Here’s a Tweet that caught my eye.
Problem with deflation is- Why buy anything if you know it will be cheaper in the future.
— david moravec (@davidmooravec) May 2, 2020
“Problem with deflation is- Why buy anything if you know it will be cheaper in the future.,” responded one person.
Let’s investigate that question starting with a look at the CPI basket.
CPI Percentage Weights
Why Buy Anything Questionnaire
Q: If consumers think the price of food will drop, will they stop eating?
Q: If consumers think the price of natural gas will drop, will they stop heating their homes?
Q: If consumers think the price of gasoline will drop, will they stop driving?
Q: If consumers think the price of rent will drop, will they hold off renting until that happens?
Q: If consumers think the price of rent will rise, will they rent two apartments to take advantage?
Q: If consumers think the price of taxis will rise, will they take multiple taxi rides on advance?
Q: If people need an operation, will they hold off if they think prices might drop next month?
Q: If people need an operation, will they have two operations if they expect the price will go up?
All of the above questions represent inelastic items. Those constitute over 80% of the CPI. Let’s hone in on the elastic portion with additional Q&A.
Questions for the Fed – Elastic Items
Q: If people think the price of coats will rise will they buy a second coat they do not need?
Q: If people think the price of clothes will drop, will they stop getting dressed?
Q. The prices of TVs and electronics drop consistently. Better deals are always around the corner. Does that stop people from buying TVs and electronics?
Q. If people thought the price of TVs was about to jump, would they buy multiple TVs to take advantage?
Q. If someone needs a refrigerator, toaster, stove or a toilet because it broke, will they wait if for some reason they think prices will decline?
Q. If someone does not need a refrigerator, toaster, stove or a toilet will they buy one anyway if they think prices will jump?
For sure, some people will wait for year-end clearances to buy cars, but most don’t. And if a car breaks down, consumers will fix it immediately, they will not wait for specials.
Stupidity Well Anchored
The above questionnaires thoroughly debunk the Fed’s ridiculous spotlight on “inflation expectations”.
Yet, how many times have you heard “inflation expectations are well anchored“?
In reality, Fed stupidity is well anchored.
The one and only time inflation expectations matter is in a state of hyperinflation when it pays to buy nearly anything and barter it.
No Economic Benefit to Inflation
My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.
There is no economic benefit to inflation but there are winners and losers. The winners are those with first access to money, namely the banks and the already wealthy.
The Fed complains about income and wealth inequality but they are the primary source.
BIS Deflation Study
The BIS did a historical study and found routine price deflation was not any problem at all.
“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.
For a discussion of the BIS study, please see Historical Perspective on CPI Deflations
Asset Bubble Deflation
It’s asset bubble deflation that is damaging. When asset bubbles burst, debt deflation results.
Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive build up of unproductive debt and asset bubbles that eventually collapse.
Mish
The Fed…and by extension the U.S. government…has one and only one interest in creating “manageable” inflation, but it is not a small one: Under deflation, U.S. national debt becomes much harder…not easier…to pay off than under inflation. Literally, not figuratively, the entire (current, debt-ridden) system blows up if long-term/severe deflation takes hold. Which it is.
Well i don’t think your questions are very realistic and quite nonsensical Mish. They don’t consider the secondary effects of deflation if someone loses their job or savings/assets due to deflationary environment. Also you assume everyone in America is in your economic situation.
Q: If consumers think the price of food will drop, will they stop eating? no but they will eat lower priced items and stretch their dollar
Q: If consumers think the price of natural gas will drop, will they stop heating their homes? nope. they will stop paying and move to “THAW” and other public assistance programs
Q: If consumers think the price of gasoline will drop, will they stop driving? Maybe. They might be out of a job and will definitely curtail discretionary driving
Q: If consumers think the price of rent will drop, will they hold off renting until that happens? yup if they lost their job
Q: If consumers think the price of rent will rise, will they rent two apartments to take advantage? nonsense question
Q: If consumers think the price of taxis will rise, will they take multiple taxi rides on advance? nonsense question. I guess I’ll have to walk instead of taking a taxi
Q: If people need an operation, will they hold off if they think prices might drop next month? most people yes. rich people no
Q: If people need an operation, will they have two operations if they expect the price will go up? nonsense question
Q: If people think the price of coats will rise will they buy a second coat they do not need? I guess I’ll have to make do with the coat i have and put off getting a new one. especially if i lost my job or savings in the stock market
Q: If people think the price of clothes will drop, will they stop getting dressed? no but they will reduce spending or buy off brands and make do.
Q. The prices of TVs and electronics drop consistently. Better deals are always around the corner. Does that stop people from buying TVs and electronics? yes if they lost their job and don’t have a choice anymore.
Q. If people thought the price of TVs was about to jump, would they buy multiple TVs to take advantage? nonsense question
Q. If someone needs a refrigerator, toaster, stove or a toilet because it broke, will they wait if for some reason they think prices will decline? yeah if they dont have a lot of money like most of america
Q. If someone does not need a refrigerator, toaster, stove or a toilet will they buy one anyway if they think prices will jump? another nonsense question
Endless growth is the morality of a virus cell.
Thanks Mish. Some good food for thought.
I think one needs to differentiate between debt deflation and deflation from productivity. The later is good the other bad
I don’t think debt deflation will be pretty, but it’s much better than printing up $$s to bail out the crony capitalist and shifting the cost onto the general population. Negative consequences need to occur when business make poor decisions; otherwise, they’ll continue to behave like scoundrels.
“Why buy anything if you know it will be cheaper in the future?” I don’t know, maybe because we aren’t the immortal elves of Rivendell and we get old and die someday? The “people will always wait till it’s cheaper” crowd seems to miss the point that present goods are more valuable than the same goods at some future time, full stop. You can (pretend to) know for certain something is going to be cheaper eventually, but still make a rational decision to get it today if your discount rate is steep enough. Even more frustrating, half of these people crapping themselves about deflation seem to think that humans are rational enough to forego spending on everything indefinitely to save a few pennies, but are simultaneously so irrational that we need nudges in the right direction for any important decision so we don’t get bamboozled.
I have to take issue with your statement: “There is no economic benefit to inflation.”
I think a better statement is: There is no NET economic benefit to inflation — some are winners at the expense of those who are losers.
There is no economic benefit but yes there are winners and losers. I revised to something I have stated many times actually.
There is no economic benefit to inflation but there are winners and losers. The winners are those with first access to money, namely the banks and the already wealthy.
Looking for the source of income and wealth inequality? Look at the Fed.
New credit growth falls below interest payments
Economic growth is by definition exponential. Even at 1%. It is compounding, that is how you have the device you wrote this on.
What would be so magical about linear growth? Or no growth? Should we manage to that?
Managing to linear growth is as dumb as managing to exponential. It’s the supposed management that is the problem.
If people don’t want growth and our “leaders” force them into “growth” then that is bad.
There are so many important things in the world, like stopping war and ending the Fed. Maybe those things are harder than vacuous statements like this?
+1
In the limit case, the statement is mathematically true. Assuming the universe is not infinite (or effectively so, as in not also growing exponentially), at some point growth will have to stop.
But we’re some ways away from running into growth constraints imposed by too small of a universe…
In general, an exaggerated estimation of our own importance in the big scheme of things, is a much more common pitfall of today’s academics and “decision makers,” than any misplaced faith they may have in continued exponential growth.
On any scale of any real importance, we don’t matter at all. Nothing we do, or can do, reaches above even background noise. We could simultaneously unload every nuclear weapon ever built, and even on our tiny little earth, most life would wake up the next day and go on about their business like on any other day. Darned near nothing, anywhere, gives a toot about whether we have Iphones and Twitter, and whether us burning some oil manages to adjust some thermostat a degree or two in either direction.
The only thing our limited little selves have learned to do, is prance around trying to convince eachother we are somehow important now. Because we have an IPhone, or because The Fed handed us a few billions, or some buffoon brigade dimpled some chads for us, or some Swedes deemed we are somewhat less completely ignorant than most of our fellow irrelevant ignoramuses.
limited in our ability to service additional debt…which effects growth
Only if the measure by which you attempt to measure economic growth, in reality does no such thing, but instead only measures debt growth.
Good point!
The negative to inflation is that it is robbery. It robs the value of earnings and savings to make money for nothing for banks and other institutions which benefit from inflation without production.
I’ve always defined “economic progress” as “getting what we need and want for less labor”. That’s fundamentally deflationary.
+1
Wealth is the inverse of scarcity. The less scarcity you face, the wealthier you are.
While prices are a manifestation of scarcity. Things in abundance are cheap.
Ergo, prices and wealth vary inversely.
Also, notice the generality. It makes exactly zero difference if we’re talking about prices of something arbitrarily labelled “assets” or “consumer goods.” The less one has to pay for an X% share of any given estimated future earnings Google may have, the wealthier one is. Yet, sadly, not one well indoctrinated member of the idiot army in a million, seem able to comprehend something so trivial and fundamental.
If you buy a house plus interest on a 30-year mortgage, you will never spend anything close to that for the whole life. That’s enough math to understand the fraudulence of the CPI chart. Then again, CPI is not about math, but manipulation.
The Federal Reserve exists primarily to create the inflation that allows the federal government to finance itself by selling bonds at negative real rates of interest whose principal will never be re-paid. Simply rolled over in perpetuity (or until the scam becomes too obvious).
Debt & Politics is why a little inflation is targeted.
In a deflationary scenario pressure builds to reduce wages, or at least they don’t rise. People don’t feel so well off as they earn less or don’t grow their income, so the incumbent Government are considered to have done a bad job and are less likely to be re-elected.
As mentioned debt devalues & would cost more to repay, if that was ever the intention.
The problem is debt. Debt that can never be repaid. The problem is politicians that refuse to deal with it and make the proper adjustments. Their solution is the keep borrowing. Welcome to 2020.
Not a new thing. They papered over everything back in 2008/2009 either. Remember QE? Also global debt level is still continuing to increase.
It has to increase….otherwise you have collapse. Need new debt money to make the old debt money whole (interest payments).
Agreed
Agreed. They sure did.
I understand that. I was simply pointing out that the OP was incorrect i.e. papering over old debt using new debt is not some new thing specific to 2020.
I have a few spare computers, cars and refrigerators sitting around.
I bought them because I feared the price would go up even more and I wouldn’t have the money.
I also have a spare refrigerator, but in my case it was just sitting in the garage when I bought my house. I unplugged it and have been trying to give it away. It is a late model french door side by side in good clean condition too. Why no takers? It does not get more deflationary than free, unless I offer to pay someone to take it. But what the garbage company and recyclers want just to come haul it off is crazy for a working fridge. Goodwill and other cheritable organizations no longer take most things with an electric cord for fear of law suits.
I am seriously thinking about buying a new TV and leaving it in the box, because the supply chains are broken, and they may never be cheaper than they are right now
If consumers think the price of apparel will drop, will they stop getting dressed?
You forgot one.
Based on the memes around the lock-in the answer is — yes.
Thanks I will add that one
Um, just look at Reddit, I am shocked at how many people are going to Zoom work meetings with only a tee shirt on.
The only negative to having routine deflation is that people will not be comfortable getting their annual cost-of-living wage decrease (or social security reduction).
The issue is really natural price discovery is determined by markets, but that price discovery has been manipulated by monetary intervention. Banks have a vested interest in keeping inflation going, and the Fed is simply an extension of the banking system, and works in their behalf.
JDOG, that statement is SO 1950’s. LOL, I say that in agreement by the way, but along about the time Johnson intervened in Vietnam and Nixon closed the gold window allowing markets to set values via price discovery became impossible. Prices are now so disconnected from reality that we have millions and maybe tens of millions of adults without a roof of their own over their heads and close to 40% of all US minors living in poverty.
I think this write-up is better than your inflation/deflation debate write-up. It asks the right questions and in a Socratic manner which is helpful.
I don’t think the FED is stupid … I think it has goals that are plain for all to see (enrich the richest and have everyone else pay for it one way or another … privatize assets/profits and socialize debts/losses … support crony capitalism) and generally achieves them with a focus solely on the present because “In the long run we are all dead” …
I do think the FED is foolish, unethical, immoral, genuinely evil “in the long run” …
Yes.
Never lose for a moment who owns the Federal Reserve. Not the taxpayer, but big Wall Street banks.
Follow the money. Always.
It is a known fact that high wealth individuals adapt better to inflation than low income people.
Sure, it’s obvious that an x% cut in spending power to a larger income/wealth has far less impact than the same x% cut in spending power to a smaller income/wealth. Precisely because the expenditure required for each to acquire any good or service is identical.
Make all expenditures to cost a percentage of a person’s income/wealth and the story changes drastically …
The impacts to the smaller wealth/income will lead to poverty much faster than the impacts to the larger wealth/income. Obviously the wealthier will still moan (we see it all the time when “times get tough for the wealthy too” stories appear) because they want a $3.3M/$80K house/car rather than a $350K/$40K house/car or a $150K/$15K house/car.
It would take totally out-of-control hyper-inflation to cause any very wealthy people to worry about the price of their food or gasoline on a daily basis. The not-so-very wealthy will always feel the crunch sooner.
It’s also a well-known fact that any economic system that sets increases in income/wealth by a percentage of income/wealth while it sets expenditures at fixed cost is guaranteed to foster an ever-increasing wealth gap over time. Simple math ….
That principle is exacerbated when the percentage of increase is actually increased with increasing income/wealth … as we often hear within companies “individual contributors will receive a 3% increase/bonus … management will receive a 7% increase/bonus”.
All to explain that capitalism’s goal and means to that goal is the accumulation of more and more share of income/wealth into fewer and fewer hands. The “rising tide lifts all boats” euphemism is used to justify that, but of course the real principle (counter-intuitive) is “the rising tide lifts all bigger boats higher than all smaller boats in relation to the shore”.
“Trickle-down” economics just means that everyone but the 10% (or 1%, or .1%, or .01% as time goes on) eventually become peons … the ones the very top x% continually pee on …
It’s not that complicated. Low income people have no ability to adapt to inflation; their incomes and expenses do what they will, and they have little choice but to accept it. Meanwhile the wealthy can move their wealth into assets that appreciate faster than inflation, and come out ahead.
We all might agree/disagree on the definition of deflation/inflation or what will happen next, but I think we ALL agree that the Fed is stupid.
Have you considered that they might be part of a cartel of intelligent crooks?
Crooks are only crooks because they don’t have the aptitude to hack it without being crooks.
No little baby is born evil. He may be born ambitious. And when his limited aptitude don’t quite enable him to reach his unrealistic goals by being useful and honest……, sometime he may give in to temptation and head for Washington or New York.
Yet, how many times have you heard “inflation expectations are well anchored”?
…
Setting aside asset bubbles now bursting leading to deflation.
The Federal Reserve policy the past 12 years has been disinflationary. None other than Dick Fisher years ago as Dallas FRB president spoke that keeping rates low AND signaling that would stay low for a very long time (thank you Ben Bernanke) allowed business the luxury of sitting back and see how economy shakes out before committing to capital expenditures. If business knew rates low for only a short time there would be a stampede to lock in rates and commit to expenditures.
Also, remember that low interest rates is a 2 way street. Sure, someone can borrow cheap, but other side of equation (investor) has to settle for less interest income. Less income –> less consumption –> prices held in check.
Kocherlakota (when he was Minneapolis FRB president) gave a speech that low interest rates gave consumers low inflation expectations. Of course, now he is an uber dove and babbles about negative rates.
That I ever listened to what these clowns have to say (although that’s been a while), makes me want to bang my head. Greenspan’s double speak definitely takes the cake.