Economists expect report of first deflation in 54 years

[Felch]

And there should be no doubt: A deflation would hit not only those who ´overextended´ themselves. You could have a perfectly fine credit (if there is such a thing), built a house, still be 100.000 in the reds with it (but constantly reducing it), and then massive deflation hits. You´re screwed badly. Given the fact, that deflation didnt really occur for some time now (the thread title suggest more than half a century), it would have required more than just cautious risk-assessment to account for the possibilty of it, when the credit was issued. And that goes for pretty much all the credits issued. Altogether the credits may have contributed to a raising risk of deflation, but i would assume that the risk of it wasnt taken into account on issueing most of them. Typical market failure by unintended results of masses of individual decisions taken independently only with a specific intention in mind.

BTW, i think the crisis is systemic, not caused by misbehaviour of anyone really. If the rules of the market are considered ´natural´, then it follows that greed is also ´natural´ and those people behaved only ´natural´ (by trying to make a maximum profit) given the system they operated in. It´s damned easy to project the shortcomings of capitalism onto a rather limited group of people. In that, the major difference between 1929 and 2009 in Germany is the fact, that today, we dont blame the jews, but the managers, bankers, speculants (basically what jews were stereotypically believed to be anyways in ´29). In both cases, the chorus of society went: ´Capitalism would bring heaven on earth, if we could just get rid off these sickening elements. You know, these ´jewish´ high finance speculants and no-work-profiteers.´ Fact is, this kind of people are the children of the system and it will always bring these kind of people to its top.

Greed can be good, but greed without rational assessment of the risks runs into problems. Good greed drives people to develop new methods of manufacturing, or to invent a better mousetrap, and thereby earn huge amounts of money. Bad greed leads people to speculate with borrowed money and run themselves into debt. For example, I am greedy in that I save my money to buy stocks. That's fine. I'm not buying stocks on margin though, because that's stupid. Stupid people get burned.

As far as people owing mortgages, that does suck. Many people weren't irresponsible about buying their homes, and could be badly hurt by severe deflation. However, they could renegotiate terms with banks, under threat of defaulting. A bank would rather have fewer dollars than no dollars, especially if those fewer dollars are worth more than they were before.

Also, and this is very important, the deflation we're talking about is purely theoretical. Nearly a trillion dollars of federal money are about to be dumped into the American economy. Other countries are following suit. I'm slightly more worried about severe inflation (which does horrible things to poorest members of society, like the elderly and disabled, who live on fixed incomes) than about some phantasm of deflation.

[Agathon]

Inflation is being observed. I understand that deflation looks likely, and I understand the causes. But we've got enough problems without imagining new ones.

I don't think they are making it up.

Markets are created by people, but they obey fundamental rules. That's the nature that I'm referring to.

The problem is they don't. People often do not behave in the way that economists say they should. Behavioural economics is attempting to remedy this defect, but it is a relatively new science.

Well, that's one solution. I'd prefer to be a free citizen who is responsible for his own decisions.

Everyone might prefer this, but it would be self defeating, and thus irrational. You aren't being asked to give up all areas of your life, just those to do with productive activity.

You know, an adult, unlike these whiny pseudo-capitalist *****es who want something for nothing. I respect your intellectual clarity and honesty.

The whole point of capitalism is to get something for nothing. That's why people acquire capital - so they can use it to get others to work instead of them.

Not holding them to account is like giving in to a hostage taker's demands. That just encourages these punks to take our economy hostage again, and next time the demands will be even greater. I'd rather lose the hostages, and establish the precedence that we don't waver.

The problem with that view is that the wrongdoers won't be the people who suffer the most. Those who will bear the brunt of unemployment and poverty are those who had very little to start off with.

[Felch]

That is very rare, and requires special circumstances. If you could make money simply by borrowing it, how would the banks keep any reserves? Everyone would just remove their bank deposits, because they would be being charged for keeping them in the bank. Then it's old sock time.

It is rare, but possible. Free markets make anything possible, so long as people are willing to agree to terms.

This is pure faith based economics, and deserves no more time than a witch doctor's economic theory.

Why the animosity? Marxism either failed (in the Soviet Union) or it never existed. Marxism is faith based - capitalism is rational, and has a long history of overall success.

Why would they give it to you? You have nothing to give in exchange. You used to have a safe currency, but that is in jeopardy now.

The Dollar is doing quite well against the Euro and Pound. So we have that going for us.

The Asians have money, and they're free to lend to us. I'm not saying that they will, but they could. Unlike the USSR, nobody is going to force them to do anything. It's a free market. However, those that miss out on the opportunity to lend money to the United States will miss out on the potential for profits when our economy recovers.

[Unimatrix11]

´The market is complex, and beyond the understanding of any individual.´

I agree. Thats why no one can ever have a real grasp of the unintended effects of his intended actions. It´s as simple as this: For, say, teak-wood furniture, a lot of rainforest is destroyed (dozens of other trees for one teak-tree). Now, okay, this is well known, but suppose it was not. Many people like the wood, the high price suggests a high quality and so they buy it, because they want to have a nicer living room (intention). With that come a lot of unintended consequences, that the buyer most likely did not take into account in totality. He might realize, that his purchase will destroy an unproportional ammount of rain forest. But will he also take into account, that his purchase indirectly influences gas-prices via the now needed eco-taxes? Well, if he does, he can still say that it would take millions of his actions to make this result tangible. But he buys only one chair... Now millions think this way... et voilà: big mess.

[Unimatrix11]

dp

[Victor Galis]

The ridiculous actions that the government is going to take to try to control a natural market force are only going to be counter-productive. If you reward people who take on too much debt this time, they'll never learn their lesson. And in another twenty or thirty of hundred years we're going to go through another credit crisis even worse than the current one.

Allowing real debt burdens to increase due to deflation at a time when companies and individuals are trying desperately to get out of debt by cutting consumption is a recipe for economic catastrophe.

Unless people are held accountable for their private decisions, capitalism won't work.

This isn't about holding people accountable, this is about not kicking people while they're already down. Not holding people accountable would be printing money like there's no tomorrow and inflating our way out of this debt.

There's a risk with everything. Putting money in a bank returns interest because the bank is putting that money to good use. But if the bank loans it to anybody with a face and the ability to sign a document, then the bank is ****ing up. And if you put your money into a **** up bank, this sucks, but you don't deserve to get your money back.

It's thinking like that that caused the Great Depression.

That's capitalism. It's cold, it's hard, it's not fair, but it's real life.

Why should we accept its rough edges when the mixed economy so good to us in the post-war period?

That's the beauty of capitalism. If deflation occurred, borrowers would be free to borrow at negative interest from any willing parties. The free market is about freedom and responsibility. You're free to make any arrangement you want with anyone else who is agreeable.

Who would be idiotic enough to lend at a negative interest rate when they can hold cash at 0%? Far less risky. Deflation is bad because nominal interest rates are bounded.

The market is complex, and beyond the understanding of any individual.

Not really, it's just that the people who should be trying to are too busy drinking the free market Kool-Aid.

There's plenty of capital in Asia. It didn't disappear. Rates will be higher, but that's perfectly reasonable.

Where's it going to keep comming from now that exports there are collapsing?

[Felch]

I don't think they are making it up.

I don't think they are either. I think they are making predictions based on their best understanding of the situation. But it's still just a prediction, not an observation.

The problem is they don't. People often do not behave in the way that economists say they should. Behavioural economics is attempting to remedy this defect, but it is a relatively new science.

True. Individuals are irrational. But markets are an aggregation of many people, and over the long term, they tend to behave in a rational manner. Which is why we had a bubble that popped. Irrationality lost out to rationality.

Everyone might prefer this, but it would be self defeating, and thus irrational. You aren't being asked to give up all areas of your life, just those to do with productive activity.

Which I'm not willing to give up.

The whole point of capitalism is to get something for nothing. That's why people acquire capital - so they can use it to get others to work instead of them.

Capitalism is about getting something by directing the excess resources that you already possess into something productive. That's a long way from nothing. If you have the capital to build a robot, you don't need workers. It would still be capitalism though.

The problem with that view is that the wrongdoers won't be the people who suffer the most. Those who will bear the brunt of unemployment and poverty are those who had very little to start off with.

That's true. The poor always get it in the bum. But that's no excuse for rewarding the stupid bastards who got us into this mess. Let the downturn work itself out.

[Felch]

Allowing real debt burdens to increase due to deflation at a time when companies and individuals are trying desperately to get out of debt by cutting consumption is a recipe for economic catastrophe.

We're in an economic catastrophe. You can either pick at the scab, or rip it off. I'd rather rip.

This isn't about holding people accountable, this is about not kicking people while they're already down. Not holding people accountable would be printing money like there's no tomorrow and inflating our way out of this debt.

Fair enough. Got any useful suggestions?

It's thinking like that that caused the Great Depression.

I know. So? The Great Depression cleared out a lot of dead weight companies and opened the way for new ideas to take over. Some ideas (Nazism) sucked. Others didn't.

Why should we accept its rough edges when the mixed economy so good to us in the post-war period?

The rough edges will always be there. The mixed-economy is like trying to borrow your way out of debt. It works for a little while, but it only compounds the systemic problems. Allow the free markets to do what they do, and the problems will sort themselves out over time.

Who would be idiotic enough to lend at a negative interest rate when they can hold cash at 0%? Far less risky. Deflation is bad because nominal interest rates are bounded.

I said it was possible, not rational.

Not really, it's just that the people who should be trying to are too busy drinking the free market Kool-Aid.

Who should be trying to understand the markets? If you say it's easy, have you figured it out? You're a smart guy, Victor. Why not just spend an afternoon and solve all our problems?

Where's it going to keep comming from now that exports there are collapsing?

They've got the money. They can lend it, or they can not lend it. I have no other answers other than that. After all, I'm not an Asian banker.

[Unimatrix11]

´The whole point of capitalism is to get something for nothing. That's why people acquire capital - so they can use it to get others to work instead of them.´

Obviously. Sad, that this even has to said. Everybody who wants to be successful has to be a ´jew´ (please dont forget, how and why i am using this term from my previous posts).

And as opportunities for profit shrank in the real sector during the last couple of decades, the capital went into some sort of dream state, where it really began to reproduce itself out of mere rumors of expected profits in the future. Either you took that risk, or you put your money in the sock, as Agathon puts it. The catch is: If the risk takers win, you loose out relatively, because you didnt take that risk and thus missed an opportunity for profit. If the risk takers mess it up tho, you are at least as screwed as they are, cause it can well happen, that your money in the sock is going down the drain. Since you operate in the same economy, the risk of it breaking down depends on the average risk people are going to take - a few, ´potent´, risk takers can totally alliviate your ´security policies´ putting you at the same risk, without the chance for profit, they ´enjoy´. Thus the money goes into risky, unreal derivates pretty much unchecked. You´d be dumb if you didnt. That´s the rationality of the free market.

[Kidlicious]

Inflation is being observed. I understand that deflation looks likely, and I understand the causes. But we've got enough problems without imagining new ones.

That's the thing about capitalism, you can only imagine what prices will be in the future. So you can't plan accordingly and you can't even regulate your economy. Of course, you have to try to regulate it because if you didn't you would have widespread deflation and spending in the economy would plummet.

OTOH, if you have planned economy you can set your production and prices.

I know you have this idea that capitalism has a long history of success, but that's just dead wrong. Capitalism has a long history of failure, and those failures are getting more and more frequent, and worse and worse.

[Victor Galis]

Greed can be good, but greed without rational assessment of the risks runs into problems. Good greed drives people to develop new methods of manufacturing, or to invent a better mousetrap, and thereby earn huge amounts of money. Bad greed leads people to speculate with borrowed money and run themselves into debt. For example, I am greedy in that I save my money to buy stocks. That's fine. I'm not buying stocks on margin though, because that's stupid. Stupid people get burned.

Your view of capitalism is rather naive. While the arguments for good greed might have held in small businesses or family owned corporations, nowadays greed leads talentless hacks to lie, cheat, and steal for their bonuses while the company is falling apart long-term.

As far as people owing mortgages, that does suck. Many people weren't irresponsible about buying their homes, and could be badly hurt by severe deflation. However, they could renegotiate terms with banks, under threat of defaulting. A bank would rather have fewer dollars than no dollars, especially if those fewer dollars are worth more than they were before.

Because that's working so well now.

Also, and this is very important, the deflation we're talking about is purely theoretical. Nearly a trillion dollars of federal money are about to be dumped into the American economy. Other countries are following suit. I'm slightly more worried about severe inflation (which does horrible things to poorest members of society, like the elderly and disabled, who live on fixed incomes) than about some phantasm of deflation.

It will take a lot more than a trillion dollars to cause inflation.

It is rare, but possible. Free markets make anything possible, so long as people are willing to agree to terms.

In a free market with securitized mortgages, I'd be surprised if you could identify your creditor if by some miracle your mortgage was still in one or a few pieces. (If not... guess what, the holder of the most junior tranche probably has no intention of renegotiating terms.)

Why the animosity? Marxism either failed (in the Soviet Union) or it never existed. Marxism is faith based - capitalism is rational, and has a long history of overall success.

The sort of completely unregulated hardcore capitalism you advocate died long before Soviet "communism."

Individuals are irrational. But markets are an aggregation of many people, and over the long term, they tend to behave in a rational manner. Which is why we had a bubble that popped. Irrationality lost out to rationality.

No... greed lost to fear.

Capitalism is about getting something by directing the excess resources that you already possess into something productive.

Very true. Maybe someone should have told Wall Street.

We're in an economic catastrophe. You can either pick at the scab, or rip it off. I'd rather rip.

I prefer to think of your solution as slitting our wrists to make the rest of the pain go away.

Fair enough. Got any useful suggestions?

Yes, if deflation starts, print money. When deflation stops, stop printing excess money.

I know. So? The Great Depression cleared out a lot of dead weight companies and opened the way for new ideas to take over. Some ideas (Nazism) sucked. Others didn't.

At what cost though?

The rough edges will always be there. The mixed-economy is like trying to borrow your way out of debt. It works for a little while, but it only compounds the systemic problems. Allow the free markets to do what they do, and the problems will sort themselves out over time.

Yes, but a world-wide worker's revolution isn't exactly how I'd want my problems to sort themselves out. That or the apocalypse in some form are the only possible end-points for totally unfettered capitalism.

Who should be trying to understand the markets? If you say it's easy, have you figured it out? You're a smart guy, Victor. Why not just spend an afternoon and solve all our problems?

It would take much longer than that, but the problem is a lot of economists aren't even trying. They treat the market as a black box with certain characteristics and never bother to question what's inside or whether their assumptions lead to useful results in practice.

[Felch]

´The whole point of capitalism is to get something for nothing. That's why people acquire capital - so they can use it to get others to work instead of them.´

Obviously. Sad, that this even has to said. Everybody who wants to be successful has to be a ´jew´ (please dont forget, how and why i am using this term from my previous posts).

And as opportunities for profit shrank in the real sector during the last couple of decades, the capital went into some sort of dream state, where it really began to reproduce itself out of mere rumors of expected profits in the future. Either you took that risk, or you put your money in the sock, as Agathon puts it. The catch is: If the risk takers win, you loose out relatively, because you didnt take that risk and thus missed an opportunity for profit. If the risk takers mess it up tho, you are at least as screwed as they are, cause it can well happen, that your money in the sock is going down the drain. Since you operate in the same economy, the risk of it breaking down depends on the average risk people are going to take - a few, ´potent´, risk takers can totally alliviate your ´security policies´ putting you at the same risk, without the chance for profit, they ´enjoy´. Thus the money goes into risky, unreal derivates pretty much unchecked. You´d be dumb if you didnt. That´s the rationality of the free market.

Or the money can go into capital investments that make your company more viable in a competitive marketplace. There are always options. You can invest in developing markets, or enhance automation in production, or put money into IT to automate record keeping, or any number of things. There are more options available than "invest in crackpot scheme" and "put money in sock."

[Felch]

That's the thing about capitalism, you can only imagine what prices will be in the future. So you can't plan accordingly and you can't even regulate your economy. Of course, you have to try to regulate it because if you didn't you would have widespread deflation and spending in the economy would plummet.

OTOH, if you have planned economy you can set your production and prices.

I know you have this idea that capitalism has a long history of success, but that's just dead wrong. Capitalism has a long history of failure, and those failures are getting more and more frequent, and worse and worse.

The USSR
China under Mao
Cuba
North Korea

Yeah, planned economies are winners.

What planet are you from?

A central state committee has never managed an economy better than a market. They do a better job than a Czar, which I admitted in the Venezuela thread. But compared to a free market, a planned economy is unresponsive, shows little initiative, and is too politicized to be effective.

Show me Capitalism's long history of failures. For every downturn, you'll see an upward progression that makes up for it and then some.

[Unimatrix11]

It is exactly due to many production already being almost fully automated and communication being so cheap, that there is so little to do for the money. Remember, that investments need to be profitable - and not only that: they should be the MOST profitable option.

Sure, a lot of private homes could have gotten solar panels up, and this way invest their money into the real economy - yet, the ´Telecom´ stocks seemed to be a more profitable investment - until it crashed. Just one example out of the top out of my head...

[Unimatrix11]

The USSR
China under Mao
Cuba
North Korea

Yeah, planned economies are winners.

What planet are you from?

A central state committee has never managed an economy better than a market. They do a better job than a Czar, which I admitted in the Venezuela thread. But compared to a free market, a planned economy is unresponsive, shows little initiative, and is too politicized to be effective.

Show me Capitalism's long history of failures. For every downturn, you'll see an upward progression that makes up for it and then some.

Read Marx, Engels or the ´Black book of capitalism´ (Robert Kurz) for that. There are plenty. It can in fact be argued, that for every upward progression, you´ll see a downturn that makes up for it and then some. Remember, that you also have to see things on the global scale - sure WE are relatively well off right now...

EDIT: I guess the two most prominent instances of capitalism really being not all that great are the two world wars - the first being indeniably a child of capitalism and the second having its roots in the first and the great depression. BTW, i regard the eastern socialist states of the 20th century as state-capitalistic states - they still produced goods, the only difference was that the workers were now supposed to identify with the state - which indeed brought forth the cynic nature of the ongoing self-disciplination of the populace, obeying the ´natural laws´ of the ´machine´. ´Work´ was still an abstract universal value (and i think the propanganda art of both National Socialism as well as ´Communism´ shows this pretty well), purpose of which unquestioned (´alienated´ in the Marxist term (´entfremdet´)).

EDIT II: In general it´s hard to compare a ´truely´ communists ´state´s wealth with that of a capatalistc one, since you cant just take the GDP of both. GDP is generated mostly by ways that communism strives to eliminate. If you knit a sock for your neighbor, who then cuts your hair as a price, that´s 0 in GDP. If you produce a sock for someone else, who then sells it, there is no barber involved yet, but it already counts twice in the GDP (your loan, and the transaction of selling the sock). This assessment may not be all too accurate, but you get the idea...

EDIT III: This brings up another thing, that might remind you, that even now (disregarding the financial crisis for a minute), things around you do not change all for the better: My grand-ma used to actually knit socks for me as presents - GDP: 0. In capitalistic terms, it would have been more ´wealthy´ if she had worked at a factory instead, to earn some money, so she can go out and buy me socks. I regard the way she did it as inmeasurably preferable. Now, think about elderly care - what´s better: To grow old and die among your family at home, or be shoved off to some retirement home? In capitalism, the latter is clearly to be prefered, since the former does not induce nearly as much money-flow and profit-opportunity - and thus grandpa and grandma ´have to´ pay a lot of money to exile from their families - or the families pay it, by -guess- ´working´ (whoring themselves out to whoever will buy their ´workforce´), instead of taking care of the elderly themselves... It´s like a sick man´s vision if you think about it.

EDIT IV: And the middle generation? Well, ´modern´ parents work - both of them. Childcare is handled quite in the same fashion as elderly care - Kindergartens all around (the social democrates actually wanted to make it a ´right´ to get a place in Kindergarten). While the parents are missing out on a good deal of their kids childhood while raising the pressure on salaries with their combined labor, chances are either him or her produce something that nobody really wants. Maybe not. But one thing is sure: Both will complain about the TV-commercials they have to see. And eventually, they will have to buy some of this crap, if they want to go back to work tomorrow. And they do want to go back to work tomorrow - after all they are sane people...
Of course they are both worried about the environment - ´something oughta be done!´. The next thing in the news is the economy will probably only grow by 1% this year. That´s horrible! ´What about my job ? Why cant those bastards up there keep the economy running. Greedy selfish punks! We need to sell more cars!!! But hey - thanks for the eco-taxes!!! How are they supposed to sell cars if the gas prices are so ****ing high !?!? And what about my stocks ?!´ - ´Oh, dont worry, darling, the guy in the bank said, they are absolutely save, yet very profitable - what firms did he say, he would put our money in, again?´ - ´Heck - i dont care as long as they are going up! That´s his job - that´s what i pay him for...´

This is my picture of the average ´self-responsible´ ´econmic subject´ that ´satisfies´ his ´demand´ according to his ´preference matrix´, resulting in a ´rational´ ´free´ market, with the ´optimal allocation of ressources´ geared towards maximazing ´utility´.