NationStates Jolt Archive

Come on girls and boys.

Who called it?

You can all thank me later.

But really, I want this thread to be a discussion about what deflation means to you. Do you have debt that you can now never pay off? Are you hoarding cash watching things get cheaper and cheaper?

Or are you just sitting there wondering how interest rates can go down and down and down, yet there is no inflation whatsoever.

Why is that? Maybe you own gold, was that a bad move?

Take this thread to explain your experience of how your dollars got more valuable.

Did I miss something?

My take-home wages are currently 1/3 of what they were 4 years ago, so yes, my dollars are more valuable, but not for the reason you think ;)

Currency is too complicated. Let's all just use the barter system.

What can I get for these beaver pelts?

My take-home wages are currently 1/3 of what they were 4 years ago, so yes, my dollars are more valuable, but not for the reason you think ;)

Exactly. Your time is now worth less in dollar terms. Hence the dollars are more valuable.

Here is the thing. 75% of the world's debt is denominated in dollars. That means you need dollars to pay it back. But it's not like 75% of the world's debt had dollars instantly available. No. You would borrow some dollars, then they would be deposited, then they would be lent out again. And all the time it would be used to buy stuffs.

Now here's the important bit. AND PAY ATTENTION BECAUSE AFTER THIS BIT U ARE ON U'RE OWN.

This is basically a massive short on the dollar. And now margin is being called, there are not enough dollars to make the debt good. So the value of the dollar, because of scarcity will go.... (U CAN FILL IN THE REST).

I only say this because, I miss U guys when I am busy. Trade this accordingly.

Well years ago I figured out the shrub was a fracking moron and new his policies would screw me over.

I dumped all debt and credit cards.

Right now I am sitting ok.

Hopefully no layoffs as they are going on right now....

Paradoxically, this actually the first time that my family has started doing much better economically. We recently managed to get rid of a lot of outstanding debt (a second house that we've spent the past five years trying to sell), and so far my parents wages have been holding steady even as prices are going down.

Hopefully this trend continues at the very least until I graduate from college.

I'm actually better of since I retired than I was when I was working. My gross income is roughly 50% of what I earned at the University, but my net pension is closer to 60% of what I took home when I worked. I don't owe on my house (except a ridiculously low HOA fee and taxes). I don't owe anything on the car. My daughter is employed and living elsewhere. So, while I appear to have less, I actually have more. I'm paying off my debts and saving money. I hope it stays this way.

Deflation is a short term phenomenon with only short term gains to be made from it.
A brief period of deflation has been preceded by, and will be followed by, a longer period of inflation, that will quickly evaporate any gains made by deflation.
So alas no, for your average person, it holds no promise of quick fortune.

Bokki

There has never been such a short position on any currency in the world like this ever before.

Peoples who have held their dollars lovingly close are the winners here. Don't be bitter.

U R just gumpy

According to inflationdata.com (http://inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx), inflation this year is higher than any time in the last ten years. I'm not sure what the OP is talking about.

According to inflationdata.com (http://inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx), inflation this year is higher than any time in the last ten years. I'm not sure what the OP is talking about.

Source?

LOL.

Oh flower of scotland,
when will we see your like again?

Little know fact, my ancestors fought at Flodden. On the English side.

Those days are past now,
And in the past they must remain.

&c.

I am doing the peoples of nation states a favour.

Thats sort of like when you pop a balloon with a pin and all the air leaves it right?

Bokki

There has never been such a short position on any currency in the world like this ever before.

Peoples who have held their dollars lovingly close are the winners here. Don't be bitter.

U R just gumpy

Me isn't gumpy, me are euro user. :D

Me isn't gumpy, me are euro user. :D

I think the Euro settles at around 80-90 c. Maybe lower.

Well in the last few months we have cleared our mortgage, paid off the car loan and have been able to start investing part of our income. We owe nothing to anyone.
So how does it affect me? - Not at all. With the exception that I work in risk management, so I have rather a heavy workload at the moment.

Also you were far from the first to call it. I, amongst others, predicted the current meltdown in the financial system, more than five years ago. When it became obvious that the US, individuals, corporations and government, was just continually pushing its debt forward instead of embracing any form of fiscal responsibility.

I think the Euro settles at around 80-90 c. Maybe lower.

The euro will never "settle" against the dollar, as it and its predecessors, and any other unit not directly linked to it, have never "settled".

The euro will never "settle" against the dollar, as it and its predecessors, and any other unit not directly linked to it, have never "settled".

But I think I see the Zimbabwe Dollar starting to settle at 1 USD = ∞ ZWD.

Here is the thing. 75% of the world's debt is denominated in dollars. That means you need dollars to pay it back. But it's not like 75% of the world's debt had dollars instantly available. No. You would borrow some dollars, then they would be deposited, then they would be lent out again. And all the time it would be used to buy stuffs.

Now here's the important bit. AND PAY ATTENTION BECAUSE AFTER THIS BIT U ARE ON U'RE OWN.

This is basically a massive short on the dollar. And now margin is being called, there are not enough dollars to make the debt good. So the value of the dollar, because of scarcity will go.... (U CAN FILL IN THE REST).

I only say this because, I miss U guys when I am busy. Trade this accordingly.

What you are missing is that just because a debt is denominated in USD does not mean that it has to be paid in USD. In most cases outside of the US the denomination was a way of pegging the nominal value of the debt to a relatively stable currency, nothing more - inflation protection. The debt is to be serviced in the local currency - no need to buy dollars at all.

Who would lend in Zimbabwe dollars, for example, with the inflation there - no one. But if you lend in Zimbabwe dollars indexed to USD, then there is no such problem because the value of the debt closely follows the real inflation rate (not the one published by the government, which is why such loans are not index linked rather than currency denominated)

This means that there is not a massive short on the dollar outside of the USA at all. There is a short in the USA - but this creates a very different scenario. This is one of the factors that will drive inflation and devaluation of the USD unless the government and the Fed are very tight on the money supply.
Add to this the loss of worldwide confidence in the dollar, which will lead to central banks around the world reducing their position in USD, and there will actually be an excess of dollars compared to the demand which leads to ....
- now you complete that

You have to see and understand the whole picture, not just the internal position.

Paradoxically, this actually the first time that my family has started doing much better economically. We recently managed to get rid of a lot of outstanding debt (a second house that we've spent the past five years trying to sell), and so far my parents wages have been holding steady even as prices are going down.

Hopefully this trend continues at the very least until I graduate from college.
Collective debt? Commie! ;)

Sadly my dollar is worth less now. :(

What can I get for these beaver pelts?

A large box of Timbits.

Peoples who have held their dollars lovingly close are the winners here. Don't be bitter.

Well, hurrah for having paid off all my debts and saved a bundle by deploying again. Of course, if I'd had any brains I'd have come over as a contractor and made 5x as much with much less risk.

What you are missing is that just because a debt is denominated in USD does not mean that it has to be paid in USD. In most cases outside of the US the denomination was a way of pegging the nominal value of the debt to a relatively stable currency, nothing more - inflation protection. The debt is to be serviced in the local currency - no need to buy dollars at all.

Who would lend in Zimbabwe dollars, for example, with the inflation there - no one. But if you lend in Zimbabwe dollars indexed to USD, then there is no such problem because the value of the debt closely follows the real inflation rate (not the one published by the government, which is why such loans are not index linked rather than currency denominated)

This means that there is not a massive short on the dollar outside of the USA at all. There is a short in the USA - but this creates a very different scenario. This is one of the factors that will drive inflation and devaluation of the USD unless the government and the Fed are very tight on the money supply.
Add to this the loss of worldwide confidence in the dollar, which will lead to central banks around the world reducing their position in USD, and there will actually be an excess of dollars compared to the demand which leads to ....
- now you complete that

You have to see and understand the whole picture, not just the internal position.

That's exactly what a dollar denominated debt means. Hence all the fucking swap lines the Fed has put out to keep the dollar artificially low.

If you are going to give pompous lectures, at least pay attention to what is happening in the rest of the world.

The euro will never "settle" against the dollar, as it and its predecessors, and any other unit not directly linked to it, have never "settled".

YAH, settle was an imprecise word in this case. 'scuse.

But I think it is going to trade in the 80-90c range.

That's exactly what a dollar denominated debt means. Hence all the fucking swap lines the Fed has put out to keep the dollar artificially low.

If you are going to give pompous lectures, at least pay attention to what is happening in the rest of the world.

A dollar denominated debt means only that the value of the debt is expressed in USD. Nothing more, nothing less. The servicing currency can be anything - the denomination does not define this.

Dollar denominated bonds or other securities, on the other hand, have to be serviced in dollars. The Fed has had to issue the swap lines as it is funding the rescue packages by the issue of dollar denominated bonds.

However 75% of the worlds debt is NOT in dollar denominated bonds.

No need to get aggressive in your defense just because you misunderstood something.

A dollar denominated debt means only that the value of the debt is expressed in USD. Nothing more, nothing less. The servicing currency can be anything - the denomination does not define this.

Dollar denominated bonds or other securities, on the other hand, have to be serviced in dollars. The Fed has had to issue the swap lines as it is funding the rescue packages by the issue of dollar denominated bonds.

However 75% of the worlds debt is NOT in dollar denominated bonds.

No need to get aggressive in your defense just because you misunderstood something.

Commodities.

Look, I know you are all waiting for the inflation. But that ship has sailed. If you can't see the deflation, I can't help you.

Yah, you are very articulate. But you basically know nothing. And that's not even what I mean by dollar denominated anyway.

What do they say, poverty is knowing the right word, but not getting a chance to use it.

Also there are all those derivative contracts that need dollars. They are notionally at some multiple of world GDP. I grant that they net out, so it's not that bad, but they fail all the time on credit events. And this needs dollars.

But I think I see the Zimbabwe Dollar starting to settle at 1 USD = ∞ ZWD.

And you say that just as it stayed almost level for 3 whole days?
http://www.zimbabweanequities.com
Okay, only to plummet a factor 4 the day after that, but who's noticing... :D

But I think it is going to trade in the 80-90c range.

It may reach 1 USD = 0.80 to 0.90 EUR briefly.

I think we'll see deflation in the sense that, as energy costs go down, the price of goods will return to where it was a year or two ago. But it will probably result in a net loss to the average american consumer with the layoffs and decreased demand coming out in the news.

Personally, I'm thankful that I was scared out of the market in February by a really bad trade. I'm happy I only lost $2700 considering the alternatives. At this point I could pay off all my loans out of my bank account if necessary. Now I just wish they would stop dropping the fed rate to ridiculous levels so I can get a better return on my savings (since I don't want to move them into higher yield returns whilst waiting to pay down debt). I feel the fed policy unfairly punishes the financially prudent for the benefit of the financially ignorant.

Ultimately, I suppose it might have been better to not go into debt if I wanted to do elaborate things with my capital.

I have absolutely no idea how it will affect me.

I have zero ability to understand most economic issues. Hell, I suck even at basic math. However, I do have a very good sense of proportion and momentum, and I am fairly well read on world history. I have been expecting exactly all of this to happen -- this exact scenario -- since the frigging Reagan administration, since fucking Milken went to jail, since everyone was high and optimistic on an economy based almost entirely on credit and "service industries." That's how long I've been saying this train was speeding towards a cliff. Kind of like that scene at the end of "Bill and Ted's Excellent Adventure" where Napoleon makes a presentation about his plan for victory at Waterloo, and Ted says, "I don't think that's gonna work, dude." (I'm Ted in that scene.)

However, as of today, I have zero debt. I have almost 30K in savings. I have no investments, no 401K, nothing like that. I currently have only intermittent income as a temporary office worker. I have already lowered my living expenses about as far as I can, short of giving up all monthly electronic services -- internet, cable, phone -- and moving to a cheaper state, which I likely will do when my current lease is up. I am trying to figure out how to make art and writing generate income. That is very hard to do even in a good economy, so I am thinking outside the box -- hell, I put the box out with the recyclables a long time ago -- trying to develop art "products" that can be cheaply and effectively commercialized at prices people can afford in times like this, hoping that volume of sales will make them somewhat profitable to me, while still being art.

So I figure that I am both screwed and on top of things at the same time. My support platform is very small but stable. I don't have a lot of time to make something happen income-wise, but I don't have no time, either.

I have no clue as to how deflation might affect me, if at all.

I would be interested in opinions.

I hope inflation comes down sooner rather than later - it's already higher than the interest rates that most banks offer, and the Bank of England has now decided to cut interest rates even further. My bank and building society have lost no time in cutting interest rates for their depositors (but, it seems, their mortgages seem to be about the same.) Still, I bet interest rates will rack up once I graduate so, having been careful and worked/saved money and see it lost through inflation, I get to pay more in terms of my student loan repayments!

Oh, I love the economy...

A large box of Timbits.

DEAL! ......sucker...those were squirrel, not beaver.

But really, I want this thread to be a discussion about what deflation means to you. Do you have debt that you can now never pay off? Are you hoarding cash watching things get cheaper and cheaper?
Well, for the past 2 years I've been saving some money to buy a used Mitsubishi Evo or Toyota MR2.

Today I'm wondering if I should get a Porsche 996 Turbo or 997 Carrera 4S, because both are now well within what can be bought for that money, or even push it to a 997 Turbo. Every next selling owner I tell it about is trying to beat others; lots of people can't afford good cars anymore, and they know there are no new buyers on the market.

The prices are dropping, while my employer is in no position to reduce my payment: despite the crisis, the shipbuilding industry is in too great a shortage of personnel - I still have offers beating what I earn now, even including one from far abroad.

That's the good part. But on the other hand, there's a bigger problem. From now on, I can no longer live below my means, invest the very solid savings, and grow money on the stock market, accumulating a personal reserve. Plus, there's no cheap credit anymore, and the market for luxuries is falling. So I won't be able to fulfill my previously very realistic dream of starting my own private company for designing and building modern and expensive recreational watercraft.

Technically I could start it, as the workforce is generally cheaper, but there's no real market now - it's too likely to fail. I've spent time, talking to people ranging from my uni teachers to our contractors' top management, researching the target market and the ways to impress it. I know I have the talent to be more than a salaryman - I have a good grip on business, I'm good with administration, and I have more than enough technical skills. But instead, due to the crisis, I have to go on just developing systems for big corporations, because there's at least always enough customers.

And this loss is way more important than whatever temporary gains I get on the deflation. I can only hope that by the time this crisis ends I'll still be young enough to change my life and do what I really can and want.

Currency is too complicated. Let's all just use the barter system.

What can I get for these beaver pelts?

I'll give you 10 shiny shiny beads per pelt. Papa needs a new hat!

I would say the Fed is going to print the shit out of the dollar once it can't cut rates any more. There's been a lot of research into what happened in Japan, and though it's kinda complicated because all the normal graphs and functions move over into negative territory, one fairly straight-forward answer was that if people want dollars (for saving or for paying back loans), you give them to them.

It's a question of scale though, I suppose. And it's not really something they can just do unilaterally, various central banks as well as the Chinese will want to have a say.

As what it means for me...well, Australia's still around the 5% inflation mark, though it'll collapse over the next month or two. Rates are still at 5.25% (notes of the most recent RBA meeting are coming out today), so they have some way to go. I've got some euros coming in from time to time, but the relative movement of those two hasn't really been dictated by the USD. The most impact will probably be on a trip I wanna take at the end of next year, which would involve the US. We'll see whether currency movements might be cancelled out to some extent by a collapse in the tourism industry.

I would say the Fed is going to print the shit out of the dollar once it can't cut rates any more. There's been a lot of research into what happened in Japan, and though it's kinda complicated because all the normal graphs and functions move over into negative territory, one fairly straight-forward answer was that if people want dollars (for saving or for paying back loans), you give them to them.

Give them the money? They don't want to do that, Japan tried that, people weren't spending at all they just saved it for next year.

It's a question of scale though, I suppose. And it's not really something they can just do unilaterally, various central banks as well as the Chinese will want to have a say.

But will the US Fed listen?

As what it means for me...well, Australia's still around the 5% inflation mark, though it'll collapse over the next month or two. Rates are still at 5.25% (notes of the most recent RBA meeting are coming out today), so they have some way to go. I've got some euros coming in from time to time, but the relative movement of those two hasn't really been dictated by the USD. The most impact will probably be on a trip I wanna take at the end of next year, which would involve the US. We'll see whether currency movements might be cancelled out to some extent by a collapse in the tourism industry.

Can you explain this more? When you say the collapse of the tourism industry (which will happen) and currency movements might be cancelled out are you saying that the AUD might rise against the USD?

Well, for the past 2 years I've been saving some money to buy a used Mitsubishi Evo or Toyota MR2.

Today I'm wondering if I should get a Porsche 996 Turbo or 997 Carrera 4S, because both are now well within what can be bought for that money, or even push it to a 997 Turbo. Every next selling owner I tell it about is trying to beat others; lots of people can't afford good cars anymore, and they know there are no new buyers on the market.

I thought in your car thread you had decided to buy a Porsche?

Currency is too complicated. Let's all just use the barter system.

What can I get for these beaver pelts?

Agreed. We need our own Bartertown with a Thunderdome. "Two men enter, one man leave!"

Give them the money? They don't want to do that, Japan tried that, people weren't spending at all they just saved it for next year.
Japan's real interest rate was still positive. Even when the nominal rates are zero, if inflation is negative, the real rate can be positive. To get the economy back into swing, you want the real rates as low as possible.

Usually the link between nominal and real rates is strong enough to allow monetary policy to be conducted through modifying the cash rate (transmission mechanisms and all that). With sustained deflation, that link is severed and you can't cut nominal rates below zero. The only way you can keep going is to just flat-out print currency and produce enough inflationary pressures to get real rates down. Japan didn't do that to anything the extent that would have been necessary, and the little of that it actually did came very late in the piece. I don't think the Fed would wait that long.

But will the US Fed listen?
That depends on what's being said. Some of the biggest debtholders of the US are foreign governments, and there are feedback mechanisms as well - the success of Fed policy depends on the reactions of these forces outside its control. Politicians may bitch, but I don't think Bernanke is the nationalist type.

News on the side, for those that hadn't heard: The Chinese announced their own fiscal stimulus package (http://www.businessspectator.com.au/bs.nsf/Article/Chinas-great-leap-sideways-L92Y4?OpenDocument&src=sph). 4 trillion yuan - that's almost $590 billion US, more if you take PPP rates, or 20% (!) of GDP.

Can you explain this more? When you say the collapse of the tourism industry (which will happen) and currency movements might be cancelled out are you saying that the AUD might rise against the USD?
No, simpler than that - if tourism operators (travel agencies, airlines, hotels, etc) are struggling, they'll have to compete for every customer. So they cut prices, and maybe enough for me to cancel out or at least mitigate the drop in the AUD. I don't think our dollar is coming back up for the next few years, barring more drama (or Lacadaemon's prediction, I suppose) between 65 and 70 US cents seems likely to me. Either way, the only way for it to go is down.

Japan's real interest rate was still positive. Even when the nominal rates are zero, if inflation is negative, the real rate can be positive. To get the economy back into swing, you want the real rates as low as possible.

Usually the link between nominal and real rates is strong enough to allow monetary policy to be conducted through modifying the cash rate (transmission mechanisms and all that). With sustained deflation, that link is severed and you can't cut nominal rates below zero. The only way you can keep going is to just flat-out print currency and produce enough inflationary pressures to get real rates down. Japan didn't do that to anything the extent that would have been necessary, and the little of that it actually did came very late in the piece. I don't think the Fed would wait that long.

Yes I know the real interest rate is still positive even when it is still zero. IIRC real interest rate = nominal interest rate - inflation rate, and that was one of the problems with Japan as it was still high. So Japan's problem wasn't giving people more money it was more that they didn't give them enough and was to late?

Could there also be some cultural issues if wanting to use this technique?

For example if consumers have a large MPS and know that next year's prices will be cheaper, would it work as people are going to save a large amount anyway, or does that mean the government just needs to print more? Vice versa if consumers have a low MPS?

That depends on what's being said. Some of the biggest debtholders of the US are foreign governments, and there are feedback mechanisms as well - the success of Fed policy depends on the reactions of these forces outside its control. Politicians may bitch, but I don't think Bernanke is the nationalist type.

Fair enough.

News on the side, for those that hadn't heard: The Chinese announced their own fiscal stimulus package (http://www.businessspectator.com.au/bs.nsf/Article/Chinas-great-leap-sideways-L92Y4?OpenDocument&src=sph). 4 trillion yuan - that's almost $590 billion US, more if you take PPP rates, or 20% (!) of GDP.

Damn that is a lot of money, and good for Australia when some industries are now suffering the effects of this downturn in China, such as 25 million tons of Iron Ore just sitting on the docks in China with no one wanting it anymore, I hope it works out for the Chinese economy.

No, simpler than that - if tourism operators (travel agencies, airlines, hotels, etc) are struggling, they'll have to compete for every customer. So they cut prices, and maybe enough for me to cancel out or at least mitigate the drop in the AUD. I don't think our dollar is coming back up for the next few years, barring more drama (or Lacadaemon's prediction, I suppose) between 65 and 70 US cents seems likely to me. Either way, the only way for it to go is down.

Oh ok I see, wrong way around oops. So it may continue heading down, that's a shame at least to my own finances.

For example if consumers have a large MPS and know that next year's prices will be cheaper, would it work as people are going to save a large amount anyway, or does that mean the government just needs to print more? Vice versa if consumers have a low MPS?

Print more. Generally, the goal is to print enough to lower the MPS. And when there's a low MPS already one needs to print less, yes.

Print more. Generally, the goal is to print enough to lower the MPS. And when there's a low MPS already one needs to print less, yes.

Well not always, if the MPS is high while it would mean they would need to print more the MPS may not fall, after all the MPS talks about proportions rather than in absolute terms, so while they may be spending more in dollar amounts they may be saving the same percentage of income.

My question was a bit of a whim and was not thought out all that well but rather a general question and whether culture might have an impact on monetary policy and the effectiveness of it.

Well not always, if the MPS is high while it would mean they would need to print more the MPS may not fall, after all the MPS talks about proportions rather than in absolute terms, so while they may be spending more in dollar amounts they may be saving the same percentage of income.

My question was a bit of a whim and was not thought out all that well but rather a general question and whether culture might have an impact on monetary policy and the effectiveness of it.

The MPS is not static. People save money for a reason. Generally when the MPS is very high its because people have shitty expectations of the future. Change their expectations and their mps will change.

Yes I know that, but then even giving them money if they think that prices are going to fall over the next years they are going to want to save that money. Giving them money isn't always going to do that (which is what happened in Japan) now give them a lot more and they might start spending more but they might also begin saving the same proportion anyway.

Once they start spending more than as prices rise and output increases then their expectations would change it won't happen straight away some time is needed. And then their MPC might begin to rise.

News on the side, for those that hadn't heard: The Chinese announced their own fiscal stimulus package (http://www.businessspectator.com.au/bs.nsf/Article/Chinas-great-leap-sideways-L92Y4?OpenDocument&src=sph). 4 trillion yuan - that's almost $590 billion US, more if you take PPP rates, or 20% (!) of GDP.



whats scares me is that China must have 8% gdp growth or social unrest will occur prediction. Because that growth is really not sustainable. though on the bright side they wont have to artificially lower their currencies value after this stimulus package.
Economic management aside recessions are just a normal cycle of economies. So there should be some years where they are below. the 8%.
On top of this the shanghai stock exchange is down 50% from last year.

so much for china is too big to fail.

Once they start spending more than as prices rise and output increases then their expectations would change it won't happen straight away some time is needed. And then their MPC might begin to rise.
Expectations being the real key word here, namely those on inflation.

Anyways, read this: http://www.pkarchive.org/japan/japtrap.html

The point is to act completely recklessly to the point where people actually start believing that the central bank will do whatever it takes to raise prices. Weird, yes, but these are weird times.

Expectations being the real key word here, namely those on inflation.

Anyways, read this: http://www.pkarchive.org/japan/japtrap.html

The point is to act completely recklessly to the point where people actually start believing that the central bank will do whatever it takes to raise prices. Weird, yes, but these are weird times.

Hmmm, yes indeed, interesting paper and I suppose the central bank should do this.

Now does the US Fed have the same perception of responsibility as the Japanese central bank? If so can you see the US Fed sitting back and allowing inflation to rise?

The economy needs a healthy deflation - but that ain't gonna happen. Hyperinflation is ahead. Obama will increase government spending, the banks will never get enough government money to satisfy their insatiable thirst for handouts, and American businesses will continue to fail. This will be "compensated" with more debt and more printing of increasingly worthless dollars. Governments only "solve" problems by throwing money around and then pretending that everything's been fixed.

*edit* remember that the last president who actually tried to fix things in the economy got shot in the head down in Texas.

Healthy deflation is an oxymoron

Healthy deflation is an oxymoron

No. if it follows a period of rapid or extended inflation it can be healthy. I am sure Zimbabwe would love a period of healthy deflation right now.

The economy needs a healthy deflation - but that ain't gonna happen. Hyperinflation is ahead. Obama will increase government spending, the banks will never get enough government money to satisfy their insatiable thirst for handouts, and American businesses will continue to fail. This will be "compensated" with more debt and more printing of increasingly worthless dollars. Governments only "solve" problems by throwing money around and then pretending that everything's been fixed.

*edit* remember that the last president who actually tried to fix things in the economy got shot in the head down in Texas.

Large amounts of deficit spending do not necessarily lead to hyperinflation. You need to start printing a whole hell of a lot of money in order to have hyperinflation.

No. if it follows a period of rapid or extended inflation it can be healthy. I am sure Zimbabwe would love a period of healthy deflation right now.
What Zimbabwe needs is a healthy period of disinflation. That's not the same thing.

Ongoing deflation encourages people to save and wait for prices to be lower in the future. That causes economic growth to slump, and prices to fall further. You end up trapped in a vicious cycle. It's better to have a low, predictable level of ongoing inflation than the opposite. And because the risks are so much bigger on the downside, you shouldn't aim for zero inflation either.

The scenario here is pretty obvious: we're looking at a potential repeat of Japan throughout the nineties, with the added bonus of the USD being even more important to the world economy than the yen. It was the same scenario: real estate bust gets banking system into trouble. Over there that then failed to properly resolve itself because neither the banks nor the government were willing to lose face by owning up to how bad things were. So you had little bail-outs, changes in accounting rules to hide losses and so on. The result was that the banks took a decade to fix themselves up, and just didn't want to lend during that entire time. Worse was that even when they tried, people wouldn't borrow, because in a deflationary environment that would be stupid. So the Japanese put their money into bank accounts and waited for a recovery that never came. And with that then came the job losses, followed by the social ramifications that are eating Japan from the inside out even today.

The challenge for the Obama administration and the Bernanke Fed is to do a better job of it. Going nuts with the printing presses seems an obvious way to do it - whether anyone will stand up to these demands at the moment to soften accounting standards is another question.

Large amounts of deficit spending do not necessarily lead to hyperinflation. You need to start printing a whole hell of a lot of money in order to have hyperinflation.
More importantly, you need to do it over a period of time. A once-off price increase because of a cash injection doesn't lead to inflation (which is the growth rate of prices) unless it changes people's expectations of future inflation.

What Zimbabwe needs is a healthy period of disinflation. That's not the same thing. they need to reverse the last year of inflation before any sane man invest in that country again. Actually just making a new currency wouldn't hurt either.


Ongoing deflation encourages people to save and wait for prices to be lower in the future. That causes economic growth to slump, and prices to fall further. You end up trapped in a vicious cycle. It's better to have a low, predictable level of ongoing inflation than the opposite. And because the risks are so much bigger on the downside, you shouldn't aim for zero inflation either.

That's only noticeable if you have deflation of 5% or higher
If you have a year or two of 1-3% deflation Few consumers change spending habits. Besides right now we need more savings so fewer banks go belly up when loans are defaulted on.

The scenario here is pretty obvious: we're looking at a potential repeat of Japan throughout the nineties, with the added bonus of the USD being even more important to the world economy than the yen. It was the same scenario: real estate bust gets banking system into trouble. Over there that then failed to properly resolve itself because neither the banks nor the government were willing to lose face by owning up to how bad things were. So you had little bail-outs, changes in accounting rules to hide losses and so on. The result was that the banks took a decade to fix themselves up, and just didn't want to lend during that entire time. Worse was that even when they tried, people wouldn't borrow, because in a deflationary environment that would be stupid. So the Japanese put their money into bank accounts and waited for a recovery that never came. And with that then came the job losses, followed by the social ramifications that are eating Japan from the inside out even today.
Major difference in real state markets in the US and Japan. Japans population is shrinking which means real estate will get cheaper over time. where as the US population is growing so real estate prices will continue a general trend upward. What we have here is a correction as the over availability of loans caused prices to be artificially inflated.


The challenge for the Obama administration and the Bernanke Fed is to do a better job of it. Going nuts with the printing presses seems an obvious way to do it - whether anyone will stand up to these demands at the moment to soften accounting standards is another question.


More importantly, you need to do it over a period of time. A once-off price increase because of a cash injection doesn't lead to inflation (which is the growth rate of prices) unless it changes people's expectations of future inflation.
Printing money like crazy, and giving more loans when there is too much bad credit is economic suicide. look at pre WWII history in the US minor and brief periods of deflation were common and normally came before a good decade.
And most of your major deflation periods are caused by economic collapse not vice versus.

they need to reverse the last year of inflation before any sane man invest in that country again. Actually just making a new currency wouldn't hurt either.
That's just not necessary. Have a look at how they dealt with hyperinflation in South America - of course you make a new currency, but first you have to deal with the inflationary pressures, which equates to trying to bring about disinflation. Unless you do that first, that big, one-time nominal price cut brought about by a new currency won't help (I've lost count of how often the central bank in Zimbabwe has declared all its currency's worth divided by some factor of 10).

That's only noticeable if you have deflation of 5% or higher
If you have a year or two of 1-3% deflation Few consumers change spending habits. Besides right now we need more savings so fewer banks go belly up when loans are defaulted on.
It's too fine a line to tread. There are deflationary pressures in the economy all the time, you're right, namely the effects of productivity improvements making goods cheaper. But that's different to a deflation caused by a collapse in demand. And even if the rates are quite low, it knocks out most of the mechanisms we have to influence what's going on, so we have very few means of reacting to a sudden increase in deflation.

Major difference in real state markets in the US and Japan. Japans population is shrinking which means real estate will get cheaper over time. where as the US population is growing so real estate prices will continue a general trend upward. What we have here is a correction as the over availability of loans caused prices to be artificially inflated.
You wouldn't actually invest based on that logic, would you? Because that's just about the most simplistic thing I've seen. By the same logic, IIRC Japan's GDP per capita has actually been growing faster than that of the US, for example, meaning that each one of these people now has more money to spend on housing...

Printing money like crazy, and giving more loans when there is too much bad credit is economic suicide.
I don't think you'll get around the fact that people will be more careful for a few years in who they lend to. As it stands, bad debt is bad, but no debt is probably worse. Of course there has to be a new equilibrium, with debt levels in the US lower than they were, but all the indications are that we should aim to slow down and manage the trip there as best we can. This is not a short-lived, benign thing like the ones there were in the 19th century from time to time under the gold standard.

look at pre WWII history in the US minor and brief periods of deflation were common and normally came before a good decade.
And most of your major deflation periods are caused by economic collapse not vice versus.
Of course some shock sets of the deflation in the first place. But it is then self-sustaining, and causes the ongoing slump.

Also relevant:
http://www.economist.com/finance/economicsfocus/displaystory.cfm?story_id=11964819
http://www.economist.com/finance/economicsfocus/displaystory.cfm?story_id=11750467
http://www.bis.org/publ/work152.htm