By Michael Pento The fear of deflation has become the cornerstone of Keynesian economic thought. A lack of inflation has been used to explain periods of economic weakness from the Great Depression of the 1930’s, to the Great Recession 2008-2009. And now, that philosophy has been adopted as gospel by those that control the Federal Reserve and virtually every central bank on the planet.In reality deflation is cathartic, and a necessary condition to heal the economy. If deflation were allowed to naturally run its course, as it did in the brief Depression of 1920-21, depressions would be sharp but fairly short in duration. And the economy would find itself on firm footing fairly quickly. However, Keynesians view deflation as the source of a destructive cycle in which; asset prices plunge, companies cut jobs, spending plummets, and a permanent recession sets in. Therefore, the prevailing current view maintains that deflation is something that needs immediate intervention of massive monetary stimulus–you can say they have become deflation phobic. This is why I find it fascinating that Keynesians, who proliferate in central banks and in the financial media, are relentlessly cheerleading the recent spate of deflationary data. And, just to be clear, deflation has not been limited to the New England Patriots’ footballs–it is everywhere you look. However, it is the height of hypocrisy that Keynesians use the specter of deflation to frighten us into believing we need to endlessly dilute the value of our currencies and take the rate on our savings to zero percent. But then, at the same time, take every data point that points to falling prices as another reason to be bullish on markets and the economy. Their mantras are: Lower commodity prices–a boost to the consumer, plunging interest rates–an increase in mortgage refinancing, I actually heard a commentator suggest crumbling copper prices were a boon to minting pennies–he obviously didn’t realize pennies have been minted mostly with zinc since 1983. How can Keynesians celebrate deflation, while at the same time use it to scare us into accepting ZIRP forever? The easy answer would be, they are cheerleaders for the stock market…and I believe they are. But a more compelling reason is these individuals have convinced themselves that a group of 12 academics can arrive at better conclusions than the free market. So enamored are they by the collective wisdom of our men and women who occupy the Federal Reserve, that they can’t bring themselves to imagine there may be some unforeseen negative consequences to their actions. And, because for a moment it appeared as though the Fed would have a graceful exit from QE, their blind faith in micromanagement of markets appeared to be warranted. Keynesians are unable to acknowledge that printing and borrowing money has simply been a failure in bringing sustainable and vibrant growth back to economies. Unfortunately, we are just beginning to experience the pain associated from believing central banks can obliterate the free market pricing of stocks, bonds, commodities and currencies for seven years with impunity. Most importantly, there is an inherent danger in basing investment decision on the capriciousness of a handful of individuals, as opposed to economic fundamentals and markets. For example, Mario Draghi is doing his best imitation of the Fed and the Bank of Japan in promising to buy at least 1.1 trillion euros worth of public and private debt over the course of the next year and a half. However, much like in the U.S. and Japan, Europeans will find that monetizing debt will do little in the way of engendering growth; but will be remarkably successful in destroying the purchasing power of the middle class. The ECB’s bid to monetization massive amounts of Eurozone sovereign debt won’t rescue the economy or do much in the way of creating inflation. This is because sovereign bond yields are already close to zero percent, and even have negative yields in some cases. Once the ECB buys debt from private banks they will likely sit on most of that new central bank credit. Why would private banks buy new government bonds that offer no interest and have tremendous downside risks to the premiums? And why take the risk of making new loans to unqualified borrowers when the interest rate they can charge in nearly zero percent? In fact, the private banks that already front ran the ECB’s bid could very well just unwind their positions to Mr. Draghi and then sit on that cash. And the hopes of “saving” the European economy from the disastrous fallout of deflation will go down in history as yet another failure of central banks to manipulate markets. Central bankers tend to be duplicitous and incompetent plutocrats. Investors would be far better off placing their faith in markets and real money instead of fiat currencies and empty promises. Of course, this misplaced faith will eventually lead to the biggest shock of all…the soon to arrive collapse of paper currencies and the insolvent sovereign debt backed by central banks. http://www.pentoport.com/
This thread should be moved to economics, away from the purview of blind hate, as it may actually get interesting. The commonly taught"wisdom" http://www.slideshare.net/dolaneconslide/why-fear-deflation-a-tutorial
Hayek: "Such a "secondary depression" caused by an induced deflation should of course be prevented by appropriate monetary counter-measures. Though I am sometimes accused of having represented the deflationary cause of the business cycles as part of the curative process, I do not think that was ever what I argued. What I did believe at one time was that a deflation might be necessary to break the developing downward rigidity of all particular wages which has of course become one of the main causes of inflation. I no longer think this is a politically possible method and we shall have to find other means to restore the flexibility of the wage structure than the present method of raising all wages excep those which must fall relatively to all others." Hayek: "I agree with Milton Friedman that once the Crash had occurred, the Federal Reserve System pursued a silly deflationary policy. I am not only against inflation but I am also against deflation. So, once again, a badly programmed monetary policy prolonged the depression.”
part of that article by penta seems uninformed The FED is not 12 academics trying to figure what the best policy is... the Board is controlled in half by private shareholders and the board can only act through consensus... hence the private shareholders have practical control. does anyone think the board and greenspan really did not see the housing bubble? or did they decide to allow lower lending standards so their owners could continue to cash in on the mortgage mania.
This is good. You are reading Hayek. Mission accomplished! But when Hayek speaks of deflation, he is speaking of wage deflation. He is not speaking of price deflation, and the two are not as inexorably linked as you Krugmanites would have us believe. Additionally, Hayek was against a lasting deflation - which is the type that brought about wage declines in the past. The problem today is that whenever the government's manipulated CPI drops below 2%, more calls for easy money ring out from the clueless. A necessary corrective deflationary event (or disinflationary event) is what is needed to "clear the pipes". That's what Pento is referring to. Of course no one - not Hayek or anyone else for that matter - could have foreseen the lunacy the world's central bankers would yield themselves to in supporting a bloated, debt creation machine that has no chance of ever being repaid without a crash.
from: http://www.bloombergview.com/articl...ng-economic-crises-commentary-by-sylvia-nasar GREAT DEPRESSION DEBATE "This strategy succeeded brilliantly, snagging Hayek an invitation to Beatrice and Sidney Webb’s London School of Economics, which a group of young Turks were itching to turn into a libertarian antipode of interventionist Cambridge, where Keynes’s disciples were. With Hayek on the LSE team, young economists everywhere followed the furious debate that ensued with the passion and partisanship of soccer fans. As the Depression deepened, Hayek held that it was “due to monetary mismanagement and state intervention operating in a milieu in which the essential strength of capitalism had already been sapped by war and by policy.” Overinvestment during the boom -- not underinvestment, as Keynes contended -- had produced the slump. Consequently, what was needed was “time to effect a permanent cure.” “The creation of artificial demand,” Hayek argued, would only lead to another burst of inflation and another downturn. Like most American economists -- as well as President Herbert Hoover and his political rival, Roosevelt -- Hayek opposed going off the gold standard, and favored spending cuts and tax increases to balance the budget. Give the economy time to heal. When “nature’s cure” failed to end the Great Depression, Hayek’s star hurtled to earth." Consider the last sentence I've quoted. The left has painted the great depression as a time when there was no gov't intervention to stimulate growth. That Roosevelt didn't try Keynesianism in the great depression. What a joke all of journalism and economists are. They will literally say anything to get the public's money and grind the public into dust. If you like you're health care plan, you can keep your health care plan was just another in a string of massive deceits to gain control of our lives. The lies have been going on forever. Yet I still find it stunning that they try to paint the great depression as a time of Roosevelt 'letting nature take its course'.
That's a nice presentation. There seems to be a typo last paragraph, left-side, of Slide 8. The sentence should read "Once nominal rate hits zero any further decrease in the inflation rate causes the real rate to rise." An alternative way to say the same thing is "...any further increase in the rate of deflation causes the real rate to rise." A negative rate of inflation is a positive rate of deflation and vice versa. The sign of either changes at the zero line. I think the presentation of "common wisdom" here is a clear cut case of the common wisdom being correct -- Gore Vidal's "the common wisdom is nearly always wrong", notwithstanding. May I add that a less algebraic way of explaining the same phenomenon, that I have found to be more easily grasped by many, is to note that deflation results in debts being paid back with dollars that have more purchasing power than the dollars borrowed. Somehow when it is put this way, most people find it intuitive that such a situation would be equivalent to a rise in the interest rate paid on the debt. Economists recognize that even though technically there is little to be gained by putting off purchases in deflationary times, assuming you save at interest the money you put off spending, as a practical matter, many won't save at interest the money they don't spend on some item they hope to buy later. Instead they will fritter the money away on other items. This un-texbook like behavior doesn't affect net demand. On the other hand, consumers who don't spend their holidays reading economic texts won't know there is no theoretical advantage to putting off purchases, so they may put them off anyway, in unwitting defiance of academic economists everywhere.
My customers' product has fallen in price due to oversupply. As production efficiencies (oh, the irony) have not risen (yet), they foresee downward pressure on their margins. Thus, they are cutting labor costs and cutting their capital expenditure budgets for the coming period (one hopes it's not an entire year, but reporting does drive its own necessities). So they have effectively reduced external demand. Consequently, we respond to that reduced demand, visible as jobs put on hold, or even canceled, i.e. we foresee reduced sales for the coming period. Without higher production efficiencies (yet), and as we wish (need) to protect our margins, among other cost-control measures, we have instituted a hiring freeze, a promotion freeze, and (temporarily!) suspended bonuses. Thus, we have reduced effective external demand to our suppliers. One would imagine our employees will slow their personal purchasing activity as a result, so all kinds of additional upstream suppliers will feel this. And so it goes. This is not mere theory, and it is not any kind of self-fulfilling prophecy that a mythical cult, say the rumored "Krugmanites" could induce. It is the cold, hard facts of business during price deflation.
Yeah, it's almost as if you and your energy customers are the only businesses in America, isn't it? How about we just refer to your business as noise? Like the fed does when looking at price increases in other areas of the economy.