they lose their jobs. This allows them to continue buying at least some degree of necessities to support their families, and at least slows down any deflationary pressures in the economy.

Deflation would be a problem if the amount of available money remained relatively smaller than the amount of available goods and services. However, as people lose their jobs, they stop producing goods and services, so the available goods and services has actually gone down at a relatively more rapid rate than the amount of money, due again to the "safety net" of unemployment insurance, welfare, and other transfer payments. Deflation occurs when people lose confidence in the economy and hold on to whatever money they have, collapsing the purchasing power out of the economy much faster than the quantity of goods and services can contract to try to match the money supply.

But given the huge percentage of the economy that is now financed on credit (car loans, credit cards, and so forth) rather than saved or hard-earned cash, deflation is less likely, largely because people are more willing to spend OPM (other people's money) on stuff, figuring that if the worst happens, it isn't their money that they spent......

The bottom line is that serious economists worry about deflation as a possibility, but those economists are living 50 years in the past, when credit was only used to buy a few things, like houses and cars. In this day and age, so long as credit is available, people will continue to buy (and buy and buy....). And it is Alan Greenspan's job to ensure that plenty of credit remains available in the banking system, so worrying about deflation is pretty-much a waste of time.

== Bill

God Fearing Atheist

But Bill, deflation during a cyclical contraction, especially one as severe as the Great Depression, is a GOOD thing!

Frankly, i'd rather have the brunt of any contraction felt in prices rather than in real output (the AS curve classical), because the alternative (the AS curve being Keynesian) is absolutely terrible. In the case of the GD (and every other cyclical contraction), its a mixture of both, with the AS curve shifting more vertical as time goes on (because of menu-costs and money illusion and all that).

-GFA

echidna

So would you say that the Fed's recent comments are just a beat-up ?

http://www.steelnews.net/members/new...232003-1.shtml ... bearing in mind that this is the same man famous for saying words to the effect of "if I seem unduly clear to you you must have misunderstood me". Two months old now, but something seems to have prompted talk of deflation. With some interest rates at 40 year lows, overconfidence would seem misplaced.

echidna

I think I'd add that the world economy does appear somewhat stagnant and as such, delicate at the moment. With the impact 9/11 had, were another similar event occur in the near future, the unspoken question is what impact that would have and how well positioned is the US economy to handle it. Factor in Bush's current economic mismanagement & at the very least it would significantly delay any recovery.

Ruy Lopez

Would just like to make comments.

From Boneyard Bill; The term "deflation" originally meant a reduction in the supply of money in circulation just as the term "inflation" meant an increase in the supply of money in circulation. Later, inflation came to mean an increase in prices. i.e. the effect was given the same label as the cause.

Yes. An important terminology distinction--which does not matter to most people anymore.

From Bill; We haven't had a large deflation since the "Great Depression" of the 1930s. The primary reason we have avoided a major deflation is the huge "safety net" erected by FDR as part of the "New Deal."

After "avoided a major deflation", the phrase "so far" would make the statement considerably more accurate. Ballgame is not over; buzzer has not sounded. If my guess is correct, we should have another 10 to 12 years of this quagmire.

Kindly look carefully at the period 1933 to 2002 in my favorite cluttered link; the T bond and PPI/CRB plots. The PPI/CRB (commodity and wholesale prices) started to rise sharply in 1933 completely at variance with the magnitude or amplitude of three previous long waves in the past 160 years. You guessed it. This is the effect of the New Deal and Keynesian deficit spending. HOWEVER, look at the t bond rate plot. Interest rates continued to drop from 1933 to 1947--the real bottom of the long wave. I t means no amount of Fed pump priming and spending could persuade businessmen and consumers to increase loan demand.

http://www.ldusa.com/roger/200210KondraWithCRB4.pdf

Yes, the gov't or Fed can keep reflating money supply, as they have been doing are doing and will do next election year, but it won't get the economy going. More jobs to be lost; business will not invest.

Your The bottom line is that serious economists worry about deflation as a possibility, but those economists are living 50 years in the past, when credit was only used to buy a few things, like houses and cars. In this day and age, so long as credit is available, people will continue to buy (and buy and buy....). is a good counter argument BUT we are currently in a mass psychology state that is still "bullish" Most people still believe the stock market will rally to top the 2000 peak and the economy will come roaring back. I saw statistics quoted in an intrview that barely 2% of the long-term investing public got out of the market. Only the rich, the insider rich have substantially left the market. I'm saying give the people more time. Markets love to punish unanimity and uniformity.

Appearing before the Joint Economic Committee of Congress, Mr. Greenspan declared that the war over inflation has been won.

This spectacled guy loves to take credit for something he did not do. The long-term decline of interest rates starting in 1980 and the start of disinflation and the current teetering into deflation have little to do with the Fed, Volcker or Greenspan. Those 1980-82 turning points in inflation and interest rates are the result of market forces far stronger than any country or Central Bank. There were inflation and interest rate bubbles which reached exhaustion after rising for 30 years (47 years for inflation).

Now what we have are long-term decline in interest rates, product prices, stocks, collectibles, real property and other tangible assets that rose with inflation in the 50s to the 80s.

Ruy Lopez

There's an important issue I failed to mention.

Remember the PPI/CRB plot in the link that went into orbit in complete divergence with the past. The sheer volume of money pumped into the economy starting 1933 (after the shocking crash), drove the PPI upwards way ahead of the real long wave bottom in 1947-48.

http://www.ldusa.com/roger/200210KondraWithCRB4.pdf

What bothers me and what,up to now, I still refuse to think of, is what the CRB plot will do in the next 10 years. The absolute and nominal level of the PPI/CRB should be linked to the amount of debt in the US economy. It is the debt,( fossilized monetary inflation) that supported this high level of the PPI.

If this PPI value collapses to the base default position, down, down there--this is what could be called "Great Deflation". I have no idea if this is possible or will happen. What do you think?

I can vouch though that the following is true; "Mild deflation is synonymous with economic stagnation as more severe deflation is with a depressionary condition."

Money supply can be destroyed in an economy faster than the Fed can create it. I think Bill mentioned one or two ways. In one case, it takes a sudden change in mass pyschology just as the bulls in Yahoo turned into despair in just one year.

John Hancock

Aw duh! old sword what's CRB abbreviate. Mr. Lopez your patience is appreciated.

John Hancock
__________________
"Fascism,should more properly be called corporatism, since it is the merger of state and corporate power." Mussolini

Ruy Lopez

John;

I think CRB means Commodity Research Bureau while PPI is Producers Price Index.

Also have a favorite line(lyrics from a song) that suits this topic. Yours is:

"Fascism,should more properly be called corporatism, since it is the merger of state and corporate power." Mussolini

Mine is:

"They go UP; they go DOWN---the magnificent men in their flying machines. They go up they go down ........"

In our thread, up is inflation; down is deflation. The cycle takes 60 years more or less.