Tuesday, December 9, 2008

Deflating Expectations

This story linked from Instapundit reminded me that I wanted to post about deflation.

There's a lot of talk these days about how some amount of inflation is good. Good cases are made for this. You can read the link and see some economists who obviously cleave to that notion.

I don't honestly know if the theory is true or not. And there's one guy there (Burton Folsom) who talks about how the US prospered during the deflation that followed the Civil War.

But what I've been thinking about for a while is the unidirectionality of the pro-inflation types. I'm suspicious of it. Economic systems seem to need to flow in both directions. Markets need to expand, but they also need to contract. You just want them to end up a little bigger than before.

Money is essentially a commodity (with certain special properties, to be sure) and it seems to me that it needs to be able to become more or less valuable along with everything else. There's something odd about being pro-inflation as well, given the pride that countries have in the value of their money. The British have loved lording their pound over the American dollar, and the Euro-promoters loved it when the Euro towered over the dollar.

On the other hand, when money gets expensive, it's harder to export stuff. So, why all the bitching when money gets cheap?

Sometimes I think economics is just an excuse to complain about whatever.


  1. Recall that the financial institutions got $700 billion w/o much questioning, accountability, or reforms. We were told (repeatedly) that the banking sector is critical to every other aspect of our economy.

    What does the banking sector do?

    Grow liquidity.

    And ask yourself; if an economy is deflating why would you risk your money in a risky/weak economy? As long as you're not loosing money, you'll be increasing your wealth because your money increases in purchasing power w/o increasing in quantity.

    Did you see that the Treasury had very strong demand for some zero percent Bills today?

    Why would folks be eager to get a guaranteed zero percent? It's a problem when de-investment in the economy is an effective investment. Capitalism w/o flowing capital = not good.

  2. And, we must keep in mind that increasing populations require increasing economies for the average person to maintain their wealth status. Of course, an increasing economy can still leave a lot of folks behind if the increases are disproportionately benefiting certain populations, e.g. the super rich.

  3. I do get that, really.

    But when investing, you take the rate of return and subtract the rate of inflation to get the real rate, right? A 10% return when there's 4% inflation means, means you get an actual 6%.

    If you had chronic deflation, you get the rate of deflation plus the return, with the danger being no one wants to invest because the deflation is, essentially, free money. (Though there's both greed and ambition: Some want even more money--and it's easier to risk if you have more--and some want to do things.)

    All I'm saying is why not inflation some times and deflation others? Seems to me we went for 150+ years with inflation and deflation mostly balancing out. I'm less inclined to believe that our prosperity over the past 50 years is due more to productivity advancements than money policy.

    I suppose the holy grail is inflation of money coupled with deflation due to progress.

  4. If you had chronic deflation, you get a shrinking economy, and therefore you have a shrinking business environment. Even if some folks manage to make a profit, they are the exception; most folks would be losing.

    This situation is (naturally) confounding to a supply-sider. They tell us that we need to encourage businesses to produce more. But, clearly something is wrong with this philosophy when you see that we have parking lots packed with unsellable cars and backlogs of unsellable houses and even commodities are sitting w/o demand.

    Did I say "demand?" That's not supply-side you can believe in.

  5. I don't see how an excess of production invalidates any particular theory. Production is set on past trends and curbed as soon as the waning demand is felt (generally).

    I also don't see how deflation necessarily equates to a shrinking economy. Deflation can be caused by an increase in production.

  6. Do you realize the implication of your comment? You're acknowledging that we have a demand problem. That is, your being Keynesian, i.e. a non-supply-sider.

    As I said "confounding."

    You don't see how deflating wealth/capital is bad for the health and growth of an economy? OK.

  7. To give you a practical view, all of my suppliers are losing their minds. They have to have a cutting ticket that is big enough to justify putting in an order for a dress or a top. Now when a department store puts in an order it's easy. You can tag onto Nordstroms or Macy's or whatever. Even if they cut back or cancel part of the order they can still sell it to small stores. But the big guys have cut way way back. So they are dying to get enough people to sign on to order so they can cut. But not enough people are doing it. So they call every freakin’ day to try to get you to the showroom to drum up some orders. Thus the demand is way down and the producers are panicking.

    To combat that we have developed same vendors who are doing very limited runs for us of unique and exclusive stuff. That is the wave of the future.

    In the meantime the big guys are crapping in their pants.

  8. 1jpb,

    You view this politically; I view it mechanically. I don't care whose ox gets gored.

    You don't see how deflating wealth/capital is bad for the health and growth of an economy? OK.

    No, I'm saying that a relative reduction in money supply--the increase of the value of that money that is deflation--isn't the same a reduction in wealth.

  9. Troop,

    But what you're describing sounds like a good thing: We've had economy of scale, but there's another sort of economy of scale--that is, small scale.

    If you're smaller you have agility, you can respond to the market better and faster.

    I just get the impression that the world is a very dynamic place and every change disadvantages some and benefits others. But the pros and cons aren't all equally represented.

  10. Oh I see it as a very good thing. I am working toward that end. If I can be small and nible I can get through the tight places a lot better than some of the big boys. It just takes a lot more work. I mean it is easy to go to a showroom and just pick stuff out. When you have to help design it and more importantly decide how much to make of any one item, it gets a lot harder.

  11. Hey where are all the tits dude?

    I mean I am keeping up my end talking about Dana Delaney's plumbing.

  12. lol

    All right. I'll try to put up some mammaries in the next coupla days.

  13. Do you make up your "economic philosophy?"

    Do you think that deflation is unrelated to the pricing of stuff?

    In your imaginary world were the money supply (rather than prices) are the key; what measure of money supply is used to measure deflation (and presumably inflation?)

  14. I'm not sure what you're having trouble with, 1jpb. As I said, money is a commodity with certain special properties. I think a certain degree of fluctuation is normal and even necessary from time-to-time.

    I'm just suspicious of any economic theory that insists that prices have to always go in one direction.

  15. Alright, I concede that you're not really interested in divorcing pricing from money supply in the deflation discussion. I'm sure you intuitively (w/o necessarily thinking of a math formula) see that the "mechanics" include and link multiple factors, including pricing.

    Likewise, I'm sure you understand that money is hardly a traditional raw resource commodity. So, there's no point in me noting the differences.

  16. 1jpb,

    Yes, I'm deliberately trying to keep this topic super-simple with an eye toward understanding the basic laws.

    Economics is, in my view, like physics, only less tractable. (Heh.) Most economists seem to talk about six layers up from the basics and often end up failing to respect simple supply-and-demand.

  17. You view this politically; I view it mechanically. I don't care whose ox gets gored.

    Blake's secret weapon.

    : )

  18. To combat that we have developed same vendors who are doing very limited runs for us of unique and exclusive stuff. That is the wave of the future.

    It's inescapable, for America, if we are to succeed, isn't it?

    Increasing niches. Specialization. Back to the wilderness, the frontier. Everyone's on their own.

    It's going to be badass.

    Or we'll become socialist.

  19. The problem I see is that those two forces are opposed.

    They don't have to be. We could have a tax system that just took 50% of what everyone made, and still have a bad-ass wild frontier economically.

    But the taxes never come alone any more, do they? They always come with regulation so sweeping that it crushes all innovation and entrepeneurialship--unless you count thieves, gangsters and pirates. They tend to do pretty well in socialist economies.


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