Deflation: The dog that didn't bark.

Graham_Devon

One of the prime reasons for the extremes of emergency monetary policy during the past few years has been the risk of deflation.

For Keynesian economists, nothing is more catastrophic than debt deflation. After all, that’s what triggered the Great Depression during the 1930s.

Except there are good reasons to believe that the deflationary threat was hugely overstated. Even the Keynesians have started to backtrack — if slightly — from their claims.

First, it was on how much of a danger deflation is. Adam Posen, an economist on the Bank of England’s monetary policy committee and a specialist on Japan’s lost decade, has admitted that although Japan has suffered deflation on and off for the past two decades, perhaps it hasn’t been quite as economically catastrophic as economists might otherwise have thought.

Indeed, U.K. inflation has been considerably above the Bank of England’s 2% target and has only dropped a little below that target during the past five years thanks to a temporary cut in value added taxes early in the crisis. Deflation is the dog that hasn’t barked.

So Keynesians have responded by saying, well, of course deflation hasn’t struck, because wages and prices are exceptionally sticky in these developed economies.

So then....why do we continue to fight deflation through monetry policy?

Or do we? Was deflation a scare tactic to vote in more QE and low interest rates to cover other bases?

http://blogs.wsj.com/eurocrisis/2012/04/03/deflation-the-dog-that-didnt-bark/

ILW

Deflation is bad for the indebted and good for the prudent. The majority of policymakers seem to favour rewarding those who overspent on credit, and punishing those who tried to provide their own security through saving. Not sure why.

michaels

Which prudent - those comforted by the illusory deposit guarantee scheme? Deflation results in the real burden of debt increasing, almost certainly to the extent that the level of defaults would not only bring down the banking system but show the lie that the govt could afford to backstop individuals savings, thus the prudent would have lost a great deal more than the few percent pa resulting from negative real interest rates.

Or are you talking about the prudent with farmland, shotguns and gold?

Graham_Devon

ILW wrote: »

Deflation is bad for the indebted and good for the prudent. The majority of policymakers seem to favour rewarding those who overspent on credit, and punishing those who tried to provide their own security through saving. Not sure why.

Probably because they allowed too much debt in the first place and didn't try to do anything to stop a bigger and bigger pyramid scheme building.

Take one layer of the debt away and the whole system falls to it's knee's, taking the prudent with it as all the magical layers of security that were supposed to be there, actually weren't there.

Now, I'm not sure if this has always been the case, but I should think it's a far stronger case now than it has been in the past...but I'm not intelligent enough to pass comment really...just a gut feeling based on what I see.

wotsthat

ILW wrote: »

Deflation is bad for the indebted and good for the prudent. The majority of policymakers seem to favour rewarding those who overspent on credit, and punishing those who tried to provide their own security through saving. Not sure why.

We all need to be punished then after voting in a series of governments that have overspent.

Deflation seems to allow those with money to sit on it and make a return without any risk or effort which seems an odd incentive and unlikely to lead to a vibrant economy. At least with inflation you need to get off your harris if you want to make a return.

Generali

Graham_Devon wrote: »

Probably because they allowed too much debt in the first place and didn't try to do anything to stop a bigger and bigger pyramid scheme building.

Who are "they" please?

Generali

wotsthat wrote: »

harris

Aris => Aristotle => Bottle => Bottle 'n' Glass => Ar se

Graham_Devon

wotsthat wrote: »

At least with inflation you need to get off your harris if you want to make a return.

And who are the ones who can make inflation work for them?

Those with the means to invest in the first place. Simply another rich get richer analogy.

ILW

wotsthat wrote: »

We all need to be punished then after voting in a series of governments that have overspent.

Deflation seems to allow those with money to sit on it and make a return without any risk or effort which seems an odd incentive and unlikely to lead to a vibrant economy. At least with inflation you need to get off your harris if you want to make a return.

I would have thought that the ideal situation was that of you did work and earn, the value of what you have earned should not be devalued away.

Graham_Devon

Generali wrote: »

Who are "they" please?

The policymakers who "never saw it coming".

The regulators who didn't really regulate (if they did, how on earth did Sub Prime happen)?

Even the Eurocrat's who let Greece etc into the Euro, and continue on the path pushing more resources to help hold it just above water, refusing to let it jump out or sink, knowing full well it can never sustain itself.

mylati

thank you...........