What so many people get wrong about US deflation threat
- Thread starter brettman9
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1. I'm not sure where you are getting the "inflate at all costs" premise from, but I'll continue reading.
2. I'm not sure about where you live, but where I am from we are entitled to cost of living increases each year. I don't think wage increases are a purely academic argument at all.
You live in Canada, don't you?
In the US, there are any number of ways to disguise inflation in an official capacity so as not to realize any cost of living increases.
The private sector is certainly not under any mandate to guarantee cost of living increases, so yes, to be perfectly honest it is an academic argument.
With regards to the inflate at all costs, that is the exact mentality of the Federal Reserve, the backstopping of bad debts, the POMO, the admission by Bernanke that higher stock prices are a positive..i.e. the iron fist of changing consumer sentiment towards an inflationary environment at the complete disregard of the natural progression towards deflation after a credit collapse and decades worth of asset inflation.
Anyway, I'm finished, I've been debating this topic for months now and I'm just tired of arguing about how completely immoral and ultimately disastrous these monetary policies have become.
Yes, I live in Canada, and have received a cost of living increase each of the past three years of 2-3%.
I'm not sure the Fed's mandate is inflate at all costs. I would describe it as avoid deflation at all costs.
For the record, I have never argued against the fact that inflation is/can be disastrous, I simply argue that deflation is more catastrophic than inflation given the current situation in the good ol' US of A.
There is a problem I think with this reasoning .
I would think that rising real rates are not impacting people's consumption habits as much as rising inflation.
People don't think in real terms , if their mortgage explodes in real terms, they won't feel the pain as much as if it is inflation that's exploding.
Anyway the Fed's goals and the economics behind it are totally
amoral and scandalous. This is a bailout of overextended homeowners and borrowers, and of course of the banks , to the expense of the responsible people.
Bernanke is a MAD MAN who has to be stopped now !
He 's a puppet just like his former boss Dubya was ! I don't understand why more people are not clamouring for his removal .
He's creating inflation, death and soon Adolf Hitlers
Look at what 's going on ! It's a nightmare come true.
Everything they say is a lie. They say there was deflation in 08, no deflation whatsoever, just oil prices coming down from record levels and that took headline CPI down. They say no risk of inflation because of slack in the economy, commodities are through the roof. They say QE is for employment , it's a bailout of the financial system, because they want to erase all of the hidden bad debt out there and create a new bubble to bail out the economy. Now tell me what does a central banker care about unemployed people especially a republican) , a lot of them will never get a job again, they are good for welfare, even in prosperous times because society has nothing to offer to them. QE is n't going to change anything for those. They lie , and they lie all the time.
I would think that rising real rates are not impacting people's consumption habits as much as rising inflation.
People don't think in real terms , if their mortgage explodes in real terms, they won't feel the pain as much as if it is inflation that's exploding.
Anyway the Fed's goals and the economics behind it are totally
amoral and scandalous. This is a bailout of overextended homeowners and borrowers, and of course of the banks , to the expense of the responsible people.
Bernanke is a MAD MAN who has to be stopped now !
He 's a puppet just like his former boss Dubya was ! I don't understand why more people are not clamouring for his removal .
He's creating inflation, death and soon Adolf Hitlers
Look at what 's going on ! It's a nightmare come true.
Everything they say is a lie. They say there was deflation in 08, no deflation whatsoever, just oil prices coming down from record levels and that took headline CPI down. They say no risk of inflation because of slack in the economy, commodities are through the roof. They say QE is for employment , it's a bailout of the financial system, because they want to erase all of the hidden bad debt out there and create a new bubble to bail out the economy. Now tell me what does a central banker care about unemployed people especially a republican) , a lot of them will never get a job again, they are good for welfare, even in prosperous times because society has nothing to offer to them. QE is n't going to change anything for those. They lie , and they lie all the time.
Good question.
Prices and wages tend to move together, while the value of debt is fixed. So in a deflationary economy, prices fall 10%, but you can't buy more because your income has also fallen 10%. However, your debt hasn't decreased, so you are now using a greater percentage of your income to pay off debt. You end up consuming less.
This reduced consumption feeds back into lower prices and less income, and ever reduced capacity to pay off debt, a deflationary spiral.
Inflation punishes savers and rewards debtors. Nobody is arguing that it's not 'moral' or 'just', but if we got caught up in a deflationary spiral, there would be a world of pain.
I'm with the OP. It sucks, but it's necessary.
Fine. Touche. Sure. But that's not really what I was trying impress on readers here. You're citing the falling prices of assets and how that affects the supply of credit.
The point I'm making is that it is "supply of credit" that is the end issue. The distinction I'm drawing is between that concern and the other concern that lots of people seem to think is the problem with deflation, namely: that falling price trends cause people to think things will be cheaper in the future and therefore cause them to save, or hoard cash, as a strategic or behavioral response.
A lot of people seem to think that the Fed is afraid that deflation begets deflation by this 'savers instinct', a sort of learned frugality through trend observation.
My point is that the Fed is not being evil and deciding falling consumer prices are bad practice, and in response, trying to get inflation going to force money to burn holes in pockets.
Instead, they are concerned that the supply of credit will entirely disappear if banks suffer another spike in defaults. Since credit tightening is the response to default waves, and defaults are the response to tightened credit, there is a feedback loop that they want to avoid.
The 'savers instinct' is the 'tiny and minor' concern.
As an adjunct, to set the record:
I am not saying "there is deflation now". I actually believe inflation will certainly be the result, and it will be a big problem. I'm a Fleck fan, for crying out loud. And I do think the unintended consequences of this clearly short-sighted panic reaction will more than outweigh its benefits.
I was simply trying to make a point that seems very misunderstood about what the real problem with deflation is in a debt-laden economy. The problem is one side of the ledger goes poof. This is what happened in 1930-1932. Deflation hit and spiraled through this feedback loop as banks defended their solvency. When that happens, first the bad loans default, and then, through the jump in real rates, the good debts become bad and default.
One question for you, denner (and maybe atticus), if you're so inclined.
What, if anything, will you need to see to conclude that the Fed is doing the right thing?
