Hyperinflation or Deflation?

by Dollars and Sense

Interesting piece from Counterpunch from a couple of days ago:

Is Hyper-Inflation Around the Corner?

By MIKE WHITNEY | Counterpunch | June 9, 2009

The Republicans are convinced that hyperinflation is just around the corner, but don't believe it. The real enemy is deflation, which is why Fed chief Bernanke has taken such extraordinary steps to pump liquidity into the system. The economy is flat on its back and hemorrhaging a half a million jobs per month. The housing market is crashing, retail sales are in a funk, manufacturing is down, exports are falling, and consumers have started saving for the first time in decades. There's excess capacity everywhere and aggregate demand has dropped off a cliff. If it wasn't for the Fed's monetary stimulus and myriad lending facilities, the economy would be stretched out on a marble slab right now. So, where's the inflation? Here's Paul Krugman with part of the answer:

"It's important to realize that there's no hint of inflationary pressures in the economy right now. Consumer prices are lower now than they were a year ago, and wage increases have stalled in the face of high unemployment. Deflation, not inflation, is the clear and present danger....

"Is there a risk that we'll have inflation after the economy recovers? That's the claim of those who look at projections that federal debt may rise to more than 100 percent of G.D.P. and say that America will eventually have to inflate away that debt—that is, drive up prices so that the real value of the debt is reduced....Such things have happened in the past....

"Some economists have argued for moderate inflation as a deliberate policy, as a way to encourage lending and reduce private debt burdens (but)... there's no sign it's getting traction with U.S. policy makers now."

Krugman believes that conservatives have conjured up the inflation hobgoblin for political purposes to knock Obama's recovery plan off-course. But even if he's mistaken, there's little chance that inflation will flare up anytime soon because the economy is still contracting, albeit at a slower pace than before. A good chunk of the Fed's liquidity is sitting idle in bank vaults instead of churning through the system. According to Econbrowser, excess bank reserves have bolted from $96.5 billion in August 2008 to $949.6 billion by April 2009. Bernanke hoped the extra reserves would help jump-start the economy, but he was wrong. The people who need credit, can't get it; while the people who qualify, don't want it. It's just more proof that the slowdown is spreading.

That doesn't mean that the dollar won't tumble in the next year or so when the trillion dollar deficits begin to pile up. It probably will. Foreign investors have already scaled back on their dollar-based investments, and central banks are limiting themselves to short-term notes, mostly 3 month Treasuries. If Bernanke steps up his quantitative easing and continues to monetize the debt, there's a good chance that central bankers will jettison their T-Bills and head for the exits. That means that if he keeps printing money like he has been, there's going to be a run on the dollar.

Now that the stock market is showing signs of life again, investors are moving out of risk-free Treasuries and into equities. That's pushing up yields on long-term notes which could potentially short-circuit Bernanke's plans for reviving the economy. Mortgage rates are set off the 10 year Treasury, which shot up to 3.90 per cent by market's close last Friday. The bottom line is that if rates keep rising, housing prices will plummet and the economy will tank. This week's auctions will be a good test of how much interest there really is in US debt.

Read the rest of the article.

Labels: Ben Bernanke, deflation, financial crisis, Inflation, recession

 

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6/12/2009 05:46:00 PM 1 comments links to this post

 

Stock Market's Loss Means Higher Wages?

by Dollars and Sense

Dean Baker has put forth a provocative claim on his blog:

The lead article in the New Year's Day edition of the Washington Post bemoaned the loss of $6.9 trillion in value in U.S. stock market last year. While those who own large amounts of stock have reason to shed tears, this may end being good news for the rest of us.

The loss of stock wealth means that stockholders have less claim to value of the country's output. The U.S. economy can produce just as much in 2009 as it did in 2008 (in fact somewhat more, because of labor force and productivity growth). If stockholders can demand less because of the reduced value of their stock, then this leaves more for the rest of us.

The most visible evidence of how the loss of stockholder wealth can benefit the rest of us was the sharp decline in consumer prices over the last three months. As a result, real wages rose at almost a 15 percent annual rate in the three months from September through November.

Of course, insofar as the demand generated by stockholders (and homeowners, who have also seen their wealth plummet) is not replaced by other sources, then workers are losing jobs. Eventually weakness in the labor market will put more downward pressure on real wages. However, if the loss of demand from stockholders is effectively replaced by demand from the government or foreign sector, then the vast majority of the country will be made better off by this plunge in stock prices.

The Post should have reporters who understand this fact.

--Dean Baker

Addendum: Since the question has been asked repeatedly, I will try to quickly explain how the fall in stock prices can make non-stockholders wealthier. There are two components to the wealth that people have in stock.

One component is the flow of income in dividends, which is turned based loosely on the growth of corporate profits. If, for the moment we make the unrealistic assumption that the growth in profits is unaffected by the crash (there will be feedback effects as we are seeing -- the plunge in demand that resulted from the stock and housing crash is also leading to declines in profits), then this future flow of dividend income will not be affected.

The second component of wealth is that value of the stock itself. How much can I get for selling my 100 shares of Verizon today. This second component is obviously directly affected by the fall in stock prices. Stockholders will consume based in part on the value of their stock wealth. The logic is that they try to more or less balance their consumption over their lifetime. If they have more wealth, then they can consume more over their lifetime.

To take a simple example, imagine a person is 75 and can expect to live another 10 years, and had $200,000 in stock. Then we might expect this person to spend roughly 10 percent of her wealth or $20,000 a year. Now suppose the market has crashed and her stock is only worth $100,000. Then we would expect her spend just $10,000 a year.

This is what is happening as a result of the stock crash. Stockholders have less wealth and therefore are spending less money on cars, vacations and everything else. The reduction in demand places downward pressure on the price of these goods, making them cheaper for everyone. Those folks who did not have a lot of stock gain in this story, assuming that they hold onto their jobs.

Labels: Dean Baker, deflation, Inflation, stock market, wages, Washington Post

 

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1/03/2009 02:38:00 PM 0 comments links to this post

 

Baker Deflates Deflation-Panic Bubble

by Dollars and Sense

There's a lot of talk in the business press about deflation and why we should be worried about it ("like trying to catch a falling knife" is the preferred metaphor).

Dean Baker takes issue with much of what's being written in a recent post on Beat the Press.

Okay, so let's parse this one. If prices are falling, why should we buy items today when we can get them for a lower price next month? That's a real good question.

Has anyone bought a computer in the last two decades? I have run across a few people who have. According to the Commerce Department, computer prices have been falling at the rate of more than 30 percent a year over most of the last two decades. If people felt that it made more sense to wait for prices to drop, we should expect the computer market to have been very weak. That isn't quite consistent with the explosion in computer sales over this period.

But, returning to the other items that might fall in price, if we turn to Japan, which supposedly suffered from deflation for a decade following the collapse of its bubbles, the rate of deflation was typically less than 1 percent a year. (Prices did rise in some years during this decade.)

This means that for a typical item in a typical year, the price would be falling at a rate of less than 0.1 percent a month. That means the pair of pants that i could buy today for $30 will cost just $29.97 cents next month. If I put off buying for two months, then I would only have to pay $29.94. You could easily understand how this would discourage consumption. Of course, the actual rate of deflation was slower in most years.

Baker acknowledges that housing prices are in a serious downward slide, and that this impacts consumer spending, saving, and a myriad of other related industries. But he argues that the housing market is a separate matter, and isn't even factored into the inflation indexes.

Labels: Dean Baker, deflation, housing bubble, Inflation

 

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11/23/2008 04:21:00 PM 0 comments links to this post