Endless Nonsense About Deflation

posted by Nima

September 20, 2010 · Posted in General Economics 

The pitiful and infantile state of the Economics profession is exposed wide in the open, every single day. Whenever you open a newspaper or turn on the TV you enter an uncontrollable shit storm of people making blind assertions, using fuzzy terms, contradicting themselves without caring, in other words taking mental craps all over the map.

Government sponsored economists are indeed the witchdoctors of our secular age.

Another great example is this guy who, in an apparent Scorpions 90’s moment, perpetrated “The Winds of Deflation“:

Three economic reports Friday that should sound warning bells about deflation.

  • The Labor Department reports [2] that consumer prices are essentially flat. Compared to August 2009, prices are up 1.1%. That’s only slightly lower than the 1.2% year-on-year rise in July. Excluding volatile food and energy, however, consumer prices in August were 0.9% higher than a year earlier. That’s below the Fed’s informal inflation target of between 1.5% and 2.0%.
  • In a separate report, the Labor Department said [3] real average weekly earnings were unchanged in August from July, as both the average work week and hourly earnings were flat.
  • The Thomson Reuters/University of Michigan September reading of consumer confidence [4] shows consumers more pessimistic in September than in August. In fact, consumer sentiment is the lowest since August 2009.

Put the three together and you have what could be a recipe for deflation: Flat consumer prices, weekly earnings, and hours, coupled with increased pessimism about where the economy is heading.

Consumers aren’t buying. They’re acting rationally. Their debt load is still huge, they’re worried about keeping their jobs, they know they have to tighten belts, and they’re justifiably worried about the future.

But for the nation as a whole, it spells even more trouble. If consumers hold back even more, prices will start dropping. When and if they do, consumers will hold back even more in anticipation of still lower prices. That means more layoffs and less hiring.

It’s a vicious cycle. And once deflation sets in, it’s hard to reverse. Just ask Japan.

Anyone who spouts out this hilarious price spiral argument … ask them the following:

Q: Over the past 20 years, did prices not constantly fall in the computer and cell phone industries (coincidentally some of the least government regulated industries in the US)?

A: Yes, they did!

Q: And during that time, did people hold back in buying computers and cell phones, stingily awaiting the expected further price decline?

A: No, they did not!

Q: And did employment in those industries grow or fall over the past 20 years all over the world?

A: Why, it went up manyfold!!

Q: And did businesses from those industries not do exceptionally well as compared to other industries?

A: Why, of course they did!

Q: THEN WHAT THE HELL ARE YOU TALKING ABOUT??

A: But dude … don’t you get it? I have no idea what I am talking about. I merely try to skew any event into the direction where it justifies more government stimulus spending, more deficit spending, and higher taxes, don’t you get it?? Why else do you think would I hold my tenure, be respected in the echelons of power, and get invited to Bill Maher’s weekly Obama worship fest to talk about this stuff with more clueless people while looking completely superior and competent? It’s absolutely beautiful, man, you should totally try it on for size!

OK, enough of this hypothetically honest conversation … which is never going to happen of course :)

Here is some more stuff I wrote on deflation:

Deflation

Deflation is defined as a drop in the money supply. It occurs when the central bank or fractional reserve banks reduce the money supply by reversing their inflation by selling goods other than money, thus withdrawing money out of circulation, or when individuals make more re-payments as part of credit transactions (which they entered into with the central banks or fractional reserve bank) than additional money is produced.

As the money supply declines, the price of other goods in terms of money is more likely to drop over time.

Deflation is in essence a correction of the previous misallocations created by inflation.

Addendum: What I was referring to above is monetary inflation. Please see more details in Inflation & Deflation Revisited.

This is more on credit deflation AND money deflation.

And here is what I said over 1 year ago would happen if the US continues to copy the Japanese experience one by one:

From 1989 on, the Japanese government has launched one stimulus after another to no avail, leaving Japanese taxpayers with the largest public debt per capita of all industrialized nations.

A burden that the US government seems to be more than willing to have its taxpayers shoulder over the years to come unless someone picks up a history book and tries not to feverishly repeat mistakes others made in the past.

Thus the long term outlook for the US economy is the fate Japan took: A long lasting correction supercycle with one failing “stimulus” program after another, and with on and off periods where the economy slips out of and back into recessions from time to time.

This is the long term trend we are and will be in for a long time … whether Robert Reich, Paul Krugman, Ben Bernanke, Barack Obama or any other sociopathic and laughable clowns like it or not. All they can do is make it worse … and they have certainly done great at that over the past few years. Good going guys …

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Comments

4 Responses to “Endless Nonsense About Deflation”

  1. scott t on September 21st, 2010 3:49 pm

    i am not sure by what you mean by nonsense and deflation.

    if someone is wrong or just lying i dont think that is nonsense.

    if you mean money supply decrease by deflation…i dont know that that has ever happened to any great degree.

    when i view economagic,com charts

    since 2008…currency in circyulation went from 815 billion to 950 billion
    m1 went from 1.35 trillion to 2.0 trillion, m2 went from 7.5 trillion to 8.6 trillion and adj monetary base went from 800 billion to 2.0 trillion. i dont know if these figures are true or not. if they are that sounds like an increase in money/currency…inflation, ie.

    but i havent seen money/currency being created by the govt, so if someone claims deflation…a lessening of the money/currency supply then if they could show the fewer amounts of money/currency i would look at it. the deflation claims may be lies.
    i am nut sure about how specific price intereactions are with currency currency amount movements.

  2. Nima on September 21st, 2010 6:29 pm

    you are right, money supply did not decline … and that’s where credit deflation comes into play … http://www.economicsjunkie.com/inflation-deflation-revisited/

  3. scott t on September 21st, 2010 11:18 pm

    so woth all the new money/currency that has come into existence does that just take the place of any so-called credit diminishing??

    is current credit counted in dollars? can credit be paid with a dollar bill???

    do the above money/currency measure not include dollar denominated credit???

    i thought m1 had a signioficant dollar credit component and was counted in a money supply figure????

  4. Nima on September 22nd, 2010 6:47 pm

    Read the post Inflation & Deflation Revisited thoroughly …

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