Wednesday, August 04, 2010

Even If Deflation Is Bad, We Know How to Solve It

"Even if deflation is a bad thing, we know how to solve it. Print enough new money and people will eventually start spending it. It’s alleged that no matter how much you print, it can all just fall into the liquidity trap, and it’s alleged that this is what happened in Japan over the past decade. But I am sure the Japanese just didn’t try hard enough. Liquidity trap or not, I guarantee you there’s a central banker in Zimbabwe who knows how to fight deflation. If we really get into trouble, all we have to do is hire him."

~Steven Landsburg

33 Comments:

At 8/04/2010 7:37 AM, Blogger fboness said...

You would pay an astronomic amount for that Zimbabwe central banker based on his salary history.

 
At 8/04/2010 7:44 AM, Blogger Free2Choose said...

As always, Landsburg is a gem. :)

 
At 8/04/2010 8:31 AM, Blogger Jason said...

I'll solve your deflation for...100 trillion Zimbabwe dollars!

 
At 8/04/2010 9:03 AM, Blogger morganovich said...

i don't know who this guy is, but his thinking is greatly oversimplified. he seems to ignore large issues.

deflation is deadly to business lending. if a bank gets a return just by holding dollars, then why lend them? to be induced to lend, you need an even higher nominal rate as you are lending someone an appreciating asset. in effect, dollars become bonds and may well trade over par if deflationary expectations take root. (look at japanese postal accounts for a prime example) worse, a borrower will then use the money to buy a depreciating asset (equipment, real estate) or at least an asset whose appreciation is much lower and whose nominal economic output will decrease, not increase.

it's much more difficult to justify capital investment under such circumstances. deflation is great if you have a pile of money already, but it retards capital accumulation and business growth terribly. this flows right through to employment levels.

deflation causes misery, pure and simple, especially in a society with too little savings and too much debt. if you have to pay your mortgage back in dollars worth more than the ones you borrowed

his notion that we can always print our way out of deflation simply isn't true. oh, gee, i bet japan never thought of that...

money supply and price level are not simply a supply driven system. you can't make people take money they don't want. we have zero rates and a steep curve right now, but money supply is shrinking. demand is not there, not at any price.

so, the only mechanism left would be trillions more QE, and that both crowds out private investment and plays a very dangerous timing game if demand resurfaces. zimbabwe solutions can yield zimbabwe results. sterilizing such a massive impetus if is looks to be too much would be VERY difficult.

total sidenote:

astoundingly, the $100 trillion zimbabwe dollar bill is not the largest denomination bill ever circulated. the hungarian hyperinflation was even worse. they first renamed the currency from pengo to milpengo (one million pengo) then would up with a 100 trillion milpengo bill, which is to say 100 sextillion pengo. at the peak, prices in hungary were doubling every 18 hours. wow.

 
At 8/04/2010 9:21 AM, Blogger juandos said...

I don't think the supposed worries about deflation are anything but a shallow attempt to divert attention away from the real problem...

 
At 8/04/2010 10:55 AM, Blogger Benjamin said...

Start booking a flight to Zimbabwe.

This Fed cannot cure deflation. They think they are still fighting inflation, and they are still giving moral rectitudey, prim, preachy commentary on the need for discipline and control and blah, blah, blah.

Everything Morganovich says is true, but add to that small businesses. Let me tell you where small business get capital: From real estate. To even get an SBA loan (I've tried) you have to post collateral. And what is your collateral?

A small factory, a house, a retail strip etc. Your equipment is worth not much, Your employees are worth nothing to the bank. Only your land and property count for much.

But if property values sink, then forget small business America. Property values have sunk.

Now, send an e-mail to your regional Fed president.

 
At 8/04/2010 10:57 AM, Blogger Ron H. said...

Thanks for the interesting link, juandos.

BTW thanks to you & your neighbors for your votes against Obamacare on Tue.

 
At 8/04/2010 11:01 AM, Blogger Ron H. said...

"Now, send an e-mail to your regional Fed president."

...and tell him what, to raise your real estate values?

 
At 8/04/2010 11:54 AM, Blogger Benjamin said...

Ron H.
My real estate values and everyone else's.
You have a thing against prosperity and small businesses hiring?
Listen we ain't going to see jack-diddle on hiring until small biz starts hiring.
Yeah, I don't like the higher taxes, but Obamacare does not impact most small businesses. Taxes were higher when I was young, I have seen worse.
What I have not seen, and do not want to see, is deflation.
This is terrible monetary policy--a outright sign of abject failure.
You don't either, unless you want to see your country go the Japan route.

 
At 8/04/2010 1:25 PM, Blogger Paul said...

"Yeah, I don't like the higher taxes, but Obamacare does not impact most small businesses."

Awww, Benji still hasnt' lost that lovin' feeling. He'll ignore the contrary evidence rather than face up to the fact his boyfriend is telling him sweet little lies.

 
At 8/04/2010 1:50 PM, Blogger Benjamin said...

PAUL-

Believe it or not, Obama did not cause the 20-year long deflation in Japan.

Do you have any idea what did?

Do you want to see your stock portfolio shrink in value by 75 percent, and your land values continually decrease?

While you are hysterically sniveling about Obama, and the R-Party pettifogs and sermonizes about deficits (a newly found religion, to be discarded as soon as they regain control and can pump lard homeward)), we are sinking into a deflation caused by our prim central bankers.

 
At 8/04/2010 2:43 PM, Blogger morganovich said...

the only reason we are even arguing about deflation is that the CPI calculation was changed. you can argue that it was good or bad (and i'm not looking to start that one off again) but it's incontrivertible that the new version of CPI put in place by greenspan reads much lower than the old one did.

using the old methodology (pre 1990), inflation is still around 4% and there's nothing to worry about from a deflation standpoint.

actual deflation is a very dangerous trend, but we are nowhere near there at the moment.

we are just misdefining inflation and using the conclusions to attempt to drive all out government intervention in the economy to prop up the failing fortunes of the party in power.

 
At 8/04/2010 2:57 PM, Blogger Bill said...

Benji: Do you mean lard like this from Obama?

"Government To Spend $1.2 Billion To Broaden Internet Access

The U.S. administration said Wednesday that it plans to spend $1.2 billion to help expand high-speed Internet access to dozens of under-served rural communities.

Wednesday, 4 August 2010"
http://www.redorbit.com/news/technology/1900481/government_to_spend_12_billion_to_broaden_internet_access/index.html?source=r_technology

 
At 8/04/2010 3:34 PM, Blogger Ron H. said...

"My real estate values and everyone else's."

And just how would the Fed do that, Benji, should they run the printing presses harder? If that's your answer, then I understand why so many of your comments don't make sense. You must be confusing value with dollars, and dollars with money.

More dollars in your hand won't make your real estate worth any more.

""You have a thing against prosperity and small businesses hiring?"

Absolutely not! I'm a real supporter of small business.

"but listen we ain't going to see jack-diddle on hiring until small biz starts hiring."

And that won't happen until your boyfriend stops screwing with everything we rely on. No one will commit to the future until there is some small degree of predictability.

""Yeah, I don't like the higher taxes, but Obamacare does not impact most small businesses."

Well, that one really takes the cake. I started to prepare a really scathing response, but I see Paul already did a better job. Be sure to read those references carefully and watch the video.

"Taxes were higher when I was young, I have seen worse."

Do you mean tax rates, or tax revenues, or taxes as a percentage of income? Just what are you talking about?

"This is terrible monetary policy--a outright sign of abject failure."

Current fed policy? Well yes, you finally got one right.

 
At 8/04/2010 4:03 PM, Blogger Paul said...

Ron H,

"And just how would the Fed do that, Benji, should they run the printing presses harder?"

This is the same Benji that constantly advocates yanking out the home mortgage deduction. In theory it's correct, but it would crush real estate values further.

 
At 8/04/2010 4:42 PM, Blogger Ron H. said...

"This is the same Benji that constantly advocates yanking out the home mortgage deduction. In theory it's correct, but it would crush real estate values further."

Paul, I agree. I've enjoyed the mortgage tax deduction but I know it shouldn't exist. It's one of the few things Benji is right about.

I think he just throws comments out here to get reactions. No one could seriously believe some the things he says, could they? If he were serious, he would learn some economics.

 
At 8/04/2010 5:25 PM, Blogger Benjamin said...

Morganivich: Inflation? You mean in housing, commercial, industrial or retail rents?
Or in manufactured goods (aside from military hardware, which only gets more expensive continually). Unit labor costs are going down.
Stock prices are where they were in 1999.

True, health care seems to have inflation, and military outlays/costs. What else?

Other items are inflating, but not due to the USA. Gold goes up in Chinese-India demand. A bad wheat harvest in Russia--this means we should crush out economy with tight money?



I wonder if Ron is going to marry Paul. And to think I started the lovefest. I feel like a proud doting uncle.

Dudes, get real. Of course we should dump the mortgage interest tax deduction, but now is not the time. I just point that out as the snivelers conveniently never mention it when describing the housing boom. It probably played a central role.

When I was young, the top tax rate was 90 percent. Now, under 40 percent. I think that was a healthy change, and I would like to target Juandos' 25 percent flat consumption tax as a goal.

Japan is finding consumption taxes flatten consumption though.

Yes, the Fed should print more money, engage in massive quantitative easing, and talk about targeting 3 percent inflation, or nominal GDP growth of 5 percent.

 
At 8/04/2010 6:28 PM, Blogger Jason said...

Benjamin, morgonovich is correct, we don't have chronic deflation. We have areas of oversupply that are are rectifying themselves. If you talk retail and housing, where there are insane excesses, sure prices are falling. But there is no deflation in commodities and heavy industrials, nor is there deflation in automotive.

Automotive did have deflation, occuring for almost 8 years, because of competion and enough plant capacity in the US to build 32 million cars when Americans could only afford 15 million. A few bankruptcies, a bailout or two, and the capacity and inventory problems eliminated, and what do you know, no more deflation.

Housing and business real estate have to go through this cycle as well. We have put on another pair of socks and suck it up, because it's gonna be a while.

 
At 8/04/2010 7:23 PM, Blogger morganovich said...

benny-

read this to understand how CPI has changed and why it is no longer a pure measure of price level:

http://www.shadowstats.com/article/consumer_price_index

there are charts on the site showing the old CPI calculation:

http://www.shadowstats.com/

you would need to subscribe to get the actual data.

the simple fact is that what would have been called 4-5% inflation in the 80's is called around 1% now using the new methodology. that is not an arguable fact.

which one you find more credible will determine whether you fear impending deflation (i do not).

remember how CPI failed to pick up the housing boom in 2006-7? why do you think that was? it's because it doesn't measure price level any more, but rather a flexible basket of goods providing a systematic downward bias.

it's like having a speedometer that reads 20 when you're going 60. it changes nothing about the situation, just makes you unaware of it. you cannot seriously believe that inflation was 4% in 1999 or 2006. that claim alone ought to make you doubt the current CPI methodology pretty seriously.

 
At 8/04/2010 7:57 PM, OpenID Sprewell said...

This guy Landsburg is an idiot, like all the other morons calling for massive inflation and "quantitative easing," ie the Fed buying more overpriced assets, essentially taxpayers bailing out more idiot creditors. Increasing the money supply is essentially a tax on creditors that is redistributed to debtors, no doubt appealing to idiot congressmen at all levels since they've run up almost $15 trillion in debt over the last century. However, while this might boost consumer spending in the short-term, at least until prices rise and equilibriate, it only creates more uncertainty for investors and makes it less likely that they'll invest, spurring the next round of layoffs and destabilization. It's called stagflation and is the reason why such monkeying with the money supply was thoroughly discredited in the '70s. It's hilarious when people bring up Japan, considering the huge fiscal programs they underwent to goose their economy, similar to the crap Obama's proposing today, all of which probably hurt much more than it helped.

Bernanke knows what he's doing: he pumped a bunch of reserves in, threatening to print money if there ever were massive bank runs, but he'll make sure it never enters the economy if he can help it. What is far more worrisome is his decision to bet $1 trillion in taxpayer-backed money on mortgage-backed securities, hoping either that they will not lose much value over the medium-term or that the losses the taxpayers will eat is less than the massive bank failures those losses would have caused. I don't care for all this interference in the economy, but Bernanke is by far the best of a bad bunch, ie Congress and their "stimulus," and there's no way he's going to inflate.

 
At 8/04/2010 10:02 PM, Blogger QT said...

Morganovich,

Interesting stuff regarding changes to CPI. Agree that there does not seem to be much evidence of deflation. Also agree that Landsburg is underestimating deflation.

Have to confess to finding the invocation of Zimbabwe's hyper-inflationary printing of dollars quite oblivious to the suffering of the citizens of that country. Do journalists invariably invoke the most extreme examples be evocative?

Benny,

The pricking of a housing bubble while painful and certainly inconvenient for any business trying to obtain a loan is not really the same as price declines across all sectors of the economy. Do you have any evidence of deflation?

Although Landsburg's arguments are less than compelling, I must concur that deflation seems to be a lesser threat than government insolvency.

 
At 8/04/2010 10:58 PM, Blogger Benjamin said...

QT! What prompts your Canadian invasion?

On deflation: CPI down three months in a row, PPI down two months in a row (I think). Unit labor costs going down, not up.

Office buildings, industrial selling half off from peak. Retail down too.

When people point to gold, oil, wheat and say inflation, what they are really describing are global markets--the US is every year becoming a smaller player. No way we should tighten our money supply just because the Indians and Chinese are ga-ga for gold.

Morganivich--

I know the way the CPI has been calculated has been changed. In fact, I would expect that outdated CPI's would show higher inflation rates. Naturally, buyers switch away from expensive services and goods. I actually used to know a lot about the CPI, a few decades in the past, in a professional capaciy. It used to overstate inflation, in times of rising mortgage rates, and these overstatements would get fed in the the Social Security system and its payouts, and other CPI-linked contracts.
Back then (1970-80s), you were presumed to be buying a new house every month etc. No one ever turned down the heat when fuel bills rose. You and I could have long hair-splitting conversations on what constitutes inflation.

For that matter, in SoCal we have dollar stores everywhere, and I seem to be able to buy shampoo, dogfood, reading glasses, detergent, sunglasses, drinking glasses, screwdrivers and who knows what for $1, a lot less than I paid 10 years ago. BTW, I love dollar stores. There were no such stores 10-15 years back.

I will give you health care bills, and legal bills, and the military bills. They only seem to go up, and get higher. A lot of parasites feasting on the economy in those categories.

Yes, too many niggling government regs, I suspect in the years the Social Security tax was rising, it caused unit labor cost inflation.

But if you are worried about inflation now, you are pettifogging. Dude, there isn't any. It is so low, we are having debates about measuring it. I suspect the next few CPI readings, for the next year, will basically be flat. I suspect the CPI overstates inflation--jeez, anyone living in Los Angeles now has it a lot cheaper than four years ago. Housing is less, phones are cheaper, computers are cheaper, gasoline is cheaper, clothes are dirt cheap (Ross Dress for Less), dollar stores everywhere.

Health care is more, the military monkey is bigger, and abandon all hope if you need a lawyer.

You can buy a condo for $10-20k in Phoenix or Florida.

 
At 8/04/2010 10:59 PM, Blogger Benjamin said...

QT! What prompts your Canadian invasion?
On deflation: CPI down three months in a row, PPI down two months in a row (I think). Unit labor costs going down, not up.
Office buildings, industrial selling half off from peak. Retail down too.
When people point to gold, oil, wheat and say inflation, what they are really describing are global markets--the US is every year becoming a smaller player. No way we should tighten our money supply just because the Indians and Chinese are ga-ga for gold.

Morganivich--

I know the way the CPI has been calculated has been changed. In fact, I would expect that outdated CPI's would show higher inflation rates. Naturally, buyers switch away from expensive services and goods. I actually used to know a lot about the CPI, a few decades in the past, in a professional capaciy. It used to overstate inflation, in times of rising mortgage rates, and these overstatements would get fed in the the Social Security system and its payouts, and other CPI-linked contracts.
Back then (1970-80s), you were presumed to be buying a new house every month etc. No one ever turned down the heat when fuel bills rose. You and I could have long hair-splitting conversations on what constitutes inflation.
For that matter, in SoCal we have dollar stores everywhere, and I seem to be able to buy shampoo, dogfood, reading glasses, detergent, sunglasses, drinking glasses, screwdrivers and who knows what for $1, a lot less than I paid 10 years ago. BTW, I love dollar stores. There were no such stores 10-15 years back.

I will give you health care bills, and legal bills, and the military bills. They only seem to go up, and get higher. A lot of parasites feasting on the economy in those categories.

Yes, too many niggling government regs, I suspect in the years the Social Security tax was rising, it caused unit labor cost inflation.

But if you are worried about inflation now, you are pettifogging. Dude, there isn't any. It is so low, we are having debates about measuring it. I suspect the next few CPI readings, for the next year, will basically be flat. I suspect the CPI overstates inflation--jeez, anyone living in Los Angeles now has it a lot cheaper than four years ago. Housing is less, phones are cheaper, computers are cheaper, gasoline is cheaper, clothes are dirt cheap (Ross Dress for Less), dollar stores everywhere.

 
At 8/04/2010 11:00 PM, Blogger Benjamin said...

QT! What prompts your Canadian invasion?
On deflation: CPI down three months in a row, PPI down two months in a row (I think). Unit labor costs going down, not up.
Office buildings, industrial selling half off from peak. Retail down too.
When people point to gold, oil, wheat and say inflation, what they are really describing are global markets--the US is every year becoming a smaller player. No way we should tighten our money supply just because the Indians and Chinese are ga-ga for gold.

 
At 8/04/2010 11:01 PM, Blogger Benjamin said...

Morganivich--

I know the way the CPI has been calculated has been changed. In fact, I would expect that outdated CPI's would show higher inflation rates. Naturally, buyers switch away from expensive services and goods. I actually used to know a lot about the CPI, a few decades in the past, in a professional capaciy. It used to overstate inflation, in times of rising mortgage rates, and these overstatements would get fed in the the Social Security system and its payouts, and other CPI-linked contracts.
Back then (1970-80s), you were presumed to be buying a new house every month etc. No one ever turned down the heat when fuel bills rose. You and I could have long hair-splitting conversations on what constitutes inflation.
For that matter, in SoCal we have dollar stores everywhere, and I seem to be able to buy shampoo, dogfood, reading glasses, detergent, sunglasses, drinking glasses, screwdrivers and who knows what for $1, a lot less than I paid 10 years ago. BTW, I love dollar stores. There were no such stores 10-15 years back.

I will give you health care bills, and legal bills, and the military bills. They only seem to go up, and get higher. A lot of parasites feasting on the economy in those categories.

But if you are worried about inflation now, you are pettifogging. Dude, there isn't any. It is so low, we are having debates about measuring it. I suspect the next few CPI readings, for the next year, will basically be flat. I suspect the CPI overstates inflation--jeez, anyone living in Los Angeles now has it a lot cheaper than four years ago. Housing is less, phones are cheaper, computers are cheaper, gasoline is cheaper, clothes are dirt cheap (Ross Dress for Less), dollar stores everywhere.

 
At 8/04/2010 11:06 PM, Blogger Benjamin said...

Morganivich-

I read the piece by John Williams. He strikes me as a rank amateur and even a bit of a crank.

Cars are in fact better and more value-added than 40 years ago. People do get better health care.

I suspect the guy just wants a higher SS payment.

 
At 8/05/2010 8:31 AM, Blogger juandos said...

"BTW thanks to you & your neighbors for your votes against Obamacare on Tue"...

Yeah Ron H except for the 'usual suspects' in St. Louis city and Kansas City Prop C thoroughly spanked the idea of ObamaCare...

Hey Paul thanks for the links... Good stuff!

Bill brings up a point that might even bolster pseudo benny's whine about the who rural thingie...

From the USDA: By leveraging Recovery Act funding authorized by Congress, USDA has been able to provide loans and grants of $2.65 billion to construct 231 broadband projects in 45 states and one territory. The remaining authorized funds will allow an additional $1 billion in loans and grants by September 30, 2010. The Recovery Act provided USDA with a total of $2.5 billion to invest in expanding broadband access to rural America...

Still the Obama administration isn't done wasting extorted tax dollars...

From Byron York of the Washington Examiner: Justice Department steers money to favored groups

Now whether we like it or not we taxpayers are also owners in Government Motors (a.k.a. General Motors)...

How do you like the way Government Motors is spending money?

From the WaPo: GM donates $41,000 to lawmakers' pet projects

It just gets better and better everyday...

How many more jobs will be lost over the next few years when citizens find themselves with less disposable cash on hand to spend on goods and services?

 
At 8/05/2010 9:36 AM, Blogger morganovich said...

benji-

i'd read his bio before dismissing him as a crank.

an awful lot of very sophisticated folks agree with him.

play around with geometric weighting yourself. take a basket of 100 goods and have their prices fluctuate randomly but with zero net change in the total price of the basket.

old CPI would show no change in price. new CPI would show deflation. which do you think more accurately reflects reality?

for another interesting inflation example, look at something simple and basic like the continuous commodity index.

in the beginning of 2002 it was 191. it ran to 615 in 2008 and is currently 510.

so, even if we count YTD 2010 as a full year, we get 167% appreciation in 9 years. that's double digit annual inflation in basic commodities.

how do you explain that if inflation is so low?

the CI is up from 466 to 510 this year, a gain of over 9%. so that's not inflationary pressure?

i grant you that CI is more volatile than overall inflation, but over long periods (like 9 years), it ought to be giving you a pretty decent signal.

william's data fits the conventional models much, much better that what is currently published.

you need to consider the possibility that it's not the models that are broken but that data that's tainted.

 
At 8/05/2010 11:29 AM, Blogger Benjamin said...

Morganivich-

BTW, I enjoy your posts, even if I disagree with you.

See this: John Makin of Caxton Associates and the American Enterprise Institute spoke with CNBC this morning about the threat of deflation now hanging over the U.S. economy.
Makin explains that deflation is already here. He talks about how CPI is only at 0.9% right now, and heading lower. That prices and wages in the U.S. are falling, and that we are now exporting deflation to Europe and Japan via a weakening dollar.
Housing is where this starts, and Makin thinks that the American public believes that house and car prices will be cheaper in the future. He also argues that, if we included housing prices in the CPI, we would already be in a deflationary period.
Bond yields are a key source of knowledge about where the economy is, and Makin points out that yes, bond yields falling on both short term and long term government debt makes clear that markets believe in the deflationary storyline.
He calls for more Fed action, and further experimental measures including the purchase of more treasuries.
Makin calls monetarists "wackos" for fearing inflation due to the increase of money supply.
It's compelling viewing for anyone concerned about our coming Japan scenario.

 
At 8/05/2010 2:41 PM, Blogger VangelV said...

it's much more difficult to justify capital investment under such circumstances. deflation is great if you have a pile of money already, but it retards capital accumulation and business growth terribly. this flows right through to employment levels.

It seems to you that you do not know much about money or monetary history. The computer sector kept seeing the price of its output decline yet had no problem with attracting investment capital. The USD saw its purchasing power increase for more than a century but the economy boomed as investors found it favourable to accumulate productive capital rather than hold gold or bank notes.

Creating money out of thin air to promote is stealing from savers and an attack on personal liberty. In a free society savers should be left to determine what they should do with their earnings without a push from the banking cartel or the federal government.

 
At 8/05/2010 5:54 PM, Blogger Benjamin said...

Vange IV--If creating money is stealing from investors, then is deflation stealing from borrowers, property owners and equity holders?

How about borrowers who were told by the Fed that 2 percent inflation was target, but also full employment?

I find the greatest morality is not connected deflation or inflation, but to policies that engender economic prosperity. Right now, the Fed needs to take action.

 
At 8/08/2010 9:51 AM, Blogger Nick Rowe said...

This comment has been removed by the author.

 
At 8/13/2010 9:34 PM, Blogger VangelV said...

Vange IV--If creating money is stealing from investors, then is deflation stealing from borrowers, property owners and equity holders?

Not at all. When you borrow from someone it is up to you to pay them back. The fact that you may find it more difficult than you imagined is your problem and is not the fault of the lender.

On the other hand, printing money and using it to buy government paper is a form of theft. It if wasn't everyone would be allowed to do the same thing.

How about borrowers who were told by the Fed that 2 percent inflation was target, but also full employment?

What about them? Stupidity and greed are no excuse. What is borrowed should be paid back.

That having been said, let me point out that I have little sympathy for the lenders who are so stupid to make loans to people who are incapable of paying them back. I would not be surprised to see credit defaults and payback for the ignorant.

I find the greatest morality is not connected deflation or inflation, but to policies that engender economic prosperity. Right now, the Fed needs to take action.

The Fed created the problem by inflating the money supply. It is not who I would have take action, particularly if I wanted the economy to improve.

 

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