what do you guys think of deflation?

what do you guys think of deflation? I keep hearing bad things about it but I think it can't be all that bad is it makes the dollar's buying power that much more...but hey what do I know I'm still probably wet behind the ears

any and all opinions are welcome I want to hear all I can about this subject

Alex

 

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You must not be a business owner. During deflationary times the price of your product or service goes down which means you don't make as much money.

 

Deflation is good if you have cash. Otherwise not so much. I have 1000 oz of silver and 10k in cash in my safe. This, coupled with my other investments - property, stocks and my 401k, make up my portfolio. Diversify, diversify, diversify.....

I firmly believe that the FDIC is in no position to cover everyone if there is a run on banks. Fractional reserve banking guarantees that the banks won't have the dough if everyone asks for theirs at the same time. Plus, you make, like, .05% on most savings accounts. Too much risk and too little reward for me, dude.

 

and if the business owner doesn't make enough cash, he can't support as many employees. If employees get laid off, then there will be less to buy his goods, so he has to lay off more employees, and the downward spiral continues. If a person has the reserves to meet obligations ( housing payment, current loans, food, medical expenses, etc. ) then they can survive such, but otherwise they will have to seek a life with less, and the spiral down to depression continues. Sometimes a person who thinks they have deflation proof jobs or benefits find that they fail. I was hoping we would escape it, but then lately the jobs and housing starts reports were bad, and the confidence level dropping are signs that it could come. The people who will profit are those that can wait until the price of stocks, bullion, property, etc falls so much and they have the cash to buy them. IMO.

 

Just my opinion but there isn't anything wrong with deflation. I can buy more with the dollar bills that I saved. If you ran up a debt and find that deflation makes the bill harder to pay, ask, "why am I in debt in the first place?"

Deflation means prices are cheaper. Cheaper food, cheaper gas, cheaper rents. What's wrong with that? Of course, the reason for the deflation is because you can't keep charging prices as if the economy is healthy and everyone is working, when that isn't the case. We don't have to have deflation, we could opt for inflation by printing more money, which we have been doing, but banks aren't lending it out. Since banks now have all this extra free cash in the form of taxpayers dollars, maybe deflation is exactly what they want, so their dollars they just got for free will be worth even more.

 

Hasn't Japan's economy has been in a deflationary spiral for almost 2 decades? (starting from 1990) Maybe deflation might be good short term but if it continues for a long period of time, then it could be very bad.

If I am wrong on any of this, then feel free to correct me.

 

Deflation has its own challenges, just like inflation. Deflation is bad for business and investors. If you have all of your life savings in coins [regular old pocket change], you might be okay. If it is in stocks, bonds, or money market funds, it is at risk. Delfation is frequently accompanied by massive defaults. Remember early 2009? Even 'A' rated commercial paper could not be rolled over and the Feds stepped in to guarantee it. The reason why the dollar rises during deflation is because there aren't enough of them due to all of the defaults. It won't be pleasant.

That's the "bad deflation." The "good deflation" is what happens when business is good and the money supply is stable. Then, productivity gains tend to result in slowing decreasing price levels, and your money really is worth more. We don't have that kind.

 

selling government debt

Can anybody give me a reason why government debt has to sold.For example,if I have to pay for something and I control the printing presses can't I just print up enough money to pay for it and be done with it.I have never been able to grasp this idea of one country having to have another country buy it's debt.
Question:
What would be the result if say the U.S. had no buyers for it's debt?
When another country buys debt are they just buying printed I.O.U's?

 

This happens from time to time when there is a failed Treasury auction. If there aren't enough buyers, then either the primary dealers hold the bonds or the Federal Reserve [or another central bank] buys them. If carried to excess, this can cause the inflation rate to rise if the Fed doesn't sterilize the transaction. If another country buys US debt, they have to pay with US dollars, not IOUs. This hasn't been a big problem since many countries have a trade surplus with the US and need to do something with the dollars. Demand for Treausries has been large enough to keep interest rates low as people and insitututions seek a risk-free place to park money. But this too will pass and it would be dangerous to assume that things will stay this way forever.

But to answer your first question more directly, there is no good reason why the government has to issue debt instead of printing their own money. Lincoln did this to finance the Civil War. Back then it was inflationary, but there are more tools to handle the inflation now and it remains an alternative that just isn't used anymore because central banks are viewed as a better way to control the economy than permitting Congress and the Treasury to do it.

Edit: I hope that isn't political. It was intended to be economic and non-partisan.

 

I don't see anything political about that at all. Informative and factual.

I, personally, am "ehh" on deflation. I hold a lot of stock, with a growing silver hedge, so deflation wouldn't be a good thing for me. OTOH, it wouldn't be horrible for me either. The more I learn about the current US monetary system, the more I dislike it, and that goes for pretty much the state of everything in this country right now...

 

An Informative Neutral Post!

I believe your post to be a well stated compliment of fact and opinion, in the proper vain of relative neutrality. Thanks for the enlightenment. :thumb:

 

Thanks, guys. I just don't want people to start coughing up blood and have spinal fluid pouring out of their ears like the last time I posted some economic thoughts. It's tough to see where the line is sometimes until you cross it.

 

safety of treasurys vs gold

While were on economics,I would like to know why treasury notes,t-note or t-bills are considered safe and liquid.In the event of a currency collapse,for example a hyper-inflation scenerio,why are they preferred if you would be receiving worthless notes in return for your t-bills or t-notes ect.
I can understand why they would be safe if they were backed by gold or silver but are they not backed by nothing more than a promise to pay?Am I right or wrong.
Although bullion pays no interest,it appears to be the ultimate hedge against anything negative.
If anyone can answer thanks in advance.

 

They are safe because they can't default. A $1000 note is denominated in terms of itself. The money is the debt and the debt is the money. It is liquid because it is a huge market with many players seeking an asset that cannot default. Hyperinflation is a very low probability event despite what you read on the internet. If it was considered probable, interest rates wouldn't be so low. A "simple" solution if you are worried about a currency collapse is to not hold currency. Own stocks, real estate, coins, bullion, food and a lifetime supply of toilet paper. Hold only enough currency to pay your bills and live your life. When you think about it, money isn't wealth. Money is the stuff you use to buy the things that represent wealth.

 

Deflation by its nature destroys an economy, that is the danger. It doesn't SOUND bad, but it is much more horrible than low to moderate inflation.

An example, lets say we have deflation and everyone gets used to it. Then no one will spend their money because it will be lower tomorrow. Since no one spends their money, then businesses slow down, lay people off, then there is even less spending. A deflationary spiral is actually more sever than most inflationary ones. Inflation, on the other hand, encourages people to spend today, since prices will be higher tomorrow. This spurs economic growth, adds jobs, etc.

One cannot judge inflation or deflation by their own circumstances, but by what it would do overall to the economy.

Btw, I used to teach grad level economics, and can go into the boring stuff if anyone wants.

Regarding why does the US issue debt and not more notes, there is very limited market for notes. Printing trillions more would lead to hyperinflation, so it isn't an option anymore. Not many good options left really except inflate our way out of this and take the money from average US citizens. That will be the "tax" the politicians levy next I am afraid.

 

Treasuries are called "safe" since they harbor theoretically zero credit default risk. All other bonds have to price in a default risk on top of Treasury yields. This "safe" categorization is really only effective in understanding bond pricing mechanisms. It does not relate to what would happen in the event of an economic catastrophe. If hyperinflation happened, all bonds would really be valueless, but stocks would be more valuable since they are claims on hard assets, not claims on money. And of course direct ownership of commodities, (like gold and silver), would be intact.

As to your assertion that metals being the ultimate safe haven for anything negative, that is not true. In a deflationary spiral, everything I just said is reversed. Bond are preferable since they are claims on money, which goes up every day. Stocks become devalued, and people who have their money in gold and silver lose more every day. This happened in the late 1890's, with farmers demanding freer minting of silver to spur inflation, with the Treasury resisting. This lead to Bryan's famous "Cross of Gold" speech.

 

I usually get myself in a lot of trouble responding to this stuff, but here goes nuthin'...

I don't agree that deflation is worse than inflation, or inflation worse than deflation. Either way, people experience a destruction of purchasing power. Deflation destroys it through default and lack of money. Inflation destroys it through the destruction of purchasing power and loss of real value. The hoarding of necessities before prices rise isn't "economic growth." It's a race to survive, just like deflation. I find it very dangerous when experts in economics believe that one "flation" is better than the other "flation." Either way, the average person will lose their life savings and struggle to survive. Of course, it is all a matter of degree. The inflation of the 70s was "better" than the deflation of the 30s, and the deflation in Japan is better than the inflation in Germany in the 20s. It's all a matter of degree, not kind.

 

True that neither are perfect. But, the fact remains that low inflation in reality acts as an inducer for consumption. Even if someone tries to hoard necessities, most necessities are somewhat perishable. This hoarding will correspond to advanced production, which will lead to larger payrolls and input purchases. Deflation is the opposite, it discourages payroll and input purchases, therefor further retarding economic growth. Therefor, as a preference, almost all economists would state that low inflation is preferable to low deflation. Also, if inflation is low, it can be offset by investing wealth in interest bearing instruments, therefor not eroding wealth. Deflation, unless you have all wealth in cash, cannot be countered this way. There would be a point where moderate inflation, (or severe), would be worst than low deflation, I am not exactly sure how it would be calculated, but it would be there.

Please feel free to disagree, just stating a standard opinion, and the one I agree with. Given a preference, (and same degree), I would always choose inflation. Now severe inflation is of course horrible to everyone, and Japans deflation was very mild, so a comparison of Japans deflation to severe inflation anywhere will show Japan to be the winner. Also the fact that Japan is an export driven economy mutes the effects of deflation, since if local consumers do not buy, Japanese companies can always sell overseas. This would not be as effective in the US since we are not an export driven economy, but a consumption driven one.

Many economists actually claim low inflation is actually the most preferable situation of all. I completely understand where they are coming from, but I still lean towards an ideal of flat pricing, (ie no inflation or deflation at all). That is almost impossible, though.

Now, if you want to get into an argument that the government systematically underreports inflation, I would completely agree and help you out. I am CFO of a company and we are actually a part of the CPI, and how it is calculated is pretty silly.

 

In my opinion, the weakness in the "standard opinion" is that it concentrates on flows and not on the balance sheet. It is true that low inflation forces people to spend, and if your measure of wealth is nominal GDP, things look good. But low inflation also seriously erodes purchasing power over time for people trying to save and invest. I think you overstate the ease of earning an after tax rate of return that exceeds the inflation rate. A mild deflation hurts the nominal GDP that most economists focus on, but makes it easier for people to save and invest for the future since they can come out ahead by doing nothing, while beating inflation involves substantial risk-taking. And mild deflation doesn't necessarily hurt employment. Japan, which has mild deflation, has less unemployment that the US which has mild inflation. So I think the "standard opinion" works better in theory than it does in the real world.

 

Low inflation is hard to beat? Heck, the US sells bonds that pay inflation plus a small interest rate. Buy them and you always beat inflation. You have to remember most Americans are heavily in debt, therefor deflation is incredibly burdensome to them. I am not talking about credit cards, but mortgages. By advocating deflation, you would put most houses out of reach because every year the payments would become harder and harder to make since the dollar goes up in value. With inflation, every year the payments become easier. What do you think that would do to the economy? We have just went through just a fraction of the destruction we would see in the housing industry if we had deflation.

Like I said, do not use Japan as your deflationary model. Look at the US in the 1890's. The farmers were most affected, since most Americans did not have mortgages. Look at that model instead, and then take the farmer's plight and spread it to 90% of Americans today. You say people can make money by doing nothing in deflation, but you forget that almost all wealth people own is NOT cash, but assets. By doing nothing in deflation you lose every year. How much of your wealth is in cash versus your home, coins, cars, stocks, etc?

Sorry but concentrating on balance sheets shows you how older Americans who own their home and simply want to preserve their lifetime of wealth would fare, (even then they would have to be all cash for investments). It is ignoring everyone else who is trying to build lifetime wealth or simply trying to live. Balance sheets are a result of, not a driver of, economic activity, and to the extent your balance sheet is not cash or bonds, you lose in deflation.