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Fed Leaders Show Division Over Deflation

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ViennaSausage Posted: Thu, Jul 15 2010 10:44 AM

This article suggests that the Fed has run out of options in terms of "stimulating" the economy.

http://www.nytimes.com/2010/07/15/business/economy/15econ.html?_r=2&hpw

I am trying to understand the "logic" of price inflation, price disinflation, and price deflation.  The Fed allegedly wants to counter price deflation, but isn't deflation a good thing?  Prices fluctuate accordingly.

Disinflation is still inflation, just at a slower arbitrary rate.  Perhaps there is no logic to their position at all?

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Bogart replied on Thu, Jul 15 2010 2:25 PM

Inflation is always a monetary phenomina.  The Fed has created more money than what was supposedly lost in the business and personal bankruptcies, and forclosures.  The Fed is trying to remove money from the economy, but I think the affects of this are mixed in with the other massive malinvestments in government over the past several years.

 

So it is not inflation or deflation as the inflation has taken place, but the question is are prices going up or down.  And here the government statistics are outright lies (Really distorions based on increases in the capabilities and qualities of electronic products and services.).  Prices are rising and have been except for maybe the late fall of 2008.  And if they dropped there, it has not been by much.  Now the price rises are accellerating.  Look at the prices on clothes and food.  And once the economy starts to pick up you will see rising prices in energy.

 

Unlike the advisors to Obama and the NYT, I have put my real money where my mouth is.  I am buying energy and precious metals mainly silver.

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Hard Rain replied on Thu, Jul 15 2010 2:37 PM

Deflation is rabidly feared by institutions immersed in debt. Which institutions have the most debt in the world? Governments...

Jörg Guido Hülsmann does a brilliant presentation of this here.

"I don't believe in ghosts, sermons, or stories about money" - Rooster Cogburn, True Grit.
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The federal government and many other debtors will be harmed by deflation.  We grow our debt fast enough as it is, we don't need our debt growing by monetary forces...

At least that is what I believe the mentality of the federal reserve is.

Our federal debt is >13 trillion imagine 2% deflation per annum or 13X1.02=13.26

or in other words 260 billion dollars piled up per annum onto the federal governments on budget debt alone.

Combine that with an economic outlook that views deflation as catastrophic...

Or perhaps that is why their economic outlook views deflation as catastrophic blush

 

"It was different with the "new economics" of Lord Keynes.  The policies he advocated were precisely those which almost all governments, including the British, had already adopted many years before his "General Theory" was published.  Keynes was not an innovator and champion of new methods of managing economic affairs.  His contribution consisted rather in providing an apparent justification for the policies which were popular with those in power in spite of the fact that all economists viewed them as disastrous." - Ludwig Von Mises. Critics of Keynesian Economics p. 319

 

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"Jörg Guido Hülsmann does a brilliant presentation of this here."

That was a great vid.  By any chance, does anyone know the critique for the 4th position, interventionism, that he did not cover in the video?

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"Prices are rising and have been except for maybe the late fall of 2008."

What is the explaination of the drop in prices, albeit the drop was only for a moment?  If monetary inflation leads to price inflation, there should never be a drop in the general price level.

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Hard Rain replied on Thu, Jul 15 2010 3:48 PM

What is the explaination of the drop in prices, albeit the drop was only for a moment?  If monetary inflation leads to price inflation, there should never be a drop in the general price level.

I'm not exactly sure of this, but I'll take a stab at it: My view is that this is the immediate result of the credit bubble popping. Thereafter Helicopter Ben and his government pals dowsed the economy in cheap money and stimulus to counter-act the correction.

Any one more knowledgeable please feel free to elaborate and/or correct me.

"I don't believe in ghosts, sermons, or stories about money" - Rooster Cogburn, True Grit.
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yessir replied on Thu, Jul 15 2010 3:54 PM

 

isn't price deflation like a nuclear bomb in economics, i.e. it will RUIN civilization lol.

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Giant_Joe replied on Thu, Jul 15 2010 3:58 PM

isn't price deflation like a nuclear bomb in economics, i.e. it will RUIN civilization lol.

Yes. It's the same price deflation that's been destroying the market for electronics for the past 50 years. :)

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Hard Rain replied on Thu, Jul 15 2010 3:58 PM

isn't price deflation like a nuclear bomb in economics, i.e. it will RUIN civilization lol.

AaronKilleen's post points things out pretty succinctly. Deflation is disastrous for the heavily indebted; namely governments.

"I don't believe in ghosts, sermons, or stories about money" - Rooster Cogburn, True Grit.
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ViennaSausage:

"Prices are rising and have been except for maybe the late fall of 2008."

What is the explaination of the drop in prices, albeit the drop was only for a moment?  If monetary inflation leads to price inflation, there should never be a drop in the general price level.

Not so. That is part of the beauty of economics, that there always many factors at work. For instance, we have the law of supply and demand. If people lose their jobs by the millions, they won't have money to spend, no matter how much is printed. No money to spend means you are not part of Demand, so demand goes down, so by the law of supply and demand, price goes down.

Also, if people are so in debt that they feel they should repay first thing whatever they can, giving them more money won't increase demand, not for a while.

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