Jan

24

Why do markets naturally gravitate to a state where things that are good are considered bad and vice versa. The idea that deflation is bad is a horse from that garage. When deflation and prices goes down that means that the stock of wealth is increased in real terms. That's good. How have we been cowed into thinking that when our real wealth goes down, that's bad, and we should encourage our central banks and governments to create inflation.

Etali writes:

The Chair of course knows the answer to his own question. Deflation is good for savers and bad for debtors. There are more debtors than savers. Inflation helps debtors by devaluating their claims. Governments, for example, the Swiss and the Luxembourgers, are the biggest issuers of IOUs. Why, the Dutch mathematician asked, "do government clerks and bailiffs become rich, yet leave their offices in great debt and financial chaos?".

Gordon Haave writes: 

1. The banks have an interest in inflation. They get zero percent loans and invest in things that pay interest.

2. Everyone is obsessed with GDP numbers and deflation can make GDP look "worse". There has been little to no research into GDP and how it's calculated in the last 50 years and people take it for gospel that GDP going up is good, GDP going down is bad. They are having trouble however explaining why GDP has been up but the average person's financial picture hasn't really improved in 20 years. They also can't explain they GDP in southern europe is flat to down, but the average person is vastly worse off.

The answer lies in the two things going together. Deflation is the cure to the world's economic problems. In order to prevent the cure the government and central banks have enacted policies that make the GDP number look ok, or stable, but it isn't doing anything for the average person.

Incidentally, this is also the cause for the "wealth disparity" issue.

anonymous writes: 

Finance-based (collateral) deflation and technological progress based deflation are not the same thing, exactly. The fact that we can buy a computer cheaper this year does not cause banks to fail or a contraction in the money supply/ability to pay interest.

 


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2 Comments so far

  1. Matthijs Sypkens Smit on January 25, 2015 8:08 am

    To most ordinary people their salary matters, and not the few assets that they have. Salaries, however, are very difficult to revise downwards. With prolonged deflation businesses need to restructure. Without the option of lowering salaries, they will inevitably reduce staffing or even fail all together. This leads to higher unemployment, which results in lower demand, which puts more pressure on businesses. It’s hard to get out of it, certainly without a lot of prolonged suffering for a large part of the population.
    Of course ‘what is right’ depends on ones political philosophy. However, if you accept that a state should strive for a decent living and avoid suffering for its constituents, then striving for modest deflation makes sense.

    In the end it is the employment-unemployment balance that counts. Deflation threatens to disrupt this balance more easily than inflation.

  2. Estebiza on January 25, 2015 9:15 am

    Deflation is a consequence of missing consumption, the collapse of purchasing power.
    Some (economists) argue that consumers do not consume because wait that prices will fall in the future.
    But if you go in Greece you will immediately see the reality.

    The current reality speaks of a crisis of structural collapse of purchasing power, the collapse of the real estate sector, the banks filled with toxic assets to the inability of the “real economy” to pay its debts (see velocity of money).
    for over 40 years, the markets have been helped by policies of “QE” ,more limited, compared to the current, the real economy has expanded accordingly, determining the nominal wealth priced markets, also improving the quality of life of people.

    the printed currency, particularly in high numbers, causes inflation and unfair competition (see this crisis), just observe the situation on the markets …
    in a real market BULL improves everything, not only the financial wealth and the currency, but the most important part in the quality of life of the people, if this does not improve then it is wealth transfer, and if in your Nation this does not happen it’s because someone globally it’s gonna Burst, for pay your wealth

    The printed paper is increased in the past but now is being reduced (Taper + No lending).
    The problem lies in finance (QE) but affects the real economy.
      in the past, this liquidity met the real economy, but from the subprime crisis to today much has changed, banks do not lend to the real economy because the real economy has not guarantees of solvency.
    Ford to sell their cars increased the salary of its employees …
    Currently everyone is busy at the banquet on corporate profits but nobody cares about the health of the consumer, once (before QE) sole maker of the growth in share price

    the DEBTS of Nations explain it clearly what the problems are real.
    The amount of toxic assets absorbed by the Fed and the amount of money placed via banks in the financial system may not even point out the underlying reality that the GDP produced in the world is not able to pay back the returns that finance is expecting, even mortgaging the future of your children.

    If you are rich then you have not problem(until when QE maintains the nominal value of the “dynamic wealth” …
    but is not the only 5% that supports the real economy(actually it’s QE).

    Deflation it’s good for the poor .. but when you loose work or they rise yours tax(Beatles TAX MAN) ,even deflation and oil to 30 can’t help.

    P.S.
    is deflation, if you see Vs the last 2/3/4 years, but, considering last 30/40 years of printed money ,we are in Hyperinflation .

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