Fear And Dread Of Deflation—-The Keynesian Big Lie At Work

[fhl]

Back to FDR. They describe him as someone who believed in balanced budgets and that it was this belief that undermined the economy from coming out of the great depression. And that he only turned to Keynesianism after he realized how wrong he had been.

" From 1933 to 1937, FDR maintained his belief in a balanced budget, but recognized the need for increased government expenditures to put people back to work. Each year, FDR submitted a budget for general expenditures that anticipated a balanced budget, with the exception of government expenditures for relief and work programs.He considered such programs to be emergency in nature, and therefore separate from usual governmental outlays."

http://www.fdrlibrary.marist.edu/aboutfdr/budget.html

See, he was a budget balancer. If you don't count his public works projects. LOL
And it was because he was a budget balancer that the economy never pulled out of its misery. We're supposed to pretend that the new deal didn't exist and he didn't spend money on make work programs until after he got religion keynesianism later in his admin. That's when he began to count the spending as part of the budget.

But even though ol FDR was a budget balancing new dealer, the federal debt went up during his admin from $22 billion to $258 billion.
http://www.wealthwire.com/news/finance/1520

The federal debt went up by over $230 billion dollars but the reason FDR wasn't successful in bringing the country out of the recession was because he was a budget balancer.
This is what we are supposed to believe.

 

[Tsing Tao]

Yeah, it's almost as if you and your energy customers are the only businesses in America, isn't it? How about we just refer to your business as noise? Like the fed does when looking at price increases in other areas of the economy.

Exactly.

Look, there's no question that if deflation persisted for long periods of time, the end result would be a total reversal of anything related to growth in a large section of the economy. But the problem here is that prices don't decline much at all without a serious exogenous event. They only slow their rate of ascent. With the exception of direct commodities and the products they yield without significant manufacturing, can anyone tell me what prices have been falling as of late? Remember, we're not talking about gasoline. Food is fair game, however. I can tell you (because I have access to the data being in CPG Food that the grocery market has not seen a whole bunch of price declines since 2008. Exceptions being in things like cooking oil or sprays, most products in the grocery store have either risen (either directly in price or "down sizing" for same price) or stayed stable.

What about durable goods? Home prices? etc. Why is it necessary that the overall prices we pay have to increase by 2% each year?

For the type of deflation that Ricter is describing - that Hayek was worried about - to manifest, we first have to have a prolonged period of price declines in order for margin compression to occur. It is more likely Ricter's example has something else driving it.

 

[StarDust9182]

Interesting thread. I think part of the problem is that deflation is not falling prices and inflation is not rising prices. A previous ET thread once pointed out that the definition of inflation had been changed in the dictionary and that was true when I checked it against my grade school dictionary.

Capitalism tends to choose winners and losers so one would expect the biggest winners to own the biggest buildings (and perhaps own the best lobbyists) in most cities. In my city, insurance companies, banks and oil companies own the biggest buildings. Those owning the biggest buildings fear deflation, not the guy riding the bus and that is because it hurts their business. A spread business (not to be confused with spread betting.) One knock against capitalism is that successive economic downturns weed out weak hands and concentrate the owners. Has that happened? If so maybe the fear talk is really the owners knowing that the game will have to end one day.

I used to say we have been in deflation for years, but I think the term I meant to use was dis-inflation. Is there a bond market bubble? Time will tell.

Sorry. I have only skimmed the thread, so I will read more later when I have time but I am interested in the topic.

 

[piezoe]

Back to FDR. They describe him as someone who believed in balanced budgets and that it was this belief that undermined the economy from coming out of the great depression. And that he only turned to Keynesianism after he realized how wrong he had been.

" From 1933 to 1937, FDR maintained his belief in a balanced budget, but recognized the need for increased government expenditures to put people back to work. Each year, FDR submitted a budget for general expenditures that anticipated a balanced budget, with the exception of government expenditures for relief and work programs.He considered such programs to be emergency in nature, and therefore separate from usual governmental outlays."

http://www.fdrlibrary.marist.edu/aboutfdr/budget.html

See, he was a budget balancer. If you don't count his public works projects. LOL
And it was because he was a budget balancer that the economy never pulled out of its misery. We're supposed to pretend that the new deal didn't exist and he didn't spend money on make work programs until after he got religion keynesianism later in his admin. That's when he began to count the spending as part of the budget.

But even though ol FDR was a budget balancing new dealer, the federal debt went up during his admin from $22 billion to $258 billion.
http://www.wealthwire.com/news/finance/1520

The federal debt went up by over $230 billion dollars but the reason FDR wasn't successful in bringing the country out of the recession was because he was a budget balancer.
This is what we are supposed to believe.

World wars are a bit expensive.

 

[Tsing Tao]

Interesting thread. I think part of the problem is that deflation is not falling prices and inflation is not rising prices. A previous ET thread once pointed out that the definition of inflation had been changed in the dictionary and that was true when I checked it against my grade school dictionary.

Capitalism tends to choose winners and losers so one would expect the biggest winners to own the biggest buildings (and perhaps own the best lobbyists) in most cities. In my city, insurance companies, banks and oil companies own the biggest buildings. Those owning the biggest buildings fear deflation, not the guy riding the bus and that is because it hurts their business. A spread business (not to be confused with spread betting.) One knock against capitalism is that successive economic downturns weed out weak hands and concentrate the owners. Has that happened? If so maybe the fear talk is really the owners knowing that the game will have to end one day.

I used to say we have been in deflation for years, but I think the term I meant to use was dis-inflation. Is there a bond market bubble? Time will tell.

Sorry. I have only skimmed the thread, so I will read more later when I have time but I am interested in the topic.

Great post!

 

[fhl]

World wars are a bit expensive.

So are new deals. And the war ended. But the new deal hasn't.

 

[piezoe]

Exactly.

Look, there's no question that if deflation persisted for long periods of time, the end result would be a total reversal of anything related to growth in a large section of the economy. But the problem here is that prices don't decline much at all without a serious exogenous event. They only slow their rate of ascent. With the exception of direct commodities and the products they yield without significant manufacturing, can anyone tell me what prices have been falling as of late? Remember, we're not talking about gasoline. Food is fair game, however. I can tell you (because I have access to the data being in CPG Food that the grocery market has not seen a whole bunch of price declines since 2008. Exceptions being in things like cooking oil or sprays, most products in the grocery store have either risen (either directly in price or "down sizing" for same price) or stayed stable.

What about durable goods? Home prices? etc. Why is it necessary that the overall prices we pay have to increase by 2% each year?

For the type of deflation that Ricter is describing - that Hayek was worried about - to manifest, we first have to have a prolonged period of price declines in order for margin compression to occur. It is more likely Ricter's example has something else driving it.

Correct me if I'm wrong (I know you will!) but you seem to be confusing less inflation,i.e., a lower, positive inflation rate, with deflation. Central banks are concerned over potential deflation, not less inflation. They use an inflation rate under 1% as a warning sign.

Central banks shoot for a nominal target of 2% inflation, because a lower target would risk slipping into deflation for the simple reason that control of the inflation rate via monetary policy is inexact and subject to considerable error. Lower inflation is not bad per se, but when the inflation rate is hovering near zero it is worrisome because of the danger of an economy slipping into deflation, i.e. a negative inflation rate.

Central banks aren't concerned about prices "slow[ing] their rate of ascent", as you put it, rather they are concerned that a general decline of the prices of goods and services could occur if , for whatever reason, demand and supply get too far out of balance. They view core inflation as a barometer which can warn of imbalances and the potential for deflation.

Unless one can grasp the dire consequences of deflation in societies whose economies depend heavily of credit, one will not understand the necessity of setting an inflation target well away from zero!

 

[Tsing Tao]

Correct me if I'm wrong (I know you will!) but you seem to be confusing less inflation,i.e., a lower, positive inflation rate, with deflation. Central banks are concerned over potential deflation, not less inflation. They use an inflation rate under 1% as a warning sign.

Central banks shoot for a nominal target of 2% inflation, because a lower target would risk slipping into deflation for the simple reason that control of the inflation rate via monetary policy is inexact and subject to considerable error. Lower inflation is not bad per se, but when the inflation rate is hovering near zero it is worrisome because of the danger of an economy slipping into deflation, i.e. a negative inflation rate.

Central banks aren't concerned about prices "slow[ing] their rate of ascent", as you put it, rather they are concerned that a general decline of the prices of goods and services could occur if , for whatever reason, demand and supply get too far out of balance. They view core inflation as a barometer which can warn of imbalances and the potential for deflation.

Unless one can grasp the dire consequences of deflation in societies whose economies depend heavily of credit, one will not understand the necessity of setting an inflation target well away from zero!

Except that periods of low inflation (below the 2% target rate) occur as a natural course of the business cycle. We have to let them occur. But we don't. The moment prices fall below the magical, mystically created 2%, Central Bankers are on the airwaves about pushing loose monetary policy, printing more money and keeping emergency measures in place (for over 6 years now in the US, many more in Japan for all the good it's done either country).

I pulled the data yesterday for 172 categories in the grocery store (all that are tracked by IRI) and out of 172, 121 are rising, 80 of them well over 2%. Of the 50 or so that are falling, this is the first year for many of them falling in a long time. Is that deflation? I don't think so.

Yet central bankers are all over the wire worried about deflation here in the United States, which, for anything other than gas prices, is a joke. One year of falling prices does not constitute deflation, much less any need to put "emergency measures in place".

QE is about pushing asset prices, creating wealth inequality by making the rich, richer, and distorting markets so that if (ever) the accomodative policy is removed, chaos reigns.

Let me know if you want the excel file on food stuffs. You can pm me your email.

Oh, and:

 

[piezoe]

I'm sure your food price data is valid. You still seem to me to be flirting with the idea that "a little" deflation would not be so bad. As long as we can agree that deflation is negative inflation in the overall economy and not just some price reductions in a segment of the economy, oil for example, we can discuss this on the same wavelength.

It does seem to me that the official inflation figures underestimate the inflation that most of us experience in our everyday lives. It is a fact that the government has revised its methods of computing various measures of inflation in recent decades. These revisions have invariably resulted in a lower, official inflation rate used to adjust inflation indexed treasuries and entitlements. Cutting adjustments of entitlements and interest on treasuries isn't as evil as it first sounds, because there is feedback into the economy that helps hold inflation in check.

One of the changes has been the introduction of hedonics. That's perhaps the most controversial change. Also, when baskets of good and services are used to compute an inflation measure the components are weighted; changes in the prices of some components counting much more than others. You can access these weighting factors at the Bureau of Labor Statistics website. An estimate of the CPI as it would have been computed in 1986 is available at shadowstatstics.com. The 1986 methods produce an inflation rate that is about 3 to 4% higher than the CPI estimated by current methods.

A good argument can be made, I won't make it here, for the 1986 method producing inflation rates that correspond better to the inflation actually experienced by consumers. I have never known an economist, however, who seems interested in my experience with sticker shock at the grocery store. The newer methods produce numbers just as useful to economists as the older methods, but have the advantage of helping to control inflation via feedback from inflation indexed entitlements.

Clearly, the estimation of inflation in the prices of goods and services in the overall economy is an inexact undertaking. Using current methods, the Fed economists decide what they think is the best estimate for their purposes. They are aware of flaws in the inflation estimates and the difficulty of estimating the effects of changes in monetary policy, so they have built in a safety factor. And that is why you see the inflation target set at 2% and not zero %. It isn't that a two percent inflation rate is better than a one percent inflation rate; it is that 2% is less dangerous than a lower target! The Fed believes that deflation could have an extremely deleterious affect on the U.S. economy. Consequently, of the two evils, mild inflation vs. deflation, they consider the former to be a much lesser evil. They use very low core inflation, and other measures too, as a warning that deflation may be on the horizon. They want to lessen the odds of deflation by choosing a target inflation rate well away from zero. They chose 2%, and my guess is that that is not an arbitrary number, but one based on economic research and error estimates for the inflation measures.

Just having prices in some parts of the economy rising or falling is not necessarily what concerns the Fed economists. Their concern is what is happening in the economy overall, in other words, the macro view. If the core inflation rate, everything but food and energy, falls below 1%, they will start to get concerned about the possibility of deflation, i.e., a negative inflation rate, in the overall economy. The Fed's view, which I share, is backed up by past experience and a vast body of economic research and studies.

If you are one that believes "a little deflation" would not be so bad, then I would say the correctness of you position depends on how much is "a little", for how long, and what measures you would take to prevent slipping further into deflation. Would you, Fed like, try to control the deflation rate at say 2%. You could try monetary policy. Even were that possible, you'd then have real interest rates on public and private debt not merely rising, but rising compounded over time! Talk about debt trauma! Yikes!

The U.S. is a nation of borrowers and spenders -- through a constant barrage of advertising, and capitalist hucksterism in general, we have unconsciously become psychologically well-suited to borrowing and spending. Notwithstanding the impossibility of infinite growth -- this is a pattern that fuels growth and innovation in an economy. Among fully developed nations, the U.S. economy consistently leads in growth and innovation. It takes credit to grease the American economy's wheels. Significant deflation in the U.S. economy would be an unmitigated disaster!

The U.S. flirted briefly with deflation in late 2008 to early 2009, but the Fed stepped in with extraordinary measures to rescue our economy. And thank goodness for that!

 

[BONECRUSHER]

I'm sure your food price data is valid. You still seem to me to be flirting with the idea that "a little" deflation would not be so bad. As long as we can agree that deflation is negative inflation in the overall economy and not just some price reductions in a segment of the economy, oil for example, we can discuss this on the same wavelength.

It does seem to me that the official inflation figures underestimate the inflation that most of us experience in our everyday lives. It is a fact that the government has revised its methods of computing various measures of inflation in recent decades. These revisions have invariably resulted in a lower, official inflation rate used to adjust inflation indexed treasuries and entitlements. Cutting adjustments of entitlements and interest on treasuries isn't as evil as it first sounds, because there is feedback into the economy that helps hold inflation in check.

One of the changes has been the introduction of hedonics. That's perhaps the most controversial change. Also, when baskets of good and services are used to compute an inflation measure the components are weighted; changes in the prices of some components counting much more than others. You can access these weighting factors at the Bureau of Labor Statistics website. An estimate of the CPI as it would have been computed in 1986 is available at shadowstatstics.com. The 1986 methods produce an inflation rate that is about 3 to 4% higher than the CPI estimated by current methods.

A good argument can be made, I won't make it here, for the 1986 method producing inflation rates that correspond better to the inflation actually experienced by consumers. I have never known an economist, however, who seems interested in my experience with sticker shock at the grocery store. The newer methods produce numbers just as useful to economists as the older methods, but have the advantage of helping to control inflation via feedback from inflation indexed entitlements.

Clearly, the estimation of inflation in the prices of goods and services in the overall economy is an inexact undertaking. Using current methods, the Fed economists decide what they think is the best estimate for their purposes. They are aware of flaws in the inflation estimates and the difficulty of estimating the effects of changes in monetary policy, so they have built in a safety factor. And that is why you see the inflation target set at 2% and not zero %. It isn't that a two percent inflation rate is better than a one percent inflation rate; it is that 2% is less dangerous than a lower target! The Fed believes that deflation could have an extremely deleterious affect on the U.S. economy. Consequently, of the two evils, mild inflation vs. deflation, they consider the former to be a much lesser evil. They use very low core inflation, and other measures too, as a warning that deflation may be on the horizon. They want to lessen the odds of deflation by choosing a target inflation rate well away from zero. They chose 2%, and my guess is that that is not an arbitrary number, but one based on economic research and error estimates for the inflation measures.

Just having prices in some parts of the economy rising or falling is not necessarily what concerns the Fed economists. Their concern is what is happening in the economy overall, in other words, the macro view. If the core inflation rate, everything but food and energy, falls below 1%, they will start to get concerned about the possibility of deflation, i.e., a negative inflation rate, in the overall economy. The Fed's view, which I share, is backed up by past experience and a vast body of economic research and studies.

If you are one that believes "a little deflation" would not be so bad, then I would say the correctness of you position depends on how much is "a little", for how long, and what measures you would take to prevent slipping further into deflation. Would you, Fed like, try to control the deflation rate at say 2%. You could try monetary policy. Even were that possible, you'd then have real interest rates on public and private debt not merely rising, but rising compounded over time! Talk about debt trauma! Yikes!

The U.S. is a nation of borrowers and spenders -- through a constant barrage of advertising, and capitalist hucksterism in general, we have unconsciously become psychologically well-suited to borrowing and spending. Notwithstanding the impossibility of infinite growth -- this is a pattern that fuels growth and innovation in an economy. Among fully developed nations, the U.S. economy consistently leads in growth and innovation. It takes credit to grease the American economy's wheels. Significant deflation in the U.S. economy would be an unmitigated disaster!

The U.S. flirted briefly with deflation in late 2008 to early 2009, but the Fed stepped in with extraordinary measures to rescue our economy. And thank goodness for that!

+1