Paradoxical Deflation coming?

Quote from trefoil:

The question is whether public sector debt leads to inflation. If that were actually the case, there should have been a massive inflation immediately after WWII in the US.
But there wasn't.
Doesn't stop everyone from absolutely categorically stating that it will happen, though. Just another case of ideology triumphing over the actual way the real world works.
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I think the reason there was no inflation for the US after the second world war was because America produced so much it had the manufacturing infrastructure from the war and also cam out of the war the victor. The Germans after the first war received inflation.
 
Quote from trefoil:

The question is whether public sector debt leads to inflation. If that were actually the case, there should have been a massive inflation immediately after WWII in the US.
But there wasn't.
Doesn't stop everyone from absolutely categorically stating that it will happen, though. Just another case of ideology triumphing over the actual way the real world works.
More...

There were large deficits 1942 thru 1946, then surpluses in 1947-49 and again in 1960 and in 1969. The other years between 1942 and 1969 produced mild deficits except 1959 where the deficit reached 12 billion. In other words, while the deficits during WW II were large they were easily financed and serviced in a high productivity economy and by a fiscally responsible government that returned to surpluses or only small deficits after the war. Perhaps the right question here is what part of the WWII debt was monetized, if any?

Contrast that post WW II period with the period 1982 - 2012 where very large deficits have become the norm. Beginning with Reagan, deficits reached levels four times greater then the deficits run during the preceding Vietnam war. The only years since 1982 that the government has not run huge deficits was a brief period 1997-2001. The past four years we've seen the first trillion dollar plus deficits.

I don't think there can be any question regarding whether or not deficits can lead indirectly to inflation, if the resulting debt is monetized. They obviously can, but it also seems to be true that they don't necessarily have to if the debt is not monetized. Perhaps the probability that they will has something to do, indirectly, with the Bretton Woods accord being abandoned and going to fiat money. That event seems to have let the fiscal responsibility cat out of the bag and ushered in a period of eye-popping deficits even during boom times! That is certainly not something Keynes would have approved of! Apparently we are selective in our application of Keynesian principles. We like Keynes when things are going badly, but are happy to ignore him in the good years.
 
Quote from piezoe:

There were large deficits 1942 thru 1946, then surpluses in 1947-49 and again in 1960 and in 1969. The other years between 1942 and 1969 produced mild deficits except 1959 where the deficit reached 12 billion. In other words, while the deficits during WW II were large they were easily financed and serviced in a high productivity economy and by a fiscally responsible government that returned to surpluses or only small deficits after the war. Perhaps the right question here is what part of the WWII debt was monetized, if any?

Contrast that post WW II period with the period 1982 - 2012 where very large deficits have become the norm. Beginning with Reagan, deficits reached levels four times greater then the deficits run during the preceding Vietnam war. The only years since 1982 that the government has not run huge deficits was a brief period 1997-2001. The past four years we've seen the first trillion dollar plus deficits.

I don't think there can be any question regarding whether or not deficits can lead indirectly to inflation, if the resulting debt is monetized. They obviously can, but it also seems to be true that they don't necessarily have to if the debt is not monetized. Perhaps the probability that they will has something to do, indirectly, with the Bretton Woods accord being abandoned and going to fiat money. That event seems to have let the fiscal responsibility cat out of the bag and ushered in a period of eye-popping deficits even during boom times! That is certainly not something Keynes would have approved of! Apparently we are selective in our application of Keynesian principles. We like Keynes when things are going badly, but are happy to ignore him in the good years.
More...

No.
Slack.
If you got it, no inflation.
If not, you got it.
After WWII, there was a ton of slack: the big worry was that we'd return to the unemployment of the Depression, with the demobilization of millions of soldiers. Fortunately, that didn't happen. But that slack is why there was no inflation.
 
Quote from trefoil:

No.
Slack.
If you got it, no inflation.
If not, you got it.

After WWII, there was a ton of slack: the big worry was that we'd return to the unemployment of the Depression, with the demobilization of millions of soldiers. Fortunately, that didn't happen. But that slack is why there was no inflation.
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Perhaps a factor. Because of the very concern you mention, Truman and his advisers decided not to completely demobilize following the War, but instead to continue to maintain a fairly large standing army, according to Patrick Moynihan and Richard Powers. An exaggerated communist threat provided a convenient excuse for doing so; thus the cold war took root and was nurtured by both sides.

Consequently, the slack you speak of may not have been as great as you suppose.

Currently we should have lots of slack, as real unemployment is probably closer to 20% than the governments 8% figure. But we have headline inflation. Demand down, but inflation still.
 
Swan, what is the point...you set up a comparison that is not at issue. What is on the table is reducing interest rates from 1.65 to 1.

If you actually look at the history of QE you will see that interest rates rise when QE is announced and they decline when QE expires. The Fed says they do it to reduce interest rates in order to spur borrowing but all it does is increase or support the current level of interest rate and prop up equity prices and the prices of commodities. Look how commodities go up with QE and decline without it. Look at how gold goes up with QE and comes down without it. Interest on the other had go up with QE, and go down without it.

'Twist' is not really QE, it does not increase the money supply, because it is a sterilized process that moves the Fed portfolio to a longer term Treasury Security weighting. The current Twist extension of $270B shift of short Treasuries to long Treasuries over the next six months is nothing; its pure bullshit. It could have hardly any impact on the Fed portfolio, it will not materially contribute to reduced mortgage rates and it will not add any money to the real economy. Its most direct impact is to continue to shift investment income out of the aggregate banking system and to increase investment earnings in the Fed portfolio. This is hardly a positive move if you think that banks need to reinvest income to build capital.

So, if you beleve the Fed does QE to reduce interest rates there is no evidenc that it actually does that. The evidence shows that the Fed does QE to prop up the equity markets at the cost of higher commodity and energy prices.

This is all incoherent if you assume that the Fed is trying to help regular people with their debt costs. In reality most people who need to, cannot qualify to refinance their debts, and most small businesses lack the collateral value to expand their borrowing, even at the low rates. So, the real effect of the QE is to increase the cost of fuel to people who can't afford it and provide low cost financing to people who don't need it.

So, we return to your comment...what is the point of comparing 1% interest to 10% interest when that has nothing to do with what is actually going on?
 
Quote from Ed Breen:



So, if you beleve the Fed does QE to reduce interest rates there is no evidenc that it actually does that. The evidence shows that the Fed does QE to prop up the equity markets at the cost of higher commodity and energy prices.
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maybe they are not connected, but from my vantage point interest rates look pretty damn low. Are you suggesting had the Fed not done any QE that interest rates would have been this low from lack of demand for credit. If so I might be forced to agree (I hate that.) because we would likely be in a depression now. On the other hand what banks would have had any money to loan, had there been no QE and buying of bad bank assets by the Fed? Well, Bank of Hawaii maybe.
 
Quote from Ed Breen:



So, if you beleve the Fed does QE to reduce interest rates there is no evidenc that it actually does that. The evidence shows that the Fed does QE to prop up the equity markets at the cost of higher commodity and energy prices.
More...

maybe they are not connected, but from my vantage point interest rates look pretty damn low. Are you suggesting had the Fed not done any QE that interest rates would have been this low from lack of demand for credit. If so I might be forced to agree (I hate that.) because we would likely be in a depression now. On the other hand what banks would have had any money to loan, had there been no QE and buying of or loaning against bad bank assets by the Fed? Well, Bank of Hawaii maybe.
 
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