The prices of US goods and services, excluding food and fuel, fell last month for the first time since 1982, as aggressive measures to stimulate economic growth failed to inflate the cost of living.This is bad. The only solution to world indebtness is controlled inflation. If people starts to save instead of consuming, the world may spiral down into a prolonged depression. Then, war will be the way out.
Saturday, February 20, 2010
Deflationary pressures
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Food and fuel are basic necessities, the electronic gizmos we can do without. As you say it is bad news, the deflation in this case hitting the wages of the of the industrial and service sectors. I have noticed this trend too in low-inflation Singapore. Food and fuel prices have increased for every year since 2000/01. There is no relief in sight. One can however see this as a trend towards reversing the disparity in incomes between the agricultural and industrial nations. This is scant comfort for the millions of workers caught in the dead end electronics and semiconductor industries. The troubles are manifold. The Chinese produce everything much cheaper, a sophisticated piece of electronics like the DVD player sell for about the same price as a pound of prime beef. The pattern of relentless price reductions is the same across all so called knowledge industries. There is little if any commensurate return for all the improvement in quality, reliabilty and functionality of the mass produced goods. Under such circumstances where are the factory bosses going to find money to pay the workers let alone give them bonuses to pacify them? Even Schumpeter, prophet of creative destruction realised that without inefficiencies, no one could run a profitable business. The dark horses we were betting on; green jobs, alternate energy, nano and pico technologies have so far only succeeded in producing vapourwares. I did not want to add to the atmosphere of gloom but I in the dire straits I find myself in I must take up the Luddites' cry. Down with the machines!! Clean living through the Arts and Craft movement and the kibbutz!!
You write a lot about your investments. When you invest, you obviously want the value of what you buy to increase over time. Why, then, should it be a good thing for the value of the US dollar to decrease over time? Mild deflation would actually be excellent for society.
Genius,
Deflation is benefits the holders of debt, which are far and apart. Inflation benefits those who are indebted, because it allows them to pay back their debts in inflated currency. Unfortunately, everybody these days seems to be deeply in debt, people who took mortgages, countries that sold bonds that they cannot pay, governments that spent more than their income. Inflation slowly solves these situation, deflation causes penury for everybody. An example of a society in prolongued deflation is Japan. Deflation would be catastrophic for the United States, because it owes billions to China but not only China.
Deflation is benefits the holders of debt, which are far and apart.
Not necessarily. It makes the debts they hold more valuable. But if debtors can't pay their creditors due to extreme deflation, creditors lose and the debtors actually win.
Inflation benefits those who are indebted, because it allows them to pay back their debts in inflated currency.
Yes, that's why inflation is so dangerous: by helping undeserving debtors, inflations prevents them from having to pay back the real value of their debts. Tell me, would you lend $100,000 to someone if you thought that in 15 years, there's a good chance you'd only be getting $50,000 back? 5% inflation for 15 years cuts the value of currency in half.
Unfortunately, everybody these days seems to be deeply in debt, people who took mortgages, countries that sold bonds that they cannot pay, governments that spent more than their income.
Nobody is in debt who didn't choose to be. I took a massive loan to pay for university, and now a chunk of my paycheck goes to pay it down every month. But I knew what I was getting into.
Inflation slowly solves these situation,
Wiping away debt is not a solution to debt. It's more like a solution for credit.
deflation causes penury for everybody.
It doesn't. Over very long historical periods, deflation has actually been the norm in societies. Mildly deflationary policies encourage all sorts of good behaviors like saving, prudent investment and relying on one's family for support.
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