Posts Tagged ‘deflation’

Pulitzer Prize From a Cracker Jack Box

January 5, 2009

Today, the Pulitzer Prize winning writer, Paul Krugman, wrote an Op-Ed piece in the New York Times.

His main points:

1.  We thought we could prevent depressions by providing banks liquidity, but we can’t.

He’s just writing this now?  Geez, Ron Paul and Peter Schiff should have Pulitzer Prizes too!  If a layman like myself could tell that people were getting into way too much debt and that money was way too easy to come by, why couldn’t our leading economic minds?  Why couldn’t Krugman see this coming?  Oh, that’s right, because he thought we could avoid recessions, let alone depressions, by lowering interest rates.  What a joke!

2.  The only way out is to act “swiftly and boldly,” which means government needs to spend, spend, spend.

Has he been in a cave for the last 4 months?  I’m glad he notices how much good the trillions of printed dollars have done to firm up our economy!  If the banks aren’t lending now, why will they after we pump another trillion into our economy?  Please stop writing such nonsense!

3.  He’s worried because there is posturing in Washington that will prevent Obama’s massive stimulus plan.

Good!  There needs to be at least some sort of reason on Capitol Hill.  Is Krugman trying to make a play for a job on Obama’s staff?  Does he want to run the Fed now?  Why else is he being such a big government cheerleader?  Stick to your day job Paul!  Stay out of subjects you obviously don’t understand!

4.  His nightmare scenario involves “delflation that is already setting in.”

Wow, he really has drank the Kool-Aid.  This “deflation” everyone is clammoring about is 100% driven by food and energy costs dropping.  Core prices remained flat.  If you really think that inflation is a good thing, please go and educate yourself immediately!  Right now, I love getting a tank of gas for $25.  I know it won’t last, but it’s way better than getting 5 gallons for the same price.

When you are printing trillions of dollars, you are “inflating.”  Inflation is the expansion of the money supply, not rising prices.  That is a result of more dollars in circulation.  Deflation is the opposite, it is the contraction of the money supply.  That is not happening right now.  The drop in commodities (mainly oil) is being caused by the massive unwinding of leveraged investment positions, not “deflation”.  Please get your facts straight before spreading Federal Reserve propaganda, Paul.

To me, the main problem right now is a lack of confidence in the system.  Banks don’t want to lend money because they just got burned for billions of dollars.  Consumers don’t want to spend because they are already in debt up to their eyeballs and they are uncertain about their jobs or their sources of income.  Some businesses are reluctant to spend their own money because they are waiting for their own federal bailout (like the commercial real estate developers).

We need to restore faith in our economy and the way to do that is for the government to stop making panicked moves printing billions of dollars and throwing them around.  We need a sound money supply so everyone can get their footing and start to put themselves back together.  Right now, no one knows what is going to happen next, so they are all waiting it out.  If Bernanke would come out tomorrow and say “that’s it, no more money, no more bailouts” we’d probably take a huge dive tomorrow, but would be on our road to recovery.  Instead, we’re still falling deeper and deeper into the abyss.

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Plunge In Consumer Prices Decoded

December 16, 2008

I’m sure you’ve heard a lot today about the “plunging consumer prices” in the news.  There’s a huge headline at the top of Marketwatch, Yahoo Finance, and Google News.  

The problem is that these numbers are reported linking them to the Great Depression.  This is completely different, but to the lay person, it looks like they should be scared and nervous.  No wonder there is no confidence right now.

Here’s a story from the AP, with my comments:

Inflation plunges by record 1.7 percent in November, housing starts fall more than expected

 

WASHINGTON (AP) — A record plunge in consumer prices in November puts pressure on the Federal Reserve to act decisively to guard against a debilitating bout of deflation.
BE:  What is so debilitating about this episode of deflation?  Please explain to me, AP, why this is so bad?  Is paying less for gas so horrible?  How will this adversely effect businesses?  Also, why do they report deflation in consumer prices, but inflation in core prices, which exclude food and energy?

The Fed wraps up a two-day meeting Tuesday. Economists expect the central bank to cut the federal funds rate, already at a low of 1 percent, by another half-point in an effort to keep the recession from worsening.

BE:  How about you report on how well the Fed’s easing of the monetary policy has worked so far and then talk about this “effort”?

Consumer prices, an inflation barometer, last month fell by the largest amount on records going back 61 years as energy costs posted nearly double the decline of the previous month, the Labor Department reported Tuesday.

BE:  Oh, now you tell us how the deflation you spoke of earlier is directly tied to falling energy costs.  When gas prices were skyrocketing, you told us inflation was in check because if you excluded food and energy, prices weren’t going up.  Now, you want to show how bad deflation is, and you include these items.  What kind of double standard is this?

 

Prices fell 1.7 percent, surpassing the previous record decline of 1 percent set in October. It was the largest one-month decline dating to February 1947. Core inflation, excluding food and energy, showed no increase at all in November after a 0.1 percent drop in October.

BE:  Here’s the part about core inflation, and it’s flat!  Well, that sure looks a lot like “deflation” if you ask me!  There is a huge correction going on in the commodities market right now, and that is the whole reason for the flat reading.  With the amount of money we’re printing, we should still be worried about future inflation.

The overall slide in prices reflects the big drop in energy costs in recent months. After hitting a record at $147 per barrel in mid-July, crude oil has fallen by $100 per barrel since then, pushing down the price of gasoline from a record $4.11 per gallon in July to $1.34 in the most recent Energy Department survey.

In other economic news, the Commerce Department reported that construction of new homes fell in November by 18.9 percent, the biggest drop in a quarter-century. The steep decline pushed construction down to a seasonally adjusted annual rate of 625,000 homes, the slowest pace on records dating to 1959.

Only a few months ago, some anticipated that the Fed would start raising interest rates to battle a prolonged surge in energy costs. But since September, the Fed’s focus has switched to trying to prevent the worst financial crisis since the Great Depression from pushing the country into a deeper recession.

BE:  And it has completely failed so far.  Most recessions last 10 months, and we’re a year into this one and probably haven’t hit bottom yet.  Good job, Ben, pat yourself on the back.

Energy prices fell by 17 percent in November, nearly double the 8.6 percent decline in October. Both declines were record drops.

Food costs posted a modest 0.2 percent rise in November, the smallest increase in eight months.

The 1.7 percent decline in consumer prices was larger than the 1.2 percent drop that economists had been expecting. It left inflation rising over the past 12 months by 1.1 percent, the smallest 12-month increase since June 2002. Inflation has not risen at a slower pace since a 1 percent rise in the 12 months ending in February 1965.

BE:  Again, why is this bad?  Why is it bad that the consumer can buy more goods for less money?  I love having to pay $25 to fill up my tank.  A few months ago, I was paying $40 for less than half a tank of gas.  All of our recent inflation/deflation has been energy cost driven.  

Inflation is good for the government because they can fund their ever increasing programs without raising taxes.  However, inflation is a hidden tax that erodes the value of our dollars.

New car costs fell by 0.6 percent in November, underscoring the troubles facing auto companies as demand plunges in the weak economy. General Motors, Chrysler and Ford are appealing for a government lifeline, and the Bush administration has said it is considering what type of support to provide.

BE:  Supposedly, deflation caused by people waiting for a better deal to come along is a detriment to our economy.  However, with auto sales, it’s not that people are waiting for a better deal, it’s just that they don’t want to commit to such a big ticket item when times are tough.  The lower price reflects dealers trying to clear out inventory.

Airline prices fell by 4 percent in November, reflecting the big declines in fuel prices, while clothing costs were up 0.3 percent, a rise that followed a big 1 percent drop in October.

BE:  Airline prices dropped because of lower fuel costs, which means we’re counting the same energy prices twice.  This shows how flawed the inflation/deflation calculations are.  Also, the change in clothing costs shows the month to month volitility that appears in short term measures.  We need to look at inflation over the long term to really see it’s effects.

More Deflation Propaganda

November 24, 2008

Here’s a link to a video I received in an email from TheStreet.com.

This is a perfect example of how misinformation spreads throughout the public.  People will take what is said in videos like these and accept it as the truth because “TheStreet.com (or other media outlet) said so.”

Basically, all it says is “deflation is bad because it occured during the Great Depression.”

Notice though, that deflation is reported in falling consumer prices, or the CPI.  This number includes the costs of food and energy, which are falling right now.  Normally, when the Government reports inflation, they use core inflation, which excludes food and energy prices.

This is very convenient, isn’t it?  They pick and choose what numbers they want to report.  The government always tries to show inflation as low as possible, and now is showing big, bad deflation as high as they can.

Why does the government do this?  Because they need inflation to operate.  Inflation broken down to the simplest term is “adding to the overall supply of money.”  Rather than taxing the population, they just print the money they need instead.  This is why inflation is sometimes referred to as the “hidden tax.”

As you add more money to the overall supply, each dollar is worth less, which means our dollars buy less goods.  They need to report inflation as low as possible so we don’t realize how much the purchasing power of our dollar is declining.  Also, many foreign governments hold billions of dollars in reserve.  The last thing they want to hear is that their holdings are declining in value.

The only entity that does not benefit from the deflation we are experiencing is the government.  That is why we are conditioned to think it is bad.  Under normal circumstances, they need inflation to fund their programs.  Currently, we are in a special situation, where the government is just printing trillions of dollars right and left.  We might have short term deflation due to the decline in food and energy prices, but we are going to have massive inflation because of the massive amounts of new dollars entering our system.

The lesson of this video is that we always can’t take things for face value.  We need to learn about our financial system and what the numbers and stats the government and financial institutions use mean.  If we really understood, we would see through the lies and propaganda, and see how the actions of our government are going to destroy our standard of living.  As Henry Ford said,

“It is well enough that the people of this nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution tomorrow morning.”

An Excellent Essay on Inflation and Deflation

November 19, 2008

Today, the big headline was that consumer prices dropped by the largest amount in 61 years.  I’m not sure what measurement they were comparing but that is a pretty significant event.  The funny thing though, is that when we talk inflation, the headlines are always for “core” inflation which subtracts food and energy.  However, these deflation headlines used the CPI number, which includes food and energy.  So it’s definitely selecting the statistic that better suits your argument.

This made me ask myself, “What is so bad about deflation anyway?”  Why is it bad that the price we pay for something goes down?  This lead me to a search on google and I came across this very informative essay entitled “Why So Much Concern About Price Deflation” by Richard E. Wagner, Ph.D, who is Holbert Harris Professor of Economics at George Mason University.  This was written in 2002 during out last economic downturn.

“We recently have been hearing a lot about the threat of deflation, doubtlessly inspired by recent falls in indexes of consumer and producer prices. The Great Depression of the 1930s comes to mind when people speak of deflation. No one wants another Great Depression. Nearly everyone would prefer the double-digit inflation of twenty years ago. This preference is reasonable, but it does not follow that deflation is bad. Whether deflation is bad or good depends on why prices fall.

The Great Depression of the 1930s is the prime example of the bad kind of deflation. The Federal Reserve allowed the supply of money to shrink by thirty-five percent between 1930 and 1933. This gigantic destruction in the supply of money sabotaged markets throughout the land. Consumers could not afford to buy products, businesses could not sell their output, and workers could not find jobs. All of this happened because the Federal Reserve failed in its fundamental task of keeping the stock of money intact. This kind of demand-side deflation is clearly an economic scourge of major proportions.

Deflation can also result for supply-side reasons. This type of deflation is a radically different type of animal, and is a good one to have around. It is the kind of deflation that occurred in our economy after the Civil War and existed pretty much continually until the creation of the Federal Reserve in 1913. As productivity increased, consumer prices fell. Workers did not receive the continual wage increases that they have received during our recent inflationary times. Their well-being increased nonetheless. Steady wages with falling prices is a fine recipe for progress. This is, moreover, a recipe that works to the advantage of retired people on fixed incomes. With moderate deflation, a fixed sum for retirement goes ever farther because deflation allows retirees to share in the gains from rising productivity.

There is all the reason in the world to avoid a demand-side deflation. There is no reason at all, however, to oppose a supply-side deflation. No reason, at least, for ordinary citizens to oppose a supply-side deflation. It may be different for politicians and government officials. They are in a different situation with respect to deflation than are ordinary citizens. Inflation allows for increases in government budgets that would never be possible under deflation. Sustained inflation entered the American economy only with the creation of the Federal Reserve in 1913. Until then, the federal government claimed less than ten percent of the output of the American economy. It was only after steady inflation became a way of life that government’s share in the economy grew and now approaches fifty percent.

There are many reasons why inflation promotes growth in government. One of them is that inflation increases the share of total income that is collected through ordinary taxes. A ten percent increase in income increases collections of income tax on the order of twelve percent. This ability of tax rates to rise with inflation is referred to as “bracket creep.” Inflation pushes people into higher rate brackets, where they pay larger shares of their income in taxes.

Besides bracket creep, inflation is also a type of tax in its own right. The inflation tax is a form of public counterfeiting that goes by the technical name “seigniorage.” Seigniorage is the difference between the value of the money the government creates and the cost of creating that money. It is the government’s profit from creating money, and it is of the same character as the profit that a private counterfeiter makes. It costs almost nothing for the government to print another $100 bill, but this new bill is as valuable as all other $100 bills.

To be sure, the collection of this seigniorage tax works differently in different nations. In some nations, the Treasury and the central bank are joined. In those places, the government can finance its activities directly by creating money. It is different in America because the Treasury and the central bank are distinct. The government can still finance its activities by creating money, only this happens indirectly in two stages. In the first stage the government runs a deficit; in the second stage the Federal Reserve buys government bonds. The end result is indistinguishable from the Treasury directly creating money to finance its activities.

Supply-side deflation would put an end to the government’s ability to finance its activities through monetary expansion as well as through bracket creep. It would also eliminate the need for all of the various forms of indexing that have arisen to deal with inflation. The only losers from deflation would be those who live off the tax revenues that inflation generates.”

From reading this, I think we are experiencing a combination of the two types of deflation.  We have demand side deflation problems with the current credit crisis and the lack of lending.  However, I really do not believe that goods are so unaffordable that it is dragging prices down.  It is more a lack of confidence and uncertainty that is driving the lack of consumer spending.

We currently have more supply side deflation, where people are cutting back and there is an over-abundance of goods and an unwinding in the commodities bubble.  In order to move goods and equalize supply and demand, prices are dropping.

We have just been convinced to think deflation is a bad thing associated with the Great Depression.  However, currently, deflation in consumer prices is great.  We need lower prices for gas, food and our overall living expenses.  As you read above, the main benefactor of inflation is the government, who has us convinced deflation is bad.  They also experience no benefits from deflation.