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Fear Not Deflation

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Re: Fear Not Deflation

#31

Post by juliancorlet »

RockyMcNuts wrote: post #29

tell it to the guy who goes from an 80% loan-to-value on his house to owing way more than the house is worth. who's going to build a factory if building the factory is going to be significantly cheaper next year, not to mention everything it produces? who's going to hire anyone if you can hire them cheaper next year? especially in a country like the US, where everyone is in debt up to their eyeballs, deflation is a d…

"who's going to build a factory if building the factory is going to be significantly cheaper next year, not to mention everything it produces?"

That statement is true of just about any technology I can think of, and yet investment in tech doesn't seem to have collapsed as a result.

Re: Fear Not Deflation

#32

Post by slurry »

jerguismi wrote: post #13
josephlord wrote: post #8

Earlier quoted context omitted.

Up voted. Would add that in a deflationary environment no one will want credit so really you have to print money and give it away (or just print it and spend it).

But what about free currency competition? Allow all kind of currencies co-exist. Those who want inflation can use the inflatable currencies, the people demanding deflation can use more deflationary currencies.

This is roughly the scenario under which Gresham's Law was discovered. Long story short: the inflationary currency wins.

Re: Fear Not Deflation

#33

Post by slurry »

goodcanadian wrote: post #28

Personally, I don't consider mild deflation to be any worse than mild inflation. A stable currency is better for everyone. Things get increasingly bad as the rate moves away from 0% in either direction, especially, if it occurs in an unpredictable way. As it happens, most central banks aim for a stable currency with a slight tendency towards inflation. My policy change would really only be minor: make the inflation t…

> Personally, I don't consider mild deflation to be any worse than mild inflation.

A priori this sounds reasonable.

But would you rather live/invest in 1990s Japan (mild deflation) or 1990s America (mild inflation)?

Mild deflation is absolutely terrible in practice. Mild inflation is good/not so bad.

Re: Fear Not Deflation

#34

Post by jvm »

goodcanadian wrote: post #28

Personally, I don't consider mild deflation to be any worse than mild inflation. A stable currency is better for everyone. Things get increasingly bad as the rate moves away from 0% in either direction, especially, if it occurs in an unpredictable way. As it happens, most central banks aim for a stable currency with a slight tendency towards inflation. My policy change would really only be minor: make the inflation t…

The advantages of monetary stability come with a stable growth rate, because contracts are bets on the future growth rate of money and stability means those bets can be made reliably.

You have proposed a stable CPI growth rate of 0%. There are two problems with this: the first (more important) problem is that arguably stable money supply is more desirable than stable CPI. During a downward supply shock, tightening the money supply can lead to a financial crisis by causing contracts made before the shock to fail. In that instance, rising CPI is good because it reflects a real fall in supply (prices should be higher).

The second problem and the reason why they shoot for 2% CPI inflation is that many prices are sticky downwards so an average CPI growth rate of 0% leads to problems. For example, people are known to find a paycut of 1% under 0% inflation more aversive than a pay increase of 1% under 2% inflation. As a result, during deflationary periods wages are often frozen at levels higher than equilibrium, leading to greater unemployment.

Despite these reservations, I agree that 0% CPI growth would be an acceptable policy, particularly as opposed to erratic policy as we saw in 2008–9. But you should recognize that moving from 2% to 0% would itself be a strong downward demand shock that in most countries would likely cause a recession.

Re: Fear Not Deflation

#35

Post by RockyMcNuts »

juliancorlet wrote: post #31
RockyMcNuts wrote: post #29

tell it to the guy who goes from an 80% loan-to-value on his house to owing way more than the house is worth. who's going to build a factory if building the factory is going to be significantly cheaper next year, not to mention everything it produces? who's going to hire anyone if you can hire them cheaper next year? especially in a country like the US, where everyone is in debt up to their eyeballs, deflation is a d…

"who's going to build a factory if building the factory is going to be significantly cheaper next year, not to mention everything it produces?" That statement is true of just about any technology I can think of, and yet investment in tech doesn't seem to have collapsed as a result.

good point. but tech progress is fast, and tech margins for the leader are gigantic. so you recoup your investment in 3 years before the next generation. then the next generation is 10x better, so that motivates building the following factory with high margins.

you can't build a new power plant that makes 10x better power than the last one. and yet prices are falling. so basically you have to wait a lot longer until the old plant is obsolescent, or only build a power plant when the power shortage gets really bad and margins so high that you would recoup quickly.

falling prices mean high real interest rates, fewer projects meet high hurdle rates, less investment, less growth and employment.

Re: Fear Not Deflation

#36

Post by martinced »

I agree with the author of TFA that Krugman is wrong. Just as every single Keynesians out there: they have never predicted anything more than short term (and what really hurts them is that there are economists from other school of thought who can repeatedly predict correctly over the long term. Ouch.).

And I also agree that we should not fear deflation.

However hoping that deflation will happen would be like waiting for some pink unicorn to show up: both the U.S. and the Japan have announced "unlimited QEs".

In order words: endless money printing to prevent the utter failure of the Keynesian system.

We'll not discuss the fact that if money is free to print this is not true capitalism at work (because the amount of new money in circulation doesn't correspond to the new wealth created)... But hey, this is a Keynes' world right, so what do you expect.

Could anyone explain me how we'll anything other than inflation (and possibly a very severe inflation) when, worldwide, the biggest economies are doing "unlimited QEs"?

If deflation takes place I'd be very surprised (and very happy too, because I'm a "saver"). I did hedge myself against inflation/hyper-inflation but I still do have lots of cash/savings.

I'd love deflation to take place but with unlimited QEs it's never going to happen.

Re: Fear Not Deflation

#37

Post by martinced »

eli_gottlieb wrote: post #4

This has got to be one of the dumbest fucking things I've ever seen. Its only real point is that commodity-based currencies and deflations weaken government. Furthermore, its idiotic praise of societal-level saving is pure nonsense. My income is someone else's expenditure, my credit is someone else's debt. Money can obscure this fact, not alter it. In order for me to save, someone else must spend. Do they have to spe…

"Deflation is a wet dream of survivalist "gold..."

Say what!? Gold's price goes down too if there's deflation.

Someone holding on gold hopes there's inflation, not deflation.

Deflation is the dream of people who hoarded truckloads of bills, not gold.

"My income is someone else's expenditure, my credit is someone else's debt. Money can obscure this fact, not alter it. In order for me to save, someone else must spend."

OK, so I produce 100 tons of lithium-ion in my backyard. I just created wealth. There's supposed to be money created corresponding to that wealth created. How does this money correspond to someone else's debt? Isn't money supposed to correspond to wealth and new wealth to be constantly created? You make it sound like it's a zero-sum game in the non-gold backed scenario too...

Re: Fear Not Deflation

#38

Post by martinced »

jerguismi wrote: post #22
pash wrote: post #14

Earlier quoted context omitted.

> This has got to be one of the dumbest fucking things I've ever seen. It's pretty dumb. Really, thoroughly dumb. But you've added some real bloopers of your own: > If we have a standard-issue modern currency, ie: slow but steady rate of inflation targeted by a central bank, then some amount of new money enters the economy each year. As long as total new savings in the year don't exceed this amount, then and only the…

> What I find really funny when I hear Ron Paul or somebody advocate a return to the gold standard and the abolition of the Federal Reserve is that they're really arguing for handing over monetary policy to the mining industry! Not really, mining industry still can produce only fixed amount of gold, while central bankers can potentially print infinite amount of paper money. (I'm not advocate of gold standard)

+1...

And seen that unlimited QEs have been announced one can only conclude that our current system is deeply broken.

The probability that it ends up in a really ugly way is far from zero.

I could tell that I'd take the "gold-backed, 5% inflation per year max no matter what" anytime over the unlimited QEs we have now.

We're sitting on a time bomb and it has the potential to change the western world as we know it.

Re: Fear Not Deflation

#39

Post by goodcanadian »

slurry wrote: post #33
goodcanadian wrote: post #28

Personally, I don't consider mild deflation to be any worse than mild inflation. A stable currency is better for everyone. Things get increasingly bad as the rate moves away from 0% in either direction, especially, if it occurs in an unpredictable way. As it happens, most central banks aim for a stable currency with a slight tendency towards inflation. My policy change would really only be minor: make the inflation t…

> Personally, I don't consider mild deflation to be any worse than mild inflation. A priori this sounds reasonable. But would you rather live/invest in 1990s Japan (mild deflation) or 1990s America (mild inflation)? Mild deflation is absolutely terrible in practice. Mild inflation is good/not so bad.

All else being equal, I don't consider mild deflation to be any worse than mild inflation.

Comparing 1990s Japan to 1990s America is not an "all else being equal" situation. Really, economics is such a complex beast, it would take an incredibly complicated analysis to demonstrate which is better.

Re: Fear Not Deflation

#40

Post by goodcanadian »

jvm wrote: post #34
goodcanadian wrote: post #28

Personally, I don't consider mild deflation to be any worse than mild inflation. A stable currency is better for everyone. Things get increasingly bad as the rate moves away from 0% in either direction, especially, if it occurs in an unpredictable way. As it happens, most central banks aim for a stable currency with a slight tendency towards inflation. My policy change would really only be minor: make the inflation t…

The advantages of monetary stability come with a stable growth rate, because contracts are bets on the future growth rate of money and stability means those bets can be made reliably. You have proposed a stable CPI growth rate of 0%. There are two problems with this: the first (more important) problem is that arguably stable money supply is more desirable than stable CPI. During a downward supply shock, tightening th…

But you should recognize that moving from 2% to 0% would itself be a strong downward demand shock that in most countries would likely cause a recession.

Any sudden policy change is going to lead to turmoil and a likely recession. I did not suggest the change should be sudden.

Also, a target of 0% does not prevent appropriate price increases or decreases any more than a target of 2%. It is a goal not a mandate. As long as everyone knows what to expect, plans can be made reliably.

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