Deflation: It's Starting to Get Silly

So, let me get this straight...

After presiding over the inflation and bursting of the biggest financial bubble in the history of mankind, in the process blessing soaring home prices that far outstripped any reasonable expectation of borrowers to repay and praising the "financial innovation" of Wall Street for facilitating such, the smartest economists at the world's most important central banks are now concerned (actually, "scared witless" as you'll see below) that prices may fall.

Yes, "Deflation is the New Public Enemy Number 1".

It says so right there in the MarketWatch headline in what is quickly becoming one of the silliest ongoing stories in the global economy - dimwitted economists are once again redirecting the discussion and a gullible public and financial media are going along...

Deflation is the problem now.

Never mind what led up to the current crisis.

More of what got us into this mess is required to get us out.

It seems "the drunk must be kept in Scotch a while longer".

Here she is, doe-eyed Janet Yellen, President of the Federal Reserve Bank of San Francisco to make the case for why all the stops must be pulled out - governments and central banks must borrow and print money as never before.
Now that short-term interest rates are at zero, Ms. Yellen favors the expansion of the Federal Reserve's recent unconventional monetary policy measures where anything and everything is bought with newly created money.

She also urged aggressive spending of newly borrowed money by the Obama administration.

The menace is upon us again.

The scourge of "deflation" is here, where individuals see prices dropping like a rock and defer purchases, pulling the rug out from underneath a consumer-led economy, creating a vicious downward spiral, an economic black hole from which there is no escape.

Never mind that people are scared witless because they fear for their job, their retirement accounts, their home, their children's future, and the Western way of life where overconsumption was the rule rather than the exception, something that, up until about a year ago, seemed like a birthright.

Consumers are pulling back because they see prices falling - it's DEFLATION!!

According to the MarketWatch report, central bankers are scared:

But many agree with Barry Eichengreen, a professor at the University of California at Berkeley, who called deflation "a very serious danger."

Central bank officials are "scared, if not scared witless" about the specter of deflation, he said.

The good news is that, because the Fed is so vigilant, the U.S. should be able to avert it, he said.

Fed officials would use the new unconventional monetary policy measures to simply buy up "anything whose price shows signs of going down," he said.

If only the Fed had been so vigilant a few years ago.

Comments

[joshuaodonnell:]

Deflation isn't the main problem. Unemployment is. Because no matter how cheap things get, if people dont have jobs, they won't be buying anything(not because things are cheap, but because everybody will be broke)....

We should be more concerned with the devaluization of the USD and the depreciation of homes all across the USA. And as long as the unemployment rate keeps going up, we will see 9% by end of Q4 of 2009 and will be at pre-depression levels with GDP..(9% is really more like 15%, technically)

Sorry, but the stimulus package wont do a thing. Its just more wasted money...just like the last 2. Maybe if they ended the war in Iraq, that would free up the 10billion there spending there every single month, when Iraq itself sits on a 75billion dollar oil surplus...

priorities............... just wondering where they are?

Jan 05 06:02 AM

[1worldcurrency:]

Anyone who can't afford a house at current prices is begging for deflation.

The Fed cares only about banks and the rich.

Jan 05 06:12 AM

[Tradememe:]

Deflation can't happen. Not with the rate at which the Fed is printing money. Stagflation is the one to watch for.

Jan 05 06:32 AM

[six:]

As usual by the time the fed announces their intention to fight a trend it is well under way. For most Americans their house is the largest asset they own and it has been deflating for over 2 years. For year the government told us there was low inflation while home prices soared now there is deflation as they fall. There is nothing the fed or anyone else can do about that. The American consumer has stopped spending like a drunken sailor becasue they are in grave (is there any other kind?) danger of losing their job and the one asset they felt was safe is now tanking. There wil be pain as this happens but the long term is much brighter. Americans are learning what their granparents knew, savings is good thing to have and a home (that you live in) is not an investment or a piggy bank.

Jan 05 07:54 AM

[olrick:]

Your crude male bias is showing ---you wouldn't comment on Bernake's eyes, would you?
So drop the "doe eyed" slurs and stick to business....

Jan 05 08:10 AM

[ebworthen:]

She does look doe-eyed.

Bernanke does not look stag-eyed except when eyeing the taxpayer dollar.

Tim looks stag-eyed but it's probably because he's at the beach and there are some hot babes in bikini's (wink, wink).

Inflation of housing prices and easy credit, health care and insurance costs and taxes, along with steady deflation in median income got us here. We're going to "attack" it with more debt spending and lending? Brilliant.

Give me a year without taxes and health insurance premiums and I could nearly pay off the mortgage.




On Jan 05 08:10 AM olrick wrote:

> Your crude male bias is showing ---you wouldn't comment on Bernake's
> eyes, would you?
> So drop the "doe eyed" slurs and stick to business....

Jan 05 08:49 AM

[long_on_oil:]

The government needs to get out of the way and let free markets do what they do best and that is to let the weak die and the strong survive. It is all simple econ 101 over supply and low demand = lower prices = businesses making the product going out of business. low supply and high demand = more businesses coming on line making the product. It never fails.
We have to let these corrupt failing banks and businesses fail or we are accepting a cancer that will eventually destroy capitalism.
The car companies are a prime example. They drove themselves out of business by making a product that lasts 3X as long as it use to thus lowering the demand. They kept up the supply, hell they even added car companies from abroad to create more supply. The auto companies still don't get it, but they sure know how to beg. The market for autos no longer demands 15 million cars a year so something has to give. They either have to learn how to make money producing less or they go out of business.
The Fred Thompson video which is being passed around says it all.

Jan 05 08:50 AM

[deflation r...:]

Note to Fed: Stop printing money. Let housing prices fall, so those of us who are under 30 years old and can buy a house for the first time. Let the dollar deflate so we can strengthen our currency and buy cheap gas. Raise interest rates so I can earn a return on the money I have been SAVING for the house my family can't buy. And no, don't tell me cheaper rates let me buy the home. Low rates only artificially prop up the price. Rase the rates and let the REAL price of the home fall to what the market can support.

But Fed and Mr. President elect, most of all, punish those who made poor financial decisions and products that suck (GM, LEH, GS, C, FNM)

P.S. Need a job? The Army gives free healthcare, school benefits and a steady paycheck. I'm sure they could use you to replace me here in Iraq. We are not leaving anytime soon- trust me.

Jan 05 09:13 AM

[User 86999:]

When there is an elephant running around violently in the streets, do you think someone should tackle the beast, or should it be left alone to do whatever it wants? That's the analogy to show the big corrupt organizations (bank/insurance/auto/w... and the government's role is to tame the beast and to define its boundaries.

The problem with the government is that it's micromanaging/mismanag... the affairs. Now, it's not just a bunch of rowdy elephants that are the problem, but also the ring-masters in this circus that are part of this fiasco. When the government was sleeping while the elephants were slipping out by bribing whoever was supposed to be watching them, that was the time to raise the red flag. And, some people did, but when everyone is drunk on the easy money, voices of sanity are usually ignored; because, some people are just too fond of learning the hard way.

Deflation is a problem for those who have been on credit, and that means a whole lot of US population, and the government itself, and the central bankers cannot allow for that. People who were/are savers, they will gain more purchasing power during deflation, but the government would rather punish those who were careful and reward those who were/are reckless.

Jan 05 09:31 AM

[Boubou:]

This is insanity.
Poeple who are broke and need to defend their future, are being exhorted to get further back into debt.

Get out to that mall and buy chinese junk!
And you, lend them the money.
And World, buy our bonds so it goes round some more.

There is a tantalizing glimpse of a simpler life not based on frenzied consumption financed by worldwide debt.
It would be wonderfull if somone would stand up and paint the picture. Church where are you?

It would be a difficult transition for the well off but there would be a genuine possibilities for more satisfying pattern of life.

Unfortunatel I can't see a champion for a modest decent life in the West. The idea mast seem insane to you guys.
Guess I'll go to Kathmandu.

Jan 05 09:59 AM

[AndrewBaker:]

Too much cheap debt got us here in the first place, and the politicians' cure is: you've guessed it; too much cheap debt! Sure, it's one way to make houses affordable again without dropping the price, but when the result will be debt our grandchildren will still be paying off, what sort of cure is that? With overpaid bankers on the one side and overpaid politicans on the other, I'm amazed we've got this far without a repeat of the 1930s. How about sustainable growth that improves our lot without at the same time proclaiming that we all need every gadget going and a million dollars in the bank to feel rich and self-satisfied?

Jan 05 10:10 AM

[silver-bullet:]

What then, will happen to our all mighty bonds?

Jan 05 10:11 AM

[Chris B:]

To a lot of people, we are on Japan's path of the late 1980's. We have had a real estate and equity bubble and watched it burst. We then poured money into zombie banking institutions that weren't lending and continue to need more and more money as the crisis continued. We cut rates to near zero, and consumers still didn't have the money or credit to spend. We satisfied ourselves with a series of minor top-down supply-side "stimulus" actions that didn't help consumers and are still waiting for the results. We are making all the same moves as Japan, as if we can't help ourselves. Those observations by market participants explain the silly treasury bubble.

I think they're wrong. The government is determined to return to inflation and I'm not about to say they can't produce enough money to make it happen. I'll sit on the sidelines for now rather than making a risky bet on the repeat of history.

Jan 05 11:33 AM

[User 268734:]

Bail-outs, stimulus packages, hand-outs, and market manipulation look to me like a vote of no confidence in free markets and in the resilience of the American people by the leadership class. Or perhaps it's more self-serving than that.

Jan 05 11:45 AM

[carey_jim:]

An axiom of war, (economic wars included) is that all wars are fought with the tactics of the previous war.

It is the Holy Grail of the economics profession that the Great Depression was caused by a retraction of the money supply.

Ben S. Bernanke is a high priest of economics.

Bang!

Jan 05 01:39 PM

[Tony Daltorio:]

Very good article! The two biggest economic myths ever are occuring right now - deflation is just a fairy tale and the other fairy tale is that US Treasuries are "safe".

Jan 05 01:47 PM

[Guero:]

Deflation?? The heady combination of US$ deval & oil production cutbacks (leading to higher energy costs) will kill off any whiffs of deflation.

Jan 05 03:43 PM

[Sargasso:]

What a crock! The majority of people don't buy because they're scared to death they will run out of jobs and money. The minority that have the resources to strategize about spending after prices fall have little impact on the real economy.

Jan 05 05:41 PM

[Jason Rines...:]

Way to net-out Jim Carey.


On Jan 05 01:39 PM carey_jim wrote:

> An axiom of war, (economic wars included) is that all wars are fought
> with the tactics of the previous war.
>
> It is the Holy Grail of the economics profession that the Great Depression
> was caused by a retraction of the money supply.
>
> Ben S. Bernanke is a high priest of economics.
>
> Bang!
>

Jan 05 11:23 PM

[Jason Rines...:]

I am buying in 2009. It will not be difficult to see Washington fiscal policy and which boats will be lifted by the reinflation attempt by the end of Q1. Earning reports and cash flow review after Q1 will also be very telling on the company-specific, survivability equation. I have no vested interest in your money, just a contrarian view about when to buy equities. But your economic general analysis seem spot on as per norm.


On Jan 05 11:33 AM Chris B wrote:

> To a lot of people, we are on Japan's path of the late 1980's. We
> have had a real estate and equity bubble and watched it burst. We
> then poured money into zombie banking institutions that weren't lending
> and continue to need more and more money as the crisis continued.
> We cut rates to near zero, and consumers still didn't have the money
> or credit to spend. We satisfied ourselves with a series of minor
> top-down supply-side "stimulus" actions that didn't help consumers
> and are still waiting for the results. We are making all the same
> moves as Japan, as if we can't help ourselves. Those observations
> by market participants explain the silly treasury bubble.
>
> I think they're wrong. The government is determined to return to
> inflation and I'm not about to say they can't produce enough money
> to make it happen. I'll sit on the sidelines for now rather than
> making a risky bet on the repeat of history.

Jan 05 11:35 PM

[WAKEUP:]

It IS silly; and what's-her-name IS doe-eyed. Bernanke? Ah, he's merely ugly.

Jan 06 12:44 AM

[Ray Lopez:]

I've thought about deflation versus inflation a lot. I've concluded that it just does not matter--what will be will be. Whether you are Keynesian (printing money is good, creates demand, and money illusion means most people don't really realize the money you are printing is devaluing over time--which BTW history has shown really is true, at least short term, i.e, that people are clueless when the government speeds up the printing press), or whether you are "Austrian school" (sound money is best, let deflation reign, let prices fall, and eventually creative destruction will create demand from the ashes), the reality is that history shows business cycles tend to have their own life--what will be will be(see the paper by Reinhart and Rogoff in Dec. 08). Even with FDR's stimulus and make-work (soon to be replicated by Obama) the US Great Depression took over 10 years to play out. Even with Keynesian spending on infrastructure, the Japanese malaise has lasted over 10 years. Whether silly money or sound money, the result is the same, but with this caveat: with silly money (Keynesian 'helicopter drop' easy money of the kind the US Fed is doing now) the worse case is Weimar hyperinflation (the best case is artificial demand creating business as usual long term). With sound money (Austrian/Chicago freshwater school economics) the worse case is sovereign default (the best case is moral hazard is reintroduced into the marketplace after a chastising period). I think governments therefore prefer hyperinflation over default since they can stay in power with the former but not the latter (witness Mugabe's Zimbabwe), and the best case is worse for the latter versus the former (nobody likes pain, like with Austrian economics, even though there's later gain--'no pain no gain' is a slogan only masochistic bodybuilders like).

Jan 07 05:30 PM