AP Lives In A World Where Inflation Is A Threat

By Big Tent Democrat, Section Economy
Posted on Thu Feb 05, 2009 at 09:16:57 AM EST
Tags: (all tags)

Share This: Digg!

In some other dimension:

Productivity was increasing at the end of last year at three times the expected pace while labor costs slowed significantly, underscoring that a deepening recession has taken away the threat of inflation. . . . Before the financial crisis hit with ferocity last fall, the Federal Reserve had begun to worry that rising inflation could become a problem threatening the economy. . . .

Buried in the AP story?

In another report, the government said that new jobless claims jumped far more than expected last week in an already dismal labor market and that there was no relief in sight for workers as mass layoffs persist.

Meanwhile, back on Planet Earth, Paul Krugman describes the deflationary threat:

Larry Summers has finally made the point I’ve been pushing for a while — that we’re at major risk of falling into a deflationary trap.

. . . Right now the CBO is saying that in the absence of a policy action the average output gap will average 6.8 percent over the next two years. Do the math: if anything like the historical relationship between output and inflation holds, we’re looking at major deflation. . .

We truly are flirting with disaster.

(Emphasis supplied.) And still the Beltway "bipartisan" BSers are fiddling.

Speaking for me only

< Jobless Claims Jump To 26 Year High: 626,000 New Claims | Lessons In "Journalism" From Mike Barnicle >

Legal

Nothing on this site should be construed as legal advice. TalkLeft does not give legal advice.

TalkLeft is not responsible for and often disagrees with material posted in the comments section. Read at your own risk.

AP Lives In A World Where Inflation Is A Threat | 23 comments (23 topical)

Readers Must Login or Create an Account to Comment

Crash course (none / 0) (#1)
by Coral on Thu Feb 05, 2009 at 09:21:02 AM EST

Looks like we are all in for a crash course in economics 101.

I have a question (none / 0) (#2)
by CST on Thu Feb 05, 2009 at 09:25:36 AM EST

That may make me seem pretty dumb...

What is so bad about deflation?

Prices go down...

It seems to me that the problem with deflation is not deflation itself, but the problem is that only really bad things cause deflation. It's an effect of a bad economy, but it doesn't cause a bad economy. Is that right? Or is there some other problem with deflation?

One thing I think it does (5.00 / 1) (#3)
by andgarden on Thu Feb 05, 2009 at 09:32:27 AM EST

is kill growth. That makes it harder to get a job, and harder to pay back your loans.


And... (5.00 / 2) (#5)
by kdog on Thu Feb 05, 2009 at 09:44:08 AM EST

manufacturers, distributors, retailers make less money when their goods fetch less money, which means no raises or pay-cuts for workers, lay-offs and no new hires.

Executive bonuses appear to remain unchanged though...I guess they are untouchable and deflation proof in our rigged market economy.

I think we all might be served by forgetting about the mental giants in economics, and look to the Amish for examples and leadership on how to survive in the 21st century...they're the only ones not suffering down in Kentucky right now. No electricity and high unemployent and they don't even notice, just keep on keepin' on. Gotta respect that...


: Is the (none / 0) (#8)
by coast on Thu Feb 05, 2009 at 10:14:54 AM EST

horse and cart market down as much as the auto industry? If so, we may be in trouble.

: finish it! (none / 0) (#13)
by wystler on Thu Feb 05, 2009 at 11:20:41 AM EST

manufacturers, distributors, retailers make less money when their goods fetch less money, which means no raises or pay-cuts for workers, lay-offs and no new hires.
and producers, distributors and retailers go out of business, leading to shortages in the marketplace.

: That's assuming of course (none / 0) (#14)
by blogtopus on Thu Feb 05, 2009 at 11:21:38 AM EST

that said companies are interested in no pay-cuts, lay-offs and new hires. There are more than a few who'd do that even when not necessary, and blame it on the economy.

In the short-term (1.00 / 1) (#10)
by Samuel on Thu Feb 05, 2009 at 10:41:50 AM EST

Long-term it fosters growth by flushing out economic inefficiencies. Real growth that is.


Deflation ... (5.00 / 1) (#4)
by Robot Porter on Thu Feb 05, 2009 at 09:35:12 AM EST

is both a symptom and a cause. Because if deflation continues it will result in lower salaries, fewer jobs, etc..


: and the cure. (1.00 / 1) (#19)
by Samuel on Thu Feb 05, 2009 at 03:57:01 PM EST

If you thought that the TV you wanted to buy (5.00 / 4) (#6)
by steviez314 on Thu Feb 05, 2009 at 09:44:30 AM EST

would be cheaper next month, you'd wait to buy it.

If the company who makes the TVs thinks you're going to wait until next month, it won't make the TV now or hire people to do it.

This deflationary spiral is hard to break, as we see. It's much easier to stop inflation, we know how to do that.


Interestingly (5.00 / 1) (#7)
by andgarden on Thu Feb 05, 2009 at 09:47:43 AM EST

I DO think that the TV I want to buy will be cheaper next month. Paradoxically, because so many people feel the same way, investment in new display technology and efficient manufacture is likely to slow, so TV prices may plateau or even go up.


: Free Market! (5.00 / 1) (#11)
by Samuel on Thu Feb 05, 2009 at 10:42:42 AM EST

They should have sent a poet.

If prices go down more than the cost of (5.00 / 2) (#9)
by esmense on Thu Feb 05, 2009 at 10:28:44 AM EST

production and the cost of doing business, because fewer and fewer people can afford to pay the real cost, the economy is in real trouble. Businesses shutter. Workers lose jobs. Prices continue to tumble, but only because still fewer people can afford to buy. This is very different from price decreases because of greater production efficiency, economies of scale related to increased demand, etc.

As a small manufacturer (very small) I can tell you that all through the Bush years the cost of production materials -- such as steel, rubber, urethane -- and, of course, transportation and shipping costs, increased very dramatically, while consumer prices did not. Last year we were forced, for the first time in 15 years, to very reluctantly and modestly, raise our prices. That price increase didn't entirely cover the increases in cost of goods -- or, the further increases we've experienced in the year since. We are certainly not the only business caught in this vise (one which has very bad implications for worker hours, wages, etc.); but how many want to or feel they can raise prices in this environment? We however are fortunate in running a very lean, low overhead, totally self-financed operation (no loans, no interest payments) which allows us to absorb the increases without too much difficulty. Many, if not most, small businesses are not in such a fortunate position.

Over time, of course, as businesses fold and production decreases, materials cost WILL decline. But not for positive reasons.


FWIW (none / 0) (#17)
by squeaky on Thu Feb 05, 2009 at 02:37:18 PM EST

In the arcane world of art collecting, I have hear that many collectors who have tons of $$$ are not buying now. The logic is why buy something for $20,000. at 30% discount when in six months or a year the same work will be selling for $10,000.

The problem with that is many galleries will go out of business while the collectors siege is on and many artists will not survive either.

I guess that is a problem of deflation.


Threat of Inflation (none / 0) (#12)
by Samuel on Thu Feb 05, 2009 at 11:02:41 AM EST

That was a real concern before the Fed knew it's policies were leading to a future slump and is the only reason the inflationary stimulus is being considered.

Despite record M3 growth at the Fed over recent months, asset value depreciation is preventing inflation in parity. This is compounded by the reluctance of bank's to lend and initiate the fractional reserve process despite a near 0 Fed rate.

The problem here is the current inflation (not rate) that the stimulus bill is attempting to maintain (by not allowing deflation and market recovery). The only reason for a market to deflate without wage/price controls or government hoarding (aka tax and burn) is because the current levels are inflated.

Krugman's fear mongering post (referencing his language - and yes, he's been right on a zillion things before this) offers no long-term solution. His approach can only suggest perpetual monetary growth which a debtor nation cannot do.

As for his analysis. Why does he assume linear, where is his r-squared value and who can take a model with so few variables seriously?

I know this sounds kinda socialist (none / 0) (#15)
by blogtopus on Thu Feb 05, 2009 at 11:26:24 AM EST

But can we make a strong(er) set of laws that punishes people who deliberately sabotage the Free Market model? I know we have the anti-trust laws, but what about those people who knowingly mess with a healthy economic model in order to make a few extra bucks? I mean, if we have laws against treason (doing things that deliberately hurt our nation's core ideals / values), then why can't we hold financial traitors in similar contempt?

What am I saying? That's the American way. Never mind.

Free Market Manipulation (none / 0) (#18)
by Samuel on Thu Feb 05, 2009 at 03:35:22 PM EST

The only by which to violate the "Free Market" is to partake in an action which is not itself "free".

If companies choose to collude and price set - the rule is not violated. As pre-antitrust studies have shown - collusive price setting arrangements are not sustainable within the free market as lowering supply and raising prices incentivises the creation of a new firm which will undercut prices and typically have newer / more efficient capital equipment. That is, collusion will stagnate the technolodgical development of the involved firms and encourage the creation of a more efficient and permanent competitor.

Secondly, there is no way for firms to ensure that other firms are following their agreed upon collusive plan. Historically collusive group members violate their informal agreements as no legal authority is there to enforce the agreement.

The free market model (in this most recent case) was sabotaged by collusive banking (the Federal Reserve lending rate and fine enforced lending requirements) and government insertion of a socialized risk mechanism in the form of Fannie and Freddie. Without this coerced collusion (banks have no choice, tax payer has no choice) individual banks following what were the typical banking practices a few years ago would have experienced bank runs and failed individually long ago as investors would be rightfully skeptical of said bank's stated balance sheet.


I see (none / 0) (#21)
by NYShooter on Fri Feb 06, 2009 at 12:44:26 AM EST

"As pre-antitrust studies have shown - collusive price setting arrangements are not sustainable within the free market as lowering supply and raising prices incentivises the creation of a new firm which will undercut prices and typically have newer / more efficient capital equipment. That is, collusion will stagnate the technolodgical development of the involved firms and encourage the creation of a more efficient and permanent competitor."
*****************
So what happens to the gazillion dollars the colluders extort from the "temporarily" fixed marketplace? Do they give it back? Or maybe, just maybe, they use their ill-gotten gains to buy out their embryonic would-be competitors and further consolidate their monopoly positions.

Or maybe you don't remember how General Motors bought out all the locomotive companies 100 years ago, destroyed them, and thereby guaranteed that America would never have a decent mass transit system.

When all the banks, in lock-step, inserted their 6% flip to 34%, credit card interest rate schemes, please point out to me which little fledgling banks were "incentivised," and stepped up to fill the void?

You know, I heard that if you leaned against an oak tree for a couple of hundred thousand years, it would eventually lean over at 90 degrees. That's pretty much the timetable the supply siders count on with their "trickle down" theory.

I don't know about you, but I just can't wait that long.


: What do I have to do with Supply Siders? (none / 0) (#22)
by Samuel on Fri Feb 06, 2009 at 11:08:05 AM EST

Regarding credit cards - the US banking system is far from a free market enterprise. In fact the US banking system is an example of the only form of sustainable cartel as non-compliant banks can be legally fined. US banking policies - not the free market - led to the pervasiveness of credit cards. Beyond that - the consumer can seek credit with less complex terms and flexibility in areas beyond credit cards or choose not to use a credit card in the first place.
I'll look into the GM thing - I'm not specifically familiar and looking at the point you made it looks like you are right. I'll let you know if I find anything regarding government assistance towards GM in these transactions - voiding the free market comparison.
"So what happens to the gazillion dollars the colluders extort from the "temporarily" fixed marketplace?" I didn't use the word temporarily so please don't quote me on it! The reason I did not is this: private firms looking back on history (this is 1900s before heavy gov regulation in many higher production goods) would not attempt to price fix as they knew the ultimate reality. There are no gazillions as price fixing arrangements were altogether avoided for the reasons I described. If not competition has the opportunity. Show me the pre-antitrust price fixing scheme you're talking about and we'll discuss!
Barring the condescension I appreciate the response!

Question (none / 0) (#23)
by Samuel on Fri Feb 06, 2009 at 11:43:04 AM EST

Are you referring to the street car system being bought out by National City Lines? (interesting aside, that's reference in Who Framed Roger Rabbit and is tied into the plot to destroy Toon-Town and replace it with miles and miles of highways and gas stations).

I'm trying to find the nature of ownership for the original street car lines as they traverse cities I'm not clear on what ownership of the line means - the land or the metal on public roads and the government sanction to operate street cars on those lines.


Mortgage Rates (none / 0) (#16)
by Pianobuff on Thu Feb 05, 2009 at 12:25:29 PM EST

Does anyone know if or what the correlation between 30 year mortgage rates and inflation is? I think they have gone up .5% in the last 4 weeks and wondering what that says (if anything) related to inflation/deflation in general.

While checking out the BTD link to Krugman , (none / 0) (#20)
by jawbone on Thu Feb 05, 2009 at 05:00:03 PM EST

don't miss this one. (Since you're there, read Krugman's most recent column on Health Care Now.)

...when it came to stimulus legislation, when Obama finally introduced his economic plan he immediately began negotiating with himself, preemptively offering concessions to the GOP, which voted against the plan anyway. (And Obama appears, in the name of bipartisanship, to have thrown away a Senate vote he may well need.)
As a wise man recently said, failure to act effectively risks turning this slump into a catastrophe. Yet there's a sense, watching the process so far, of low energy. What's going on?

Don't miss the Martin Wolf quotes Krugman opens with. Wolf appeared on Charlie Rose on Monday, and you can see the video, with comments and transcript under the image.

Wolf tells Charlie Rose that the major problem with banks worldwide is undercapitalization (everything was way overleveraged).

MARTIN WOLF: ...I'm convinced and I think nearly all the economists I spoke to in Davos...believe the fundamental problem is that the banking system in the West, certainly in the U.S. and the U.K. is under capitalized, it needs more capital. It will not be fixed by buying their bad assets, unless you buy those assets at ludicrously inflated prices.
I think that's the wrong way to go, and I'm eally a bit worried that we don't know the detail, that the Obama administration's approach may turn out to be the wrong one.
SNIP
MARTIN WOLF: ...- the hole is so big [referring to undercapitalization].
SNIP
In the world as a whole, and a lot of it is outside the U.S., the figures I'm hearing are in the $2 trillion to $3 trillion range. Believe it or not, this is affordable for Western governments, but it is of course a massive financial disaster.
SNIP
MARTIN WOLF: There are always limits. The U.S. has roughly a $14 trillion economy a year. So $2 trillion, if that was -- is about a seventh of GDP, so you could say the debt of the U.S. government would rise by a seventh of GDP. That would still leave it well within the margin of a standard developed country.