Preventing Deflation Should Be The Fed's Top Priority
A high percentage of my recent posts (scratch that; I have no recent posts – say a high percentage of my posts since the summer) have been devoted to voicing my skepticism that looser monetary policy can engineer a meaningful recovery. My own view is that what you’d get instead is new speculative bubbles and a new crisis.
But that doesn’t mean monetary policy should err on the side of tightness in all circumstances. And if we’re at a real risk of slipping into a new round of deflation we should be erring very heavily on the side of looser money. That’s particularly true because the situation with the Euro is sufficiently touchy that we could experience a sudden and substantial liquidity shock with very little warning.
Inflation is dangerous. Deflation is much more dangerous. The Fed should be signalling very clearly that they have the tools available to prevent deflation, that they are ready to use them, and that preventing deflation is their top priority, even if it means overshooting on in an inflationary direction.
So for the time being, the inflationists and I are on the same side. Hopefully, clear messaging and prompt action on the Fed’s part will do the trick, and in a quarter or two we can go back to arguing about how to generate a real, sustainable recovery.
That’s all the “inflationistas” are saying. Just because we’re against firfighting in Noah’s flood doesn’t make us pyromaniacs.
— Pithlord · Oct 27, 01:38 PM · #
Noah:
Two questions: First, you say the Fed should be signalling very clearly they have the tools. Why not just use the tools?
Second, are you suggesting more quantitative easing?
I’m not trying to be a wise-ass. Monetary policy is way above my pay grade. It’s just that interest rates are at historic lows so the Fed is clearly limited…as it should be, in my opinion.
— jd · Oct 27, 04:52 PM · #
Neither you nor the Reuter’s article make a case against deflation.
— mfarmer · Oct 28, 09:32 AM · #
The case is that if you work for a wage, sell goods, perform services, or own mostly possessions, deflation makes you substantially worse off. It impoverishes you, in fact.
The devestation wreaked by deflation cannot be overstated.
— Chet · Oct 28, 10:51 AM · #
That’s the thing — the Chetiot has a gift for being so wrong that even though the point he’s trying to defend is right, you want to bite back. Of course the devestation wrought by deflation can be overstated, moron, Japan’s gone through it for a while and it’s been bad but the place was hardly “devastated,” same for many other places. And if you “work for a wage” deflation does not, in fact, impoverish you: in fact it makes your wage worth more. So as usual you don’t really understand, but are talking.
Farmer: I think you could imagine some kind of financial system that can easily accomodate deflation. But ours isn’t that system. It’s hard to charge a negative itnerest rate (although there’ve been interesting ideas) and it imposes that much more burden on borrowers, making it hard to, say, start a business. In addition wages are sticky so that wage earner (contra Chetaling) gets richer and richer — on the back of his boss, who can’t figure out what to do. You I think know all that so if you want to make some deeper critique by all means do so, but remember it’s gotta be for the real financial world we live in.
Now, here’s the place where I just don’t follow, and Noah knows a lot more than I. Sure, the Fed should signal willingness to use some tools. But s’far as I can tell, your real worry is that everything gets so unstable that you can’t ride the horse: markets start changing real damn fast. For example, if the euro implodes but you still have the wacky appetite for dollar debt that you have now, then I don’t know how much easing you need to do to prevent deflation. I suspect you have to do so damn much of it that markets will skitter the other way and suddenly you’ll have a really bad inflation problem. It at least seems to me that there’s a lot of potential to seesaw, and a lot of that comes from the fact that there’s a whole lot of significant but ridiculously divergent possibilities on the near horizon (euro collapses/euro survives, people still nuts for dollars/US credit not looking so good, Chinese property bubble bursts/keeps going, etc.) and none of them are particularly improbable.
So there’s a good chance that you’ll hate yourself in a year for whatever policy signal you throw now, and nobody thinks that policy will become more lithe even as market responses grow more erratic.
— kieselguhr Kid · Oct 28, 12:03 PM · #
“Own mostly posessions.” hee,hee!
— kieselguhr Kid · Oct 28, 12:04 PM · #
It depends on what’s deflating. Housing prices needed to deflate. Policy aimed at propping them up is a stupid idea.
— Matt · Oct 28, 02:26 PM · #
I love, love, love the Kid! I think the fundamental battle between the market monetarists or new “inflationistas” or whatever you want to call Scott Sumner and his disciples and the traditional inflation hawks (maybe someone like John Taylor?) is exactly this point that you get at here:
“But s’far as I can tell, your real worry is that everything gets so unstable that you can’t ride the horse: markets start changing real damn fast. For example, if the euro implodes but you still have the wacky appetite for dollar debt that you have now, then I don’t know how much easing you need to do to prevent deflation. I suspect you have to do so damn much of it that markets will skitter the other way and suddenly you’ll have a really bad inflation problem.”
The hawks are not sanguine about the ability of the Fed to control inflation once it starts getting out of control. Folks like me who have taken Sumner’s red pill say — look at the data right now — no inflation as far as the eye can see and once there is inflation in sight, we put on the brakes (Volcker did back in the early 80s, can it be so hard to replicate that experience if necessary?)
— Fake Herzog · Oct 28, 09:12 PM · #
Never mind that you’ve taken a hyperbolic turn of phrase literally; you’re talking about the place we describe as having had a “lost decade” for about two decades, now? The place with the highest suicide rate in the Western world? (Japanese rail line recently instituted a fee to be paid by the victim’s family when people kill themselves by jumping in front of trains.)
Uh-huh. No devastation in Japan, huh? Tried to buy a 2012 Honda recently?
Why is it every time you storm in here to tell me I’m an idiot, you’re the one who winds up looking stupid?
No, exactly wrong, stupid. It takes your wage to zero. Who is going to pay you to work today when tomorrow their money will be worth more of your work? Inflation impoverishes everyone who does or sells things for money, because the people with money stop buying things with it.
How do you always manage to get things so completely backwards? I know you think you’re the smartest of TAS’s commenters because Fake Herzog is always here to lick your butthole, but nobody else here thinks you’re the one who knows what he’s talking about.
— Chet · Oct 29, 03:16 PM · #
BWAHHAHHA! “In the Western World”! Always with th incredible boner.
ANd that’s the pattern. Chetamajig says something tat reveals he has no idea what’s going on, gets called, and tries a ridiculous save, like calling “a stunami and the destruction of a nuclear power plant” “deflation” and thinking we’ll buy it.
Deflation did not devastate Japan. Been to Tokyo lately? Real GDP grew during the “lost decade.” It’s the “lost decade” because things stopped getting radically better, which they were doing in the ’80’s. You really have no idea what you’re talking about, do you?
Japanese suicide rates were pretty much always the highest among industrial democracies — even in the 80’s.
Amazing, trying to save the wage thing. No, your real wage goes up. Period. Saying, “OK, but the economy gets hurt so ultimately your wage goes to zero” is really, really, really stupid — yes, that’s true of inflation and eveything else. Fact is, deflation is really OK for you if the only interesting thing about you is you collect a wage. (Now, in countries like the US where you also probably have a ton of debt….)
But then again maybe you don’t own mostly possessions. Wow, that still makes me chuckle……
Yeah, Herzog, I’m on the Sumner side too I guess. I just think, shit, it’s hard to actually do.
— Kieselguhr Kid · Oct 29, 04:33 PM · #
Again with the futile nit-picking. Japan may not be geographically west but it’s definitely considered “Western.”
It’s just “Chet”, please. (“Chetamajig”? Seriously, what does that even mean?) No need to be infantile. Well, more than usual for you anyway.
I didn’t call those things “deflation”. I call those things the devastation that you asserted Japan has not experienced. And really, that’s the pattern – the English language escapes you, flies right over your head, and you think everybody else is the idiot.
Unemployment rose as people shifted from consumption to saving. Many of those people are now permanently unemployable in a market full of 20-year-old graduates. Real wages haven’t risen in 20 years (contrary to your nonsense.) Credit is impossible to get because holding cash has a greater real interest rate. Deaths by suicide doubled during the Lost Decades.
But, keep pretending like it was no big deal. All you’re doing is proving me right about you.
Only if you keep your job. But unemployment rises during deflation because people prefer owning money to buying services. Wages may be sticky but employment rates most definitely are not, and people who become unemployed generally find the experience impoverishing.
No, I’m definitely not that rich.
If you didn’t understand what it meant why didn’t you just ask?
— Chet · Oct 29, 05:13 PM · #
The problem with deflation is that 9 times out of ten it’s associated with a shrinking economic pie. Yeah… goods are cheaper, but you probably lost your job at the same time so no one really gives a good goddamn.
— Console · Oct 29, 09:09 PM · #
I think the Kid takes an overly linear approach. It’s true that nominal wages are “sticky downwards” and therefore deflation means those with a job typically end up with higher real wages. But lots of people desparate for jobs means less job security and less bargaining power with the employer. For those still employed, you’d expect higher real wages, but worse working conditions.
In the big picture, fear of more working class bargaining power is precisely why we have Noah’s fire department.
— Pithlord · Oct 31, 01:05 PM · #
Well, sure, Pithlord, but the problem there isn’t deflation per se, it’s recession putting downward pressure on (real) compenation: same thing happens during an inflationary recession. Again deflation — just plain, deflation — increases your (real) wage, period.
— Kieselguhr Kid · Oct 31, 07:52 PM · #
The devastation wreaked by inflation cannot be overstated.
— The Reticulator · Nov 1, 01:02 AM · #
OK, but everything bad about deflation is because it goes with recession.
Reticulator, the problems with inflation can indeed be overstated. If inflation was totally predictible and easy to hedge against, there would be no problem at all. In reality, there are problems, but these have to be weighed against the alternatives.
In the US today, the problem is not inflation. It is unemployment caused by lack of aggregate demand.
— Pithlord · Nov 1, 01:14 AM · #
No, Pithlord, it doesn’t. It doesn’t have to in general, although it’s hard for it not to the way interest rates are laid out, and it doesn’t have to in specific — China, for example, has experienced deflationary expansion. And again, the problems you want to ascribe to deflation can also be ascribed to stagflation or anything else — they’re not deflation problems, they’re inflation problems.
(I also think you’re wrong; I think there’s an aggregate demand problem, and a structural problem, and both are comparable in effect — but much smarter people than I are on both sides of that question so it’s just a matter of, what sounds convincing to me).
I know, Reticulator — he’ll be here all week!
— Kieselguhr Kid · Nov 1, 08:16 AM · #
Kid, how many people have to tell you you’re wrong before it sinks in? Jesus, and you think I’m the idiot.
— Chet · Nov 1, 11:00 AM · #
OK, prove it. Give an example of someone overstating the danger from inflation.
— The Reticulator · Nov 1, 03:41 PM · #
Chetamajig, I have an actual example there (and it isn’t hard to find others). If your theory says otherwise, it’s not me who’s wrong.
— Kieselguhr Kid · Nov 1, 03:54 PM · #
The world is at risk of a double dip recession precisely because elites with money care more about imaginary inflation (i.e. price stability) than deflation and somehow it’s impossible to overstate the dangers of inflation?
— Console · Nov 1, 04:55 PM · #
The world is at risk of a double dip recession precisely because of unsustainable spending coming home to roost. We can no longer afford to support the leftwing/establishment elites in the manner to which they have become accustomed, and they don’t want to admit it. They don’t look forward to the future any more than European aristocrats of the 18th and 19th centuries looked forward to losing their positions of privilege.
— The Reticulator · Nov 1, 05:32 PM · #
Console — and I agree, being serious, that a little inflation is a good thing, our system is lubricated by credit — I don’t think anyone thinks we’re risking a plunge because elites care about price stability. Rather they think — and Noah has sort of been arguing against this proposition — that we’re risking piddling along with a positive trend but with no real employment gains because people are overly concerned with inflation. Not “price stability” — tell people you want so much inflation that you don’t want “price stability” and the Reticulator is going to have a lot more to beat you with.
The reason it all might go to hell — well, one not improbable reason it all might go to hell — is that Europeans can’t figure out a really palatable solution to their mess. Then we’ll see what the currency does, but I’m prepared to sneer at anyone who’s real real sure what that’ll be exactly.
— Kieselguhr Kid · Nov 1, 07:22 PM · #
Again, just “Chet” will be fine, and the point is you don’t have an example; the period of time in Japan that you characterize as “just fine” was actually characterized by wage decline, high unemployment, a “lost generation” of unemployable thirty-year-olds, the doubling of an already astronomical suicide rate, and other social and economic devastation.
You can continue to misrepresent the recent history of Japan, but it’s not convincing anybody that you’re the one who knows what he’s talking about, here. In general, any time you find Reticulator agreeing with you, you should immediately stop and change your mind. It’s a pretty reliable external guide for recognizing when you’re being a total moron.
— Chet · Nov 2, 01:25 PM · #
Chet,
I would fire up the Google machine and find some links but since I have work to do I’ll just argue for now that I suspect this is misleading:
“the period of time in Japan that you characterize as “just fine” was actually characterized by wage decline, high unemployment, a “lost generation” of unemployable thirty-year-olds, the doubling of an already astronomical suicide rate, and other social and economic devastation.”
I say “misleading” because I want to know what you mean by “wage decline” (for individuals or households — i.e. were more Japanese not getting married like us stupid Americans), I want to know what you mean by “high” unemployment (over 5%? over 10% just how bad?), I want to know more about those supposedly unemployable 30-year-olds, I’m interested in learning about that suicide rate and finally, what could you mean by “other social and economic devastaion.” Everything I’ve read about Japan, both the stats and ancedotally, suggest that life in that country is still very nice.
— Fake Herzog · Nov 3, 11:18 AM · #