RSS Feed MenuI check into my hotel in Los Angeles.
“Ah,” says the receptionist, “I see that you that you are a Starwood gold member. To show our appreciation, we’re discounting all your meal, bar and in-room dining purchases for the length of your stay.”
I stay in a Starwood hotel maybe 6 or 7 times a year. No way am I an especially valuable patron. Still – 20% off for me.
This has happened again and again all year. My Fedex bills were cut without asking. At the register, Nordstrom’s takes another 20% off the price of an already discounted item. It seems that almost every week’s mail brings a $50 gift card from Gap Kids.
Yet I keep reading that the United States is teetering on the precipice of inflation.
Well maybe. Most of these inflation forecasts wisely heed the advice of my former boss, Bob Bartley. When making financial predictions, Bob suggested adherence to the following rule: If you give a number, don’t give a date. If you give a date – don’t give a number.
So I daresay it’s probably true that sooner or later inflation will pick up. It’s very possible that the monetary authorities will then respond badly – that inflation may surge past 5, 6, 7% – that the 1970s will return – and that all those cable news viewers now buying gold at over $1100 will have a good laugh at the expense of us inflation doubters.
In the meantime, though, I’m going to believe what I see with my lying eyes.
Wages: down.
Housing costs: down.
Yuppie food at boutique hotels: down.
I’m not an economist, but it sure looks like deflation to me.
spikeytx86 // Jan 5, 2010 at 9:19 pm
I have noticed this too. I took my mother out to a steak house the other night for her birthday. They took an expensive appetizer off the bill and the cost of the entrees was flat if not a little less then the last time I ate there nearly two years ago. And I didn’t tell them it was her birthday either (because they have an embarrassing routine they do for Birthdays), it was just because.
I am sure when the expansion kicks in there will be some inflation, but I doubt there will be anything close to 1970’s era inflation. If anything the fed will overreact and raise interest rates too fast and cause a double dip recession. I just don’t see Inflation being a dramatic problem. But we could be wrong, and I will personally apologize to G. Gordon Liddy for mocking him.
COProgressive // Jan 6, 2010 at 12:26 am
Funny, meals, gift cards, wages, housing costs all down. But the formerly cheap plastic crap made in China is UP. Go figure.
tdawg11870 // Jan 6, 2010 at 11:42 am
Wasn’t runaway inflation supposed to be one of the big unintended consequences of TARP and the bailout? Wasn’t government profligacy supposed to be the reason Glenn Beck and friends have been telling listeners and viewers to buy gold at huge markups?
And wasn’t one of the main macroeconomic arguments for the stimulus that the most pressing problem was a deflationary spiral leading to a far worse economic meltdown than any caused by ’70s-level high inflation, and besides, there wouldn’t be much inflation anyway?
So who will be the first to step up and apologize for being wrong on this point?
DFL // Jan 6, 2010 at 1:10 pm
Deflation is so strong that government policies that are inflationary are being eaten up by the deflation. In my own case, my business is off 15 % since the September 2008 meltdown and I’ve been sending out 10 % off coupons for almost a year to encourage more business. I may cut back hours on some employees very soon with a loss of wages. I’m destined for a lower bonus, thus lower pay and less to spend. I will probably cut a week’s vacation this year. So I am part of that ripple effect caused by economic decline and deflation.
WillyP // Jan 6, 2010 at 3:04 pm
tdawg11870,
see here:
http://mises.org/daily/4005
Inflation doesn’t appear overnight. As sure as an apple falls to the ground from the tree, TARP raise our prices.
sinz54 // Jan 6, 2010 at 4:45 pm
This doesn’t look like deflation to me:
http://www.kitco.com/charts/popup/au0365nyb.html
In the 1990s, Japan had a real deflation. There, the price of gold as denominated in yen collapsed.
“COProgressive” has it right: It’s true that goods produced here in America have declined in price–especially housing. But imports make up a much larger fraction of the average household’s market basket–from produce at the supermarket to gasoline to foreign automobiles. And the price of all that stuff hasn’t declined–actually, I’ve noticed the price of gasoline has risen quite a bit in the past year.
China’s exports have been kept artificially cheap, by the Chinese government’s policy of pegging the renimbi to the U.S. dollar. But China is getting a little tired of subsidizing American gluttony.
WillyP // Jan 6, 2010 at 5:02 pm
irrational prices are the inevitable effect of a monopoly money supply.
sorry to sound like a paulie, but it’s true.
DFL // Jan 6, 2010 at 5:14 pm
China is riding the tiger by running an economy dependent on American consumption. If they don’t subsidize the American material appetite, the socio-economic system of China will experience upheaval. Of course, the Chinese police and military will shoot desenters and rioters if they have to. I wonder how much pain the Chinese government is willing to inflict on their subjects in order to give America a kick in its sides.
mlloyd // Jan 6, 2010 at 8:07 pm
Well, people who have been right about stuff for the past decade, and the numbers, haven’t really been talking about inflation.
http://www.nytimes.com/2009/05/29/opinion/29krugman.html
canadianmoderate // Jan 6, 2010 at 10:19 pm
I think, more technically, that it isn’t deflation we’re seeing – remember, this is what the fed believes it avoided through quantitative easing, etc. – but disinflation. As I understand it, disinflation isn’t outright deflation (even though technically it could be said to be deflationary). Instead, it’s a decrease in the rate of inflation.
The word ‘deflation,’ so I’m told, is only applicable when there is a sharp and pronounced (and fairly rapid) decrease in prices. This then leads to people waiting to purchase things because they know prices are falling. This is the equivalent of there being not enough dollars circulating and chasing goods, which I think is more or less the definition of deflation.
WillyP // Jan 7, 2010 at 9:36 am
canadian, and anyone else who wants a functional economic lexicon,
“The notions of inflation and deflation are not praxeological concepts. They were not created by economists, but by the mundane speech of the public and of politicians.
They implied the popular fallacy that there is such a thing as neutral money or money of stable purchasing power and that sound money should be neutral and stable in purchasing power. From this point of view the term inflation was applied to signify cash-induced changes resulting in a drop in purchasing power, and the term deflation to signify cash-induced changes resulting in a rise in purchasing power.”
-Mises, Human Action, 1949
We’re experiencing mild, though steadily increasing, inflation when we should be experiencing significant deflation.
Understanding why is not really not very hard, and stating it plainly would go a long way to removing the apparent mystery around these topics.
So we had a stock market crash, and people’s savings disappeared. Naturally, because people have to replace their lost savings, they are going to hold more cash. Let’s assume we didn’t have a Federal Reserve for a minute, and the money supply was fixed, and pretend that total national income was 10x. Before the crash, people split their income between consumption and saving as 8x and 2x – in other words, for every $10 earned, $8 is spent on consumption, and $2 goes into savings (and/or is invested).
After the crash, when the mirage of abundance has evaporated, people’s expectations, and hence their planning, change. Instead of 8x and 2x, it shifts to 6x and 4x, as people save more money. The 4x, which goes into savings/investment, is not “chasing” consumer goods. Hence, prices fall. On the other hand, as more money is diverted toward productive investment – i.e. capital goods – the price of these goods will go up. Keep in mind this is all ceteris paribus.
The severity of this crash would, theoretically, cause big time “deflation” – that is, your money would buy more per dollar for consumer goods. The actions of our central bank, however, are frustrating these natural (and wholly rational) efforts, and undermining people’s ability to save. This only prolongs the pain.
WillyP // Jan 7, 2010 at 10:03 am
mlloyd, you do realize that’s from May, right?
canadianmoderate // Jan 8, 2010 at 12:49 pm
But Willy, don’t waste your breath here trying to teach me about the economy. I suppose in some sense by elucidating the distinctions between the words ‘inflation,’ ‘disinflation,’ and ‘deflation’ I was trying to show off my very own “functional economic lexicon.” You should be busy selling everything you own and buying gold. If you’re right, we’ll all have to admit it eventually, and you can rub it in our noses by being filthy rich.
WillyP // Jan 8, 2010 at 1:40 pm
you sound resentful.
i was trying to point out the important lesson that “inflation” and “deflation,” whether you take the modern definition of price increases/decreases or the traditional definition of increasing the money supply/the crash of prices following the subsequent, induced boom, ARE POLITICAL PHENOMENA. that is, they are not natural to the study of economics, but arise only when government tampers with the money supply.
importantly, i note that under a regime of free banking, under which the practice of fractional reserve banking could be preserved, there would likely still be inflation/deflation because there is no economic difference whether the counterfeit money comes from government or a bank. the effects would remain the same. what banks cannot do, unless granted legal privilege, is cover the losses, creating the conditions under which they are unable to pay back their depositors, that occur when the bubble resulting from credit expansion pops. today, the fdic and, ultimately, the federal reserve serve as the backstop. so in theory, if you were to eliminate the fdic/fed and end the legal privileges, a free banking system would regulate itself just fine, because the abusive companies would bankrupt themselves.
the coining of a third term, disinflation, contributes nothing to understanding. someone reading post #10 would come away more confused than before, so i felt the need to offer an alternative argot and set of definitions.
WillyP // Jan 8, 2010 at 1:51 pm
err, that should read, “are at their SOURCE, POLITICAL PHENOMENA.”
or, in other words, without an accommodating legal system, credit expansion to the dizzying and destructive heights we observe today would be practically impossible.
canadianmoderate // Jan 8, 2010 at 3:48 pm
You have a point about free banking regulating itself. Crappy restaurants go out of business because they don’t serve their customers, etc. Market forces work – I get that. But I’m not so sure it would work “just fine.” When the Fed and FDIC (and in Canada the Bank of Canada and the CDIC) don’t backstop deposits or act as lenders of last resort, the obvious problem is the potential for a run on the banks, which I’m sure you’re aware of. It does create some level of moral hazard, (something I can’t remember you talking about but I’m willing to bet you’re concerned about) which is a problem, as I see it.
But I also believe it’s a problem that has to be weighed against its alternative, which, as I said, is the run on the banks problem. I get that any bank who failed to look after people’s money would go out of business in a deregulated system, and they wouldn’t get rescued or bailed out by their competitors (since the taxpayers wouldn’t supply the bailout money). So other banks who wanted to grow couldn’t grow without protecting peoples’ money, and they would therefore be incentivized not to overstretch themselves. But in the process, people could lose their savings for good – like they did during the great depression – that’s the main problem. In our current system, people don’t rush to the bank to withdraw their deposits, since they know their deposits are safe (more or less). I think the rationale here is that this is a greater problem than the moral hazard created by the existence of the FDIC, for example. I know, you think I’m a statist.
canadianmoderate // Jan 8, 2010 at 3:59 pm
But to the point about deflation, as I understand it, the type of deflation the fed and treasury were (and still are to some degree) worried about isn’t the fun kind where all the sudden everybody’s dollars go further, prices go down, and things get better. What they (and some big money managers) are worried about is the possibility of a sustained drop in prices that incentivizes people to hold on to their money until things just get cheaper, which they’re guaranteed to do during deflation.
The point is that nobody would buy a home if they knew prices were going to continue to go down. Most would wait for a ‘bottom’ in the housing market. And people wouldn’t want to sell, because they would want to wait and see if the price would go back up after deflation so as not to lose all their money. This means that the entire housing market would collapse – not just the subprime market. To date, though the housing market isn’t strong necessarily, it hasn’t collapsed entirely in this way. The same would happen with cars, not just home sales. The point is that with no market at all (no buyers and sellers meeting up with one another) employment couldn’t be sustained across the board. That’s what leads you toward 25% unemployment like you had in the 30’s, not just 10% like you have now in the U.S. (though the actual figure is almost certainly higher).
What I’m saying is that the actions of the Fed weren’t meant to frustrate “natural (and wholly rational)” forces, but something much scarier.
WillyP // Jan 8, 2010 at 4:00 pm
Whether you’re a statist or not, I would question the observational prowess of someone who looks around at the rubble of our economy, which is actually getting worse rather than better, and says this is a preferable alternative.
WillyP // Jan 8, 2010 at 4:03 pm
“What I’m saying is that the actions of the Fed weren’t meant to frustrate “natural (and wholly rational)” forces, but something much scarier.”
The possibility of success provided by such thinking that says a central bank can actually control prices and “help” the economy recover, is what F.A. Hayek described as “catching a tiger by the tail.” You’re always being reactive, and will never succeed in making things better – only worse.
As for the fallacy of a deflationary spiral (or “trap”), there is a lot of literature on this and I think you can find it if you look hard enough.
WillyP // Jan 8, 2010 at 4:07 pm
“This means that the entire housing market would collapse – not just the subprime market. To date, though the housing market isn’t strong necessarily, it hasn’t collapsed entirely in this way. The same would happen with cars, not just home sales.”
Can you ever name a time in history when buyers did not meet sellers to create a market? This happens even when currencies collapse totally – Zimbabwe, Argentina, Germany – and in environments where there is no legal tender, such as prison camps.
WillyP // Jan 8, 2010 at 4:11 pm
“That’s what leads you toward 25% unemployment like you had in the 30’s, not just 10% like you have now in the U.S. (though the actual figure is almost certainly higher).”
What leads you to 25% unemployment, instead of “merely” the 17/18% we have now is a trade war, through tariffs. When the populism rises to a new height because conditions fail to improve (directly thanks to the mentality you proffer), Obama will start the trade war. In fact, there was an article on MarketWatch 2 days ago precisely about this ;
http://www.marketwatch.com/story/betting-on-inflation-and-a-looming-trade-war-2010-01-06
canadianmoderate // Jan 9, 2010 at 9:48 pm
Willy, you definitely make some good points. I’m not sure this is the preferable alternative – obviously an argument can be made that deregulating banks is the way to go. And I don’t know the history that well, but I’m under the impression that (regular) people wanted deposit insurance before the FDIC was created. Like I said, I don’t know the details that well, but I imagine that it had some amount of public support, rightly or wrongly (and there’s always been critics too, I imagine). But even if I don’t necessarily think that this is the preferable alternative, as I understand it, millions of Americans in the 30’s did. But it’s true to say that the FDIC is a disaster now, so I get wanting to get rid of it. Like I said, that leaves the alternative, and I doubt that that option would be politically popular, even if it were the right thing to do.
canadianmoderate // Jan 10, 2010 at 1:47 pm
My last post was confusing, I think.
WillyP // Jan 10, 2010 at 11:34 pm
I think it’s confusing because your thinking might be evolving in light of the fact that I’ve pointed out a number of problems with your preconceptions.
I don’t think I’m particularly brilliant or incredibly insightful, but I do tend to defend positions that I find truthful. It seems extremely obvious to me that the cost we incur for “insurance” on deposits far outweighs any benefit.
If you are agree that people should not lose their savings from fractional reserve banking and also acknowledge the danger in a government operated ponzi scheme, then there are only two viable solutions. Either we deregulate, and institute a free banking system that is market regulated, or you write law that separates warehouse banking from investments. This would effectively end fractional reserve practices, and stop these society consuming business cycles that only lead to political drama. The market system would likely come to this system on its own, and people would pay banks to store their money, backed by gold, and then go to a different institution for their investments.
But bailout after bailout, which yes, creates moral hazard after moral hazard, and is a result of permitting (really encouraging) a credit expansion induced boom/bust cycle, has, in my opinion, no tenable defense.
I’m not really sure what I was addressing there, but then again I was replying to a self-confessed confusing post! I’m not really an obnoxious person, but fear I must come off as arrogant and obnoxious. Such is the nature of political debates, to a certain extent, but still it’s not an excuse.
canadianmoderate // Jan 17, 2010 at 6:23 pm
I might have spoken too strongly about the FDIC. Sheila Bair has some interesting ideas – better ideas, it seems, than many of the other economic thinkers Obama surrounds himself with.