13 ms·

Deflation

70 points by gz5 12y ago

jldugger 12y ago
This is more or less what Bernake was staving off in The Crisis, but he had the political savvy to use a technical term:'deleveraging.'
- chasingtheflow 12y ago
  This was also posted recently http://www.brookings.edu/blogs/ben-bernanke/posts/2015/03/30-why-interest-rates-so-low http://www.brookings.edu/blogs/ben-bernanke/posts/2015/03/30...
api 12y ago
I can't imagine energy staying this low for very long. 80+% is fossil: increasing consumption, finite supply. Short term booms and busts are possible, but I fail to understand how the laws of physics permit a secular bear market in energy until we have something really replacing fossil fuels. Conventional wisdom seems frequently wrong in economics. If deflation is now the expectation, inflation might be around the corner.
- deleted 12y ago
  [deleted]
- jessaustin 12y ago
  ...fossil... finite supply. This is only true in a trivial sense. As it should be clear by now (although to be fair it also should have been clear 30 years ago), more effective extraction methods are developed at a steady pace. [EDIT: since this has been confused multiple times, let me clarify that "trivial" and "absolute" are not antonyms.]
  - jacquesm 12y ago
    No, it is very true in an absolute sense as well. It's just that border keeps on shifting but underneath that there is a very real finite amount that exists, and not all of that will ever be extracted.
    - jessaustin 12y ago
      I was thinking of exactly that absolute sense. I consider that sense trivial, in that it won't ever affect our economic situation. (I assume we'll have some other way of making plastics centuries from now when extraction tech finally stops improving.)
      - jacquesm 12y ago
        > I consider that sense trivial, in that it won't ever affect our economic situation. It is already affecting our economic situation in a very real sense and it has done so catastrophically on several occasions in the past. Imagine a world where oil costs $500 / barrel and you're looking at a totally different world than the one we live in today. That would completely alter the balance of power.
        jessaustin 12y ago
        Well, let's not bicker. If you're contemplating sustained (not temporary spikes!) $500/b then you don't agree with TFA's claim that "energy prices are going relentlessly down", although you state above that the feasible extraction "border keeps on shifting". Presumably you envision some factor that will stop innovation in extraction, which would be interesting to learn.
        jacquesm 12y ago
        We are awash in energy, that's not the problem. The problem is in capturing that energy and that energy comes in many forms and only oil currently allows you to project power on a global scale. "It's raining soup, and all we have is forks" And energy prices for say electricity could be going down while energy prices for petroleum could be going through the roof. Utility pricing for energy is historically coupled to the oil price but that won't be sustainable as an ever larger chunk of the energy consumed electrically is generated by renewables or nuclear. The big wildcards are: - ITER - further dramatic reduction in solar panel pricing - mass transportation using electricity - battery technology - the first successful long range electrical airplane
  - api 12y ago
    This will be true until it isn't. Since supply is absolutely finite and EROEI declines over time (easy reserves are used first), fossil fuel extraction as a general economic phenomenon is basically a bubble. Bubbles have a way of going higher and further than anyone expects. As they do so, everyone gets their turn to look like a fool. Initially the bubble skeptics look like idiots and the believers are repeatedly proven right as the bubble builds and builds. Then the bubble pops and the situation inverts. When bubbles do pop they often do so rapidly and destructively. To the extent that our civilization is dependent upon fossil fuels, complex technological civilization is therefore also a bubble. I'm really surprised this doesn't scare the crap out of more people. It's really simple math and physics, and most of the people here have lived through two economic mega-bubbles so you all know what a bubble looks like. You've all seen how "it's different this time" until it isn't, and then crash. If we're still 80+% dependent upon fossil fuels and a real crash comes, this could be an extinction level event. It would likely trigger a global thermonuclear or biological war, since game theoretically the rational course of action would be to attempt to exterminate the rest of humanity as quickly as possible so you have some chance of survival in the face of a rapidly collapsing resource base. A likely scenario would be a brutal Darwinian war of all against all played out in a matter of years, and given our capacity for destruction it's possible that nobody would win. Slower but equally catastrophic scenarios are possible too. An oil crash could lead to immense expansion of the use of coal and coal-to-liquids technology, which would cause exponential increases in CO2 emissions per unit energy generated. As EROEI crashes, we just dig up exponentially increasing quantities of carbon since the net energy profit per unit is declining. If we think we have a carbon problem now, imagine the emission curve going hockey stick. This ends with planetary desertification, an anoxic event, or some kind of chaotic flip to a new ice age. This IMHO is the existential threat faced by humanity in the 21st century. Given the likelihood that similar deposits of easy energy are found elsewhere in the universe, I personally think this is a good candidate for one of the "great filters." https://en.wikipedia.org/wiki/Great_Filter https://en.wikipedia.org/wiki/Great_Filter (I've speculated that the first great filter is warfare, the second is ecology, and the third is a non-expansionary planetary utopia -- leading to gradual disengagement, birth rate collapse, and fade to black. A pleasant extinction event if you will.)
  - snowwrestler 12y ago
    Even if fossil fuel supplies were known to be infinite, our use of them is not because of the impact of their emissions.
  - brc 12y ago
    The Pacific Ocean is finite, but if I try and empty it with a bucket or even a fire truck, it might as well be infinite. Most explanations of 'peak' hydrocarbons make two errors - the first is that they don't understand what reserves are, and the second is that they don't factor in technological innovation as a cost reducing force. People like to throw around 'moores law' as applying to solar and that it will cause it to overtake other energy - but what they forget is that moores-law changes also apply to extraction technology, mind that EROEI continues to favour hydrocarbon based technology, and will do so for a long, long time.
    - api 12y ago
      Start with buckets but add exponential growth. The Pacific will be empty in short order. 1 bucket, 2, 4, 8, 16, 32, 64, ...
- beatpanda 12y ago
  The development and adoption of technologies that will (and must[1][2]) replace fossil fuels are accelerating[3][4]. The combined effect of better technology and legislation will drive demand for fossil fuels into the ground over the next few decades. There is some speculation[5] that this is why Saudi Arabia won't cut production to drive oil prices back up. [1]http://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2014/02/PB-unburnable-carbon-2013-wasted-capital-stranded-assets.pdf http://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/20... [2]http://www.nature.com/nature/journal/v517/n7533/full/nature14016.html http://www.nature.com/nature/journal/v517/n7533/full/nature1... [3]http://cleantechnica.com/2014/04/24/us-solar-energy-capacity-grew-an-astounding-418-from-2010-2014/ http://cleantechnica.com/2014/04/24/us-solar-energy-capacity... [4]http://cleantechnica.com/2014/02/06/technological-advancements-drove-solar-panel-prices/ http://cleantechnica.com/2014/02/06/technological-advancemen... [5]http://www.energypost.eu/historic-moment-saudi-arabia-sees-end-oil-age-coming-opens-valves-carbon-bubble/ http://www.energypost.eu/historic-moment-saudi-arabia-sees-e...
- holri 12y ago
  For example Germans have the electrical energy equivalent of 21 nuclear reactors installed on their house roofs in the form of solar cells nowadays. Sustainable energy has very low variable costs.
ojbyrne 12y ago
I feel like this is a blind spot of VCs - thinking that every oscillation in something - like the current price in oil - is the "new normal" - when it is just as likely to go back to where things were before in 3-5 years. Occupational hazard, I think.
- JustSomeNobody 12y ago
  I think it's just to get their name on a few soundbites rather than actually believing what they say. It's harmless to call something the "new normal". Even if it proves to be temporary it's relatively easy to spin it so that you were correct anyway.
carsongross 12y ago
A slow and steady deflation is the natural state of affairs when productivity is advancing and the social environment is relatively stable. Economists panic about things getting cheaper because they are compromised by the current banking system, which is based on fractionally reserved debt and requires inflation to stave off a general run on fictional assets. Consider: computers have been getting cheaper for a generation and its been one of the greatest economic boons in history. I'm aware of the standard economic criticisms of deflation, I just don't agree with them. The massive deflation shock of the Great Depression was due to the preceding leverage boom, and should not be used for a general analysis of deflation without considering that boom. Deflation is usually good. Things we want cost less of our labor. The benefits are widely distributed with no early receiver advantages as there is with inflation. This is a good thing.
- hobbsh 12y ago
  The problem with deflation is that we are a nation of debtors. Deflation causes debt to become more expensive, thus raising defaults and all of the ripples that follow. edit: I should clarify that I don't completely disagree, just that debt is the real problem. No one wants to endure the short term pain so we keep "kicking the can down the road" as they say.
  - carsongross 12y ago
    I agree, I think we are probably too far gone at this point. There will almost certainly be a massive deflationary shock anyway, because total debt isn't expanding at anywhere near the rate necessary to keep up with the pre-2008 curve. (Last I saw, about a year ago, the gap was 30 trillion dollars between the L1 total debt and the extrapolated pre-2008 L1 curve.) Regardless, I think its important to point out that a slow and steady deflation is actually an ideal or at least a reasonable state for an economy.
    - roymurdock 12y ago
      Reasonable yes, but I don't think you can go as far as to say that it's ideal. The ideal state for an economy is one where the rate of inflation/deflation is determined by the market. This would happen if central banks were disbanded and the production/circulation of currency was left to a (regulated) private sector with a healthy number of competing companies innovating to have the best currency on the market. What we are seeing now is a natural adjustment to years of accumulating debt under an artificial, inflation-targeting central banking system. Central banks have tried their best to prevent deflation in order to support the debt-driven "fractional-reserve" system that has created an unsustainable network of debt that is no longer tied to the productivity of real assets. A system of competing private currencies would remove artificial signals manufactured by central bank monetary policy and gov. fiscal policy.
jchrisa 12y ago
I enjoy this argument in favor of negative interest rates: http://sacred-economics.com/sacred-economics-chapter-12-negative-interest-economics/ http://sacred-economics.com/sacred-economics-chapter-12-nega...
- skilesare 12y ago
  Yes. Yes. Yes! I've read the first 5 paragraphs of this and I'm pretty sure I've found my kindred spirit. Anyone know the best way to contact this guy?
  - jchrisa 12y ago
    He's got a bunch of books, actually my favorite is "The Yoga of Eating" even though I'm not in the market for diet advice.
natrius 12y ago
I think this line of reasoning conflates deflation caused by a massive deleveraging crisis and deflation caused by more of the economy jumping on the train of dramatic price decreases that the technology industry has always dealt with. Our global deflation problem is caused by too much debt. Debt can't increase faster than the economy indefinitely because it becomes impossible to pay back. But it had been increasing in that fashion for quite some time before the financial crisis. We're now living in a world where debt isn't growing at those fast rates, and central banks have been trying to keep the economy going without it. Central banks have kept the economy going by buying low-risk assets with new money, which makes the value of assets in general go up. They've also set interest rates to zero, which makes it attractive to borrow money. Asset holders feel richer and spend more money than they would otherwise. Investment opportunities become more attractive because it's cheaper to borrow money to take advantage of those opportunities. We get economic growth. These were reasonable actions for our central banks to take. But eventually, the actions of our central banks will need to be reversed. Low interest rates and quantitative easing in perpetuity will eventually cause inflation when the economy gets healthier, or asset prices will get too high for people to continue to expect future gains. This is why the Fed is planning on raising interest rates this year. The problem is that raising interest rates will cause people to stop expecting higher asset prices as well, and they will sell. Deflation in the long run is something to worry about, but it's strange for me to hear long term worries when we have more serious short term worries. How do you stop our extraordinary monetary policies without dramatically popping the asset bubble and causing the problems that our policies have been avoiding for six years?
- surfmike 12y ago
  The Fed is still not even hitting its own 2% inflation target. Long-term inflation indicators are showing we'll have below-target inflation for a long time. People have been saying inflation is right around the corner ever since QE started, and it's nowhere in sight. I would argue exactly the opposite -- deflation in the short term is something we should absolutely worry about. We know very well how to put a lid on inflation once it starts, but for now we have exactly the opposite problem.
  - 12y ago
themagician 12y ago
The longer we stay in a zero-interest rate environment the more distorted things become, particularly here in the Bay Area. Every day more and more cash pours into the Bay Area because it's one of the best risk-adjusted investments. Be it tech, real estate, or biotech, everything is booming. Without an alternative things will continue along this path. There's just more money here now than there otherwise would be. Some call it a bubble, some don't—it doesn't really matter. From a certain perceptive, it's a good thing. If things stay like this perhaps the giant pool of money will continue to pool around things that are relatively riskier than the traditional financial instruments. This seems strange to us, but maybe this is actually a better allocation of capital. Maybe we are just moving into a world where a relatively higher portion of the world's capital flows into biotech instead of treasury bills.
softdev12 12y ago
With inflation running so low in the U.S. for so many years, it's easy to try to extrapolate this trend as the new norm. And, yes, there are technology pressures that push costs down (i.e machines replacing workers, Moore's law, etc.) However, there are two big factors that argue against long term deflation: 1) Employee wages: Built into the compensation system is a review process that rewards workers for their work. To date, this process includes a wage increase in the form of a "raise". In an era of full employment, periodic raises push costs up, which leads to increases in prices, which leads to inflation. To change this, the compensation system would need to be changed or employment severely reduced. 2) Central Banks: Most central bankers will use all their tools (in the form of monetary fiscal policy) to prevent long-term deflation. So, there will likely be a major counter-acting force from large governments over time.
- mrec 12y ago
  > To date, this process includes a wage increase in the form of a "raise". In an era of full employment, periodic raises push costs up Not inherently, I don't think. If every employee started on $10 and got a $1 raise every year until they retired, and there was a 1:1 ratio of joiners to retirers, there's no overall inflation. Individuals' wages might rise over time, but the average wage doesn't have to. > Most central bankers will use all their tools (in the form of monetary fiscal policy) to prevent long-term deflation. Empirically, central bankers respond to a bursting asset bubble by blowing a bigger asset bubble. Dotcom bubble crashes, blow a housing bubble. Housing bubble crashes, blow an everything bubble.
xhrpost 12y ago
I think this only holds true if needs (or perhaps, desires) remain completely static. If standard of living never increases and what we want to do with resources never increases. If you want to compare Moore's law, technically the 5khz speed of the ENIAC would cost pennies today. So, why do we spend hundreds of millions on super computers? Simple, we already did what 5khz did for us, now we want to do more. If commodities are cheaper, new industries will spring up that make use of that pricing. The builders of the ENIAC may not have envisioned people coding in their basements to make a nice living, but that's what they paved the way for. If there are deflationary effects in action, though there will probably be down sides, I'm excited to see what new industries pop up from it.
adventured 12y ago
"Energy prices are going relentlessly down." That's very wrong. http://i.imgur.com/LG2LTTT.jpg http://i.imgur.com/LG2LTTT.jpg Meanwhile annual energy use per household has not increased in two decades.
- wutbrodo 12y ago
  It's worth noting that the price rise is in large part due to the switch away from coal[1] towards more expensive nat'l gas and renewables. A big chunk of the cost "increase" can be attributed to actually paying the cost of externalities (i.e. the costs of coal-burning to others is not reflected in the price). You are right though, it does make the claim that "energy prices are going relentlessly hard" odd without further context; presumably he was talking about a more apples-to-apples comparison of how each type of energy is dropping in price (oil prices dropping, renewables getting cheaper), but that the mix is shifting towards types of energy that are more expensive (and have less externalities) so _residential_ energy prices reflect more of the cost. [1] http://www.latimes.com/nation/la-na-power-prices-20140426-story.html#page=1 http://www.latimes.com/nation/la-na-power-prices-20140426-st...
chubot 12y ago
Can someone explain this to me? The government seems to report that inflation is very low, bordering on deflation. But what I see is the cost of these things skyrocketing: education, housing, and health care. That is -- the things that real people actually need! I don't care about the cost of cell phones and TVs and so forth. Or even gas (for me). Those are a drop in the bucket. Education: I graduated in 2001 from an Ivy League university. It cost $32K a year as far as I remember. The same thing costs $50K or so now? That's a pretty astounding increase in such a short time. Housing: Obviously situations are different throughout the country, but in the wealthier areas like NYC and the Bay Area housing prices seems out of control. I feel like housing prices aren't falling in the US in general besides economically distressed places like Detroit, but I could be wrong. Health care: Costs also seem to be rising quickly, but admittedly that is probably because health care is generally much better than it was 50 years ago and people will pay anything to survive, and they are surviving in greater rates (e.g. compare Iraq veterans to veterans of previous wars.) Sure all of these are just anecdotes. But I think there is something to the experience that education, housing, and health care are increasing in cost. Probably the main reason is that they are NOT as affected by globalization. And they are essential to life. Lumping everything together under "inflation" or "deflation" seems misleading. There are many different parts of the economy and they have different properties.
- thistleco 12y ago
  Education, and Health Care are still very labor intensive. The benefit the author talks about wrt Moore's law hasn't yet made a serious dent in either... quite simply, computers haven't displaced humans yet, as they have in many other fields. Nearly everything else has become more industrial over time, making it relatively cheaper.
  - jazzyk 12y ago
    Education may never be fully automated - it is still (over-simplifying it a bit) one prof talking to a bunch of students a couple of times a week. On-line courses are fantastic, but young people still need coaching and inspiration coming from other humans. What is interesting is that, while the model of education has not changed, higher education costs had increased by 8-10% above inflation over the past 20 years. The money was not spent on research/learning. It went to build up spa-like amenities (gyms, swimming pools, etc), but primarily to administration personnel. Loads and loads of senior vice presidents and chancellors. But wait, the best paid profession in education? University sports coaches: http://deadspin.com/infographic-is-your-states-highest-paid-employee-a-co-489635228 http://deadspin.com/infographic-is-your-states-highest-paid-... I hope online courses can provide some deflationary effect, and force re-focusing on research and learning which should be all that education is about.
jacquesm 12y ago
Inflation adjusted oil prices: http://inflationdata.com/Inflation/images/charts/Oil/Inflation_Adj_Oil_Prices_Chart_small.jpg http://inflationdata.com/Inflation/images/charts/Oil/Inflati...
- mrfusion 12y ago
  What should I take away from that?
  - jacquesm 12y ago
    That dollar-for-dollar oil prices have not risen nearly as much as you might think since the 70's, especially not when compared to other items such as real-estate or food.
dimitar 12y ago
One of my favorite economists has argued that whether you have 1% deflation, 0% inflation or 1% inflation isn't that different. Most prices aren't really changing - you don't get much of the effects mentioned in the post or most of the comments. But getting the economy to 5% inflation? That brings a lot of dynamism back!
roymurdock 12y ago
Saving is the way to bet on deflation. If you really want to bet on deflation simply sell all non-necessary assets now, hold your wealth in cash or 10 year T-bills (not short-term interest bearing debt which are highly-correlated to the rate of deflation), and watch your cash/bonds appreciate relative to the goods you've sold.
skilesare 12y ago
I just kicked off a kickstarter to try to builds some experiments to deal with a lot of these issues. So far I'm not hopeful that there is enough interest in looking at these things differently to get it funded, but I'm going to build it anyway. https://www.kickstarter.com/projects/hypercapital/hypercapital-experiment-testnet-apis https://www.kickstarter.com/projects/hypercapital/hypercapit... More at: http://hypercapital.info http://hypercapital.info
terrilldent 12y ago
Core CPI is around 1.7% in the US right now. Energy is affecting the non-core value (currently at 0% or slightly negative). The non-core value is typically very volatile. The Fed has a target of 2% inflation. Krugman makes good arguments that the target should be 4%. Meanwhile the Fed is talking about raising interest rates later this year (which is deflationary). There are two clearly different views forming and it will be interesting to see how it plays out. Canada has a target 'between 1 and 3%' and our core is currently sitting at 2.1%. We just had a interest rate decrease. Some recent comments from Krugman about why we didn't see deflation during the recent recession: http://krugman.blogs.nytimes.com/2015/03/31/missing-deflation-and-the-argument-for-inflation/ http://krugman.blogs.nytimes.com/2015/03/31/missing-deflatio...
runako 12y ago
>What if we have seen peak energy prices on our lifetime? What if we won’t see long term rates in the US of 10% again in our lifetime? It's predictable that financial operators will, at some point during a cycle, begin to wonder if current conditions will persist forever. What's fascinating to me is that smart people have to relearn the lessons from not too far back, as if it's all new material. "The new normal" ended a long time ago for many asset classes. As a credit to Wilson, he's not cheerleading for the ideas in his post. Nonetheless, the questions he raises mirror the idea that the dollar was dead (Protect your wealth with Bitcoin!) or the earlier idea that real estate prices will only go up. Or that the New Economy wasn't bound by the old rules. The peak oil idea was popular in 2006, and celebrities wanted to get paid in Euros during the crisis. The global economy is dynamic. Times change. Stuff repeats. This time is not different.
- gfodor 12y ago
  Stuff doesn't repeat, it rhymes. We may see the economic cycle upturn again, but interest rates might not go along for the ride this time. For example, in the 70's, stagflation was pretty different that time. Also the balance sheet recession in Japan was also pretty different. We're riding some major trends in increased productivity that may go exponential, so if that's the case then yes, this time it is very different and the downward pressure on rates from this might put us into a secular deflationary period of a pretty long time. Nobody is saying we'll never see a period of rapid inflation or high interest rates, but merely saying that we may be in a secular period that lasts long enough for that not to matter for anyone alive today.
pistle 12y ago
This sounds like the converse of "housing prices are expanding at double-digit rates! Is this the new normal?!" Of course, that's right before a crash. Just a thought...
cs702 12y ago
A persistently deflationary economy would be horrible: When everyone expects prices to fall in the future, everyone becomes less willing to spend today. Sitting on cash becomes an investment with a positive yield. The less everyone wants to spend on goods and services, the less businesses sell of everything, and the more they have to compete by lowering prices further, making everyone less willing to spend... a vicious circle of economic contraction. Businesses normally find it very, very difficult to cut employee compensation in line with declining prices, so they end up cutting costs by firing people instead, making everyone less willing to spend, so businesses sell less of everything, forcing them to cut costs futher... contributing to the vicious circle of economic contraction. A deflationary economy is a negative-sum game in which everyone loses.
- nowey 12y ago
  >When everyone expects prices to fall, everyone becomes less willing to spend I find that contradictory. If something becomes cheaper, I will be more likely to buy it. It's the entire reason to have discounts and sales. Slippery slope fallacy?
  - howlin 12y ago
    Sure it's cheaper, but if you wait another month it will be even more cheap. The longer you can hold of spending, the more you get for your money. Contrast that to a sale. During the sale, things are cheap now with the expectation they'll be more expensive later. Holding on to your money is now costing you buying power.
    - gitah 12y ago
      By that logic why do people buy iPhones? They can wait another year and get the same model cheaper or get a much better one for the same price. The iPhone 6 just had record sales so empirically there are other factors for consumer purchases that are stronger than the "waiting for items to be cheaper" factor.
    - brc 12y ago
      It is a fallacy because most consumption can only be postponed for an indefinite amount of time. If I need a fridge because my old one is broken or I just moved house, then I need a fridge. I'm not going to go without for 6 months because I think fridges will be cheaper then. We all purchase phones, computers, cars and sofas knowing that, in x months time, it's likely that the same item will be cheaper or same price but with more features. It is true that major investments like new factories might conceivably become cheaper but this also ignores opportunity cost - in the same way, with inflation, new factories are more likely to become more expensive, so it's logical to think that in inflationary times, the countryside will be dotted with idle factories built as a hedge. This doesn't happen because of a variety of factors, not the least of which is that people make investments because they expect to see a big margin difference between keeping the cash and having that investment make cash for them. You don't built a new factory because you think you'll make 3% more than bank interest, you do it because you think you'll make 20-50% return on the cash. The deflationary spiral postponed purchases explanation is a bit like the efficient market hypotheses - plausible sounding but ultimately and empirically not true in practice.
chetanahuja 12y ago
Deflation is not just a problem for "debtors". It's a basic and simple problem with the economy as a whole. The very basic problem is, if the 100 dollars I have in my wallet right now will be worth 110 dollars next year, I would naturally be disinclined to spend my money today? Now, one can debate whether economic growth model as understood today (where Growth == higher number of transactions) is the most desirable model of economic goodness or not. But so many other metrics of a happy economy (jobs, govt spending on public services, societal optimism etc.) are so tied up to a growing economy in the current model, that the only practical way this could be changed is via a huge political revolution... which has it's own problems. Given all that, it'll be hard for a reasonable thinker to welcome a permanent state of deflation. And fwiw, IMHO, it's no more than a thought exercise. We're nowhere near an actual permanent state of deflation.
ArkyBeagle 12y ago
It's arguably been going on ( with interruptions ) since 1992. There are only like two years with CPI greater than 5% in the U.S. since then. Of course, it's unevenly distributed - medical care, education and housing have all gone up. I don't think we want nor should we celebrate deflation. It makes a culture hidebound, makes (some) things harder on the poor and can destabilize governments. Income inequality and political polarization both have a basis in deflation, in my view. There are nations - like Australia - that do not have deflation. It's not inevitable.
- NeutronBoy 12y ago
  Australia hasn't had deflation because for the last 20 years we've basically hitched our wagon to China in the form of mining exports. During that time (and particularly the last 5-8 years) the rest of our heavy and manufacturing industry has stagnated or died (our last locally made car manufactures are finishing up production in the next few years). Now that China's boom is slowing, and we have basically no other heavy industry left to fill the gap, deflation is a real possibility.
  - ArkyBeagle 12y ago
    I am sure it will remain to be seen. I am basing what I said on Sumner's writing on the subject ( how's that for an appeal to authority? :) ) He seems to hold that Oz uses something closer to NGDP level targeting in monetary policy. http://www.themoneyillusion.com/?p=12985 http://www.themoneyillusion.com/?p=12985 I am probably missing something.
ArkyBeagle 12y ago
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70 points by gz5 12y ago

This is more or less what Bernake was staving off in The Crisis, but he had the political savvy to use a technical term:'deleveraging.'

chasingtheflow 12y ago
This was also posted recently http://www.brookings.edu/blogs/ben-bernanke/posts/2015/03/30-why-interest-rates-so-low http://www.brookings.edu/blogs/ben-bernanke/posts/2015/03/30...

api 12y ago

I can't imagine energy staying this low for very long. 80+% is fossil: increasing consumption, finite supply. Short term booms and busts are possible, but I fail to understand how the laws of physics permit a secular bear market in energy until we have something really replacing fossil fuels. Conventional wisdom seems frequently wrong in economics. If deflation is now the expectation, inflation might be around the corner.

deleted 12y ago
[deleted]
jessaustin 12y ago
...fossil... finite supply. This is only true in a trivial sense. As it should be clear by now (although to be fair it also should have been clear 30 years ago), more effective extraction methods are developed at a steady pace. [EDIT: since this has been confused multiple times, let me clarify that "trivial" and "absolute" are not antonyms.]
- jacquesm 12y ago
  No, it is very true in an absolute sense as well. It's just that border keeps on shifting but underneath that there is a very real finite amount that exists, and not all of that will ever be extracted.
  - jessaustin 12y ago
    I was thinking of exactly that absolute sense. I consider that sense trivial, in that it won't ever affect our economic situation. (I assume we'll have some other way of making plastics centuries from now when extraction tech finally stops improving.)
    - jacquesm 12y ago
      > I consider that sense trivial, in that it won't ever affect our economic situation. It is already affecting our economic situation in a very real sense and it has done so catastrophically on several occasions in the past. Imagine a world where oil costs $500 / barrel and you're looking at a totally different world than the one we live in today. That would completely alter the balance of power.
      - jessaustin 12y ago
        Well, let's not bicker. If you're contemplating sustained (not temporary spikes!) $500/b then you don't agree with TFA's claim that "energy prices are going relentlessly down", although you state above that the feasible extraction "border keeps on shifting". Presumably you envision some factor that will stop innovation in extraction, which would be interesting to learn.
        jacquesm 12y ago
        We are awash in energy, that's not the problem. The problem is in capturing that energy and that energy comes in many forms and only oil currently allows you to project power on a global scale. "It's raining soup, and all we have is forks" And energy prices for say electricity could be going down while energy prices for petroleum could be going through the roof. Utility pricing for energy is historically coupled to the oil price but that won't be sustainable as an ever larger chunk of the energy consumed electrically is generated by renewables or nuclear. The big wildcards are: - ITER - further dramatic reduction in solar panel pricing - mass transportation using electricity - battery technology - the first successful long range electrical airplane
- api 12y ago
  This will be true until it isn't. Since supply is absolutely finite and EROEI declines over time (easy reserves are used first), fossil fuel extraction as a general economic phenomenon is basically a bubble. Bubbles have a way of going higher and further than anyone expects. As they do so, everyone gets their turn to look like a fool. Initially the bubble skeptics look like idiots and the believers are repeatedly proven right as the bubble builds and builds. Then the bubble pops and the situation inverts. When bubbles do pop they often do so rapidly and destructively. To the extent that our civilization is dependent upon fossil fuels, complex technological civilization is therefore also a bubble. I'm really surprised this doesn't scare the crap out of more people. It's really simple math and physics, and most of the people here have lived through two economic mega-bubbles so you all know what a bubble looks like. You've all seen how "it's different this time" until it isn't, and then crash. If we're still 80+% dependent upon fossil fuels and a real crash comes, this could be an extinction level event. It would likely trigger a global thermonuclear or biological war, since game theoretically the rational course of action would be to attempt to exterminate the rest of humanity as quickly as possible so you have some chance of survival in the face of a rapidly collapsing resource base. A likely scenario would be a brutal Darwinian war of all against all played out in a matter of years, and given our capacity for destruction it's possible that nobody would win. Slower but equally catastrophic scenarios are possible too. An oil crash could lead to immense expansion of the use of coal and coal-to-liquids technology, which would cause exponential increases in CO2 emissions per unit energy generated. As EROEI crashes, we just dig up exponentially increasing quantities of carbon since the net energy profit per unit is declining. If we think we have a carbon problem now, imagine the emission curve going hockey stick. This ends with planetary desertification, an anoxic event, or some kind of chaotic flip to a new ice age. This IMHO is the existential threat faced by humanity in the 21st century. Given the likelihood that similar deposits of easy energy are found elsewhere in the universe, I personally think this is a good candidate for one of the "great filters." https://en.wikipedia.org/wiki/Great_Filter https://en.wikipedia.org/wiki/Great_Filter (I've speculated that the first great filter is warfare, the second is ecology, and the third is a non-expansionary planetary utopia -- leading to gradual disengagement, birth rate collapse, and fade to black. A pleasant extinction event if you will.)
- snowwrestler 12y ago
  Even if fossil fuel supplies were known to be infinite, our use of them is not because of the impact of their emissions.
- brc 12y ago
  The Pacific Ocean is finite, but if I try and empty it with a bucket or even a fire truck, it might as well be infinite. Most explanations of 'peak' hydrocarbons make two errors - the first is that they don't understand what reserves are, and the second is that they don't factor in technological innovation as a cost reducing force. People like to throw around 'moores law' as applying to solar and that it will cause it to overtake other energy - but what they forget is that moores-law changes also apply to extraction technology, mind that EROEI continues to favour hydrocarbon based technology, and will do so for a long, long time.
  - api 12y ago
    Start with buckets but add exponential growth. The Pacific will be empty in short order. 1 bucket, 2, 4, 8, 16, 32, 64, ...
beatpanda 12y ago
The development and adoption of technologies that will (and must[1][2]) replace fossil fuels are accelerating[3][4]. The combined effect of better technology and legislation will drive demand for fossil fuels into the ground over the next few decades. There is some speculation[5] that this is why Saudi Arabia won't cut production to drive oil prices back up. [1]http://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2014/02/PB-unburnable-carbon-2013-wasted-capital-stranded-assets.pdf http://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/20... [2]http://www.nature.com/nature/journal/v517/n7533/full/nature14016.html http://www.nature.com/nature/journal/v517/n7533/full/nature1... [3]http://cleantechnica.com/2014/04/24/us-solar-energy-capacity-grew-an-astounding-418-from-2010-2014/ http://cleantechnica.com/2014/04/24/us-solar-energy-capacity... [4]http://cleantechnica.com/2014/02/06/technological-advancements-drove-solar-panel-prices/ http://cleantechnica.com/2014/02/06/technological-advancemen... [5]http://www.energypost.eu/historic-moment-saudi-arabia-sees-end-oil-age-coming-opens-valves-carbon-bubble/ http://www.energypost.eu/historic-moment-saudi-arabia-sees-e...
holri 12y ago
For example Germans have the electrical energy equivalent of 21 nuclear reactors installed on their house roofs in the form of solar cells nowadays. Sustainable energy has very low variable costs.

ojbyrne 12y ago

I feel like this is a blind spot of VCs - thinking that every oscillation in something - like the current price in oil - is the "new normal" - when it is just as likely to go back to where things were before in 3-5 years. Occupational hazard, I think.

JustSomeNobody 12y ago
I think it's just to get their name on a few soundbites rather than actually believing what they say. It's harmless to call something the "new normal". Even if it proves to be temporary it's relatively easy to spin it so that you were correct anyway.

carsongross 12y ago

A slow and steady deflation is the natural state of affairs when productivity is advancing and the social environment is relatively stable. Economists panic about things getting cheaper because they are compromised by the current banking system, which is based on fractionally reserved debt and requires inflation to stave off a general run on fictional assets. Consider: computers have been getting cheaper for a generation and its been one of the greatest economic boons in history. I'm aware of the standard economic criticisms of deflation, I just don't agree with them. The massive deflation shock of the Great Depression was due to the preceding leverage boom, and should not be used for a general analysis of deflation without considering that boom. Deflation is usually good. Things we want cost less of our labor. The benefits are widely distributed with no early receiver advantages as there is with inflation. This is a good thing.

hobbsh 12y ago
The problem with deflation is that we are a nation of debtors. Deflation causes debt to become more expensive, thus raising defaults and all of the ripples that follow. edit: I should clarify that I don't completely disagree, just that debt is the real problem. No one wants to endure the short term pain so we keep "kicking the can down the road" as they say.
- carsongross 12y ago
  I agree, I think we are probably too far gone at this point. There will almost certainly be a massive deflationary shock anyway, because total debt isn't expanding at anywhere near the rate necessary to keep up with the pre-2008 curve. (Last I saw, about a year ago, the gap was 30 trillion dollars between the L1 total debt and the extrapolated pre-2008 L1 curve.) Regardless, I think its important to point out that a slow and steady deflation is actually an ideal or at least a reasonable state for an economy.
  - roymurdock 12y ago
    Reasonable yes, but I don't think you can go as far as to say that it's ideal. The ideal state for an economy is one where the rate of inflation/deflation is determined by the market. This would happen if central banks were disbanded and the production/circulation of currency was left to a (regulated) private sector with a healthy number of competing companies innovating to have the best currency on the market. What we are seeing now is a natural adjustment to years of accumulating debt under an artificial, inflation-targeting central banking system. Central banks have tried their best to prevent deflation in order to support the debt-driven "fractional-reserve" system that has created an unsustainable network of debt that is no longer tied to the productivity of real assets. A system of competing private currencies would remove artificial signals manufactured by central bank monetary policy and gov. fiscal policy.

jchrisa 12y ago

I enjoy this argument in favor of negative interest rates: http://sacred-economics.com/sacred-economics-chapter-12-negative-interest-economics/ http://sacred-economics.com/sacred-economics-chapter-12-nega...

skilesare 12y ago
Yes. Yes. Yes! I've read the first 5 paragraphs of this and I'm pretty sure I've found my kindred spirit. Anyone know the best way to contact this guy?
- jchrisa 12y ago
  He's got a bunch of books, actually my favorite is "The Yoga of Eating" even though I'm not in the market for diet advice.

natrius 12y ago

I think this line of reasoning conflates deflation caused by a massive deleveraging crisis and deflation caused by more of the economy jumping on the train of dramatic price decreases that the technology industry has always dealt with. Our global deflation problem is caused by too much debt. Debt can't increase faster than the economy indefinitely because it becomes impossible to pay back. But it had been increasing in that fashion for quite some time before the financial crisis. We're now living in a world where debt isn't growing at those fast rates, and central banks have been trying to keep the economy going without it. Central banks have kept the economy going by buying low-risk assets with new money, which makes the value of assets in general go up. They've also set interest rates to zero, which makes it attractive to borrow money. Asset holders feel richer and spend more money than they would otherwise. Investment opportunities become more attractive because it's cheaper to borrow money to take advantage of those opportunities. We get economic growth. These were reasonable actions for our central banks to take. But eventually, the actions of our central banks will need to be reversed. Low interest rates and quantitative easing in perpetuity will eventually cause inflation when the economy gets healthier, or asset prices will get too high for people to continue to expect future gains. This is why the Fed is planning on raising interest rates this year. The problem is that raising interest rates will cause people to stop expecting higher asset prices as well, and they will sell. Deflation in the long run is something to worry about, but it's strange for me to hear long term worries when we have more serious short term worries. How do you stop our extraordinary monetary policies without dramatically popping the asset bubble and causing the problems that our policies have been avoiding for six years?

surfmike 12y ago
The Fed is still not even hitting its own 2% inflation target. Long-term inflation indicators are showing we'll have below-target inflation for a long time. People have been saying inflation is right around the corner ever since QE started, and it's nowhere in sight. I would argue exactly the opposite -- deflation in the short term is something we should absolutely worry about. We know very well how to put a lid on inflation once it starts, but for now we have exactly the opposite problem.
- 12y ago

themagician 12y ago

The longer we stay in a zero-interest rate environment the more distorted things become, particularly here in the Bay Area. Every day more and more cash pours into the Bay Area because it's one of the best risk-adjusted investments. Be it tech, real estate, or biotech, everything is booming. Without an alternative things will continue along this path. There's just more money here now than there otherwise would be. Some call it a bubble, some don't—it doesn't really matter. From a certain perceptive, it's a good thing. If things stay like this perhaps the giant pool of money will continue to pool around things that are relatively riskier than the traditional financial instruments. This seems strange to us, but maybe this is actually a better allocation of capital. Maybe we are just moving into a world where a relatively higher portion of the world's capital flows into biotech instead of treasury bills.

softdev12 12y ago

With inflation running so low in the U.S. for so many years, it's easy to try to extrapolate this trend as the new norm. And, yes, there are technology pressures that push costs down (i.e machines replacing workers, Moore's law, etc.) However, there are two big factors that argue against long term deflation: 1) Employee wages: Built into the compensation system is a review process that rewards workers for their work. To date, this process includes a wage increase in the form of a "raise". In an era of full employment, periodic raises push costs up, which leads to increases in prices, which leads to inflation. To change this, the compensation system would need to be changed or employment severely reduced. 2) Central Banks: Most central bankers will use all their tools (in the form of monetary fiscal policy) to prevent long-term deflation. So, there will likely be a major counter-acting force from large governments over time.

mrec 12y ago
> To date, this process includes a wage increase in the form of a "raise". In an era of full employment, periodic raises push costs up Not inherently, I don't think. If every employee started on $10 and got a $1 raise every year until they retired, and there was a 1:1 ratio of joiners to retirers, there's no overall inflation. Individuals' wages might rise over time, but the average wage doesn't have to. > Most central bankers will use all their tools (in the form of monetary fiscal policy) to prevent long-term deflation. Empirically, central bankers respond to a bursting asset bubble by blowing a bigger asset bubble. Dotcom bubble crashes, blow a housing bubble. Housing bubble crashes, blow an everything bubble.

xhrpost 12y ago

I think this only holds true if needs (or perhaps, desires) remain completely static. If standard of living never increases and what we want to do with resources never increases. If you want to compare Moore's law, technically the 5khz speed of the ENIAC would cost pennies today. So, why do we spend hundreds of millions on super computers? Simple, we already did what 5khz did for us, now we want to do more. If commodities are cheaper, new industries will spring up that make use of that pricing. The builders of the ENIAC may not have envisioned people coding in their basements to make a nice living, but that's what they paved the way for. If there are deflationary effects in action, though there will probably be down sides, I'm excited to see what new industries pop up from it.

adventured 12y ago

"Energy prices are going relentlessly down." That's very wrong. http://i.imgur.com/LG2LTTT.jpg http://i.imgur.com/LG2LTTT.jpg Meanwhile annual energy use per household has not increased in two decades.

wutbrodo 12y ago
It's worth noting that the price rise is in large part due to the switch away from coal[1] towards more expensive nat'l gas and renewables. A big chunk of the cost "increase" can be attributed to actually paying the cost of externalities (i.e. the costs of coal-burning to others is not reflected in the price). You are right though, it does make the claim that "energy prices are going relentlessly hard" odd without further context; presumably he was talking about a more apples-to-apples comparison of how each type of energy is dropping in price (oil prices dropping, renewables getting cheaper), but that the mix is shifting towards types of energy that are more expensive (and have less externalities) so _residential_ energy prices reflect more of the cost. [1] http://www.latimes.com/nation/la-na-power-prices-20140426-story.html#page=1 http://www.latimes.com/nation/la-na-power-prices-20140426-st...

chubot 12y ago

Can someone explain this to me? The government seems to report that inflation is very low, bordering on deflation. But what I see is the cost of these things skyrocketing: education, housing, and health care. That is -- the things that real people actually need! I don't care about the cost of cell phones and TVs and so forth. Or even gas (for me). Those are a drop in the bucket. Education: I graduated in 2001 from an Ivy League university. It cost $32K a year as far as I remember. The same thing costs $50K or so now? That's a pretty astounding increase in such a short time. Housing: Obviously situations are different throughout the country, but in the wealthier areas like NYC and the Bay Area housing prices seems out of control. I feel like housing prices aren't falling in the US in general besides economically distressed places like Detroit, but I could be wrong. Health care: Costs also seem to be rising quickly, but admittedly that is probably because health care is generally much better than it was 50 years ago and people will pay anything to survive, and they are surviving in greater rates (e.g. compare Iraq veterans to veterans of previous wars.) Sure all of these are just anecdotes. But I think there is something to the experience that education, housing, and health care are increasing in cost. Probably the main reason is that they are NOT as affected by globalization. And they are essential to life. Lumping everything together under "inflation" or "deflation" seems misleading. There are many different parts of the economy and they have different properties.

thistleco 12y ago
Education, and Health Care are still very labor intensive. The benefit the author talks about wrt Moore's law hasn't yet made a serious dent in either... quite simply, computers haven't displaced humans yet, as they have in many other fields. Nearly everything else has become more industrial over time, making it relatively cheaper.
- jazzyk 12y ago
  Education may never be fully automated - it is still (over-simplifying it a bit) one prof talking to a bunch of students a couple of times a week. On-line courses are fantastic, but young people still need coaching and inspiration coming from other humans. What is interesting is that, while the model of education has not changed, higher education costs had increased by 8-10% above inflation over the past 20 years. The money was not spent on research/learning. It went to build up spa-like amenities (gyms, swimming pools, etc), but primarily to administration personnel. Loads and loads of senior vice presidents and chancellors. But wait, the best paid profession in education? University sports coaches: http://deadspin.com/infographic-is-your-states-highest-paid-employee-a-co-489635228 http://deadspin.com/infographic-is-your-states-highest-paid-... I hope online courses can provide some deflationary effect, and force re-focusing on research and learning which should be all that education is about.

jacquesm 12y ago

Inflation adjusted oil prices: http://inflationdata.com/Inflation/images/charts/Oil/Inflation_Adj_Oil_Prices_Chart_small.jpg http://inflationdata.com/Inflation/images/charts/Oil/Inflati...

mrfusion 12y ago
What should I take away from that?
- jacquesm 12y ago
  That dollar-for-dollar oil prices have not risen nearly as much as you might think since the 70's, especially not when compared to other items such as real-estate or food.

dimitar 12y ago

One of my favorite economists has argued that whether you have 1% deflation, 0% inflation or 1% inflation isn't that different. Most prices aren't really changing - you don't get much of the effects mentioned in the post or most of the comments. But getting the economy to 5% inflation? That brings a lot of dynamism back!

roymurdock 12y ago

Saving is the way to bet on deflation. If you really want to bet on deflation simply sell all non-necessary assets now, hold your wealth in cash or 10 year T-bills (not short-term interest bearing debt which are highly-correlated to the rate of deflation), and watch your cash/bonds appreciate relative to the goods you've sold.

skilesare 12y ago

I just kicked off a kickstarter to try to builds some experiments to deal with a lot of these issues. So far I'm not hopeful that there is enough interest in looking at these things differently to get it funded, but I'm going to build it anyway. https://www.kickstarter.com/projects/hypercapital/hypercapital-experiment-testnet-apis https://www.kickstarter.com/projects/hypercapital/hypercapit... More at: http://hypercapital.info http://hypercapital.info

terrilldent 12y ago

Core CPI is around 1.7% in the US right now. Energy is affecting the non-core value (currently at 0% or slightly negative). The non-core value is typically very volatile. The Fed has a target of 2% inflation. Krugman makes good arguments that the target should be 4%. Meanwhile the Fed is talking about raising interest rates later this year (which is deflationary). There are two clearly different views forming and it will be interesting to see how it plays out. Canada has a target 'between 1 and 3%' and our core is currently sitting at 2.1%. We just had a interest rate decrease. Some recent comments from Krugman about why we didn't see deflation during the recent recession: http://krugman.blogs.nytimes.com/2015/03/31/missing-deflation-and-the-argument-for-inflation/ http://krugman.blogs.nytimes.com/2015/03/31/missing-deflatio...

runako 12y ago

>What if we have seen peak energy prices on our lifetime? What if we won’t see long term rates in the US of 10% again in our lifetime? It's predictable that financial operators will, at some point during a cycle, begin to wonder if current conditions will persist forever. What's fascinating to me is that smart people have to relearn the lessons from not too far back, as if it's all new material. "The new normal" ended a long time ago for many asset classes. As a credit to Wilson, he's not cheerleading for the ideas in his post. Nonetheless, the questions he raises mirror the idea that the dollar was dead (Protect your wealth with Bitcoin!) or the earlier idea that real estate prices will only go up. Or that the New Economy wasn't bound by the old rules. The peak oil idea was popular in 2006, and celebrities wanted to get paid in Euros during the crisis. The global economy is dynamic. Times change. Stuff repeats. This time is not different.

gfodor 12y ago
Stuff doesn't repeat, it rhymes. We may see the economic cycle upturn again, but interest rates might not go along for the ride this time. For example, in the 70's, stagflation was pretty different that time. Also the balance sheet recession in Japan was also pretty different. We're riding some major trends in increased productivity that may go exponential, so if that's the case then yes, this time it is very different and the downward pressure on rates from this might put us into a secular deflationary period of a pretty long time. Nobody is saying we'll never see a period of rapid inflation or high interest rates, but merely saying that we may be in a secular period that lasts long enough for that not to matter for anyone alive today.

pistle 12y ago

This sounds like the converse of "housing prices are expanding at double-digit rates! Is this the new normal?!" Of course, that's right before a crash. Just a thought...

cs702 12y ago

A persistently deflationary economy would be horrible: When everyone expects prices to fall in the future, everyone becomes less willing to spend today. Sitting on cash becomes an investment with a positive yield. The less everyone wants to spend on goods and services, the less businesses sell of everything, and the more they have to compete by lowering prices further, making everyone less willing to spend... a vicious circle of economic contraction. Businesses normally find it very, very difficult to cut employee compensation in line with declining prices, so they end up cutting costs by firing people instead, making everyone less willing to spend, so businesses sell less of everything, forcing them to cut costs futher... contributing to the vicious circle of economic contraction. A deflationary economy is a negative-sum game in which everyone loses.

nowey 12y ago
>When everyone expects prices to fall, everyone becomes less willing to spend I find that contradictory. If something becomes cheaper, I will be more likely to buy it. It's the entire reason to have discounts and sales. Slippery slope fallacy?
- howlin 12y ago
  Sure it's cheaper, but if you wait another month it will be even more cheap. The longer you can hold of spending, the more you get for your money. Contrast that to a sale. During the sale, things are cheap now with the expectation they'll be more expensive later. Holding on to your money is now costing you buying power.
  - gitah 12y ago
    By that logic why do people buy iPhones? They can wait another year and get the same model cheaper or get a much better one for the same price. The iPhone 6 just had record sales so empirically there are other factors for consumer purchases that are stronger than the "waiting for items to be cheaper" factor.
  - brc 12y ago
    It is a fallacy because most consumption can only be postponed for an indefinite amount of time. If I need a fridge because my old one is broken or I just moved house, then I need a fridge. I'm not going to go without for 6 months because I think fridges will be cheaper then. We all purchase phones, computers, cars and sofas knowing that, in x months time, it's likely that the same item will be cheaper or same price but with more features. It is true that major investments like new factories might conceivably become cheaper but this also ignores opportunity cost - in the same way, with inflation, new factories are more likely to become more expensive, so it's logical to think that in inflationary times, the countryside will be dotted with idle factories built as a hedge. This doesn't happen because of a variety of factors, not the least of which is that people make investments because they expect to see a big margin difference between keeping the cash and having that investment make cash for them. You don't built a new factory because you think you'll make 3% more than bank interest, you do it because you think you'll make 20-50% return on the cash. The deflationary spiral postponed purchases explanation is a bit like the efficient market hypotheses - plausible sounding but ultimately and empirically not true in practice.

chetanahuja 12y ago

Deflation is not just a problem for "debtors". It's a basic and simple problem with the economy as a whole. The very basic problem is, if the 100 dollars I have in my wallet right now will be worth 110 dollars next year, I would naturally be disinclined to spend my money today? Now, one can debate whether economic growth model as understood today (where Growth == higher number of transactions) is the most desirable model of economic goodness or not. But so many other metrics of a happy economy (jobs, govt spending on public services, societal optimism etc.) are so tied up to a growing economy in the current model, that the only practical way this could be changed is via a huge political revolution... which has it's own problems. Given all that, it'll be hard for a reasonable thinker to welcome a permanent state of deflation. And fwiw, IMHO, it's no more than a thought exercise. We're nowhere near an actual permanent state of deflation.

ArkyBeagle 12y ago

It's arguably been going on ( with interruptions ) since 1992. There are only like two years with CPI greater than 5% in the U.S. since then. Of course, it's unevenly distributed - medical care, education and housing have all gone up. I don't think we want nor should we celebrate deflation. It makes a culture hidebound, makes (some) things harder on the poor and can destabilize governments. Income inequality and political polarization both have a basis in deflation, in my view. There are nations - like Australia - that do not have deflation. It's not inevitable.

NeutronBoy 12y ago
Australia hasn't had deflation because for the last 20 years we've basically hitched our wagon to China in the form of mining exports. During that time (and particularly the last 5-8 years) the rest of our heavy and manufacturing industry has stagnated or died (our last locally made car manufactures are finishing up production in the next few years). Now that China's boom is slowing, and we have basically no other heavy industry left to fill the gap, deflation is a real possibility.
- ArkyBeagle 12y ago
  I am sure it will remain to be seen. I am basing what I said on Sumner's writing on the subject ( how's that for an appeal to authority? :) ) He seems to hold that Oz uses something closer to NGDP level targeting in monetary policy. http://www.themoneyillusion.com/?p=12985 http://www.themoneyillusion.com/?p=12985 I am probably missing something.

ArkyBeagle 12y ago

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