Deflation Theory Is Lemon We Have All Been Sold

[Kevin_Kennedy]

For much of the last year, central bankers, industrial leaders and politicians have been warning us about deflation. Falling prices, they tell us, will create another 1930s-style depression. The only answer is to print money furiously.

Now it turns out the theory is a lemon.

Deflation is no threat at all.

Deflation Theory Is Lemon We Have All Been Sold: Matthew Lynn - Bloomberg.com

 

[Paulie]

Good article, but a point that is no doubt lost on those who aren't capable of thinking outside the box.

 

[Bill O'Olberman]

Would deflation correlate with a loss in wages? But I am sure its still possible to see increases in real wages. And of course things such as your mortgage payments, car payments, student loan payments, or any debt one has will increase in real terms.

 

[Richard-H]

Deflation and inflation in moderation are both a healthy economic adjustment. Either one in excess is a sign of major economic problems, but probably not a cause in and of itself(s).

A major cause of economic problems is excessive actions to directly prevent either one. The obsessive anti-inflation actions taking throughout the past 30 years have caused us to get into this economic hole -now it's such a mess that we're in a deflationary period. Now their screwing up the economy with anti-deflationary actions.

The problem with economists is that they focus almost entirely on the hording of capital and capital assets. They don't give a damn about the real underlying economy.

 

[Kevin_Kennedy]

Deflation and inflation in moderation are both a healthy economic adjustment. Either one in excess is a sign of major economic problems, but probably not a cause in and of itself(s).

A major cause of economic problems is excessive actions to directly prevent either one. The obsessive anti-inflation actions taking throughout the past 30 years have caused us to get into this economic hole -now it's such a mess that we're in a deflationary period. Now their screwing up the economy with anti-deflationary actions.

The problem with economists is that they focus almost entirely on the hording of capital and capital assets. They don't give a damn about the real underlying economy.

Anti-inflation actions of the past 30 years? What were those?

 

[Paulie]

Deflation and inflation in moderation are both a healthy economic adjustment. Either one in excess is a sign of major economic problems, but probably not a cause in and of itself(s).

A major cause of economic problems is excessive actions to directly prevent either one. The obsessive anti-inflation actions taking throughout the past 30 years have caused us to get into this economic hole -now it's such a mess that we're in a deflationary period. Now their screwing up the economy with anti-deflationary actions.

The problem with economists is that they focus almost entirely on the hording of capital and capital assets. They don't give a damn about the real underlying economy.

Anti-inflation actions of the past 30 years? What were those?

Yeah Richard, what "anti-inflation actions" got us into this hole?

Because as I see it, it was INFLATION actions that got us into this hole. It has become almost common knowledge at this point that there was too much money created, and too loose of credit, that led to this current mess.

How else could a bubble of this magnitude form? You don't get bubbles from "anti-inflation actions". That's preposterous on so many levels.

 

[Toro]

Deflation is occurring, only in small doses.

Without the massive intervention by the government, I believe deflation would have gotten much worse.

Now, however, we are going to have inflation. Not consumer price inflation, but asset inflation, like we did with housing, only it will likely be with other real assets such as gold and silver.

 

[Paulie]

Is it possible we're seeing asset inflation right now in equities?

 

[Toro]

Probably. But it is likely to go significantly higher if I am correct.

 

[Paulie]

When I look at the monetary base graph, I can't help but wince.

Just imagine the horrible possibilities.

 

[CrusaderFrank]

Matthew Lynn is as wrong as Krugman.

US Real estate prices have been and continue to deflate and the US Dollar continue to get crushed (down 16% since March!) Also, I'm willing to bet that a lot of the recent rise in equities is from foreigners buying dollars for 80 cents

If I had any brains I'd go back to trading Commodities

IPod and Computers have NOTHING to do with Deflation NOTHING! But have everything to do with Moores Law which constantly creates faster and better produces

 

[The_Halfmoon]

Deflation is occurring, only in small doses.

Without the massive intervention by the government, I believe deflation would have gotten much worse.

Now, however, we are going to have inflation. Not consumer price inflation, but asset inflation, like we did with housing, only it will likely be with other real assets such as gold and silver.

that

 

[Polk]

Deflation and inflation in moderation are both a healthy economic adjustment. Either one in excess is a sign of major economic problems, but probably not a cause in and of itself(s).

A major cause of economic problems is excessive actions to directly prevent either one. The obsessive anti-inflation actions taking throughout the past 30 years have caused us to get into this economic hole -now it's such a mess that we're in a deflationary period. Now their screwing up the economy with anti-deflationary actions.

The problem with economists is that they focus almost entirely on the hording of capital and capital assets. They don't give a damn about the real underlying economy.

Anti-inflation actions of the past 30 years? What were those?

While I disagree with his point that it was the cause of the current crisis, Volcker's aggressive rate increases were anti-inflationary.

 

[Polk]

When I look at the monetary base graph, I can't help but wince.

Just imagine the horrible possibilities.

In theory, you've got a really good point. However, when the economy is in a liquidity trap, you can expand to sky without much real effect.

 

[Paulie]

When I look at the monetary base graph, I can't help but wince.

Just imagine the horrible possibilities.

In theory, you've got a really good point. However, when the economy is in a liquidity trap, you can expand to sky without much real effect.

I understand your point. And it's that which I use to counter those who claim that hyper-inflation of a Zimbabwe-like magnitude is "imminent".

There must be demand for all of those newly created reserves before it can increase the amount of money in circulation, and I don't see where there is anywhere near that kind of demand for more credit.

As it is, there are already so many people and businesses that are way over-leveraged. So that newly created money could theoretically sit in reserve for YEARS before it is lent or even invested by the institutions that are holding it.

During those years, the economy could slowly work its way back up in a more natural progression, and the Fed could take actions to raise rates and remove those dollars from reserve.

I still can't help but cringe at the unprecedented amount of money that's been created, though. That spike on the graph is bone chilling nonetheless.

 

[Polk]

When you put in that way, that's a good point (and one I find myself in partial agreement with).

 

[Paulie]

If you're only in partial agreement, I'm curious to know what exactly you're in disagreement about.

 

[Polk]

I guess I only really see it as a concern if the Fed doesn't take aggressive action to pull back as the economy recovers.

 

[Paulie]

I guess I only really see it as a concern if the Fed doesn't take aggressive action to pull back as the economy recovers.

But the problem is, they've never once gotten that part right. EVER.

And this time around, they've got a lot of unprecedented and complex debt maneuvering that they've got to manage. Unless Bernanke is this super-genius that so many make him out to be, it doesn't look good for us in the coming years.

They're going to have to pretty much be PERFECT in their policy to deal with this correctly. Any mistakes could end up being paid for DEARLY by all of us.