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russiangambit (29.49)

Deflation is only fair

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December 21, 2009 – Comments (15)

I am not sure if government keeps statistics of average pay per hour. But on the basis of anecdotal evidence at least, unemployed people are finding jobs at less pay. That is to be expected after all with such high unemployment. Bonuses are also cut because companies have an excuse of bad economy. This is supply and demand at work .Now, let’s assume that we have 3-5% wage deflation a year. On top of it we got FED which prints money to induce inflation in deflationary environment because to the FED deflation is worse than the devil reborn. For the FED deflation is worse of all evils.What an average Joe got as a result – 6-8% loss of purchasing power. On top of it there is consumer credit contraction. Average Joe is squeezed, no doubt about it.  

In a free market, as salaries fall the demand for goods should fall, the prices for goods should fall, thus softening the blow for an average consumer. That is a proper and fair way to deal with salary deflation. Now comes a whole bunch of economists who tell us that deflation cannot be allowed, deflation will lead for sure to an economic collapse.Remember, that these economists define deflation in terms of pricing, not money supply. They cannot allow fall in prices, they have to keep inflation expectations alive to keep the bubble going. But the bubble is bursting because the population that feeds the bubble is already squeezed. Deflation is only fair and free market way to deal with bursting bubble. FED is standing on the trucks in front of the charging deflation train. FED has the full support and faith of the US government and therefore all of the US and allies resources behind it. And that is not something to take lightly. I guess, the ultimate outcome will depend on the speed of the said deflation train.

It amazes me however that the same economists that usually preach free market, right here and now are trying to stand against the same free market and they believe they can overrule it. If memory serves me correctly, in the past free market won each time sooner or later. Fascinating.

 As an average Joe, I wouldn’t feel very charitable towards the government or their economists right now. All I know, I lost 10% of my purchasing power though I am not sure how exactly that happened.  The government has been promising for things to get better for 2 years now, why should I believe them, why should I believe they know any better than my common sense does. And common sense tells me to cut down on spending and save and work hard. Only my saving are being stolen through inflation. Now tell me why deflation is bad, I think deflation is only fair in the current situation and inflation is outright stealing.

15 Comments – Post Your Own

#1) On December 21, 2009 at 10:46 AM, binve (< 20) wrote:

russian,

Awesome post, I completely agree with your sentiments

Only my saving are being stolen through inflation. Now tell me why deflation is bad, I think deflation is only fair in the current situation and inflation is outright stealing.

I very much agree. And as long as there is a Fed, inflation and debt monetization will always be the preferred politically expedient path, and we all have to bear this inflation tax.

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#2) On December 21, 2009 at 10:48 AM, ChrisGraley (30.25) wrote:

Outstanding analysis russian gambit!

If we would have allowed deflation to begin with, we would have been much further along right now.

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#3) On December 21, 2009 at 10:59 AM, carcassgrinder (34.46) wrote:

Russian... Great post!

I've been truly astounded at the disconnect between this recession and deflation.  My common sense would tell me that when the entire globe is experiencing a recession, and the demand of almost everything falls...then prices should fall.  I would expect deflation in services as well as products...not only to reflect the drop in demand...but also to reach a value equillibrium.

In this recession....value is being terribly offset.  Other than BS sales/marketing attempts to raise retail sales by using the 'bad economy' as a 'SUPER ONE TIME RECESSION SALES EVENT!!!'....i've not seen the price of products and services fall in ratio to the economy.

I have noticed, though, that in boom(ponzi) times....products and services waste no time in pricing themselves at the upper thresh-hold of what the economy will allow.

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#4) On December 21, 2009 at 11:12 AM, russiangambit (29.49) wrote:

One more thing, which all those FED "economists" won't tell you. The free market works on supply and demand. Demand falls, prices should fall. In effect what we got now is demand falls, but prices are not allowed to fall. In effect, the free market is being prevented from working by the FED. Therefore you got the consequence of moral hazard and unhinged pricing siganls.

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#5) On December 21, 2009 at 11:14 AM, Imperial1964 (97.93) wrote:

I agree with most everything you said.  The problem we are in is that we are overleveraged.  If we as a society, an economy, and a country were not so indebted, deflation would not be a problem.

But interest rates cannot go negative.  Principal on loans does not decrease even though the debtor's ability to pay has decreased.  Default and bankruptcy for that which is not sustainable is generally a good thing, but not en masse.

If we figure out a way of constructing loans and laws to handle deflation that allows for deleveraging without being severely disruptive to the economy I would agree with you completely.

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#6) On December 21, 2009 at 11:25 AM, russiangambit (29.49) wrote:

Imperial , bascially you are saying that you support an average hardworking citizen paying for overleveraged loans  through decimiation of their savings?

Those with loans in trouble should use the opportunity to default now when Treasury still has money to spare to support the system. Instead those loans are being hidden. What if they default en masse 3 years from now, when all the savings are gone and Tresury spent another few trillion. How is that better?

Delaying is only a good tactic if you have a plan on how to solve the problem, if you have no solution it is better to deal with it before things get even worse. The problem is the US government has no plan. And in that it is not unique. I found that usually a government has no plan because it is just a collection of average Joes like you and me, not smarter, not more insightful. The problem is they are not motivated to look out for my intrests as well as I am.

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#7) On December 21, 2009 at 11:27 AM, vriguy (78.46) wrote:

I agree completely.  Deflation rewards savers - so profligate politicians cannot but hate it.

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#8) On December 21, 2009 at 11:54 AM, jesusfreakinco (29.12) wrote:

Russian,

Excellent post and comments.  As you know. the best way to save your purchasing power is through the purchase of hard assets - gold and silver.  

JFC

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#9) On December 21, 2009 at 3:13 PM, leohaas (35.73) wrote:

The reason price deflation is feared by most economists is that once people find out that their dollars buy more stuff next month, they will stop buying altogether. This buyers strike will lead to lower demand, to which supply will have to adjust, or prices will drop even lower. Etc, etc, etc. This is the description of an economy in a tailspin.

In short: deflation = economy in tailspin.

I am not convinced this is true. But it is the reason 'we need to fight deflation'.

 

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#10) On December 21, 2009 at 3:30 PM, russiangambit (29.49) wrote:

Leo, yes, that is exactly what they teach in an economics class in the US. Needless to say, I don't agree with it.

First, deflation might reduce the demand temporarily but in the end that leads to saving, right?In deflation people are not afriad to save, their money is not being diluted. Of couse,  deflation is an opposite of a bubble, and it seems the whole system is based on bubbleonomics, government expenses always increase which always require increasing atrx revenue and that is only possible in an indefinite bubble. For the past several decades the policies ahve been against savers so that savings almos all dispappeared. Now the government officials have the nerve to say that people don't save enough?

Second, the fixation on prices is very superficial. Economists should understand that money is just a medium of exchange, but money in itself is nothing, it is not wealth, it more like a contract - labor for goods. If I have to produce the same or less of labor to get a certain good, what do I care what the number printed on paper is? I don't care. But from forcing attention on the money from the process of wealth creation, all kinds of not so nice people (economists, politicans, financiers) lead the general population in a merry go round  while robbing them blind.

Which is to be addressed in my future post - "Financial wizards vs. scientific genuises", if I ever get around to writing it. 

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#11) On December 21, 2009 at 3:47 PM, PeteysTired (< 20) wrote:

russiangambit

I work as an IT independent contractor.  2009 was a terrible year. I was off 3 months and my avg contract wage is 20% less than last year.  I could use price deflation big time, but I am not really seeing it except for fuel prices.

I thought food prices were going down over the summer, but I don't see it anymore.  The gov't can print what ever CPI numbers they want, but I know that my wages are down and my prices are slightly up overall.  I am not saving and reduces my consumption to make up for the shortfall.

 

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#12) On December 21, 2009 at 3:56 PM, tkell31 (< 20) wrote:

"The free market works on supply and demand. Demand falls, prices should fall. In effect what we got now is demand falls, but prices are not allowed to fall. In effect, the free market is being prevented from working by the FED. Therefore you got the consequence of moral hazard and unhinged pricing siganls."

Just curious but what prices aren't falling?  Housing, cars, consumer goods etc etc.  All cheaper then in prior years by significant amounts.  Housing in particular is down over 25%...much more then the 6-10% you suggest would be right.

People are saving at a record pace.  I really dont get your points since the reality is everything is behaving as if there is deflation.

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#13) On December 21, 2009 at 4:22 PM, russiangambit (29.49) wrote:

Tkell31, so you don't get my point. You see deflation everywhere. Yet you believe that APWR is about to go far far and away? Deflation and stocks don't mix. I think somebody needs to learn a bit more about causes and consequences.

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#14) On December 21, 2009 at 4:43 PM, starbucks4ever (98.98) wrote:

I don't agree that deflation would cut spending. In fact, I think it's quite the contrary. Deflation gives consumers reassurance that in the future, their healthcare bill, rent, property tax, etc. will not go through the roof. So in a deflationary environment there is no need for consumers to park an extra $100,000 into stocks or gold or commodity futures because they are paranoid that inflation will wipe out their CDs and cash in the bank. The money can then be spent freely on real things. Ironically, most consumers would also be wealthier that way, because despite all this inflation talk, investments usually go sour. But who can blame them for that? When Bernanke threatens to multiply your savings by zero it's only human to overreact.

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#15) On December 21, 2009 at 4:53 PM, tkell31 (< 20) wrote:

Wow, so in your world deflation means no stocks can be successful?  Just to refresh my memory who was right about APWR again?  And people are saving more, and prices of major consumer goods have dropped.  Sorry about the drop in income, but at least you can take solace in the fact IT pays extremely well so you are probably only making fantastic money instead of ridiculous money. 

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