1-Jul-10 News -- World economy in deflationary spiral

[Tom Acre]

...Can any deflationists tell my why Bernanke's argument does not convince them?...

We are experiencing deflation despite Bernanke doing his thang.

[Higgenbotham]

Also, in the speech, Bernanke addresses the zero interest rate bound and how be might get around that but he doesn't really go into enough detail. There are a lot of holes in his discussion.

[vincecate]

Can any deflationists tell my why Bernanke's argument does not convince them?

These are the issues we've discussed in this forum that Bernanke does not address in his speech (all of these issues have a bearing on the question of whether he can generate inflation through the creation of electronic dollars):

But can you address his argument in those 2 paragraphs? It is kind of simple really. Everyone can see that if people could make unlimited amounts of gold the value of each ounce of gold would go down. How could dollars be any different? As we make more and more dollars the value of each dollar must go down. And we do have a way to make unlimited amounts (can always add more zeros). So how can deflation be a real threat?

[thomasglee]

And we do have a way to make unlimited amounts (can always add more zeros). So how can deflation be a real threat?

Again I ask... if it's "digital" dollars nobody can see, hold or trade, does that still give us inflation? If we go to a cashless society, how will one truly know if we have inflation or deflation?

Stupid question? Perhaps, but I'm a novice at economics. Sorry.

[Higgenbotham]

Can any deflationists tell my why Bernanke's argument does not convince them?

These are the issues we've discussed in this forum that Bernanke does not address in his speech (all of these issues have a bearing on the question of whether he can generate inflation through the creation of electronic dollars):

But can you address his argument in those 2 paragraphs? It is kind of simple really. Everyone can see that if people could make unlimited amounts of gold the value of each ounce of gold would go down. How could dollars be any different? As we make more and more dollars the value of each dollar must go down. And we do have a way to make unlimited amounts (can always add more zeros). So how can deflation be a real threat?

Because of the nature of the dollar, quantity is not the only issue. Gold is gold. It's a material comprised of atoms with a molecular weight of so much. The only change one can make to it is whether it's alloyed and how it's molded. Dollars exist in various forms that have time, quality, economic and political dependencies that can't be controlled.

[vincecate]

...Can any deflationists tell my why Bernanke's argument does not convince them?...

We are experiencing deflation despite Bernanke doing his thang.

So I don't trust CPI. When housing prices were going up they took them out of the CPI and then when they were going down they put them back in the CPI. And many other manipulations like this. So it really looks like the government is fudging the CPI numbers down. Housing is a massive bubble pop and not deflation. Do you have any measure other than housing or CPI that indicates we are getting deflation?

[vincecate]

Everyone can see that if people could make unlimited amounts of gold the value of each ounce of gold would go down. How could dollars be any different?

Because of the nature of the dollar, quantity is not the only issue. Gold is gold. It's a material comprised of atoms with a molecular weight of so much. The only change one can make to it is whether it's alloyed and how it's molded. Dollars exist in various forms that have time, quality, economic and political dependencies that can't be controlled.

But surely the law of supply and demand applies to dollars also? If you increase the supply the price or value will go down? And with todays electronic exchanges you can convert between any different form you want in milliseconds so how could the form really matter?

Is there anything besides dollars that you think supply and demand analysis does not work for? Something where increasing the supply significantly would not lower the value for each unit?

[gerald]

And we do have a way to make unlimited amounts (can always add more zeros). So how can deflation be a real threat?

Again I ask... if it's "digital" dollars nobody can see, hold or trade, does that still give us inflation? If we go to a cashless society, how will one truly know if we have inflation or deflation?

Stupid question? Perhaps, but I'm a novice at economics. Sorry.

That is not a stupid question. However, the real question is, what will be what level of "trust" between the "people" and the "government" regarding "money". Once trust is destroyed, it is very hard to regain. Unless, trust is replaced by fear.

Gerald

[Higgenbotham]

Everyone can see that if people could make unlimited amounts of gold the value of each ounce of gold would go down. How could dollars be any different?

Because of the nature of the dollar, quantity is not the only issue. Gold is gold. It's a material comprised of atoms with a molecular weight of so much. The only change one can make to it is whether it's alloyed and how it's molded. Dollars exist in various forms that have time, quality, economic and political dependencies that can't be controlled.

But surely the laws of supply and demand apply to dollars also? If you increase the supply the price or value will go down? And with todays electronic exchanges you can convert between any different form you want in milliseconds so how could the form really matter?

Is there anything besides dollars that you think supply and demand don't work for? Where increasing the supply significantly would not lower the value for each unit?

Generally, goods are assumed to not be defective and can get to where the demand is, so the law of supply and demand applies. Dollars aren't like that. For example, in 2007, the ABCP markets locked up. ABCP is counted in various money supply figures and not in others. Despite the fact that the ABCP markets were locked up, it was still being counted in the money supply. As MZM was increasing, a lot of analysts were pointing to that being inflationary. Now the Fed has supposedly $1.25 trilllion in MBS on its balance sheet. That's a form of money, but the banks offloaded them onto the Fed's balance sheet because they were illiquid, so that money doesn't circulate anymore. Also, when money is converted from one form to another, there are potential deleveraging effects. If a muni bond rating for a state gets lowered tomorrow, the bond price goes down and that affects money supply. It has knock-on effects that aren't predictable. And it's not like the Fed can replace the muni bond market or part of it with something that has an equivalent economic function.

If we took the example of lettuce or something like that, a bunch could be supplied into the market and there could be an excess and prices are going down. Then all of a sudden there's a salmonella scare and there's a bunch of contaminated lettuce out there and it's effectively quarantined like the ABCP markets were, but everyone is saying there is still an oversupply of lettuce. That would be a similar situation. It's not entirely equivalent though because the ABCP was mixed into other forms of money like the money markets and that eventually created additional problems. What I should probably add here is that the Fed is like lettuce growers who can't get rid of their salmonella bugs but they keep counting their production as being equivalent to uncontaminated lettuce and claiming they can create an oversupply of lettuce.

Another example might be where there's an excess of houses in cities with high unemployment and people are migrating out of those areas to areas with job openings. Say in those areas housing prices have already hit rock bottom due to very high vacancy rates and at that point are only going a little lower. In the areas where there are job openings, housing is in short supply and prices are going up a lot. Yet someone could incorrectly draw a system boundary around the entire country and count houses and population and make the claim that there is an oversupply of housing and prices should not be going up. And again, the Fed might be like pre-fab housing suppliers who have kits but don't have the means to convert those kits into desirable housing in the right locations, yet they count unassembled kits as housing units and claim equivalence - that they can create an excess of housing.

And with todays electronic exchanges you can convert between any different form you want in milliseconds so how could the form really matter?

The specific point is that a parameter the Fed can't control can lead to a markdown or lockup of an asset that is considered to be dollars, which reduces the money supply. Interest rates on long dated bonds, credit spreads, bond ratings, etc., as examples. In the case of lockup, there is no conversion possible, as the market has become illiquid, as in the current $1.25 trillion MBS on the Fed's balance sheet. If the whisper is that the Fed is looking to expand their balance sheet to $5 trillion, then there are likely more illiquid junk dollars out there already and the supply is growing, which is deflation in action.

[vincecate]

Everyone can see that if people could make unlimited amounts of gold the value of each ounce of gold would go down. How could dollars be any different?
[...]
But surely the laws of supply and demand apply to dollars also? If you increase the supply the price or value will go down?

Is there anything besides dollars that you think supply and demand don't work for? Where increasing the supply significantly would not lower the value for each unit?

Generally, goods are assumed to not be defective and can get to where the demand is, so the law of supply and demand applies. Dollars aren't like that. [...]

You are arguing that some things counted as money in some measures froze up and so were not good money. But even this does not put any limit on the amount of fresh new good money that the Fed could print.

How is paper money fundamentally different from being under a gold standard with the US government having a magic machine that can make an infinite amount of gold?

In either case, a gold standard with a magic machine or a paper money with a printing press, the money only keeps its value if the government does not make too much of it. If they sent every person in the US 1,000 oz of gold in the first case, or they sent everyone $1 mil in paper money in the second case, the result would be inflation. A printing press in paper money is the same as a magic gold making machine in a gold standard. The only thing holding back the supply of money is government discipline, which is not so very good really.