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Deflation fearmongering is again raising its ugly head



September 15, 2009 – Comments (11)

Certain things just need to be repeated over and over again. The deflation fear has no ground in reality for a very simple reason: nobody has ever demonstrated that consumers tend to postpone any major or minor purchase because of expectation that price may drop 1% or 2% a year from now. Nor is it shown that such behavior would even be rational. After all, given the fact that the useful lifetime of the item from the consumer's standpoint cannot in any event exceed the consumer's remaining life expectancy, which is 40-50 years for the average consumer, a 1-year delay automatically subtracts at least 2% of the item's value, possibly much more for items whose utility is seen as likely to diminish over the time. As long as deflation does not exceed 2-3% a year, expecting consumers to choose delayed gratification is impractical, even if you happen to think that consumers are rational.

11 Comments – Post Your Own

#1) On September 15, 2009 at 10:47 PM, russiangambit (28.81) wrote:

It is not the delayed gratification practice that is the issue here, it is the question that people are deeply and debt and they can't get anymore because the credit has been cut off. Believe me, I have outstanding credit , I am currently jumping through the hoops to get a really small loan for an investment. I get an impression that they are looking for reasons not give me the loan. And I wonder why?  Why pretend like you are issuing loans? Well, so far they haven't found a reason.

Get this - I had to write a written explanation of my US citizenship status when I got it and how, document my employement history and salary, my housing history, an explanation of all the large transactions on my account, with checks copies enclosed, all kinds of taxes statements, bank statements, insuarance copies and what not. The loan is about 2.5% of my income. I plan to repay it in 2-3 years. It is one of the TARPed banks. The only thing they haven't done is a full background check.

I am already thinking whether the loan is worth the trouble.

There is no way an average american can get a loan in this situation.

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#2) On September 15, 2009 at 11:14 PM, starbucks4ever (89.93) wrote:

Hi russiangambit,

Did it occur to you that if the guy you're going to buy the investment from did not expect inflation ahead, you would have it so much cheaper that you wouldn't need the loan? You understand that this is your chance to buy a real thing now and pay with funny money in the future, but the seller understands it too and doesn't want your funny money unless it's a really big amount, so there is no positive sum in that game...

Practically speaking, 2.5% sounds like a really small loan. A credit card or a 401K loan should do the trick...

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#3) On September 15, 2009 at 11:26 PM, russiangambit (28.81) wrote:

> A credit card or a 401K loan should do the trick...

Ha. I don't want to pay 20% interest on the credit card. 401K - I switched my job less than a year ago, that 401K is in IRA now against which you can't get a loan.

When I said 2.5%, I meant monthly payment is that amount, not the whole loan. I could probably sell all investments and get the cash together but I don't want to put all free cash on just one thing.

Good point about the funny money, though. That is probably what they are thinking. The way I see it  - there is major deflation  on the consumer level due to the credit freeze but yet major inflation in the financial sector due to money printing. What is the normalized end result of these two, I am not sure.

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#4) On September 15, 2009 at 11:29 PM, Momentum21 (98.10) wrote:

I am not sure I follow you here.

I happen to believe that deflation is a bigger concern in the short-term than inflation...and I guess you could say that the word deflation is much scarier because in theory it is less "controllable" then inflation...but fear mongering is coming from all the camps and the number of variables at play makes it really hard to bet the farm on an time frame and I am definitely willing to consider both sides here.

Yes we are engaged in policy that on the surface seems HIGHLY inflationary but wages are dropping like a rock...along with output and prices. Its not about waiting for something to get cheaper...its about holding onto my cash for things I might now view more necessary than a 3rd iPod. Inflation is about the velocity of money and no one...including the banks who can lend at extremely profitable sending the money into motion.

I don't believe that holding my cash a little closer and saving more is going to lead to our demise however...we just need some time to recover from the largesse. 

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#5) On September 15, 2009 at 11:50 PM, starbucks4ever (89.93) wrote:

It's hardly surprising that things are priced for inflation even though there is no evidence of inflation danger in the nearest future. Sellers have valid concerns. Nobody wants to stand in front of the Bernanke train with a suitcase full of greenbacks and wait for his printing press to break down. Governments, like people, have credit history. Even if Bernanke takes an oath on the Torah and promises never to print a single dollar again, nobody will believe him.  


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#6) On September 15, 2009 at 11:58 PM, checklist34 (98.67) wrote:

well FWIW, at one of the tarped banks I wanked in and announced that I wanted a sizeable loan for an investment and offered proper collateral (which should be no problem if the loan is 2.5% of your income) and they were thrilled I was there asking for money.

about the same as any loan i ever applied for except car loans, which i've gotten in the past by filling out one of those forms.  Everything else has always been "do you have collateral?  great, we'll loan you 70% of that" or whatever.  

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#7) On September 16, 2009 at 12:02 AM, checklist34 (98.67) wrote:

interesting set of comments here, i just finished reading the thread.

gambit:  i hadn't seen earlier your clarification of 2.5%, apologies.  :)

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#8) On September 16, 2009 at 9:20 AM, Lordrobot (89.92) wrote:

Deflation is good and needed. In 1955 a guy with a good salary of say $16K a year as a small plant manager, could afford a nice 3 Bedroom two story home [$15K] and a new Buick Super [$2.5K] and be happliy solvent. A simiar person so situatied in 2006 would have to have a salary of $350K to cover the same house actually sold on the market for $315K in 2006, the Buick was $30K. Most people in America don't make $350K especially small plant managers.

If this inflation trend were to continue, eventually no home would be affordable. 

The great economic deflator is Asian labor. It makes goods cost less. Other than that there is no deflator.

Deflation favors the saver and investor. Inflation favors those that are in debt and insolvent becasue they pay back notes with cheaper dollars. Problem is that wages in unemployment deflate so hyerinflation destroys economies by destroying affordability. 

The present state of all currencies are they float in relationship to each other BUT ALL ARE INFLATING that is why gold and oil are so price resistant. 

Pretending that there is a "deflation" risk is not only factually absrud, it is impossible with floating currencies in which the money supply is exapnding. Even the yen is inflating but just less than the dollar.  Gold is your better indicator though it has no real commerical value. It measures sentiment. 

If real deflation were allowed to occur and we could reveres the clock to 1955, real affordability would exist. This would also require government to become 1/3 its preent size. 

By looking back at 1955 an era when people lived a very high standard of living, the present shows the ravages of runaway gov spending and inflation that has been cleaverly concealed by a sea of flaoting currencies. 

With the present trend of out of control government borrowing and spending, high unemployment, overregulation of industry, anti-business tax policy, the greatest fear will be hyperinflaiton. But any discussion of deflation as a risk is simply unschooled and absurd. 

Think about it. What is the risk of deflation? The risk that your buying power will increse. Deflation is good. Inflation is bad. Again if you are in debt, deflation makes you pay more for your notes. 

Our nation is suffernig from 55 years of intolerable inflation brought on by reckless government spending and printing of money. The most recent gov spending has eclipsed all the spendng on all wars since the nation was formed. We are on an uncharted course to an inflationary disaster with wages dropping unemployment rising. Present policy to bloat gov will just lead to more inflation and more bad policy choices. 

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#9) On September 16, 2009 at 10:37 AM, starbucks4ever (89.93) wrote:


Very good! Inflation is fun after you took on the debt. It's much less fun when you're ABOUT to take on the debt and learn HOW MUCH you will need to borrow.  

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#10) On September 16, 2009 at 11:34 AM, jstegma (28.62) wrote:

zloj - This is not one of your better posts.  Since when is the solution to deflation for consumers to simply borrow more?  Maybe that's a good idea actually.  Please lend me $30 million because I'd like a beachfront house and a yacht.  I'll pay you back, and with even better dollars than I borrowed.  Unfortunately the banks didn't go for my idea.  They laughed at me. I guess they just didn't understand economics.


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#11) On September 16, 2009 at 11:49 AM, starbucks4ever (89.93) wrote:


I would of course (provided I had them and believed in deflation, and sadly, at the current moment there is some trouble with both of these premises :), but why $30 million then? Approach the seller, explain to him that the money he gets from you will be safe, much safer than a depreciating asset, and beat him down to $3M. Once I see no mismatch between the loan and the collateral, you get the loan. You're then likely to find out that small balance can be as fun as low interest on a large balance.

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