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Deflation explained
Monday, January 05, 2009
It's all about falling prices. Just think how far the computer and electronics industry would have progressed over the last ten years if demand hadn't been stymied by lower prices.
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9 comments:
Funny how we never hear the flip side to this story regarding inflation.
Maybe Bob Krulwich can use his patented "usual unusual" method of explaining how more debt will solve the problem of too much debt.
There is a little something wrong with that skit, the shoe manufacture and his employees are speaking English, shouldn't they be speaking Chinese.
So I suppose we must intice inflation to keep the sweat shops churning along nicely.
Most dumbest skit for the day.
Rany off.
These "economists" assume everyone will just wait to buy at a lower price. How does one wait on food? Does this assume prices fall to almost zero? No one is going to buy a Mercedes-Benz for $10K, $5K, not even $100? All the while, in plain view computers have generally always fallen in prices and completely debunk this "economic" theory.
If people can wait on buying the crap they dont need anyway, hay thats a good thing, savings go up, energy use is down, trade deficit gets better, etc.
I wouldn't buy any IC-only car at this time for any price. I felt forced by circumstances into my last purchase, and only a fool would buy a Mercedes-Benz internal combustion car given the possibility of the fuel disappearing entirely in the next 10 years.
On computers- I've often cautioned people to wait for the "next big thing" to come out, and then buy the computer they need at a discount.
But yes, we can't forget the fact that deflation is so scary that governments will do practically anything to avoid it- including run the risk of hyperinflation.
Thus here's my prediction, so far obvious in the PMI and grain spoilage numbers- deflation will continue at least through Q1'09, possibly well into Q2'09, but a lack of planting grains will hit this summer and turn into a major food crisis during Q3'09- which in turn will bring back inflation such that we haven't seen since the Ford Administration. We'll end the year with the dollar depressed to around 40% of its current value against everything.
That's the crux of the issue however the solution is not to spend again on shoes. The solution is to spend again with the purpose of innovating. The cartoon is simplistic but it did summarize the basic concept of the deflationary spiral. It also didn't offer much in the way of insight as to how to avoid it.
A deflationary spiral only occurs after an inflationary boom has pumped up demand to an unsustainable level. No junkie can avoid crash and withdrawal forever.
I can't believe this drivel is allowed on television. There is no such thing as a deflationary spiral in a free economy. It does not exist! Even in the most dire scenario, there is a subsistence level of economic activity that must take place. Long before then, entrepreneurs and speculators buy up assets, marking the floor for prices.
The Depression became Great because the U.S. government refused to let wages and prices fall. As now, the government trained the public to believe lower prices were on the way, because the artifical elevation of prices was constantly undermined by the market. If the government allowed prices to swiftly decline, they would hit bottom and begin a recovery.
Like a bad example of quantum mechanics, it is the government's actions that cause what they are trying to prevent.
So someone explain to me why it has been a bad thing that laptop prices having been dropping and dropping for years, and yet it did not cause layoffs at the laptop factory?
When my shoes wear out, I buy new shoes, I don't wait to see if there is a better sale tomorrow.
If I come into a bunch of cash, I'm going out today to buy a Ducati. I'm not going to wait until the price goes down, cause I want to drive it now. (Well, in the summer anyway).
This is only bad for superficial products that nobody would buy if they were not caught up in consuming for the sake of consuming.
I hope we are in for a good depriciatory round of rationalization of the consumer markets.
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