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2010-03-01 Economy

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Posted by tipper 2010-03-01 04:24|| || Front Page|| [5 views ] Top

#1 Fed chairman Ben Bernanke told us in his 2002 speech "Deflation: Making Sure It Doesn't Happen Here" that: ... 2) "Sustained deflation can be highly destructive to a modern economy and should be strongly resisted";

Nonsense.

Deflation is disasterous for government revenues and accumulated debts, but it's great for individuals. Taxes and prices go down. The wealth of the average Japanese has increased dramatically during the deflation years.

3) that a "determined government" has the means to stop deflation, if necessary by use of the "printing press".

So lets have hyperinflation instead.

Posted by phil_b 2010-03-01 04:50|| 2010-03-01 04:50|| Front Page Top

#2 Deflation is bad, as it means not using money makes you wealthier and is risk free rather than investing it.

What's happened however is that the damage caused by taxing incomes has been obscured by expanding credit in the economy.

Posted by Bright Pebbles 2010-03-01 06:13|| 2010-03-01 06:13|| Front Page Top

#3 Stability is best. Inflation benefits debtors and builds a culture of spending. Deflation benefits creditors and builds a culture of saving. Neither is beneficial when taken to an extreme.

We have had a lifetime of spending, extreme spending. In many ways paid for by the blood of our fallen heros in WWII. A little saving won't harm for a while, though it may hurt. It's a no pain, no gain moment.

Posted by Nimble Spemble 2010-03-01 07:15|| 2010-03-01 07:15|| Front Page Top

#4 It was not uncommon in the 50's or 60's to learn of some old farmer or hermit depression era survivor in the hinterlands passing away and familiy members discovering a Mason jar or two stuffed with ten or twenty thousand dollars. As youth, we laughed and shook our heads at the time. I no longer see it as a topic of humour.

Posted by Besoeker 2010-03-01 07:22|| 2010-03-01 07:22|| Front Page Top

#5 Deflation is bad, as it means not using money makes you wealthier and is risk free

Deflation makes saving more beneficial and debt less beneficial. Money is still invested, albeit less money, but relatively more money goes to more productive investments and less to marginal and speculative investments (say real estate bubbles). At the same time business costs decline and profitable businesses become more profitable.

If you save more than you borrow and don't work for the government, deflation is good for you.

Bernanke is being disengenous when he says deflation is disasterous for the economy. It's not. It's disasterous for government finances.

Even if deflation didn't benefit individuals, I'd still be in favor of it because it progressively constrains the capacity of governments to raise and spend money.

Posted by phil_b 2010-03-01 08:54|| 2010-03-01 08:54|| Front Page Top

#6 phil_b,
Steve Keen has an excellent pedagogical post up today dealing with debt-deflation in Australia and the USA.
Why Debt-Deflation Causes Depressions

Posted by tipper 2010-03-01 14:45|| 2010-03-01 14:45|| Front Page Top

#7 tipper,

Steve Keen thinks government and private debt levels and the deflation of that debt causes depressions. And he's almost certainly right.

During deflation the real value of debt increases.

He concludes,

A debt-dependent economy has no choice but to record rising levels of debt to GDP every year to avoid a recession. Unfortunately, this makes a debt-servicing crisis inevitable at some point, especially when a large fraction of the increase in debt is financing Ponzi-speculation on asset prices, since this adds to debt without increasing societys capacity to finance that debt.

Keen's only prescription is to crank up the printing presses, and its not clear to me whether he thinks inflating debts away is a permanent or temporary solution.

I'll also point out that deliberately creating inflation is a massive undeserved bailout of the Ponzi-speculators he refers to (as is the worldwide financial stimulus).

Posted by phil_b 2010-03-01 19:33|| 2010-03-01 19:33|| Front Page Top

#8 Keen's only prescription is to crank up the printing presses, and its not clear to me whether he thinks inflating debts away is a permanent or temporary solution.
phil_b,
Can't speak for the guy, but I think he has come to the conclusion the "Japanese way" is the only option. Remember he is dealing with a crises caused by excessive debt i.e > GDP just like Japan.
Many people assume that the options for removing excessive debt as inflate or default. Japan has been carving a third option for the last two decades reduce nominal interest rates to very low levels to reduce the debt servicing burden while leaving the debt in place in an attempt to grow out of it, even if doing so is accompanied by economic stagnation. Note that this approach does not seem to cure insolvency, except perhaps through the long and slow process of using earnings for balance sheet repair. No doubt demographics are different in Japan compared to other countries and this has some impact, but the US and Europe are also increasingly facing aging populations. Also Japan had two decades of a booming world economy in which they chalked up massive current a/c surpluses. They were therefore in an ideal position to try the Third/Japanese way. I don't think Australia or the US have that luxury.

Posted by tipper 2010-03-01 22:13|| 2010-03-01 22:13|| Front Page Top

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