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But Con, don't we have stagflation?
Definition: "Stagflation is an economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a period of time."
The supply of money and credit is exploding from the Fed, and while the CPI fell 0.1 in August it was preceded by a 0.8% increase in July and was still 5.4% higher than August 2007. So really prices are increasing save for energy and food while our economy tanks.
What do you think?
While it does acknowledge money and credit supply, it ignores many areas of prices that are up (food and fuel prices are actually up on a year-over-year basis, not down. People who look at just the month-to-month numbers will necessarily be deceived as to what the long-term trend is).
Second, there is nothing wrong with "gradual" deflation. We had it from 1800 to 1913. That is, the dollar was worth more at the end of this period than at the beginning. I guarantee you workers appreciated this. Bankers did not. During this time period the country did not lack for prosperity and attracted a massive wave of immigrants who came here to join in the prosperity and helped make the country even greater.
What we are really witnessing now is a panic, not a straight-out deflation or inflation. Nevertheless, monetarily, I would argue we are still in inflation (and even better, stagflation), going by demand/ "zero maturity" money as a particularly important measure. This is the "money" that is accessible to regular people, and circulates in the real economy.
Comparisons to 1929 fail on at least one key point: the US is a debtor nation now, not creditor. That means the dollar falls long-term as we cannot support our debt, and we "import" inflation -- regardless of what is happening with credit and money supply back at home.
These conditions did not exist at the same time in the US until now, so comparisons to the Panic of 1873 or the Great Depression are missing a key element.
A cynic might even suggest that the dollar has only rallied of late because arrangements have been put in place to allow foreigners to "launder" bad debt back into the US (some but not all of which was originated here), where the US authorities will then monetize it. This implies that the recent dollar rally will be coupled with a fall that is just as bad.
http://www.itulip.com/forums/showthread.php?p=5...
Also I should point out we are in negative real interest rates right now, which is inflationary. It is tough to keep commodities down with that kind of backdrop (yes, demand for commodities will fall, but supply also falls as production is cut back due to cost and financing pressures).
I tend to agree more with Morgan on this issue. The long term trend for the real economy is stagflation. What I mean by "real economy" -- If we called every credit market or stock market decline a "deflation", would that really mean anything? Not really , because which market are you talking about? Further, what of people who aren't participating in these asset markets at all? For those that own no house and for whom expenses are more important than stock prices (or who own no stocks), this all doesn't feel very "deflationary" to them.
Maybe we can agree that its 1930s for the bankers (and those with a lot of home equity), and 1970s for everyone else!
You make an error here that seems common in most analysis of the market corrections happening today. You assume deflation is a bad thing. It isn't. As a matter of fact, mild deflation, in the absence of government intervention, is the natural state of any economy. A stable currency implies just that. The amount of currency in circulation stays relatively unchanged while the amount of goods and services chased by said currency increase leading to a mild, but noticeable, deflation in asset prices as well as goods and services as the competition for the currency heats up. The type of deflation that the US experienced in the 1930's and today was specifically caused by the government's attempt to avoid the simple laws of supply and demand by creating more and more currency out of thin air in an effort to target the rate of inflation. Devaluation of the currency was caused by increasing levels of debt encouraged by the central bank(s) through the use of artificially low interest rates (would you loan money for 1% interest?)and by the government through overspending and overborrowing. This has led to unsustainable debt levels and misallocation of resources that must by liquidated. Demand for currency has increased, leading to deflating "asset" prices due to the fact that governements, companies, and individuals SPENT TOO MUCH AND THE BILLS ARE COMING DUE! It is that simple. Period. End of story. The longer government and central bank officials try to drag out or avoid the correction, the more painful it will be in the long run. This is not an issue of a "panic" causing "asset" values to fall below their fair value. This is an issue of "asset" values falling TO their fair value in terms of a highly demanded currency. The "rampaging deflation" should not be stopped. Instead, it should be allowed to happen as quickly as possible so the economy can get back on sound footing with lower spending, higher savings, and cash strong "fortress" companies (like Berkshire Hathaway) ready to move the US forward. Unfortunately, that is not what Congress and the Central Bank have decided to do. They have decided to create a hyperinflationary scenario in order to ateempt to avoid falling stock and house prices. It is likely these efforts will fail, the extra "liquidity" will get driven into commodities, purchases of real goods will accelerate and there will be food, fuel, and metals shortages on a worldwide basis. We will face, on a worldwide basis, the crack-up boom, as described by Ludwig von Mises, as paper currencies around the world get destroyed in an effort to capture as many physical natural resources as possible. It is likely we will see stagnant salaries, stagnant paper asset prices, stagnant housing prices, and skyrocketing physical asset prices (and costs of living). I hope to all the gods I'm wrong, because this will lead to resource wars in an effort to control oil fields, fresh water sources, uranium mines, gold stockpiles, productive farmland, etc, etc, etc, but, with the current crop of world "leaders," I don't see how it can be avoided.
I guy by the name of Copernicus came of with a model of how the universe revolves around the Earth - this about the same state of development economic thoery is in.
In geocentric models the spheres were most commonly arranged outwards from the centre in this order: the sphere of the Moon, the sphere of Mercury, the sphere of Venus, the sphere of the Sun, the sphere of Mars, the sphere of Jupiter, the sphere of Saturn, the starry firmament, and sometimes one or two additional spheres.