I am saying that low rates may, in fact, lead to expectations of deflation. It's well known that expectations can, in fact, lead to realization. This is how it works for inflation, so I see no reason for it to work any differently for deflation.
The Riddler strikes again...dazzling us all with his uncanny ability to posit questions in which he will never answer.
The Paradox of the Zero Bound -----Excerpt------ Promising low rates for long periods of time is particularly pernicious following periods of credit crises, points our Arun Motianey, now with Roubini Global Economics, in his book SuperCycles. In a discussion of Japan's low policy rates over the last 15 years, Motianey points out that deflation became worse the longer Japan's equivalent Fed Funds rate stayed at zero. Motianey argues a slightly different transition mechanism that pushes the economy into deflation, mainly through lending markets. He argues that after a credit crisis, government-supported banks are borrowing at close to government rates and at the same time being coerced to lend at rates lower than they would otherwise demand for the risk of default. The result is that they demand higher credit standards (typically higher operating cash flow) of their borrowers. Borrowers, mostly companies, oblige by halting the growth in or cutting the nominal wages of workers. Generalized price deflation typically follows wage deflation. Motianey sums up his argument up this way, âVery low nominal rates cannot be used to fight deflation, since they are, in these conditions â the condition of banking system distress â the cause of deflation.â He calls this the Paradox of the Zero Bound. -------- Deflation expectations? No way. Given how the general public invests and votes, there is no way they can comprehend what deflation is let alone expect it. The Paradox makes more sense.
Fine, we can discuss the relative merits of the two different theories later... If this paradox makes more sense to you, does that mean that you're now, in essence, agreeing with Kocherlakota's conclusion that low nominal rates can actually increase the probability of a deflationary outcome?
Save your energy. He is just plain stupid. He's been quoting all kinds of shit a few years back just to prove that there was no RE bubble.
06-01-07 09:44 AM http://www.elitetrader.com/vb/showthread.php?s=&postid=1487260#post1487260 He is the one, who started this thread back in 2005. http://www.elitetrader.com/vb/showthread.php?s=&threadid=44410&perpage=6&pagenumber=1
True. Unemployment "benefits" apparently have no expiration date any more. So most unemployed take their "free" UB checks rather than less-desirable jobs illegals are willing to take.