Inflation vs. Deflation
This is a guest post from Mike Kurth, Professor of Economics at McNeese, and an old friend of mine from grad school at VPI (aka known as Virginia Tech). When he sent this along to me and others, he attached this article that makes a similar point by Peter Cohan.
-MC
They say generals always fight the last war. I think the same is true of many economists; we are always fighting the last depression. In the Keynesian economic model, recessions are associated will falling prices due to insufficient demand. Ergo, the solution is to pump money into the economy to keep people spending. But recessions do not always lead to deflation. For example, in the seventies we saw “stagflation” with double-digit unemployment and double-digit inflation.
Basically, an economic depression occurs when markets collapse. Not just the stock market, but markets in general. In the nineteen-thirties this happened when the Fed raised reserve requirements in an effort to restore public confidence in the banks, but it had the unintended consequence of contracting the money supply and forcing banks to call in good loans. Faced with deflation, people began hoarding their money-burying it in cans in their backyards or stuffing it in their mattresses-rather than it saving and investing.
The Roosevelt administration then implemented a series of reforms to fix the economy, but each “fix” only made things worse. Somehow, for the next ten years the Democrats managed to convince the American public that all our economic woes were caused by Herbert Hoover and the failure of capitalism, and that government intervention was the solution rather than a large part of the problem. The point is that in the nineteen-thirties the causation was from a currency collapsed, followed by ill-advised government intervention which caused markets to collapse, rather than the other way around.
The problem today is not insufficient money, but too much money. The world is afloat in debt. Governments and their economic advisors in the post-war era have confused prosperity with the ability to spend. As long as we can buy big homes, new cars, fancy appliances, and the latest electronics, we are prosperous. Thus, at the first sign of a slowdown they have pumped more money into the economy, primarily by expanding consumer debt, to keep consumers spending and the nation “prosperous.” For over two decades now, US consumers have spent more than they earned. Clearly, this is not sustainable, and I fear we have now hit the credit wall.
The sub-prime crisis did not come about because the market system failed or because Democrats wanted to qualify low-income persons for home loans. The problem developed as money fled the stock market after the high-tech bubble burst, much of it going into real-estate, causing home prices to rise. Wanting to expand debt to maintain the appearance of prosperity, the government relaxed regulations were so that sub-prince lenders such as Countrywide and DiTech could encourage people with poor credit due to high credit card balances to consolidate their debt into one low payment by tapping into their home equity.
Thinking they had discovered manna from heaven, many of these high-risk borrowers then re-maxed their credit cards in the belief that in the future they could simply roll this new debt into their mortgages as home prices continued to rise. But, alas, the housing market also proved to be a bubble too, and when home prices fell these people were trapped with huge credit card debt, mortgage payments they could not afford, and negative equity in their homes.
The long-term solution this economic crisis is not to pump more money into the economy and further expand debt. Our government is acting like someone who has just maxed out all their credit cards and is feverishly filling out applications for new cards so they can keep spending to maintain their style of living. Somehow we have to get back to fundamentals: real prosperity depends on our wealth and not simply our ability to spend.
The consumer price index fell this month because oil prices have fallen sharply, but core inflation rose. In other words, lower oil prices are currently masking the underlying inflation taking place in our economy. We are now witnessing bail out mania in Washington: Congress is passing out hundreds of billions-no, make that trillions–of dollars to special interests, and no one is asking from whence the money will come. It cannot come from taxes; the American people-even the rich ones-don’t make enough money to pay that tax bill! If the government cannot get it from taxes, there are only two other possible sources: either borrow it or print it.
Will the Chinese lend us more money? I’m hoping they just hang on to the trillion plus dollars of our debt they now hold and don’t try to cash it in to stimulate their own economy. How about the Europeans or Japan? Their economies are in recession, too. We could ask our friends in OPEC, but with falling oil prices I doubt they are going to line up to loan us money. So that leaves only one option-we print it.
I don’t want to sound like some alarmist nut-case, and I don’t want to scare anyone. But I am concerned that we could possibly see hyper-inflation, similar to what the Germans experienced after WWI. If that happens, the entire global financial structure-which is built on the US dollar-will collapse. Many economists are predicting deflation as consumers cut back on spending and industrial output slows down. We probably will see some falling prices in the initial phases of this recession, but I think the eventual impact of these massive government bailouts will be more money chasing fewer goods, which means inflation and probably the end of the US dollar as the de facto global currency.
Mike Kurth
June 22nd, 2010 at 7:52 pm
Thanks for taking the time to discuss this, I feel strongly about it and love learning more on this topic. If possible, as you gain expertise, would you mind updating your blog with more information? It is extremely helpful for me.
June 22nd, 2010 at 9:56 pm
I am really thankful to the author of this post for making this lovely and informative article live here for us. We really appreciate ur effort. Keep up the good work. . . .
June 22nd, 2010 at 10:18 pm
Excellent read, I just passed this onto a colleague who was doing a little research on that. And he actually bought me lunch because I found it for him smile So let me rephrase that: Thanks for lunch!
June 26th, 2010 at 8:55 am
These kind of post are always inspiring and I prefer to read quality content so I happy to find many good point here in the post, writing is simply great, thank you for the post
June 27th, 2010 at 3:15 pm
I am really thankful to the author of this post for making this lovely and informative article live here for us. We really appreciate ur effort. Keep up the good work. . . .
July 2nd, 2010 at 6:44 pm
What’s up? Is there a way I can get email updates on this post?
July 8th, 2010 at 2:06 pm
Hey, maybe this is a bit offf topic but in any case, I have been surfing about your blog and it looks really neat. impassioned about your writing. I am creating a new blog and hard-pressed to make it appear great, and supply excellent articles. I have discovered a lot on your site and I look forward to additional updates and will be back.
July 10th, 2010 at 11:47 am
Hi, I attempted to e-mail you concerning this particular article yet cannot reach you. Please e-mail myself if get a moment. Thanks.
July 10th, 2010 at 3:03 pm
One crucial point I really like about webpage posts will be the fact that they spark an idea in my brain. Right after that happens, I think as I should comment with all the wish it is valuable to many people.
July 11th, 2010 at 12:45 am
I was very pleased to find this site.I wanted to thank you for this great read!! I definitely enjoying every little bit of it and I have you bookmarked to check out new stuff you post.
July 12th, 2010 at 9:44 am
Hi, I am viewing this blog via my iPhone and it appears somewhat strange. Thought you would wish to know. It is a very good piece of writing even so, did not mess that up.
July 13th, 2010 at 5:58 am
Well I think that your writing is rather great as it highlights a good deal of insightful information. In Any Event, was curious whether you would want to interchange web links with my site, as I am looking forward to establish links to further inflate and increase web exposure for my web space. I do not mind you laying my contacts at the front page, just approving this links on this particular link is more than adequate. Anyway, would you be kind enough be kind enough to contact me at my web site if you are keen in the link exchange, I would really like that. I would like to thank you and hope to get a reply from you very soon!
July 14th, 2010 at 5:18 am
This is a good post.
July 14th, 2010 at 7:01 am
Thanks for this usefull information.
July 14th, 2010 at 5:40 pm
I love your site.
July 19th, 2010 at 2:27 am
I just sent this post to a bunch of my friends as I agree with most of what you’re saying here and the way you’ve presented it is awesome.
July 19th, 2010 at 2:31 am
Should I buy steel golf clubs or graphite ?
July 23rd, 2010 at 2:40 am
You certainly have some agreeable opinions and views. Your blog provides a fresh look at the subject.
July 23rd, 2010 at 4:53 am
Thank You For This Post, was added to my bookmarks.
July 24th, 2010 at 2:08 am
You certainly deserve a round of applause for your post and more specifically, your blog in general. Very high quality material.
July 25th, 2010 at 3:50 am
I find myself coming to your blog more and more often to the point where my visits are almost daily now!
July 26th, 2010 at 1:06 am
I’ve been visiting your blog for a while now and I always find a gem in your new posts. Thanks for sharing.
July 26th, 2010 at 8:04 am
You certainly have some agreeable opinions and views. Your blog provides a fresh look at the subject.
July 27th, 2010 at 2:07 am
Very nice and helpful information has been given in this article. I like the way you explain the things. Keep posting. Thanks. . .
July 27th, 2010 at 10:26 pm
Hey Boss – its a nice blog, just looking around some blogs, seems a pretty nice platform you are using. I’m currently using WordPress for a few of my sites but looking to change one of them over to a platform similar to yours as a trial run. Anything in particular you would recommend me about it?
July 28th, 2010 at 2:18 am
You certainly deserve a round of applause for your post and more specifically, your blog in general. Very high quality material.
July 28th, 2010 at 4:42 am
Thanks for taking the time to discuss this, I feel strongly about it and love learning more on this topic. If possible, as you gain expertise, would you mind updating your blog with more information? It is extremely helpful for me.
July 28th, 2010 at 11:31 pm
Finding websites with as much information as this one is always a pleasure I wll be sure to come back and visit again real soon, keep up the good work.
July 31st, 2010 at 12:48 am
These kind of post are always inspiring and I prefer to read quality content so I happy to find many good point here in the post, writing is simply great, thank you for the post
July 31st, 2010 at 12:55 am
I was very pleased to find this site.I wanted to thank you for this great read!! I definitely enjoying every little bit of it and I have you bookmarked to check out new stuff you post.
August 1st, 2010 at 3:05 am
Awesome Blog. I add this Blog to my bookmarks.