So, everyone is talking about "deflation" now. Apparently, over the last two or three months, the CPI index has fallen by some percent per month.
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``The cost of living dropped 1.7 percent last month (November), more than economists had forecast, a Labor Department report showed in Washington.''
So all the talking heads are now talking about "deflation".
But let's look a little further.
``Excluding food and energy, so-called core prices were unchanged from a month earlier.''
We are coming off a huge price crash for commodities such as oil and steel, with crude prices dropping by some three times. Stock market and housing also experienced a price crash. And that left core prices unchanged.
What this means is that the Fed's money printing machine is pumping so much money that even these huge asset shocks did not decrease the core CPI. The supposed "deflation" is a simple reflection of a crash of the commodity bubble.
WHat does it mean going forward?
1) Commodities do not have much room to fall further
2) The money printing will continue unabated, as it should with "zero to quarter percent" Fed target rate.
3) Fewer goods are to be produced due to continuing economic recession.
So, more money, chasing fewer goods, without the cushion of the continuing commodity price declines, is going to mean that we'll experience inflation.
It may take a while for the talking heads to catch up.
Inflation may be the best way out of this, which I am not fully convinced is correct, but in any case, I think that it is coming in a big way.
In broader terms, this is a continuation of the process of "imaginary wealth" disappearing from us. Due to borrowing, and its effects that were not apparent, we thought that we were wealthy, whereas in fact the wealth was in part based on continued borrowing.
The correction of this imaginary wealth was that first house prices fell, then stocks, and now the value of the currency.
I liken this with being on an ice floe when ice is breaking and you have to jump from one floe to another.
Practically everyone will lose if we get into a deflationary spiral. Read the post George made today. Or read any good economic history, particularly of the Great Depression.
There are few things more devestating to an economy than a deep deflation. It screws up banking and credit, it makes investments problematic, and, worst of all, deep ones always are the result of soaring unemployment. Then the deepening deflation feeds more unemployment into the system.
Most of the people who benefit from deflation are retired people living on a fixed income.
As for Iggy's example, the gas and food price declines are important parts of the economy. There's no reason to exclude them when calculating inflation or deflation. Their prices have declined for the same reason the economy is slowing down and the same reason that will lead to further deflation if it isn't stopped. There is no reason to believe that commodity prices don't "have much room to decline further." If demand continues to fall, their prices will continue to fall.
The balance between money and demand is high because demand is falling, not because there was too much money around. The Fed will try to dry that up with open-market transactions, selling bonds to absob currency as needed, just as they did last week. But for now, they'll probably let the ratio run a little high as a counterforce to deflation. In other words, they'll be trying to inflate rates with open-market monetary actions, because they're out of room to do so by lowering interbank interest rates, and the Fed has nothing to do with fiscal policies such as spending stimulus. They have to leave that to Congress and the president.
Not in economics. Our GDP has gone up, on the average, for over 200 years. And it can take a decade before that which goes down may come up, as it did in the 1930s.
And, as John Meynard Keynes once said, in the long run we're all dead.
I think people living close to the edge are going to welcome deflation if they keep their jobs or the social support programs are extended or enhanced.
Property values deflating really doesn't bother me that much. I've lived 20+ years where I plan to stay until I die. After that point, I really don't care.
The rapid increase in property values put a lot of struggling people in a bad place when it comes to home ownership. Owning one's home is a key part of being able to survive in retirement. The increases put home ownership out of range w/o some flawed schemes to loan them money. I could segue into college education but I'm not going to. My thoughs take a similar path.
The ones that will get hurt are the ones that think a home is an investment vehicle or piggy bank. A home is shelter, long term shelter that will provide for you long after you are able to work.
Local government is going to have to deal with the loss of revenue that they joyfully took in when property taxes rose due to crazy home values. Notice that local government didn't move to lower tax rates when the times were good? Now they will be crying about the 'loss' of revenue. Screw them.
My earlier 401K, IRA investments are likely going to be trimmed a bit but my current investments will grow over time. I'm just going to hang on, watch my spending, grab that overtime when it comes up and bank it.
The drop in steel and aluminum prices sure are not going to hurt my employer that has had to eat a lot of increases.
Old people that were smart enough to put money into very stable investments when they retired are fine. Those that let it ride are going to be hurt. Moral of story, is don't get greedy, 9/11/2001 changed a lot of peoples plans. I expect this to happen again in less than a decade.
Only in Keynesian theory, which was supposedly put to sleep by the Reagan era, which in turn led to decades of prosperity. Now the current upheaval seems to have opened a Keynesian revival without much of a public debate.
Balanced budgets, sound money, free trade, and laissez-faire policies were all thrown out and replaced by Keynesian sophistry from the Great Depression until Reagan. That lasted until 2000, when GWB talked conservative but acted Keynesian. Now Obama and the Dems will complete this change: all talk and action henceforth shall be pure Keynesian.
I'll bet Ed even believes in the ultimate Keynesian sophistry, the "paradox of thrift", which says that if people save more and consume less, there is--please forgive my unsophisticated understanding--more saving and less consumption. Somehow this is held to prove that saving is bad, and deflation is worse because it potentiates savings.
"Perhaps the single most destructive tenet of Keynesian economics was its denigration of saving. Keynesianism has been used to justify wasteful spending, massive deficits, and one after another scheme to redistribute wealth from those who would save it to those who would spend it."
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Keynesian economics is popular because it makes government and academics into the only possible saviors of society, and justifies government handouts that win elections for incumbents and "change".
And most of what Ed sez is right out of Keynesian theory. Including the part about denying it is Keynesian, which is its key characteristic of volubility, simultaneously meaning anything or nothing, like Marxism or evolution. All materialist ideas that should have stayed dead in the
And what was the Reagan era but the most radical period of deficit spending since World War II? Reagan's pumping of the economy is, instrumentally, one of the clearest examples in recent times that deficit spending can juice an economy. What Reagan didn't get, however (but which Reagan's budget director David Stockman knew perfectly well, and didn't care about) was that he was putting today's spending on a credit card, and that someone would have to pay for it eventually. But not while *he* was in office, nosirree.
Keynes promoted deficit spending as a temporary expedient for getting an economy out of a slump. Reagan, and Bush 43, got the idea that it was the ideal equilibrium state. At this moment, we're still living on it. The credit card is getting pretty beat up and now that we really *do* need it, the question is how much of an increase in our credit limit the world will tolerate.
There really isn't much to debate. Keynes' general theories aren't being revived so much as being resurrected in popular attention. Economists have long since modified and codified the proven parts into neoclassical and mainstream economics, and the useful parts are today's economic orthodoxy -- because the relevant points have been well proven by events.
I can see you've been catching up in your reading , but that you missed a lot of important parts. The Paradox of Thrift, today, serves only as a pedagogical device, a lot like the Laffer curve, or the conceptual explanation of Comparative Advantage (another economic principle that does not mean what most people think it means; it's worth looking up). However, a lot of economists got a jolt in the '90s, when Japan seemed to be following Keynes' theory about the effects of savings almost to a "T". It doesn't happen often in history; it exists mostly as a theoretical model to demonstrate what the consequences of saving really are about, in macroeconomic terms, but it was a big part of what happened to Japan. As I said earlier, that is NOT the same as what it means in home economics, if you're talking about its affect on an individual. I hope that we're both making the same distinction, and that you're not melding the two.
When I said facetiously to "spend, spend, spend," I had no concern whatever that it needed to be said, or that saying it would influence anyone. People are going to save money now, until the economy turns up. Then they'll start to spend. That's what we always do. The home-economics solution is out of sync with the macroeconomics solution, but that's just a fact of human nature and nothing is likely to change it in this culture.
As I said, much of Keynes is now mainstream economics (it's really known as Mainstream Economics) and has been since most of us were in grade school. Mainstream economics is centered around Samuelson's textbooks and lectures. Samuelson melded Keynesian principles and neoclassical economics. It's been the mainstream since the early '50s. Even the neoliberal wing (which actually is conservative, and is the basis of the Washington Consensus, the IMF, and the World Bank) incorporates a lot of Keynes.
What you point to above is an empty sack written by one of the Shenandoah Valley cultists (Clifford Thies) of the Austrian School, which is where most of the remaining remnants of that endangered species still teach (George Mason has a few; Shenandoah has Thies; and, when they're not under water, there are some at Loyola in New Orleans). To give you an idea of the thoroughness of Thies's ideological posture, you may find it useful to see his position on federal regulation of toilet-tank sizes ("Fedgov 'Flushes' Bigger Toilets"):
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Obviously, this is a libertarian's libertarian. And he has a libertarian's attitude in the piece you point to. What he *doesn't* have in there is a single, solitary documentation of fact, or even a quantitative example, of what he's so annoyed about. He just doesn't like Keynes (maybe his home economics teacher was a lot like yours?), and he quotes a variety of other economists who don't like him, either. He quotes Hutt, and von Mises, Robbins and Hayek, and several other purveyors of economic heterodoxy. His thesis seems to be that it's bad because he doesn't like it, and his friends don't like it, either. One of them objects because he says Keynes was "arrogant." Sheesh.
Or they didn't, because he wrote that piece in 1996, when Bill Clinton was in office. (Thies probably didn't like that, either.) The deficit spending of the Reagan years was still glossed over by the new economic bubble, and he didn't have to address it at all. But it maybe wouldn't have mattered. He didn't address any other economic fact with evidence or an explanation, for that matter.
Is this your idea of evidence? A collection of grunts and complaints by people who are unhappy about Keynes, but about which the author never says WHY? Who never points to a fact, or a rationale, for his displeasure?
I hate to say it, because I like Cato's contrarian style, but this is what I've come to expect of their papers written for popular readers. I have to believe they have real knowledge of their subjects but this paper is one of several empty sacks I've read among their publishing, and it's impossible to evaluate what they're saying if they won't even bother to show how they arrived at their conclusions.
Maybe this is what George Bush meant the other day when he said there's gas in his neighborhood. And I wonder what Thies thinks about the statement that another libertarian economist, Alan Greenspan, made a few months ago about the collapse of the "intellectual edifice." Greenspan definitely wasn't talking about anything to do with Keynes. Maybe he was talking about the same edifice that gave Thies his cranky attitude.
----------------- This is *NOT* Keynesian economics but rather the politician's bastardized version of it.
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Deficit spending is not Keynesianism. Governments had long used deficits to finance wars. Keynesianism recommends counter-cyclical policies to smooth out fluctuations in the business cycle. An example of a counter-cyclical policy is raising taxes to cool the economy and to prevent inflation when there is abundant demand-side growth, and engaging in deficit spending on labor-intensive infrastructure projects to stimulate employment and stabilize wages during economic downturns. Classical economics, on the other hand, argues that one should cut taxes when there are budget surpluses, and cut spending-or, less likely, increase taxes-during economic downturns. Keynesian economists believe that adding to profits and incomes during boom cycles through tax cuts, and removing income and profits from the economy through cuts in spending and/or increased taxes during downturns, tends to exacerbate the negative effects of the business cycle.
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==>This is the easy part.This is the hard part that is never implemented.
I don't know. I suppose it could, but I don't think that's what's happened here. Sending jobs overseas hasn't *directly* caused as much unemployment as many people think.
Globalization presents its own sets of benefits and problems, but one would be hard-pressed to claim that it's as big a factor as something like a collapsing bubble in a large segment of our economy -- housing, for example.
I'll bet my old friend Alan Tonelson thinks so, however, and probably has written something about it that's very convincing. d8-) He's a real trade hawk.
I hope you aren't disagreeing that we're all dead in the long run. d8-)
Yes. Beyond very modest values, both are very bad. Inflation is less bad, because it can be corrected with monetary policy. It can be very painful to do so (see Paul Volcker, Stagflation, Ending The). But it can be done, and pretty quickly, if necessary. Ending a serious deflationary spiral is uncertain business. It can take many years, and, in the end, you could be dealing with an equilibrium that you didn't want and that will be hard to re-adjust.
And, if we're lucky, it will moderate and then go on forever. That is, unless someone comes up with another way to avoid tipping into deflation in the normal ups and downs of ordinary business cycles.
One could so note, but one should also note that a "huge deflationary purge" would also purge us of a large chunk of the jobs in our economy. We wouldn't have a pot left to pee in.
I'm glad to see the grin. When you start talking economics without a systematic development of ideas and a syllabus, it's really easy to get confused.
For the record, you have to do what's good for you (that's microeconomics). If you have a well-functioning economic system and everything is in order, the result of you doing what's good for you will be good for everyone in the system as a whole (that's macroeconomics). Right now, things are out of order, so things you do that are good for you can have a bad effect on the economy as a whole.
There are several such paradoxes in our (theoretical) system. You can't save the world, or even the economy, so the solution is not for you to start doing something that's against your interests just because things are out of whack. An Austrian-School, libertarian type would say that you should just sit it out and the markets will self-correct. A more interventionist type would say that the government has to apply some brakes or some throttle to keep things from getting out of hand, for two reasons: One, there are some imbalances that have vicious results (like a depression) and that may not self-correct at all, until we're all flat on our backs and trying to dig our way out of a deep hole. Two, in the long run, we're all dead. d8-)
============== I ain't Ed, but it all depends on how many jobs, what types they were, and in what economic sectors.
It is unclear at what point an economy enters a depression, and even "recession is arbitrarily defined," however it is obvious that when enough people are unemployed, even from low wage jobs, demand drops drastically, resulting in the classic economic "death spiral," even as the demand for tax funded "safety net"/"social services" spikes.
From a strictly economic perspective, it is one thing to lose even large numbers of low paying jobs in obsolescent/obsolete sectors such as shoes and textiles, and quite another to lose even low numbers of well paying jobs in high-tech high-value-added growth industries such as nano- and bio- tech, as this will have a great impact on future domestic earnings and national competitiveness, both directly, through a lack of innovation, and by discouraging individuals from investing their time/money in the types of educations required for these demanding positions.
In a larger sense, the loss of any capability, even textiles and shoes has a serious "national defense" component. [It is tough to fight when you are buck naked and barefoot.]
Of greater concern is the change in employers from an American corporation to a trans- or multi- national corporation, which may be domiciled or chartered in the US, more-or-less as an historical artifact.
An old, now largely obsolete, economic paradigm posited "When American companies do well, America does well, and when America does well, Americans do well," or as President Kennedy phrased it, "A rising tide lifts all boats." As there are now very few [or no] major actually American companies, this is of historical interest only.
While this "stealth" change in "American" corporate loyalty is of concern for manufacturing sectors, it is critical for the banking/financial sectors.
Unka' George [George McDuffee]
------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?
Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).
Economic instability/depression leads to political instability and extremism.
While it is not widely known or appreciated, the US during the "great" depression came frighteningly close to a ballot driven fascist take over [Huey P. Long -- share the wealth / every man a king] and a military coup d'etat headed by Smedley Butler.
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"In 1934, he informed the United States Congress that a group of wealthy industrialists had plotted a military coup known as the Business Plot to overthrow the government of President Franklin D. Roosevelt."
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Unka' George [George McDuffee]
------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?
Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).
Refuting the Samuelson "mainstream" doesn't require evidence. I kept my copy from freshman year Economics 101 in 1973. So much fun to read about how the Soviet economy is superior to ours, growing faster, and destined to dominate the world.
Not so fun is reading your dismissing others for being unread, as if you are going to enlighten me about liberal economics.
For opposing federal outlawing of toilets? Just how far left is your "mainstream"?
Superior? You must have a special edition. Samuelson said it was growing faster, as the whole world thought at the time. But he was a critic of Marx and of the whole communist system. Like nearly everyone else, he accepted the wildly inflated CIA estimates of Soviet economic growth (the CIA said that the Soviet economy grew by roughly 5%/year through the '70s and '80s), and concluded -- like the CIA and everyone else -- that the Soviet economy was smaller than ours but that it was growing at a faster rate. That was the nearly universal understanding at the time, based on bad intelligence and bad methodology by the CIA and by foreign intelligence services. The idea that the USSR's economy would surpass that of the US was a source of urgency and anxiety in the US government and throughout the governments of the West.
You didn't know that at the time, any more than the CIA did, so your "refutation" is based on the same surprise that hit the Reagan administration when the Soviet Union began to implode. I'm sure it surprised Samuelson, too. My edition was earlier than yours so I don't know exactly how he worded it in the 1973 edition, but all he said in the earlier editions was that the Soviet Union's economy was growing at a rapid pace, and that it was roughly half the size of the US economy by, IIRC, the late '70s. Again, that was based on US government figures, which came from the CIA.
"Mainstream" ideas in a book that's published in so many editions over a period of more than 50 years are going to evolve with the field, and Samuelson's text evolved a great deal. Today's mainstream is not tomorrow's mainstream. After the 1950s, his textbook followed the field rather than led it. But it was an evolution built on that melding of neo-classicism and Keynesianism (or neo-Keynesianism, by the late '70s) that identifies the mainstream. Monatarism's fortunes in that school of thought have gone up and down. I'm sure they'll be way down in the next edition.
If I'm misreading the pattern, I apologize. But your argument started out as blatantly sophomoric and you've been adding specifics as you go, with the apparent suggestion that you have an academic understanding of economics, which you're brandishing rather dismissively. It looks more Googlish to me, especially when you present an article as evidence, and it turns out to contain no critical argument at all, only a catalogue of critics. It looks like you're engaging in one of those cherry-picking jobs where you attach yourself to an outlier ideology and then dig up criticisms of the mainstream as you need them. It's a pattern we see all the time in regard to politics, economics, and numerous other contentious subjects.
Yes. Only a hard-core libertarian would bother with that one, and define his right to a large toilet tank in terms of individual liberties. d8-)
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