user8240

The Inflation / Deflation Forces Battles On

Untrusting says, in response to my comment that inflation or deflation is not as important as our trade deficit with China: "one has to assume that over time the standard of living in the US will decline relative to the rest of the world" and asks "Exactly what is it that you think the US government or for that matter even US business can realistically do about it?" but feels "America certainly could be much better run for the benefit of the average American and the country as a whole... but it is highly unlikely to ever be done. The reason being that the US is essentially run and has been for a long time for the benefit of the wealthy elite and the political process is part of that."
Well, I haven't given up and am not willing to go like sheep toward a third world future for the United States.
Untrusting asked me if I favored his five politically incorrect means to solve the trade crisis. The first is noteworthy: "Do you suggest we reduce US average wages to about the $500/month that they are in China in order to compete?". Hello, this is already happening...its the problem not the solution.
Since Untrustworthy asked me what solutions I would favor to deal with the China trade deficit, I advocate:...eliminate the income tax and replace it with the Fair Tax (yeah, I know special interests love tax loopholes) since the overall trade consequences of this measure would be huge....resurrect Senator Schumer's legislation to impose tariffs to offset Chinese currency manipulation, or even better impose Import Certificate requirements on China (which are permitted under WTO rules).
BTW, why not solve our health care issues by putting all ciitzens at birth onto Medicare paid for by a tax on foreign oil. But I digress from the point that deflation vs. inflation is a nice topic to debate but we have more pressing immediate issues (including the national debt) to deal with that are causal to this debate.

The Inflation / Deflation Forces Battles On

As the author indicates there are both inflationary and deflationary forces at work but takes no position on the ultimate resolution or outcome. So while somewhat informative, what do we make of this article? While many economists concerned with the consequences of fiscal and monetary policies that amount to "borrowing our way out of debt", see deflation for up to two more years then massive if not hyper-inflation, the more likely prospect is another asset bubble in a jobless recovery. The policy choices that fit government objectives are gradual depreciation of our currency while keeping long term interest rates down to avoid more unemployment. The argument that interest rates will rise as the Chinese e al stop buying our bonds is not realistic....oh, they may decrease purchases but the Federal Reserve has both an infinite balance sheet and the Congressional mandate to work toward full employment and stable prices (despite the inherent contradiction).
So, with a declining dollar putting pressure on prices to rise and interest rates held steady why would inflation not explode? Because, prices are the result of the demand supply equation not just the cost to import/produce goods. In a jobless recovery, household income won't increase and housing prices will decline in real terms...the money won't be there to pay higher prices. Demand for foreign goods will fall to offset the exchange rate changes. Until we get a government that wakes up to loss of our manufacturing base to China (83% of our non oil trade deficit is with China) and stops talking up free trade instead of fair trade, inflation or deflation will be the least of our problems.