Econ Forum: Isn't deflation a good thing?

[TGregg]

Sure be cool if we could get an econ forum someday. But I sure ain't gonna sponsor it.

I've been thinking about the current economic climate quite a bit. It's hard, because I don't really "grok" deflationary principles (I'm such a Boomer). But, it strikes me that mild deflation might be a good thing. Wouldn't it be better economically if folks where rewarded for saving? I mean, money is a claim on goods, and when somebody saves instead of consuming, then there are more capital available for investment, which hopefully results in more enterprise.

On the other hand, that ATM to the special interests that is our government has a huge VISA bill. And, that ain't gonna be pretty after a few decades of deflation. So I dunno, what do you think? Deflation, good or bad? And why?

 

[Burtakus]

Deflation in America and patrs of Europe is most likely a certaintity sometime in the future. With the rise of the global economy where corporations can send work offshore for pennies in the dollar compared to what is costs in the U.S., Americans will have to face a reduction in the our current standard of living. In an extreme case our wages will have to be reduced in order to compete with the Asian countries and even Mexico. The American worker will be forced to take wage cuts to become competive with foreign labor. When this happens the colective buying power of the American workers will be reduced and deflation will have to follow. There will always be those on top that are ahead of the game and will have a leg up on everyone else. Sucessful traders will be among this group as their wages are not dependant on any corporation and they do not have to compete with foreign labor. The divide between ther haves and have-nots will continue to increse as it always has. Living in the Houston, Tx. area this has already begun in the blue collar work force where "cheap" labor from Mexico has outplaced many of the lower end blue collar jobs. It has even seen limited progress in the high tech sector around here with high end engineering work being transferred to Russia where labor is cheaper and the workers donl't complain like us Americans when asked to do work that is "below" them. My generation will face a much more competitive work force and than what my parents did. That is one of my many motivations for becoming a successful trader. I won't have to worry about losing a job to a cheap worker through the global economy.

Just my two-cents.

 

[ramora]

During periods of inflation people buy products and services because they expect the price of products will be higher if they wait.

The problem with deflation is that people will not buy products because they expect the product price to be cheaper next week. If people will not buy products it doesn't matter how much saving are in the bank, it will not help the economy.

During inflation people do not invest in business expansion or new enterprises, as you suggest, but keep their treasure in cash as it is the only thing increasing in value as the value of products is decreasing everywhere else.

Japan enjoys a high level of personal savings and low personal debt but it doesn't help the economy as the price of products are expected to decrease next week or next year. Japan has tried to generate the economy with 'public works' spending projects but so far nobody is spending.

If you look at the Consumer Price Index and commodities such as metals I don't think many are worried about deflation for the time being. If the market tanks in September and October and we have a terrible Q4 maybe folks will start worrying about deflation again, but not today. Summer is here, and living is easy!

ramora

 

[TGregg]

Quote from ramora:

. . . If people will not buy products it doesn't matter how much saving are in the bank, it will not help the economy.

During inflation people do not invest in business expansion or new enterprises, as you suggest, but keep their treasure in cash as it is the only thing increasing in value as the value of products is decreasing everywhere else.

But, by the very nature of keeping plenty of cash in the bank, interest rates are lowered, and that makes capital cheaper for business, and makes more expansion possible due to cheaper capital costs.

Quote from ramora:
Japan enjoys a high level of personal savings and low personal debt but it doesn't help the economy as the price of products are expected to decrease next week or next year. Japan has tried to generate the economy with 'public works' spending projects but so far nobody is spending.

The problems in Japan are mainly caused by corruption and anti-free market ideas, along with the continued unwillingness to let failed corporations (including banks) fail. While Japan's problems have an impact on the world, we are unlikely to experience those problems on that scale. Not to say that (cough, Enron, cough) we don't have a few sore spots, but not like they do.

Quote from ramora:
If you look at the Consumer Price Index and commodities such as metals I don't think many are worried about deflation for the time being.

I agree with that. Uncle Al has stated time and time again that he will not stand for deflation, and is inflating the money supply at a staggering rate, currently about 8% annually(!) Using our fractional reserve banking system, the fed can indeed stave off all but the most extraordinary deflation - and I do not believe we have extraordinary deflation.

But that doesn't answer my question. Is deflation good or bad? And why?

 

[Mecro]

Quote from Burtakus:

Deflation in America and patrs of Europe is most likely a certaintity sometime in the future. With the rise of the global economy where corporations can send work offshore for pennies in the dollar compared to what is costs in the U.S., Americans will have to face a reduction in the our current standard of living. In an extreme case our wages will have to be reduced in order to compete with the Asian countries and even Mexico. The American worker will be forced to take wage cuts to become competive with foreign labor. When this happens the colective buying power of the American workers will be reduced and deflation will have to follow. There will always be those on top that are ahead of the game and will have a leg up on everyone else. Sucessful traders will be among this group as their wages are not dependant on any corporation and they do not have to compete with foreign labor. The divide between ther haves and have-nots will continue to increse as it always has. Living in the Houston, Tx. area this has already begun in the blue collar work force where "cheap" labor from Mexico has outplaced many of the lower end blue collar jobs. It has even seen limited progress in the high tech sector around here with high end engineering work being transferred to Russia where labor is cheaper and the workers donl't complain like us Americans when asked to do work that is "below" them. My generation will face a much more competitive work force and than what my parents did. That is one of my many motivations for becoming a successful trader. I won't have to worry about losing a job to a cheap worker through the global economy.

Just my two-cents.

I agree.

There is already jobs being shuffled out of here ASAP. Tech support and desktop publishing for financials has pretty much left this country. This is small scale comparing to the huge picture but it's just an example. To NYC, this is a few thousand of jobs, of which only a few hundred is left. These are not coming back.

I mean if there was some other growing sector where all these workers could go, I do not see a problem. But there isnt.

 

[ramora]

Quote from TGregg:


But, by the very nature of keeping plenty of cash in the bank, interest rates are lowered, and that makes capital cheaper for business, and makes more expansion possible due to cheaper capital costs.

You cannot force people to spend or invest. We have a lot of experience with inflation and the debate is very healthy and passionate. There is not a lot of experience on what to do when nobody wants to buy. Why would you invest if the dollars you receive are worth less than they are today? How do you stimulate the economy (other than war)? This is the major reason deflation is bad in my opinion.

In a deflationary period, you would not buy a house with your cash because it will be cheaper next year. If you did buy a house during a deflationary period, wait 2 years, and your house is worth 20% of what you paid for it. Your loan payment did not change. Over a number of years of deflation it is easier to walk away from your home than make the loan payments. Better to rent as rent keeps falling in dollar value month after month.

Jobs leaving the US will eventually cause a deflationary period in the US. All those jobs going to India, China, and Russia are not coming back. Those economies will inflate, ours will deflate. When there are no US consumers who are 'willing and able' to spend their money, regardless of product price, it will effect the entire world economy.

Successful trading is the only protection I know of for both inflation and deflation.

ramora

 

[m22au]

Deflation in the overall price level of goods and services is not going to happen in the short term in the US due to the large increases in money supply.

But that's not the deflation the Fed is worried about.

They're worried about the deflation of debt, deflation of the stock market and deflation of the property market.

Given the ridiculously high debt levels of the Government, Businesses and Consumers, debt deflation would quickly have the US spiralling into a deflationary depression.

And despite changing his mind on the "unconventional policy actions", Greenspan still looks like he is willing to print all the debt away.

It won't be repaid if he didn't.

 

[TGregg]

Quote from ramora:

In a deflationary period, you would not buy a house with your cash because it will be cheaper next year. If you did buy a house during a deflationary period, wait 2 years, and your house is worth 20% of what you paid for it.

LOL, point taken. OK, my real question is, isn't deflation of 1-3%/year (not 45% as suggested above) a good thing?

 

[TGregg]

Quote from m22au:

It won't be repaid if he didn't.

Yeah, you stated the idea I presented in the original post with more clarity but perhaps less humor .

That is the thing. But in essence, isn't Uncle Greenie essentially robbing the folks who loaned the feds money?

Essentially?

 

[FishSauce]

1. Outsourcing has been blown out of proportion. The estimated effect on personal income level and employment is minuscule. The media absolutely has no idea what the heck they're talking about.

2. Deflation or inflation is NOT necessarily bad. Its UNEXPECTED price change - whether deflationary or inflationary - that is detrimental. If everyone expects inflation to be 1%, wages, interest rate, etc etc will "factor" in this expectation.

3. Unemployment is roughly at 6.2%. Not good, but not threatening as the media portrays it. Again media has absolutely no clue. 5-6% is pretty decent unemployment number; the bubble has sensitized people into thinking that 4% is the norm. Fat chance.



---That is all.