A Visual Guide to Deflation

lol, it’s sad but the majority of people actually believe this is true. congratulations on drinking our scam monetary system’s kool-aid.

@John and everyone else. I am not sure why people thing that vicious cycle will result in total oblivion. Yes, prices will get so low, that people will just go out and make purchases again, then companies will higher people again, etc, the point is, that during this time there has been lots of joblessness, destruction of income, savings, etc. It may get back to normal eventually, but there is great loss along the way.

This is Keynesian nonsense predicated on a poor definitions and bad reasoning.

Prices Fall … Companies make less profit on cheaper goods.

Why did prices fall?

Was there some general increase in productivity? The new iPhone is better and cheaper than the old one; is this a Bad Thing?

Was the money supply reduced? Is that a result of the Fed destroying the money it had earlier invented and lent into the economy? Or is it due to previous loans being paid back?

Are the companies making less in real terms or nominal terms? Is Apple making less profit now that the iPhone is cheaper?

This sort of ex nihilo analysis is fundamentally broken.

Hoarding $1000 under your mattress becomes a good investment strategy, because the value of money is going up. … Consumers have little reason to spend and make big purchases if they know the price will always be lower.

Bullshit, pure and simple. I wouldn’t call it a “good investment.” Right now we make a few percentage points on our money by sticking it in a bank instead of a mattress; that doesn’t stop people from buying stuff. If the claim was true, then every innovation, every productivity increase would move us one step closer to economic armageddon.

the price of cars will go down, as will the price of steel used to make the cars. but labor is sticky in the downward direction.

But what if the reason the cars are getting cheaper is because the steel is cheaper, due to, say, some innovation in refining techniques? Or what if some innovation increased labor productivity? Why should either scenario reduce wages?

Credit tightens, less money is loaned and therefore spent.

And, if the author bothered reading his own work, savings would increase. Guess what effect increased savings has.

There is a remedy. By [the Fed] lowering the [interest] rate, the money and credit supply is increased.

First, he has cause and effect reversed. The Fed sets a target interest rate, and then manipulates the money supply until that interest rate emerges from the market. This says nothing about whether that target is the “correct” value.

The deeper problem is he (and his Keynesian fellow-travelers) ignore the details of why some “deflation” is occurring. The author lists the following causes:

*

Central bank raises interest rates to control inflation
*

A bubble is burst causing banks to fail
*

People default on their loans

Despite the latter two likely having different causes, the Fed solution to all of them is money-supply inflation.

Liquidity Trap

It is true that the Fed cannot, by its increasing of the money supply, cause the market to emit an interest rate less than zero, but that’s entirely incidental to the nature of how the Fed “stimulates” the economy, namely inventing money and loaning it out. The unspoken concern is not about the interest rate, but about the fact that entrepreneurs and investors are having difficulty determining profitable investments even with such low-interest loans. The root causes of such apprehension are largely uninvestigated and simply assumed to be unresolvable without government intervention.

[alternately] The government can inject money into the economy with massive spending.

And where does the government get the money? Why it either has to tax it out of the economy (unlikely during a recession), or invent it… which is precisely what the Fed does (in fact it’s where the government gets the money). So the only difference from the Fed is that the government can skip over those apprehensive investors who are actually looking for a profit. The “comparative advantage” of government spending is that it can be wasteful and not care; if history and basic analysis of incentives are any indication, that’s exactly what they’ll do.

So, with the Fed’s “solution” we get bubbles in whatever Wall Street invests in. With the government’s “solution” we get bubbles in whatever the bureaucrats and lobbyists spend on.

What they are seeking to do is reestablish the very conditions that contributed to the failures in the first place.

MORE of these visual guides please !!

Oh god, this is the worst comments section for anything ever. Wallstats, good work, and ignore all the tards who come here to post why they think you are wrong.

I appreciated your visual guide to deflation right until I got to your mandate for governmental intervention by fighting a correction with inflation. It’s a correction for a reason, namely, to destroy and revalue the distortions caused by inflationary policy. Deflation should be valued and embraced as such. That sundry industries and workers therein the bubble economy can be misplaced is a sad thing, but that doesn’t make it legitimate to prop up such parasitic industry at the expense of what a rational economy could be support.

As ‘Mike’ above pointed out to lengthy and solid effect, there is no rational justification beyond a statist justification to continue inflating. Inflating again only ensures that no lessons will be learned and we’ll be sure to replicate this whole boom/bust yet again, most likely in the lifetimes of our children. It it neither responsible nor just to toss such a grenade into our childrens’ future when we have so much evidence to support the abolition of these very unstable and confiscatory policies as fractional lending and leveraged inflation.

As Avery Hackman said above me, Mint.com has just lost me. If I want to see Keynesian hedonist economic policy being championed, I’ll turn on the boob tube, thank you.

Dan wrote “We live in a place where we share responsibility for Roads, Schools, Police, Fire, Military etc.”

Do you realize that “Roads, Schools, Police, Fire, Military” only constitute about a third of all government spending?

From Cato’s blog today: “State/local fire, police, and corrections spending amounts to just 4 percent of total government spending in the United States.”

http://www.census.gov/govs/estimate/0600ussl_1.html

Military, Education and Health Care are biggies, but the private sector is being crowded out of the last two, and the problems are only getting worse for them.

“That government is best which governs least”

Wow. I don’t completely understand all-things-economics, but from what I can see, most logical and thoughtful explanations conclude that this chart is bogus. Then there’s comments that start with various themes of the old “Bush lied, people died” or some other angry, cynical comment that has nothing to do with economics. These comments spewed some kind of hateful message and then agreed with the post and chart.

Now, I’m not big into politics of either side, but the logical comments supporting fiscal conservation kinda made sense to me. The other side of the comments made me feel like I was hated and had done something awful to the commenter just by showing up here and reading.

To all the people who hated GWB, I get it. I didn’t like him much, either. But that doesn’t mean that being a fiscal conservative is somehow evil, greedy, or manipulative…. it’s actually quite the opposite if you think about it long enough.

Love it!

Hmmm all very interesting stuff, really makes me wish I studied something useful in college…
Any way, I’ll take a crack at this thing.

I think that the best way to have prevented this from happening in the first place would have been to either
A. Not print money (or)
B. Not print more money then what is held in gold

My logic (if you’d call it that is that a lot of confusion occurs when a pay check is reduced. As was pointed out, no one wants to go from making 10 bucks an hour to 8, even if it means that 8 dollars=11, it’s too psychologically frightening.

With a “moneyless” system, however you don’t have to worry about being the greedy bad politician who is lowering Minimum wage, because there was never a minimum wage in the first place. A dollar today would have the same value as a dollar had when the US dollar came to be. It’s value would be rooted on the value of gold (or whatever preciousness it would be valued on).

Of course, the ‘moneyless’ boat sailed out along time ago. The Inflation/deflation system has it’s tentacles too thoroughly around the economy for it to be shaken off (at least IMO).

Instead, if/when a cycle such as the deflation one occurs, the wise idea IMO, in addition to other things, would be to increase tariffs.
I know, there’s much hissing and gnashing of the teeth, but this is the logic (again most likely stretching the term:)

IF prices go up on foreign widgets, that means that purchasers gain a strong incentive to buy domestic (duh) and that domestics prices can afford to go up, since foreign buying prices are artificially raised to what ever the tariff tells it to be. Then prices go up, companies make the bones, and can afford to hire more people. Isolationist though this may be, it is what needs to happen in instances of deflation IMO, at least temporarily as an aid to help with deflation issues. Obviously if it is a state or local issue then state or local tariffs are called for.
Really a free global market only benefits the ones that are capable of competing in it, as that isn’t the majority of the American people, I can’t see how its in our nations interest.(though I am more then happy to learn:)
OF course, with things like NATO and other free market obligations, what can many do now? Stop the people who keep those things in place. duh.

(Crazy rant start)
I say people start using the system to rebuild the system. Voting, yes protesting great, but what about lobbyist groups? The power of the dollar rivals the power of the vote, and I am sure if the cash is right many would be politicians would champion the cause if it meant they’d have the doe to get elected. Imagine the amount of power the honest voter would have if lobbing was eliminated. Use lobbying to end lobbying. Sounds just crazy enough to work.(Crazy rant end)

When Reddit said

“The root causes of such apprehension are largely uninvestigated and simply assumed to be unresolvable without government intervention”

I am tempted to think that the cause of such apprehensions is a many faceted thing. Lack of ambition (guilty) is one of them, sub-par education another.

ITS BULLSHIT…JUST LIKE THE BIG LIAR OBAMA IS…..HA WAKE UP!