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The Joy Of Deflation


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2008 Dec 18, 1:48am   35,459 views  285 comments

by Patrick   ➕follow (55)   💰tip   ignore  

cycle

Why is deflation written about as if it were a bad thing? Personally, I love deflation because it means lower prices for pretty much everything.

OK, I can see that people will hold cash instead of investing it, because the cash is increasing in value. But that will end eventually as people spend the cash (unless the Fed just prints forever).

And I can see that it's hard to start up a business knowing that profits will probably decrease in nominal terms, but that can be managed, because costs will decrease as well. And if the business generates cash, that cash is more worth getting in a deflationary environment.

Maybe deflation is exactly what we need for a while, to wipe out foolish debtors and get the economy back into a sustainable state.

Patrick

#environment

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1   slumlord   2008 Dec 18, 1:56am  

Ahhhhh, yes the cycle of life......

2   Peter P   2008 Dec 18, 2:16am  

Cheap lobsters. Enough said!

3   lunarpark   2008 Dec 18, 2:16am  

http://www.dqnews.com/News/California/Bay-Area/RRBay081218.aspx

Bay Area median home price sinks to 8-year low

4   Duke   2008 Dec 18, 2:52am  

Well, the obvious problems with delation is first: emplyment. As businesses delay capital spending and set cost profiles to expected revenues . . blah blah blah.

The next obvious problem is if deflation hits your paycheck. Today you make $100 and pay $30 to you mortgage. Tomorrow you make $50 and you still pay $30 to your mortgage. Ask Argntina about deflation and debt.

5   HeadSet   2008 Dec 18, 5:09am  

Those mortgages are going to be defaulted on anyway, with the gov bailing out the banks. At least with deflation, the walk-away can trade his high monthly house payment for much lower rent. That should take some of the sting out of lower wages.

6   slumlord   2008 Dec 18, 8:45am  

Like a almost anything, excess is bad. A little inflation or deflation is okay. When it gets out of control Argentina or Zimbabwe, it's no good.

7   frank649   2008 Dec 18, 9:29am  

Ask Argntina about deflation and debt.

Sigh, when will everyone learn that deflation is our friend. It simply amazes me how brainwashed most Americans are concerning inflation and deflation.

Regarding Argentina in 2002, it wasn't deflation that made life miserable but the fact that the draconian Argentinian government restricted people from withdrawing their money from the failing banks.

And it's not deflation that caused our unemployment problem but rather the loose money policy that preceded it. It's that policy that created unsustainable conditions that resulted in overcapacity and mis-allocation.

Get it right man.

8   PermaRenter   2008 Dec 18, 11:59am  

California may soon have more bankrupt towns on its hands.

The city of Vallejo, Calif., gained national attention earlier this year by filing for Chapter 9 bankruptcy protection. Now, two neighbors are fighting to avoid the same fate, as the state's economic crisis spreads.

Isleton and Rio Vista, small towns roughly 50 miles northeast of San Francisco, say they have begun consulting with bankruptcy lawyers as they draw up plans to deal with their mounting budget crises. The towns' leaders say they hope to avoid bankruptcy, but concede the move may eventually be their only option.

"We're strapped for cash and by the end of March or early April we may not have enough money to pay for payroll," says Hector De La Rosa, Rio Vista's city manager.

9   PermaRenter   2008 Dec 18, 12:32pm  

The doors were locked and business halted at two local T.G.I. Friday’s restaurants this week, leaving people wondering what will happen to the longtime neighborhood favorites.

T.G.I Friday’s in San Mateo, San Bruno and Cupertino were closed Tuesday and employees were reportedly let go. However, an unidentified woman answering the phone yesterday at the San Mateo location said they were “closed for a remodel” and that no one was sure when the doors would re-open.

The three restaurants are part of a franchise owned by a Florida company. The entire Friday’s chain is owned by a Minnesota corporation. The short explanation of a remodel yesterday comes one day after employees at all three locations were fired, possibility violating federal employment law.

Employers must offer employees a 60-day notice in a case of a mass layoff — a reduction of at least 33 percent of the workforce of 150 employees or more, according to federal law.

The property at 3101 El Camino Real in San Mateo, where Friday’s has stood for more than 20 years, is owned by Hillsdale Shopping Center. The news of the restaurant’s closure came as a surprise to the property management company, however, and no further information was provided about the lease agreement with T.G.I. Fridays.

A former San Mateo T.G.I. Friday’s manager, who wished to remain anonymous, said the local restaurants were under a franchise agreement to remodel by the end of the year. The remodel could likely cost between $3 million and $4 million to complete. The price tag could be too much to bear amid the slow economy, the former manager said.

The San Mateo location was also facing an end to its lease agreement with Hillsdale, the former manager said.

Calls to the management company’s spokeswoman were not returned.

Dana Yates can be reached by e-mail: dana@smdailyjournal.com or by phone: (650) 344-5200 ext. 106.

10   PermaRenter   2008 Dec 18, 12:35pm  

The San Mateo T.G.I. Friday's made headlines in January when an employee found 36-year-old night manager Douglas Castello of Hayward dead inside, the victim of an apparent attempted robbery. Police haven't arrested anyone in that crime.

11   PermaRenter   2008 Dec 18, 12:36pm  

Pelenaise Tapaatoutai, a University of San Francisco student who worked as a server at the restaurant, said management held a staff meeting Tuesday to inform employees of the decision to close down.

Tapaatoutai, who was at the restaurant Wednesday afternoon picking up her last paycheck, speculated that the owner hadn't been making enough money on the enterprise to stay afloat.

"I'm trying to find a job," Tapaatoutai said, noting that she wouldn't receive severance pay but is hopeful about finding other restaurant work in the area.

The franchise owner may have violated California labor law, which requires companies that have employed 75 or more people within the past year to give 60 days notice for layoffs.

"An employer who fails to give notice ... is subject to a civil penalty of not more than $500" for each day of violation, the labor code reads. The employer could also be responsible for back-pay and medical expenses.

Erika Monterroza, a spokeswoman for the California Department of Industrial Relations, said her agency is looking into the matter and would audit the franchises' records.

"If indeed they had 75 or more employees, which for all indications that's the case, they are also held to the same rules," said Monterroza, noting there are some exceptions to the law.

"We didn't receive a warn notice, to my understanding, for T.G.I. Friday's," she added.

12   thenuttyneutron   2008 Dec 18, 1:30pm  

I am not so sure about the Joy of Defleation. I may have other things to be joyful about however. The wife has a positive test. I am waiting till it is confirmed before I get too excted and party.

13   Unalloyed   2008 Dec 18, 1:30pm  

The only thing about deflation that worries me is how the Federal Reserve and Treasury will react. Bernanke is commonly quoted as saying that (roughly paraphrased) an effective weapon against deflation is a formal devaluation of the currency. I don't know if that is accurate, but it is a horrifying idea. How did we get to this point? Way before our time, the perfidious, spineless politicians in Washington gave a few unelected central bankers total control over our monetary system. Our current politicians continue the crimes against the people. With a few exceptions such as Ron Paul, they should be removed from office.

14   quesera   2008 Dec 18, 1:53pm  

Why is deflation written about as if it were a bad thing? Personally, I love deflation because it means lower prices for pretty much everything.

You have no debt and no desire for products or services provided by businesses or people who do have debt.

A little deflation every now and then isn't such a bad thing. It'll hurt some people with debt (even non-foolish debt), but macroeconomics has sharp edges sometimes.

But deflation can spiral. Reduced demand, reduced investment in production capacity, fewer jobs. Lather, rinse, repeat.

Even those of us without debt would suffer if any significant or extended deflationary period were to occur.

The modern economic prerequisite of consistent expansion almost certainly has an expiration date, assuming it's based on a finite amount of efficiency/resources/demand. But contractions hurt. And epidurals wear off.

15   monkframe   2008 Dec 18, 1:54pm  

We are in uncharted waters, Look out!

16   B.A.C.A.H.   2008 Dec 18, 1:54pm  

Neutron,

Congratulations. You must not be from around here.

In these hip and cool Metrosexual parts, when your partner tests positive, it's usually bad news.

17   SQT15   2008 Dec 18, 2:40pm  

I don't know if it's deflation as much as bad karma coming home to roost, but the Merrill Lynch comp package for '09 came out today and it's pretty ugly. My husband (thank God!) won't really see a change but the lower-end brokers got hit hard. Some will see their pay literally cut in half. Merrill is basically trying to get rid of brokers without actually having to fire them. I bet you'll see a lot of brokers leaving the industry because all the firms are going to the same comp package and there's no where else to go for people who don't do enough business. I don't know where they'll find jobs, but the finance industry is likely going to shrink quite a bit.

18   DennisN   2008 Dec 18, 5:24pm  

Here's an item which missed todays Patrick news page...

www.nytimes.com/2008/12/19/business/19tax.html?hp

And thanks to a tax break proposed by President Bill Clinton and approved by Congress in 1997, he did not have to pay tax on most of that profit. It was a break that had not been available to generations of Americans before him. ...
The different tax treatments gave people a new incentive to plow ever more money into real estate, and they did so. ...
By itself, the change in the tax law did not cause the housing bubble, economists say. Several other factors — a relaxation of lending standards, a failure by regulators to intervene, a sharp decline in interest rates and a collective belief that house prices could never fall — probably played larger roles.

But many economists say that the law had a noticeable impact, allowing home sales to become tax-free windfalls. A recent study of the provision by an economist at the Federal Reserve suggests that the number of homes sold was almost 17 percent higher over the last decade than it would have been without the law.

I've argued about this here in the blog with DinOR, where he claimed it was THE cause and I claimed it was A cause of the housing bubble.

19   Paul189   2008 Dec 18, 9:45pm  

Happy BFF everyone!

20   Duke   2008 Dec 18, 10:50pm  

I was possibly sloppy with Argentina. And I will continue to be sloppy in that i STILL refuse to do my homework on which, of the many, high debt countries were hurt with massive deflation.
Right now, the US issues its debt in dollars. This means we do not face thes problem. In fact, with Ben turning on the presses, our creditors should be very angy.
But my point is this: deflation hurts those that have debt.

Of course, we now have to go through the whole discussion on what is deflation and I would recomend anyon to Mish's site were he tackled that. In the acedemic sense it is the contraction of money supply and credit. In a consumer sense it is price declines. In a payroll sense it is decreasing wages. Taking these three defintions we can see:
1. Price deflation hurts the supplier as they get less money for their goods and in theory the supplier has a fixed debt associated with production.
2. Wage delation hurts people who now have less to pay their fixed expenses like mortgages.
3. Actual deflation of te moetary kinds hurt as less money and credit in circulation means fewar dollar to chase the same level of output which, in te short term, tamps down prices, but in the medium to long term means output is scaled back which means job loss and lower total economic activity.
Jumping ahead I would say that sustainable level of econmic activity, the so called' frictional employment' level is about 5%. Anything more than 5% unemployment means the economy is operating at less than optimal output levels.

21   FuzzyMath   2008 Dec 18, 11:52pm  

So, just 3 days after saying we are good to go, that no more financial institutions will fail, and that we won't need the other $350 billion, Paulson changes his tune.

http://biz.yahoo.com/ap/081219/paulson_rescue_fund.html

At the same time, the Bush administration, after letting lose a story yesterday that they were considering orderly bankruptcy options for the automakers, approve of an $18 billion bailout. Which we all know will balloon to probably $80 billion by the end of next year. Just as AIG keeps getting quite chunks of $50 billion here, $50 billion there.

Our "savior" Obama, appears to think 'change' in the white house equates to the presidents color of skin, as he appears to be appointing the same crew of morally bankrupt fraudsters to all of the nations highest posts. I expect no change whatsoever.

What I find depressing about this mess is not necessarily the mess itself, but rather our country's response to it. It is sickening me. We are consistently making worse decision after worse decision, and the general population still does NOT CARE. They are losing their jobs and houses, and are still apathetic. WTF America? Wake the fuck up.

If Hannah Montana was kidnapped, people across this great land would organize community meetings, picket lines, etc. But steal your future and your kids future? Nothing.

Now is the time to bear down and build character. To do the right thing and regroup. This is the response I was hoping for. But it is clear to me now that this America that I read about is dead. We clearly have the government we deserve. And people that actually give a shit, and can even understand why everything sucks right now, are on a short list indeed.

Eh, what the fuck. Might as well go buy some Chinese made trinkets to celebrate the Son of God's birthday.

22   justme   2008 Dec 18, 11:56pm  

Paulson does a calculation and the answer is that he will not get the 2nd 350B unless Detroit is saved using funds from the 1st 350B.

23   FuzzyMath   2008 Dec 18, 11:58pm  

Not to mention the big CA. Good solution guys! Lets just raise taxes and call them fees! That is a good long term solution.

God forbid we cut such important programs as providing illegal aliens health care and free schooling. Instead, lets drive the remaining businesses out of CA for good, and make sure that anyone in the state with half a brain moves somewhere else.

I am dangerously near the frame of mind in which revolutions are born. But sadly, I appear alone. I am fucking sick of writing my representatives. They don't represent me. Something that hits home is in order.

I keep thinking back to a mortgage strike, or a tax strike. These are GOOD ideas as they get the point across peacefully, and immediately.

24   FuzzyMath   2008 Dec 18, 11:58pm  

justme, obviously. Anybody paying attention at all figured that one out. Except, we will never read that in the press. And even if it was in the press, no one would care.

25   justme   2008 Dec 19, 12:09am  

I'm glad I'm paying attention :-)

26   kewp   2008 Dec 19, 12:49am  

God forbid we cut such important programs as providing illegal aliens health care and free schooling. Instead, lets drive the remaining businesses out of CA for good, and make sure that anyone in the state with half a brain moves somewhere else.

Uh, whom exactly do you think all those illegal immigrants are illegally working for?

27   Duke   2008 Dec 19, 12:52am  

I am trying to figure out which is making me more upset:
1. Taxking me without my agrement like the state of CA is trying to do with its proposed sur-charge.
2. Paying bonuses to failed business people whose malfesiance caused the loss of every working person's retirement. Good Lord, instead of prosecution they are getting SEVEN FIGURE BONUSES!
3. Seeing tax dollars making Wall stret speculators whole. Why are we paying off AIGs CDS exposure?
4. Raising the expense side of the state budget 40% in 3 years in CA then stating it would be cruel to roll back any spending so we simply must have more taxes.
5. Allowing retirment managers to speculate with CA retirement funds that are bound by law to be made whole through taxation.
6. Paying much higher than prevailing wages for fire/police/prison guards. One job opening, 3,000 people apply. Something is wrong there.
7. Legislating charity. In the past, people would privately donate for organizations like mental health care, substance abuse, child health care. Now we just make everyone pay.
8. Really stupid laws about how much and when people receive social security. Remember when families took care of their own?

I am reminded of, I think it is Marin. More than 50% of the town are renters, so everytime they want to raise money for something they vote to 1) approve it and 2) to levy the item as a parcel tax. Somehow CA has the voting might to keep putting agencies and projects into place that someone else has to pay for. This has simply got to stop.

28   FuzzyMath   2008 Dec 19, 1:12am  

"Uh, whom exactly do you think all those illegal immigrants are illegally working for?"

NOT ME.

And I don't understand your point. What does them working for CA companies have to do with giving them free health care and schooling? They would still work without the handouts.

29   Duke   2008 Dec 19, 2:03am  

I think the old addage has been, "We are such a rich country, we should do these things."
I think the new reality is, "We simply cannot afford to keep providing all things to all people becasue we think that is a good idea."

Unless the rich clas is willing to part with the amazing amount of money they have collected over the last 8 years (or longer) than asking those who do not have enough to continue paying for everything and everyone is simply an impossile proposition.

30   slumlord   2008 Dec 19, 2:12am  

Deflation is good because things tend to get cheaper, but with time wages go down so it is null.

Inflation is bad because things get more expensive, but with time wages go up so it is null.

Deflation helps savers, inflation helps borrowers.

The government is a borrower. They don't like deflation and will try to stop it. Which is what we are seeing.

31   FuzzyMath   2008 Dec 19, 2:22am  

“We simply cannot afford to keep providing all things to all people becasue we think that is a good idea.”

We are realizing this at an amazingly slow pace. It's like our country is one big underwater homeowner who keeps buying plasma tv's even though they're broke and out of work...

32   frank649   2008 Dec 19, 2:36am  

But deflation can spiral. Reduced demand, reduced investment in production capacity, fewer jobs. Lather, rinse, repeat.

That's a popular misconception.

Deflation results in increased investments in more sustainable (or what I like to call 'real') endeavors as money tied up in nonproductive investments frees up.

While jobs will be lost where overcapacity exists, new jobs will be created as resources find their way to more productive uses.

It's more than just wages and prices going down, but reallocation of resources to more productive efforts that makes this corrective phase much more desirable than the continued policy of inflation.

Blaming deflation for your woes is like a dope addict blaming his predicament on his rehab program.

33   Peter P   2008 Dec 19, 2:50am  

Deflation is just time to pay the piper.

It is a message from Free Market...

Dear Keynesian,

Business cycles cannot be defeated.

Love
XXX

34   justme   2008 Dec 19, 2:54am  

Business cycles are there because it is how the financial elite gets to buy low and sell high.

Of course cycles can be avoided, but not as long as the Federal Reserve is in cahoots with the elite rather than doing what it should.

35   quesera   2008 Dec 19, 2:56am  

frank writes:

Deflation results in increased investments in more sustainable (or what I like to call ‘real’) endeavors as money tied up in nonproductive investments frees up.

Arguably so, but it's complicated by the fact that the measurement of "productive" is changed by the swing to deflation, and therefore existing debtors (nearly everyone) will suffer.

Creditors would gain, of course. Maybe we can deflate our way into the reestablishment of the American manufacturing industry ... for the Chinese, Japanese, and European middle class. (mostly kidding, globalization is a multi-way street).

Still, I maintain that a little deflation to slow expansionist policy down a bit wouldn't hurt too much and would probably be healthy, but anything prolonged would do great and long-lasting damage.

36   Peter P   2008 Dec 19, 3:03am  

justme...

Annuit cœptis - Novus ordo seclorum

Just take out your dollar bill. ;)

37   Peter P   2008 Dec 19, 3:04am  

But it is all understandable...

Defeating business cycles is as satisfying as reversing "global warming."

38   justme   2008 Dec 19, 3:05am  

Kewp,

Exact;ly, who do we think all these illegal immigrants are working for?

Here is one answer: Doing the yard work and construction for a whole class of aspiring property owners that were too busy inflating the housing bubble to do their own chores.

Fuzzy,

Are you serious, do you think children of illegal immigrants should just be roaming the streets rather than being in school?

I heard on the radio yesterday that about 3-4B out of a 65B schools budget can be attributed to illegal immigrants. For sure this is not the real problem with the California budget. And what would we do without all the farm labor?

39   frank649   2008 Dec 19, 3:06am  

Just heard from my buddy over at Merrill Lynch that he received the same bonus as last year. He wants to thank all the rest of you taxpayers for that and wants you to know that he will promptly send most of it to his family in India. He was so gracious that ML laid off US citizens and kept his H1-B ass employed too. He told all his friends back home and they too will be lining up for your tax dollars. Merry Xmas.

40   Peter P   2008 Dec 19, 3:08am  

Are you serious, do you think children of illegal immigrants should just be roaming the streets rather than being in school?

If they have legal status (e.g. citizenship) of course they should be in school. If they are here illegally, we should deport them as we see them.

And what would we do without all the farm labor?

Guest worker program. Those who are unwilling to register or apply should be deported on sight.

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