It’s been a good day on Bloomberg, with yet another insightful piece.
Source link: http://blog.mises.org/10487/up-with-deflation/
Up with Deflation
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I’ve been pondering the patterns of movement of the GDP implicit deflator, CPI and PPI for several decades, and there’s something I’ve been seeing for a while now that puzzles me.
For decade after decade these 3 indicators moved in tandem, rarely drifting apart, usually twining about each other tightly.
But over the last several decades the PPI has lagged CPI, the gap between them has generally been widening. When they showed signs of beginning to go back closer together was when the howls of catastrophe started emanating from the executives suites of Wall Street, then the financial reporters, while the vast majority on main street were going about their business undisturbed until the government swooped into action with TARP and “stimulus” and wedged the indices back apart.
see the graphs:
http://www.kermitrose.com/jgoEconData.html
What factors are at work that I’m not seeing?
Wow, what a great day indeed! It is always really uplifting when you finally see pieces in the mainstream media that get it right. I especially enjoyed the following:
“Deflation may be bad for particular interest groups, which happen to be very powerful….On the other hand, deflation is good news for savers, who get richer just by hanging on to their cash. And it is beneficial for consumers, who get cheaper prices…There are winners and losers, just as there are from most economic developments. The important point is that the people who lose are more powerful than the people who gain. That might explain why we hear about the dangers of deflation, and not about its advantages. It still doesn’t make them right.
I’ve never understood that; peoples’ money being worth more is bad; peoples’ money being worth less is good. Hmmm… It’s almost as if the powers that be want to transfer all our wealth to themselves! Nah, that couldn’t be… could it?!
What? Keynes was wrong about deflation too? I’m shocked. Shocked.
I pretty much just assume that everything Keynes said was completely backwards. Make that assumption, and you’ll be correct about the nature of the economy more often than you will be wrong about it.
Troy, that is why it’s sometimes referred to as “bizarro economics”
Russ,
I think that the reasoning behind opposing deflation is that they are also opposed to deflation of nominal wages. Ultimately, it is this post-boom deflation that is a large reason for the spike in unemployment, given that regulation of labor wages disallow wages from adjusting. Although it would be perfectly normal for a wage to increase in times of deflation, if the deflation occurred due to an increase in production (and increase in supply), there is an obvious decrease in productivity after the boom, because the market has to reallocate resources.
Jonathon,
I think I understand what you’re saying, but all I can say is that if the “regulation of labor wages” causes unemployment, then that regulation should be eliminated, right? That way, the people who would otherwise be laid off, due to the effective inflation of wages, would still be able to keep their jobs with no real loss in spending power, right?
I’m, relatively speaking, an economic retard, and I can figure this stuff out. I don’t believe that the powers that be can’t understand this stuff. They’re just giving labor what they think they want to keep votes, because even though it really causes unemployment, the average UAW Joe Sixpack doesn’t understand that. And the fact that inflation tend to enrich those who get the wealth first (those who are financially and politically connected) probably doesn’t make the decision harder for them, either.
Economic Numbskulls
Tuesday, August 18, 2009
Deflation Is Not The Big Bad Boogeyman!
Like with most economic issues there is very little true understanding. It may seem odd but almost all trained economists just regurgitate what they were taught. They do not delve into theory to try to find coherence. One reason is because they have been taught the empirical methodology so almost instantly they would be submerged in mathematical gibberish that has no coherence.
And so what remains is a covey of academic, economic imbeciles who regurgitate Keynesian doctrine. ‘Prices are sticky downwards’ is some supreme law in Keynesianism and anything that would disrupt that ‘great law’ would cause great havoc!
To ask questions about why deflation is a bad thing causes these economic charlatans to leap into a fog of pseudo-political discussion to cover their economic ignorance and as a diversionary tactic.
Deflation is as natural as your exhale.
Don’t hold your breath waiting on economic wisdom from the empirically trained ego-driven interpreters or the ego-driven interventionists!
“Inflation means that lenders will be paid back in less-valuable dollars, and that fixed-income consumers will not (by definition) experience offsetting inflation in both income and outgo.
Deflation means that borrowers will be forced to pay back loans using higher-value dollars, which would discourage many entrepreneurs from risking innovating; it also means that many producers will be caught in the vice between the falling prices they collect versus the sticky wages and raw material contracts they pay. ” – The Skeptical Optimist.
Obviously some people will lose in deflation just some will lose inflation but for some people here it’s ‘the good guys’ who lose during inflation and the ‘bad boys’ who lose during deflation. Apparently deflation will also make for better investing – a holder of a gold coin in a gold economy will lose nothing by saving the gold coin hence someone trying to raise investment money has to really good at what they do. Likewise apparently lending will cease in fixed currency, deflation economy because borrowers are constantly losing therefore everyone’s going to save money before they buy stuff – gone are the days of easy credit and credit cards (those who are against ‘usurers’ will like this too).
Russ,
It’s been a while since I’ve read Burton’s “New Deal or Raw Deal?”, but Gallaway and Vedder (in “Out of Work”) also suggest the same thing: many businessmen agreed with Hoover (and later Roosevelt) that by maintaining high wages they would stimulate aggregate demand. And so, there is a likelihood that people really believe that by artificially maintaining high nominal wages it will justify an increase in productivity.
I think what isn’t understood is that their is a higher drop in demand in capital-goods, not consumer-goods. Rothbard offers some statistics in his book “America’s Great Depression”, but I don’t recall reading any statistics for the current economic recession. IIRC, Krugman suggested that demand for capital-goods did not fall dramatically, although he didn’t offer any real damning evidence to support his conclusion. I wonder if one of the economists here on Mises could write something short and add some graphs in a short blog post on the topic.
I don’t buy that all Keynesians lie through their teeth for political reasons. All of my university professors follow Keynesian thought, but they are not liars. They are simply incorrect. But, they honestly believe in Keynes’ theories, and then in their own interpretations of Keynes’ theories. Although, I have to admit that so far I have been pretty lucky. I actually got my last professor to agree with me on a lot in regards to my Austrian point of view (although, his usual response to my essays was, “there is more to Keynes than that”).
In short, yes, they are that “stupid” (although I think stupid is too strong of a term).
Jonathan Finegold Catalán wrote:
“IIRC, Krugman suggested that demand for capital-goods did not fall dramatically, although he didn’t offer any real damning evidence to support his conclusion.”
I used to work in the segment of the economy that makes manufacturing euqipment for auto plants; i.e. the “capital-goods” market. Trust me; demand fell dramatically. Shop floors that used to be busy as beavers were nigh empty, and still aren’t doing well. Besides, lots of people who still have their jobs have been wisely saving their money, in case they do lose their jobs. So I don’t see that aggregate demand for consumer goods is rising, either. Of course, that is all just what I see day to day; it’s not very rigorous.
“In short, yes, they are that “stupid” (although I think stupid is too strong of a term).”
I’ll take your word on it, regarding professors. I still suspect that some politicians don’t believe it, and regard your professors as “useful idiots”.
Jonathan Finegold Catalán wrote:
“IIRC, Krugman suggested that demand for capital-goods did not fall dramatically, although he didn’t offer any real damning evidence to support his conclusion.”
Of course Krugman didn’t back up his claim with any data because that would show that his claim was wrong (and most likely a liar).
Below is link for Durable vs Non Durable Mfg. Just as Austrian cycle theory predicts, durable mfg is hit hardest during the bust phase.
ABCT Durable vs Non Durable
I just finished Rothbard’s “America’s Great Depression”. To my knowledge nobody has recreated the data series that he used for examining the 1920s and early 1930s. I plan to recreate them on my own. I am especially interested in the controlled vs uncontrolled reserves.
Also here is same chart using an index (1973=100)
Durable vs Non Durable (1973=100)
Any coincidence that Durable Mfg exploded shortly after Greenspan took office? I would like to see him pin that one on the Chinese.
Jonathan Finegold Catalán wrote:
“his usual response to my essays was, “there is more to Keynes than that” ”
I’ve a similar experience with Marxians. Whenever one attacks their intellectual deity by pointing out a contradictory or downright evil concept, the answer is that one’s being “superficial”. Their faith in that twisted beardo is astounding.
The inflation/deflation argument tends to forget that cash is commodity and there are many tradable commodities. We also trade gold, oil, grains,etc…
Inflation of the USD only means something if people are reliant on the USD to store their wealth.
The state mandates that payroll and sales must occur in USDs. There are other pro-USD policies and regulations I’m sure.
If the gov would release its 100 year stranglehold on common Americans, new currencies would certainly emerge and compete for dominance.
The public need not understand the “complex” schools of thought behind inflation and deflation. People will want to pick a currency which maintains or increases in value. Not even the stupid incestuous filth that runs this country keeps their money in USDs.
Jonathan F.C.,
“I think that the reasoning behind opposing deflation is that they are also opposed to deflation of nominal wages.”
No, rather they are opposed to decline in value of commodities and real assets holdings. If you buy a house or other commodities, then you will actually loose bargaining power over time, that’s their rationale.
But since the vast majority of our economic activity is people going to work and earning money, I say deflation gives power to the people.
We could be more independent from banks and from governments and we could pay our way instead of borrow our way and those executives and government officials would have to find a real job flipping burgers like the rest of us.
Deflation causes depressions, duh!
For example… Vultures on the Serengeti ARE NOT SCAVENGERS… They’re the predators.
Seriously.
Think about it. You never see a dead animal in the Serengeti without a bunch of vultures flying overhead do you? That’s because THEY murdered the prey below. That’s why they’re the first to get a piece of meat. BECAUSE THEY DID IT. They’re the one’s responsible!
And this is why there is a systemic problem in Africa. TOO MANY VULTURES.
My solution? We should all get together and vote on a 1.4 trillion dollar omnibus vulture contraception plan. We’ll only use 200 billion of it, but who knows? If the war on vultures is anything like the war on poverty, drugs, EastAsia, or Eurasia, then we will definitely need the other 1.2 trillion.
Now hear me out… The plan, hereby dubbed, the “Vultures Killing Too Many Things In Africa” plan might seem ridiculous at first, but at least we’re TRYING to solve the problem. Which is more than can be said about the prior administration.
In the long run, by gently controlling the population of vultures we’ll see a decrease in overall aggregate animal corpses in the Serengeti.
The vulture scourge in Africa is very similar to the deflationary scourge in America. And hopefully all of you Austrian thinkers will accept this newly presented knowledge knowing full well that you’re wrong and maybe get a good night’s sleep.
Inflation causes depressions and recessions, the “deflation” perioid is merely the readjustment to reality and liquadation of malinvestment and replacement of laour and capital and growth of savings…..raising interest rates to the level quickly, strongly, and forcefully in accordance with how artificially low they had been in the past is tracing the steps back to a sound economy. Hence Reagan saving the country and getting us out of the inflationary Carter-Ford-Nixon-escpecially include this fat ass Johnson nightmare of 1966-1982
His tax rate reductions form their absurd levels and deregualtion and holding back spending saved this country.
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