This is from April 2009, but in light of recent data points, I thought it was worth revisiting:
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Source: Jess Bachman via Mint
Don’t do something – just stand there!
http://www.nytimes.com/2010/09/06/business/economy/06housing.html
Let me see, the #1 asset of most households going into a free fall, that negative wealth effect should stimulate consumer spending and help the job market. Just think if BB applied the same free market approach to the stock market – tough love for asset holders all around, prices are just too damn high! We need the shock treatment of dramatically lower asset prices to keep this recovery on track!
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BR: We went over this article earlier today, in case you missed it. I am not certain you will see the nuance of the reasons to let housing fall to its actual price level….
According to what I have read about the era of Alan Greenspan, the prices of all assets are currently distorted so severely due to extreme levels of debt everywhere that deflation is truly necessary a this time.
The “Deflationary spiral” does not go on forever.
Very cool, but um shouldn’t it be in Manga form with a Japanese example. Oh and a hint that house prices declining already represent serious asset deflation.
I am surprised there isn’t a chorus of gold bugs and Austrians telling you how this is all wrong.
Machiavelli999: Because they can’t prove they are right. And hopefully they are out grilling right now. ;-)
Good theory and great campfire scary stories but, in reality, not all dis-inflation is deflation. If a bubble bursts and prices fall as a result, is that deflation or normalization? The Fed would trot out the deflationistas and proceed to scare the crap out of everyone with logic such as the above, and continue to pump the price of everything in ‘controlled’ and ‘intelligent’ and ‘managed’ inflation. Which is supposed to be good, pure, and as God intended it.
In reality, prices will stabilize at some level if the Fed provides enough liquidity and credit remains available. People aren’t potted plants. Prices don’t fall to zero. People will start to buy when prices fall to levels that match income and wealth. The Fed has no control over income but, I suspect, tries to manipulate wealth by pumping the stock market and making liquidity available to market pumpers. It hopes to influence incomes by influencing wealth caused by inflation.
In reality, the Fed is addicted to inflation, and is only against the inflation it doesn’t think it controls. Deflation, aka price normalization, is the economy repudiating the Fed’s manipulations and perpetual bubble orientation. Price normalization is the economy telling the Fed it screwed up. The Fed counters this by treating price recovery as a terrorist. The resulting pumps keeps prices too high to match incomes and adjusted wealth.
Thus, the Fed is the enemy of this recovery and prolonging the recession by fighting the normal corrrection to its 20+ year inflation binge.
So its either massive government spending or we are totally screwed….OK. Since you have outlined what happens if we cannot stop a deflationary spiral and that as we all know the only way to stop us from going into a black hole is government spending….why would anyone vote Republican now? And if the GOP makes gains in the House and Senate what will they do to help fix the mess they helped get us into in the first place?….Yeah right…
Barry are you endorsing this idiocy?
Where is the actual example of a deflationary spiral? Don’t say Japan; prices flat even for 2 decades is not a deflationary spiral.
A bust can cause sharp deflation, but in a free society–ie, free of blankets of gov’t intervention to prevent price adjustment [USA for example], it is self-correcting. The ratio of money/goods prevails.
Not to say the the Democrats are doing a stellar job – they should be doing more with the majorities they have – with or without Republican obstructionism…
BR, thanks for the softball slow pitch. This ‘deflation’ crap is so easy to debunk, there should be a price of admission just to throw feces at it. I really don’t understand why so many otherwise smart people can’t differentiate between price normalization and text book deflation theory. Then, after thinking through the obvious, why don’t they follow the trail back to the source and ask the Fed why it keeps pumping the price of everything as a matter of routine. Then ask why prices that don’t match incomes are a good thing, meaning why don’t they just let prices fall. Then, they can pump again from the bottom if they choose and start another 20+ year bubble cycle.
When I read: “Whoa. There has got to be something else that can be done. You know, besides the Fed…”
I thought for sure the answer was going to be: “Well there is, the government could print a little money (NOT borrow it, just print it) and pay some of its bills with this newly-printed money. Taxes could be lowered because the government would be printing some money instead of borrowing it, which would put more money in people’s pockets, which would spur more economic activity. Eventually, prices would rise and the government could stop printing and go back to borrowing money from the banks.”
Instead we get the sheople answer: the same thing as above but with the government asking banks to print the money and loan it to them at interest, instead of just printing it themselves. What a joke.
I emailed this to 5 people & got back 5 this is wrong. when I asked for particulars I got 4 it just is and one Glenn Beck says so buyin’ more gold. jeez it’s a good thing I got lots o’ beer.
@dead hobo you’re right there is a difference between deflation & price normalization, but when UE is 10%+ it’s a real thin one.
I never understood this idea that people won't buy things when they know they will get cheaper in the future. Really? No gas for your car now, no food, no hair cut, no AC, no college, no healthcare, no cable, no holiday if it'll be cheaper next year? I guess with this kind of logic nobody buys clothes at full price because they know there will be a sale soon, nobody buys electronics because they only get cheaper if you wait, and nobody moves out of the dorm or their parents basement if houses are expected to get cheaper in the future. This is the kind of ceteris paribus-assuming, formula-driven logic that only economists can love: A world where all prices go down together and price alone dictates behavior, where lower prices do not free up money to buy other things, where globalisation is not a factor, where deflation does not force companies to achieve world-class productivity and where all deflation leads to downwards spirals that must be avoided at all costs. BS!
I’m all for a big dose of deflation. I’m retired with $1M in CDs. Both houses paid for. I drive a 99 pickup. Deflate away please.
i suppose the great depression really never happened. and food prices never collapsed after all every one needs to eat right?
So, “massive government spending” magically creates jobs and income. How wonderful. This should be read to all children at bedtime!
Unfortunately, in the real world, government spending of moderate or massive amounts means spending the incomes or wealth of taxpayers. Strange they leave this part out. Let’s forget the part where we tax incomes, properties and activities to pay it all back whether next year or next generation.
There are some merits to the stimulus argument in concept, but not when study after study shows our own government stimulus expenditures are negative return “investments” that generate less income even over the long term and even with absurdly low interest rates on the borrowing. Bottom line is deflation needs to happen in real terms for certain asset classes, including housing in most locales. If we all bear the full present value cost of our retirement years, savings needs to be much closer to 20% and the only way to get there reducing 1)consumption, 2)housing or 3)taxes.
It is true inanity to devise public policy promoting increased spending on consumption and housing with borrowed money.
Barry, Barry, Barry,
Unlike the time of the Great Depression, today’s population consists of tens of millions of retirees on fixed income. A general lowering of prices would increase their purchasing power and stimulate spending.
Unlike the young, old people have to listen to the ticking clock of life – i.e., that trip to Bali may be cheaper in a couple of years but I might be dead by then, or too decrepit to enjoy it as I might were I to do the same today.
I expect deflation will get markedly worse this fall. The Christmas shopping season a complete bust. I am hoping to be wildly wrong.
Back in pre-historic times, basic economic policy was presented in college that during booms, taxes should increase and savings encouraged. During busts, taxes should decrease and savings spent, generally on government projects. At its most basic, it’s how humans can best deal with feast and famine scenarios – a concept rehashed by just about every civilization since human beings first managed to chisel some marks on a stone.
So what I really don’t understand is why, thousands of years later, there’s still any debate about what actions to take. To maintain social stability, during a famine, you feed people. The famine we face today is deflation. The best course of action against the zero bound – create jobs.
PS Not a big fan of the new $50 billion transit spending bill proposed by Obama as the funds will in all likelihood go to a handful of defense contractors who handle civil infrastructure. Conveniently timed with a drawdown in Iraq. But I guess it’s better than nothing.
I’ve written about this before, I’ll reproduce the relevant bit below:
American consumers collectively owe 830.8B in revolving credit alone. People buy stuff on their credit cards with 14% interest rates. 631.8B worth of stuff. In his speech linked above, Bernanke defines moderate deflation as “a decline in consumer prices of about 1 percent per year” when talking about Japan. You know how much cheaper that stereo would be if you waited a year instead of paying for it with a credit card (assuming one year to repayment)? 14%. Hell, maybe even more as some new, fancier stereo comes out.Does this sound like the kind of population that will outright stop consuming and let the economy collapse over price declines that are a couple of points?
People buy new cars or change leases every three to five years. Americans love new, shinny shit; they line up outside of stores over night to get the new sneakers first; they bid twice the price of things on eBay to be the first to get them; they camp outside Apple stores for iPads; they buy clothes at full price knowing full-well they’ll be half the price in two months; and they charge it all to credit cards with 14% interest rates. People freezing all their spending over tentative price drops is the last thing I’m concerned with, seriously. It is true that people are lowering their debt burdens right now, but I suspect it’s more of a case of having been over-extended than anything else. As interest rates drop and debt gets repaid, people will begin to lower their monthly debt burdens, which is when the price drops are going to make that extra money itch in the pockets. It’s really only a matter of time before people go back to paying $200 for a 5th pair of sneakers and putting it on their Capital One. Seriously kids, the consumer is going to be alright.
well, they have stopped buying new cars almost (going from 16-18 million cars per year to just better than 11.5 million). mostly people are buying used and we can tell this because the market for used cars is really hot. why do people buy i-pods and other gadgets instead of what other do? mainly cause they are cheaper to own that other generations buying habits. in the past people would buy land. try to do that when your incomes have tanked. people would buy houses. even that was driven by the more affluent generations (the younger generation didn’t participate. even with almost free and easy credit couldn’t afford it). most didn’t buy cars, same reason.
i am wondering if deflation is really driven by incomes collapsing. like here in the US. and that has been happening since about 70s. wonder why that is. the only reason the economy from 2001-2007 looked as good as it did, was the easy credit. without which we have what we have now, and easy credit ain’t coming back. this decade. and demand will tank with it. which means jobs go with it
Unreal! Even on this blog, people STILL conflate government capacity to spend with Aunt Millie home budget!
FMP!!
Deflation. Coming to a place near you shortly IMHO. Japanese solutions to asset bubbles bursting produce Japanese outcomes, which shouldn’t really come as a surprise to anyone.
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