Deflation v. Inflation argument makes NYTimes.com homepage

[dummass]

Re: Deflation v. Inflation argument makes NYTimes.com homepage

yes

tell that to the laid-off teachers whom i see as patients, and who are willing to take jobs paying much less than the prior one they lost.

There is a technical difference between reduced future demand and increasing supply, but that point will surely be lost on the laid-off teachers. I don't envy your position.

[jk]

Re: Deflation v. Inflation argument makes NYTimes.com homepage

There is a technical difference between reduced future demand and increasing supply, but that point will surely be lost on the laid-off teachers. I don't envy your position.

there are new teaching-certified graduates being produced every year. simultaneously, local governments are squeezed by declining tax revenues and diminished revenue sharing from similarly squeezed state governments, so they are laying off the most recently hired staff. and simultaneously, older teachers are discovering that their savings/ira's/401k's have been devastated by conventional investing strategies, so THEY are not retiring. so it's reduced demand along with increased supply. [i'm spelling out the various factors here only because i think this process is representative of things going in other parts of the economy, as well.]

[rdrees]

Re: Deflation v. Inflation argument makes NYTimes.com homepage

I think you are vastly underestimating the extent to which this country still produces goods and the effect this recession has on our country because of our vast manufacturing output. Yes, our country has increased the services portion of the economy relative to agriculture and manufacturing, but our manufacturing is no slouch.

Our industrial output in 2005 was nearly $2.7 trillion. We led the world. In fact, our industrial output was more than the next two countries, Japan's and China's, COMBINED (Japan's output was about $1.3 trillion, China's $1.2 trillion). So we're still very much producing goods for the world.

Here's a graph showing how our manufacturing output continues to grow over time, and how much the past two recessions have harmed it:



I'm not sure what you're getting at by saying there's no inventory for services and so that means no pricing pressure. That doesn't make sense. Imagine two service companies just after the recession hits. One says "hey, lower demand. we need to lower prices for our services" and does. The other says, "let's take dummass's advice: since we have no inventory we'll keep our prices the same and just wait it out until people come back to us." Which company survives the recession and which is bankrupt almost immediately?

Of course lower demand equals lower prices for services! If you want to make any money, you better lower your price, especially if you are a offering a service because actually providing that service is the only way to get paid. You can't even burn off excess inventory at low prices to make a little cash to get by. Those supply and demand curves we learned in high school apply equally to goods and services.

As for the original posted NY Times article, I took special note of a couple things. First, BOTH economists accurately predicted this crash before it happened, which puts them in select and particularly persuasive company in my opinion. Second, BOTH economists reject the idea of significant inflation any time soon. One says it's "very remote," and both believe we'll see minor inflation in the near term. I'm inclined to believe them.

Will we have signficant inflation sometime in the future? I believe so, absolutely. Rejecting the possibility of significant inflation in the future is, to me, about as short sighted as rejecting the possibility of deflation in the future. In a complex economy such as ours, you rule either scenario out at your peril.

[dummass]

Re: Deflation v. Inflation argument makes NYTimes.com homepage

I think you are vastly underestimating the extent to which this country still produces goods

During the first depression, the US had a trade surplus. Currently, the US has a trade deficit. I agree the the US still produces goods (some very high quality goods, I would add), but that is not the point: the point is that the US consumes even more.

I'm not sure what you're getting at by saying there's no inventory for services and so that means no pricing pressure. That doesn't make sense.

Your confusing employment and inventory. Jobs are lost in both instances: manufacturing or service. In either case you will have unemployed, which will cause wage pressures, but that was not my point. I was referring to the aftermath of the unemployment. When there is no longer demand for a service sector job, the car washer throws his sponge in the bucket and takes a nap.

On the other hand, someone who has been producing goods (the widget maker for instance) will have created an inventory of widgets. There are storage costs associated with maintaining inventory, which puts additional pressure on the goods producer to reduce inventory quickly.

"let's take dummass's advice: since we have no inventory we'll keep our prices the same and just wait it out until people come back to us."

You're now resorting to exaggeration, that "quote" is absurd. I have not offered any advice to anyone (read my post). I was merely trying to explain some subtle differences between goods producing jobs and service sector job. Perhaps my point was lost or do you have an ax to grind?

Of course lower demand equals lower prices for services!

Your assertion may or may not be true; but in either event, I never made such a claim. I said:

Prices for services will not be forced down by excess inventory.

Kept in context, my comment was referring to goods inventory, not employment inventory. Please see comment above (confusion between employment and inventory).

[rdrees]

Re: Deflation v. Inflation argument makes NYTimes.com homepage

I was reacting more to your comment that "None of this will put pressure on prices, because there is no inventory." I understood the "none of this" to refer to a collapse in demand since that was your example, i.e. no car wash demand for a year straight.

You say that there's a difference between employment and inventory. OK, but you're trying to connect each of those variables to price, right? You're saying that lack of inventory means no price pressures. I don't have any ax to grind other than I believe that to be incorrect.

If the car washer throws his sponge in the bucket and takes a nap, that's the ultimate price pressure because now his service sells for precisely $0.00 because no one is demanding it at all. But service sector employment is not usually so black and white. Usually, a service firm employs more than a single individual. If demand for the service declines, they lay some people off, but some are kept on to continue to provide the service because there's still demand for the service, just less. Which means you better lower your price for your service or go out of business, as in my example. Which means price pressure.

I used your "advice" a little flippantly, sure. I probably should have said "let's take dummass's theory as fact." Because that's really what that firm would be doing: if what dummass says is true, then there will be no price pressure on us in a down economy because we don't have inventory. Accordingly, the right move is to keep our prices the same. That company will go out of business very quickly because the other companies providing that same service will quickly lower their prices because you have to provide your service in the first place in order to make any money at all.

In fact, I would argue that services have much more downward price pressure than goods. Take your widget maker. There is a bottom line price it costs him to make the widget in the first place. If the market price is below the price it costs him to make the widget, well, he'll just quit making the widget. There's something of a price "floor" there.

Not necessarily so with services. Take your car washer. Let's say he wants to avoid starving himself and his family instead of taking a nap. He'd negotiate his price downward because some money is better than no money when you need to feed yourself. Theoretically, he could go down in price to a penny because, again, a penny of food is better than no food at all. Now, since begging probably nets more than a penny per the time it takes to wash a car, that's a theoretical limit, of course, but I think it's a much lower price limit than the widget maker's.

As for the trade surplus issue, I don't really get it. Your point, as I understood it, was that during the Great Depression, there was downward pricing pressure that contributed to deflation because demand for our goods fell and so prices fell, too. How is that not the same now? The graph sure suggests it is, and I'm curious why you think our demand for other goods (which has also fallen) would somehow meaningfully affect the price for goods we produce.

Imagine the US is the widget maker. In the 30's, demand for the widget maker's goods collapsed and prices fell for widgets, even if the maker was thrifty in his finances and spent within his means. Flash forward to 2010. If demand for the widgets collapses again, why would you assume that the price he could sell his widgets for wouldn't also fall, even if the widget maker had a maxed out credit card and was living beyond his means? The widget maker is clearly in a bad personal position, but I'm curious why you think that his poor finances mean his widgets will somehow sell for more just because he's broke?

[dummass]

Re: Deflation v. Inflation argument makes NYTimes.com homepage

"let's take dummass's theory as fact."

It's very unlikely that I'm the first to notice the economic differences between the manufactures of goods vs the providers of services; I'm flattered nonetheless that you think that I have my own theory, even if it does turn out to be misguided.

You say that there's a difference between employment and inventory. OK, but you're trying to connect each of those variables to price, right?

Yes, the price of goods, not the price of employment. Unemployment is a separate issue and affects both the producers of goods and the providers of services. The providers of services have no goods; therefore, they have no inventory of goods to worry about (i.e., the car washer does not have the extra carrying costs of completed, yet unsold, car washes sitting in inventory).

I would argue that services have much more downward price pressure than goods. Take your widget maker. There is a bottom line price it costs him to make the widget in the first place. If the market price is below the price it costs him to make the widget, well, he'll just quit making the widget. There's something of a price "floor" there.

Again, you are comparing employment. If we assume zero demand for both labor participants, we can see that the wage pressures are the same. In addition to wage pressures, the producer of goods still has inventory. The widget maker has a widget factory, an inventory of raw materials used to make widgets, widget processing equipment and the costs of storage for the unsold widgets.

I am suggesting that the additional carrying cost of this inventory creates downward pressure on the price of widgets. The car washer does not have the additional costs associated with an inventory of goods.

As for the trade surplus issue, I don't really get it.

In simple terms, I will attempt to explain by example. If you have two economies, S (an economy heavily weighted by its service sector) and G (an economy heavily weighted by its production of goods), and they both experience reduced demand for their respective outputs at the same time. I would argue that G, due to its additional carrying cost (inventory of goods), will experience greater downward pressure on the price of goods. S, on the other hand, can reduce imports to meet reduced demand and does not bare the additional cost of slack resource utilization.

Not that I had any intention of entering your inflation vs deflation debate, but it would appear to me, according to the above theory (probably not mine), that deflation would have a far greater affect on an economy that is more heavily weighted in the production of goods. But I could be wrong, in which case I am sure that I will be given complete credit for this theory.

[metalman]

Re: Deflation v. Inflation argument makes NYTimes.com homepage

Buffett Shortens Bond-Holding Duration After Inflation Warning

Aug 9, 2010 10:01 PM MT

Warren Buffett shortened the duration of bonds held by his Berkshire Hathaway Inc. after warning that deficit spending could force inflation higher.

Twenty-one percent of holdings including Treasuries, municipal debt, foreign-government securities and corporate bonds were due in one year or less as of June 30, Omaha, Nebraska-based Berkshire said in a filing Aug. 6. That compares with 18 percent on March 31, and 16 percent at the end of last year’s second quarter...

ah, what does he know. he should listen to prechter. he has predicted nine out of the last nine deflations that didn't happen since 1990.

[Starving Steve]

Re: Deflation v. Inflation argument makes NYTimes.com homepage

Just reading from the Bloomberg wire at 10:15 PDT, Wed morning, 11 Aug, 2010: "Home prices up in June in 100 U.S. cities;" "Trade-deficit rises to $49.9 billion in June;" "U.S. car makers refuse to fill demand and cut-out all discounts."

My neighbour here in East Sooke, BC just showed me a pound of nails and a small packet of screws: $64 including the carbon taxes, harmonized taxes. Yes, gentle reader, that is $64, not 64 cents.

Water bills up. Electric bills up. Taxes up. Repair costs up. New car prices up. My food prices are thru-the-roof. And on bloomberg.com, that cute picture of a cottage in San Francisco for $591,000........ That is not the house you get in SF for $591K. That price would get you a dump---- something like a dog house, or worse, and near Candlestick Park Stadium, or worse. (Think: "Hey Norton" from the Honeymooners Show in the 1950s on TV.) A lovely cottage in SF, well-located, is around 1.5 to $3 million.)

Everything is going up. Inflation is running wild. As my Ukranian friends in Winnipeg used to say, "Everyting go UP, UP, UP!"

Bernanke is out-of-touch. This debate has been won by the Inflationistas. Gold is not dumb.

[rdrees]

Re: Deflation v. Inflation argument makes NYTimes.com homepage

So you are assuming zero demand for a service producer and a goods producer? That seems like a pretty extreme restriction, but even on that assumption, the widgets, which still have some value, are worth more than the supply producer's product with is now worth $0.00.

Anyway, I'm not comparing anything about employment and I'm not sure why you think I am. I'm talking about the price of the products produced by service provider vs. the price of the products produced by the goods producer. I say both products face equal pricing pressure in the face of reduced demand. I understood you to be saying that the service company's product faces no pricing pressure in the face of reduced demand. That's what I disagree with. If that's not what you're saying, my bad.

I guess I agree with you on one point in the very short term. Due to excess inventory, there may be a temporary period in which goods suplus is sold at a lower price than the new equilibrium price. But that should only last so long as the inventory is burned off. In numbers, consider S and G which currently sell their products for $1.00 each. Now, demand slumps and the equilibrium price for both falls to $0.90. Yes, the service provider S can pretty much instantly meet that new price. G, on the other hand, may burn off inventory at $0.85 cents until he recalibrates his output to get back up to the equilibrium price of $0.90.

So I agree with you that for a short time, at least, G may sell his product at a lower price than S, but both, in the end, face the same overall pricing pressure in the sense that both ultimately have to sell their products for $0.10 cheaper due to the lower demand. What this has to do with the fact that we import more goods than we export I'm still not sure. But I am happy that we found some room for agreement.

[dummass]

Re: Deflation v. Inflation argument makes NYTimes.com homepage

I am happy that we found some room for agreement.

Me too.

[aaron]

Re: Deflation v. Inflation argument makes NYTimes.com homepage

Steve, I just got back from a week long trip in B.C. I understand why you are starving. Stuff is very expensive there. I am glad I did not have to buy nails... I had nothing left over after gas and food (and ferry service).

[Jim Nickerson]

Re: Deflation v. Inflation argument makes NYTimes.com homepage

I believe there has to be some error with starvin steve's nail and screw comment.

Here is a link to five economists commenting on the question "Should We Brace for Deflation Now? Tyle Cowan, Simon Johnson, Mark Thoma, Heather Boushey, Brad DeLong None of their comments are long, nor do I think they shed much light on the issue except to confirm there are differences of opinions. Simon Johnson says in effect "no way, jose."

http://www.nytimes.com/roomfordebate...flation-happen

[rdrees]

Re: Deflation v. Inflation argument makes NYTimes.com homepage

Thanks for posting that. I found it to be very interesting.

On the Simon Johnson piece, he compares Japan's "zombie firms" to our private sector companies, noting that their balance sheets are fine. True enough, but I always understood that it was Japan's "zombie banks" that were the main problem, not their private sector firms. And there's fairly good evidence that our banks today are acting like zombie banks in the sense that they are lending money at a hugely decreased rate, with banks in the United States hoarding money. I wonder if Johnson adequately accounted for that.



In any event, although there's not much consensus on the deflation issue, there does appear to be a pretty strong consensus between all of the contributors that if there is inflation, it will be low for some time to come.

[Starving Steve]

Re: Deflation v. Inflation argument makes NYTimes.com homepage

I do not agree with the consensus of contributors that inflation is going to be low for some time to come. NO WAY!

I think the central bankers and the governments will try to fiddle with the CPI data to make the numbers come out right for them: low. But that won't be anywhere near correct.

Inflation is galloping now, and the prices are showing-up in smaller sizes of packages, fewer price roll-backs, fewer deals, prices going-up not by a dime but by a dollar or two dollars per item at the grocery store, lower quality, stale-dating, less selection, no bags, less service, membership fees (pay-to-shop fees), more taxes, more generic goods, more add-ons and hidden costs especially in appliances, quality-drop especially in clothes and appliances, etc.

But the governments love this because they can lie to the people about inflation being under-control or non-existent. In a book of statistics, the numbers look fine to economists.

Next might come ethanol again, in the gasoline. The octane drops as the ethanol content of the fuel increases because ethanol is a filler, and not a fuel. But the price of the fuel stays at the same old level as the ethanol goes up, so the cost per mile for fuel goes up. (Your fuel needle travels from F to E in fewer miles.) It is so lovely! Fast-forward to the statistics in a book, and the cost of the gasoline was steady.... It is so lovely, only an oil-refiner and a farmer would be able to explain it to you while they laugh all the way to the bank!

For kids reading this, fiddling around with the price and employment data to make the numbers come out right is what the governments do now. Government statistics are the biggest scam of all. No-one but students in universities believe the data now.

[rdrees]

Re: Deflation v. Inflation argument makes NYTimes.com homepage

I was talking about the consensus of the contributors in that particular NY Times piece that Jim Nickerson posted. Clearly, that is not the consensus of the posters on this site. I personally agree with those contributors, but there's obviously room for disagreement.

I appreciate that rampant inflation is your experience. It is not mine, but I won't bore you with my experience. If what you're saying is true, it sounds like times are tough. Good luck.