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re calls here for ej to debate inflation vs deflation... again. what for?
the record...
deflation vs inflation 1
ej debated economists in 1999 who predicted long deflation after the stock market crash
what did ej say?
we got, what, 1 month of deflation after the yr 2000 stock market crash?
ej 1, shilling 0
deflation vs inflation 2
ej debated economists 2006 - 2009 who predicted deflation after the housing bubble crash
what did they say & what did he say?
we got, what, 2 months of deflation?
keen 0, ej 1
question for ej... why debate deflationists again?
guess this belongs in 'ask ej'
the record...
deflation vs inflation 1
ej debated economists in 1999 who predicted long deflation after the stock market crash
what did ej say?
April 16, 2000 - Recession 2000
After reading Gary Shilling's fine book on deflation and hearing every argument for deflation post bubble or otherwise, we still make the case for a reversal, for a period of several years, of the previous 20 year trend of disinflation and increasing dollar strength.
First, assume the bubble has popped due to a looming recession as we contend. Then assume that the crash itself is less than salutary in a recessionary environment. (No doubt endless argument will ensue as to whether the crash caused the recession or not.) The Fed has a choice of two evils: 1) lots of credit defaults, credit contraction and a shrinking money supply, rocketing unemployment, rising real incomes for the few that have jobs, a strong dollar and stable or falling prices or 2) fewer credit defaults, less credit contraction, a steadily growing (ideally) money supply, less unemployment, and rising nominal wages for those who have jobs (more than in the deflation case) and prices rising faster than wages. If you believe as we do that the Fed has a choice, B looks a whole lot better. On close inspection, more advantages appear.
Inflationary government spending is much more politically viable than the alternative. Deflation may increase real return on capital but as was discovered in the 1930s in a democracy the unemployed (who greatly outnumber owners of capital) vote for jobs and increased nominal wages, in other words, for inflationary government programs. True, inflation lowers real return on capital and hurts creditors, and the rich and the financial community have pull in elections. But that's not how it worked out in the 1930s when The New Deal looked a lot better than socialism, a real possibility for the US government at the time. And don't feel too bad for the banks. When the process is reversed, as it was in the early 1980s, the banks make out like bandits. Later in the cycle, when interest rates are raised again, the banks continue to pay low interest rates on savings while lending rates go to the roof. Nice work if you can get it.
The alternative is higher taxation to pay for government programs to increase employment, ala The New Deal. Deficit spending and increased taxation is the track that Japan took after its bubble collapsed more than a decade ago. High tax rates are acceptable in Japan where history has evolved a culture of economic equality. Supporting the redistribution of wealth via taxation in hard times is seen as a citizen's duty, even among creditors and owners of capital. Further, the Japanese experience with hyperinflation after WWII is as deeply embedded in the culture as deflation after The Great Depression is in the US culture. A rate of inflation that is acceptable in the US may cause Japanese savers to flee yen denominated assets. With trillions of yen in savings to fall back on before the bubble burst, the Japanese have been able to take a deflationary approach with little risk of either creating a deflationary spiral or exposing the yen to exchange rate risk.
The US experience with The Great Depression makes the US intolerant of deflation, which may quickly take on a life of its own and run out of control. In a deflationary environment, few want to pay back debts with more expensive dollars later and credit-worthy borrowers are few, so borrowing and lending slows significantly. Purchasing slows as everyone waits for the next price reduction before buying. Redistribution of wealth via taxation is not politically viable in the US where economic equality is not a widely accepted political goal.
Inflation is the most politically viable method of redistributing wealth from creditors and owners of capital to wage earners in the US after the recession gets underway. Inflation allows more wage earners (voters) to stay employed and gives them the perception of increasing wealth, even though real incomes are falling since prices will rise faster than incomes. Inflation also spurs further spending, as purchases are made in anticipation of future higher prices. Inflation also allows debts to be paid off quickly with cheap dollars. Best of all, unlike taxation, inflation can be created by the "independent" Fed without any politician having to explain to his or her constituency why they voted for it. The Fed makes itself the whipping boy for a few years. Better yet, a fall guy appears, such as OPEC or, in the present case, all those foreigners turning in their dollar denominated assets for cash in their own currency.
After reading Gary Shilling's fine book on deflation and hearing every argument for deflation post bubble or otherwise, we still make the case for a reversal, for a period of several years, of the previous 20 year trend of disinflation and increasing dollar strength.
First, assume the bubble has popped due to a looming recession as we contend. Then assume that the crash itself is less than salutary in a recessionary environment. (No doubt endless argument will ensue as to whether the crash caused the recession or not.) The Fed has a choice of two evils: 1) lots of credit defaults, credit contraction and a shrinking money supply, rocketing unemployment, rising real incomes for the few that have jobs, a strong dollar and stable or falling prices or 2) fewer credit defaults, less credit contraction, a steadily growing (ideally) money supply, less unemployment, and rising nominal wages for those who have jobs (more than in the deflation case) and prices rising faster than wages. If you believe as we do that the Fed has a choice, B looks a whole lot better. On close inspection, more advantages appear.
Inflationary government spending is much more politically viable than the alternative. Deflation may increase real return on capital but as was discovered in the 1930s in a democracy the unemployed (who greatly outnumber owners of capital) vote for jobs and increased nominal wages, in other words, for inflationary government programs. True, inflation lowers real return on capital and hurts creditors, and the rich and the financial community have pull in elections. But that's not how it worked out in the 1930s when The New Deal looked a lot better than socialism, a real possibility for the US government at the time. And don't feel too bad for the banks. When the process is reversed, as it was in the early 1980s, the banks make out like bandits. Later in the cycle, when interest rates are raised again, the banks continue to pay low interest rates on savings while lending rates go to the roof. Nice work if you can get it.
The alternative is higher taxation to pay for government programs to increase employment, ala The New Deal. Deficit spending and increased taxation is the track that Japan took after its bubble collapsed more than a decade ago. High tax rates are acceptable in Japan where history has evolved a culture of economic equality. Supporting the redistribution of wealth via taxation in hard times is seen as a citizen's duty, even among creditors and owners of capital. Further, the Japanese experience with hyperinflation after WWII is as deeply embedded in the culture as deflation after The Great Depression is in the US culture. A rate of inflation that is acceptable in the US may cause Japanese savers to flee yen denominated assets. With trillions of yen in savings to fall back on before the bubble burst, the Japanese have been able to take a deflationary approach with little risk of either creating a deflationary spiral or exposing the yen to exchange rate risk.
The US experience with The Great Depression makes the US intolerant of deflation, which may quickly take on a life of its own and run out of control. In a deflationary environment, few want to pay back debts with more expensive dollars later and credit-worthy borrowers are few, so borrowing and lending slows significantly. Purchasing slows as everyone waits for the next price reduction before buying. Redistribution of wealth via taxation is not politically viable in the US where economic equality is not a widely accepted political goal.
Inflation is the most politically viable method of redistributing wealth from creditors and owners of capital to wage earners in the US after the recession gets underway. Inflation allows more wage earners (voters) to stay employed and gives them the perception of increasing wealth, even though real incomes are falling since prices will rise faster than incomes. Inflation also spurs further spending, as purchases are made in anticipation of future higher prices. Inflation also allows debts to be paid off quickly with cheap dollars. Best of all, unlike taxation, inflation can be created by the "independent" Fed without any politician having to explain to his or her constituency why they voted for it. The Fed makes itself the whipping boy for a few years. Better yet, a fall guy appears, such as OPEC or, in the present case, all those foreigners turning in their dollar denominated assets for cash in their own currency.
ej 1, shilling 0
deflation vs inflation 2
ej debated economists 2006 - 2009 who predicted deflation after the housing bubble crash
what did they say & what did he say?
Keen interview Feb. 2009...
EJ: You and I have discussed the inflation case, because you know I’ve made this case for ten years now, that eventually the US will engineer some kind of inflation, for this very reason: all other political options will be exhausted. I’m an optimist on this because I’ve argued that this process will not necessarily produce a technical hyperinflation. But now I’m starting to wonder if I’m being overly optimistic, given the rate of change, because as you know what drives a hyper-inflation is government obligations to make payroll, to fund government, to fund the military, and to fund pensions--all the expenses that for political reasons can’t be reduced easily, or if they are reduced result in lower tax revenues that worsen a nation’s fiscal position and solvency. At some point a decision is made, easily at a time when inflation is very low or even negative, that we need a little inflation anyway, so we’ll just print a little money to cover this quarter’s Federal budget shortfall and then next quarter we’ll do something else, we won’t do it again. That often kicks off the process of a hyperinflation because the next quarter the purchasing power of tax receipts is lower than in the previous quarter, and the government says, “Well, we’ll print again just this one more time to meet the budget shortfall,” which is then caused by both not enough tax revenue (nominal decline in tax revenue) and a decline in the purchasing power of tax receipts (real declines in tax revenue). This process is internal of, course, within the domestic economy, ignoring exchange rate effects. If the currency weakens as a result of this, then inflation from rising import prices adds to the trouble.
SK: I don’t think, given the scale of the debt, that most of the governments are probably going to go straight to debt repayment and not actually cause a rise in prices. So I think you’re going to see deflation going on until such time as governments start thinking of possibly Zimbabwean levels of money creation. I frankly can’t see that happening, so meanwhile I differ on that in that I don’t think we’re going to see hyperinflation. I think we’re going to see hyper-deflation. And then it’s a question of what political response the government makes and then we’re really debating which way the cockroach runs across a wire rather than the necessary dynamics of the system because if the government finds it can’t cause inflation by printing money offset by new debt creation, I think it’s going to learn that lesson the hard way, then there are those that decide to print absolute bucket loads of money (monetize existing debt by printing without an offset of new debt) and, alternatively, those that decide to abolish the debt. I have a feeling that the political response in will be the latter rather than the former.
EJ: You and I have discussed the inflation case, because you know I’ve made this case for ten years now, that eventually the US will engineer some kind of inflation, for this very reason: all other political options will be exhausted. I’m an optimist on this because I’ve argued that this process will not necessarily produce a technical hyperinflation. But now I’m starting to wonder if I’m being overly optimistic, given the rate of change, because as you know what drives a hyper-inflation is government obligations to make payroll, to fund government, to fund the military, and to fund pensions--all the expenses that for political reasons can’t be reduced easily, or if they are reduced result in lower tax revenues that worsen a nation’s fiscal position and solvency. At some point a decision is made, easily at a time when inflation is very low or even negative, that we need a little inflation anyway, so we’ll just print a little money to cover this quarter’s Federal budget shortfall and then next quarter we’ll do something else, we won’t do it again. That often kicks off the process of a hyperinflation because the next quarter the purchasing power of tax receipts is lower than in the previous quarter, and the government says, “Well, we’ll print again just this one more time to meet the budget shortfall,” which is then caused by both not enough tax revenue (nominal decline in tax revenue) and a decline in the purchasing power of tax receipts (real declines in tax revenue). This process is internal of, course, within the domestic economy, ignoring exchange rate effects. If the currency weakens as a result of this, then inflation from rising import prices adds to the trouble.
SK: I don’t think, given the scale of the debt, that most of the governments are probably going to go straight to debt repayment and not actually cause a rise in prices. So I think you’re going to see deflation going on until such time as governments start thinking of possibly Zimbabwean levels of money creation. I frankly can’t see that happening, so meanwhile I differ on that in that I don’t think we’re going to see hyperinflation. I think we’re going to see hyper-deflation. And then it’s a question of what political response the government makes and then we’re really debating which way the cockroach runs across a wire rather than the necessary dynamics of the system because if the government finds it can’t cause inflation by printing money offset by new debt creation, I think it’s going to learn that lesson the hard way, then there are those that decide to print absolute bucket loads of money (monetize existing debt by printing without an offset of new debt) and, alternatively, those that decide to abolish the debt. I have a feeling that the political response in will be the latter rather than the former.
keen 0, ej 1
question for ej... why debate deflationists again?
guess this belongs in 'ask ej'
but 'deflation' makes cash holders who didn't buy gold feel like they made the right decision... 
to believe in mish/shilling/keen/prechter. 
gold + tbonds turn every mini disinflation/reflation ka-ppom cycle a non-event... 
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