What so many people get wrong about US deflation threat

Discussion in 'Economics' started by brettman9, Feb 3, 2011.

  1. I'm not saying the Fed did the right thing. I'm just sick of reading people saying deflation is fine because that means prices are falling and that's a good thing and should be expected in a productive society.

    That's the correct view in 1890 when the railroads are burgeoning and US households have low debt load.

    In this case, deflation means rising real interest rates. Deflation of 5% means it feels like your mortgage is now at 10%. That massively increases defaults...which drives the banks to tighten lending to 0...which increases real rates...It's vicious spiral.

    That spiral is the principal fear. The falling prices trend is a tiny and minor little nothing of a concern. The rising real rates is the issue. The Fed is trying to lower real long term rates. That's it. End of story.

    Japan is not analogous because household debt is nothing. The govt is in debt to its own citizens. The US is in the opposite situation. Deflation would essentially be the proverbial nail in the coffin here.

    I think the way they are doing it is going to be a big problem at some point, and this is not sustainable (cart leading the horse). But the point is not a fear of lower prices. It is a fear of rising real rates.
  2. piezoe


    You have it exactly right, and thank you. I've been saying these same things for months in these forums, but to no avail.
  3. so the only way our debts can be paid is if we inflate our way out of them? i think it'd be less trouble if we just defaulted on everything and started over. the music will eventually stop, and their are only two ways for that to happen in my opinion. we can either pay off all the debt that we have amassed both privately and publicly (fat chance in hell with a 1T+ annual governmental deficit) or we can default on it. i'll take deflation, i'm sure as hell not going to borrow money to buy a 500k house in chicago any time soon, i'd rather rent for the rest of my life and keep my money in physical assets since the only way houses are going to go up in value is inflation i'll win if that happens and i have physical assets- and if we default at least i have something other than worthless paper.

    why is it such a terrible thing to give savers a real interest rate? they should get something for saving. trouble is we'd rather bail out the "poor" of our country, driving around talking on their cell phones to pick up fast food and eat while they watch a color tv at home, all purchased with debt. what other country has such rich "poor" people. we should try living within our means and then maybe there is a hope, but as is we are doomed as a society. until i see a dramatic shift in the way people live their lives i'm staying as far away from debt in any form, be it lending or borrowing.
  4. Is that meant as a response? Of course rates are going higher. The Fed is holding the bond market up...poorly. And I am short treasuries, as who wouldn't be who likes money.

    But those are nominal rates. And a solid uptick in money and credit supply, and inflation, means that real rates are declining. barely.

    The point is, if money is easier to get, prices will rise (for everything), and debts will be easier to pay off. That's only relevant point...in this thread, and to the Fed right now.
  5. Ahh, you're talking about justice.

    Agree on all points, but -50 points for irrelevancy.
  6. clacy


    Fortunately Bernake is our Fed chair and not gold bugs obsessed with Wiemar Germany and Zimbabwe like Ron Paul and Glenn Beck.

    As if those two situations are at all analogous to the US.

    I would say based on our situation, as net importers and having a fair amount of foreign held debt, that walking a fine line of getting a little inflation verus deflation is a much desired outcome.
  7. I don't think thats exactly what the OP was saying. If we have deflation it could be impossible to pay our debts, would be a more analogous statement, in my opinion.

    Investment and Consumption are what drives a market economy. When cash has more value than just a means of exchange both those things slow down and the gears of the economy slow, because people and corporations just start hoarding cash. Its not a good place to be for any economy.

  8. No. The "when people start hoarding cash" argument is the other part of it. That's the "falling prices trend" part of it. The "that jacket will be 30$ tomorrow" part of it. That's the wrong problem. It's a problem, kind of. But not the big problem.

    The big problem is the "I have a ton of debt and now I can't get any money" problem, and is a different problem. And it's the real problem. It's not about stagnation. It's about spiraling out of hand collapse. That's the fear, anyways.

    The "jacket" problem is very very minor by comparison. The supply of credit is not really affected by the rising relative value of mattress money. But it is affected by a sudden humungous jump in defaults, which is caused by, and exacerbates, the real rates problem, due to the collapse of bank balance sheets.
  9. It sounds more impressive to say "repudiate" instead of default. :D
    #10     Feb 3, 2011