Deflation

Bantex_2

Generali wrote: »

If you distrust all economics, posting on a thread about economics on a board that is about economics probably isn't the best place for you.

I'm not sure what mess you're talking about and why economists got you there. If you called in an economist to fix your plumbing or do your tax return then you're probably right.

Economics does not seem to have any right or wrong answers.
Both major parties use respected economists to come up with opposite answer to the same issues.

One will say borrow and spend out of recession, another equally qualified will say austerity is the answer.

Does the sort of negate the point of much of the industry?

Even to MPC cannot agree amongst themselves so run the BoE like an episode of the X Factor.

Odd thing is that they all appear to know exactly what they are doing, but cannot even agree with each other.

CLAPTON

Generali wrote: »

This is what Brookings has to say about deflation:

http://www.brookings.edu/research/opinions/2014/10/16-reasons-worry-about-deflation-wessel

that's pretty much the standard economists' response to deflation in 5 simple bullet points.

these seem very weak points and no longer seem to apply (e.g. wages can be reduced)


the issue is more about what is the cause of lack of demand : deflation is the consequence.

Generali

CLAPTON wrote: »

these seem very weak points and no longer seem to apply (e.g. wages can be reduced)


the issue is more about what is the cause of lack of demand : deflation is the consequence.

Or excess supply.

Increasingly that seems to be the problem in the world. China in particular and Germany too simply have too much capacity for the rest of the world to want to buy. Interest rates need to stay so low because new investment is counterproductive: it reduces prices more than it increases output.

CLAPTON

Generali wrote: »

Or excess supply.

Increasingly that seems to be the problem in the world. China in particular and Germany too simply have too much capacity for the rest of the world to want to buy. Interest rates need to stay so low because new investment is counterproductive: it reduces prices more than it increases output.

I am unconvinced that Greece (or Africa or ....) simply have too many goods and services)
There may well be economic imbalances in the world : they may show themselves as deflation but I don't see deflation as the 'cause'

N1AK

CLAPTON wrote: »

I am unconvinced that Greece (or Africa or ....) simply have too many goods and services)
There may well be economic imbalances in the world : they may show themselves as deflation but I don't see deflation as the 'cause'

By definition too much supply and too little demand are the same issue looked at from different perspectives. Generally we use whichever has changed to decide how we refer to an imbalance. So, for example, a sudden rush to buy snow shovels after an unusually early snowstorm would be 'high demand' but a lack of snow shovels in normal conditions due to a tsunami knocking out some major manufacturing plants would be 'insufficient supply'.

In the case of manufactured goods it could well be a mix of the two. Demand has been artificially high for some time due to cheap credit. Supply has been increasing rapidly due to the massive manufacturing booms in China and other economies.

CLAPTON

N1AK wrote: »

By definition too much supply and too little demand are the same issue looked at from different perspectives. Generally we use whichever has changed to decide how we refer to an imbalance. So, for example, a sudden rush to buy snow shovels after an unusually early snowstorm would be 'high demand' but a lack of snow shovels in normal conditions due to a tsunami knocking out some major manufacturing plants would be 'insufficient supply'.

In the case of manufactured goods it could well be a mix of the two. Demand has been artificially high for some time due to cheap credit. Supply has been increasing rapidly due to the massive manufacturing booms in China and other economies.

no


there is no lack of want or even need in the world


we have a financial problem of matching the supply with the demand


deflation is one of it's symptoms : poverty and high unemployment are others.

N1AK

CLAPTON wrote: »

there is no lack of want or even need in the world

I want a Lamborghini Veneno but in no way is that demand in an economic sense.

CLAPTON wrote: »

we have a financial problem of matching the supply with the demand

No.

Thrugelmir

Bantex wrote: »

One will say borrow and spend out of recession, another equally qualified will say austerity is the answer.

Events control future direction not policy. As there's constraints that limit the effectiveness of pulling any lever. Sometimes the outcome may be may felt months/years down the road. After 40 years of credit expansion i.e. more growth in credit than physical trade. There has to be a change of direction. As the numbers have become simply so large as to be unmanageable.

CLAPTON

no point in having an orchard full of fruit that no-one can afford to buy but with starving people outside

michaels

This is where we come on to what I and Janet Yellen have been saying, the increasing inequality of incomes is resulting in a lot of income ending up with people who simply can not spend it all and thus end up saving a lot.

All this saving drives down interest rates but is not triggering investment because there is insufficient demand and thus the return on investment is even less than the low interest rate (and now we are into the dangers of deflation, interest rates can not be negative)....this same insufficient demand is because of the unequal distribution of income.

Prior to the crash this issue was circumvented by those on lower incomes borowing to consume rather than invest - all seemed to work, the excess savers were earning nice returns and those on low incomes were maintaining a lifestyle by running up debts

But of course this is not a model where exponential growth can continue indefinitely, eventually the 'borrow to consume' group can no longer afford the interest on their debts and the whole scheme collapses (see GFC)

So now post GFC borrowing to consume (except by those govts with debt less than 100% of gdp) is ruled out due to prudential regulation/self interest and thus interest rates are low but this is still failign to discourage saving or boost investment, the only rate low enough would be negative...and we are back to the assymetry that rates can not go negative and hence the danger of a deflation trap.