Dec

17

Deflation, from Nils Poertner

December 17, 2023 |

is as good/bad for the economy and stock mkts (as leading econ) as being sober is for the alcoholic. credit mkts will not like deflation.

Eric Lindell responds:

deflation poses the same problem as inflation — introducing random noise into the price system. With stable prices, producers know that a price increase signals increased demand for a product. Von Mises compares inflation to running someone over and deflation to running him over backward. January 2014 was the only deflationary month in recent years. Deflation as cure for inflation is bad mathematics.

H. Humbert asks:

But there is no deflation. Other than the Walmart CEO talking about some possible food deflation (which is not deflation overall) who has any original information that deflation is likely?

Eric Lindell responds:

Re MV = PQ, deflation would accompany decreased money supply/velocity or in increased output.

H. Humbert replies:

That's true, but not in itself predictive. Will any of these things occur and be strong enough to matter? All that can be said now is that there seems to be some evidence of disinflation, not deflation. I'll believe deflation overall when I'll see it.

William Huggins writes:

the reason we aren't likely to see it is the totem power of irving fisher who taught generations of american economists that deflation led to an activity-suppressing feedback loop. far be it from me to opine on the well-regarded analysis of a seminal thinker (for several other reasons), but it may be worth noting the source of this deeply held belief. as a result of fisher's expert authority, particularly among other influential economists like friedman, the view is profoundly held by today's cadre of central bankers whose playbook warns them that deflation will lead to the great depression pt 2.

historically, the US had a notable 20 year run of deflation in the late 19th century and the economy at the time was soaring. (very) reasonable arguments can be made for confounding factors like mass land seizures, new tech, reconstruction, immigration, etc at the same time but to bring it back to the basic monetarist framework (assuming stable V during the period), the economy could have simply been expanding faster than the money supply. the big difference with today is that the money supply has been untethered from physical constraint. combining (potentially) limitless quantity with a dread of not having enough pretty much assures the outcome.

interesting question arises when one thinks about palindrome's reflexivity theory, where systematic incorrect beliefs start to create new (unsustainable) realities that seem to defy physics and then burst suddenly. are the CBs doing enough to trim their BS and get the money supply under control? (M2 drifting back to that 6% annual growth since the 90s) but will the fear of deflation drive us too far in the other direction?

H. Humbert comments:

It's an interesting coincidence that the belief that deflation is bad for highly technical economic reasons that have nothing to do with unsustainable money printing, coincided with inflation being useful when said money printing occurred.

What Irving Fisher was evidently saying was that deflation is bad because it suppresses economic activity through some sort of a feedback loop. I think the deranged animals that advocate (or justify or fight any attempts to control) the kind of deficit spending that we have given the debt that we have don't like deflation because it would cause them to have to stop the spending a couple of years sooner than otherwise, hence they would lose their hold on power that much sooner, and that's all that they care about. Irving Fisher is described thusly in his wiki page:

Irving Fisher (February 27, 1867 – April 29, 1947) was an American economist, statistician, inventor, eugenicist and progressive social campaigner. He was one of the earliest American neoclassical economists, though his later work on debt deflation has been embraced by the post-Keynesian school. Joseph Schumpeter described him as "the greatest economist the United States has ever produced", an assessment later repeated by James Tobin and Milton Friedman.

So it's an interesting coincidence that the some progressive social campaigner economist found through his incredibly insightful, but totally politically unmotivated, theoretical work a formula that the animals need to stay in power.

William Huggins responds:

exactly - they will either inflate it away, or at some point engage in a selective default. that said, societies can go on self-financing for a very long time (japan) as much of that interest is being put right back in the pockets of americans. its not like the wealth is being disintegrated, its simply being moved around. i have no idea how to gauge the limit.

i wouldn't be so quick to dismiss Fisher's work simply because you dislike "animals" who are actually your fellow countrymen whom you disagree with (do americans really hate one another so much? is there another reflexive breakpoint that's much more important to watch for?).

my point was that he was very wrong about the 1929 crash and I believe his losses must have set a terrifying fear upon him when the markets didn't bounce back. hence deflation as his bete noir, not some silly "convenience" for politicians who weren't even a dirty twinkle when we wrote. the issue is inherited wisdom being unbalanced, not conspiracy most foul.

H. Humbert replies:

You may very well be right about his motivation, I just found it interesting. I hate inflation because it's unfair to people who are good, who behave according to what I consider to be good moral principles. It also hurts many who are weak, whether through no fault of their own or otherwise. But those I call animals talk about any feeble attempt to restore sanity to the budget as an attempt to simply stop the government from functioning, just because those who attempt it are somehow motivated by evil intent. Lying to keep power while destroying the country is despicable behavior.


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