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Thread: Stoneleigh takes on John Williams: Deflation it is

  1. #21
    Join Date
    Jun 2006

    Default Re: Stoneleigh takes on John Williams: Deflation it is


    I really don't thonk that this belongs in "Junk Economics" even though you put it here to make a point. There was a good guest post at TAE today on deflation. I am linking to the original blogpost - Deflation and You: A Guide to Understanding this Peculiar Economic Model

    I am posting all of it, as it is extremely clear and good, and needs to be read along with EJ's latest.

    I just wanted to share a little bit about deflation.

    What is deflation?

    Deflation is when the combined amount of money and credit in an economic system is shrinking.

    Once deflation begins, it is self reinforcing.

    Let's examine how that works precisely.

    To do so, think of your own spending decisions.

    If you are like me, you spending behavior and patterns have probably changed quite a bit since the housing bubble started to bust, and especially since the Dow Jones Industrial Average hit its all time high on October 11, 2007 and then started it's wild ride down.

    Before that thinking about your spending behavior, one thing must be known: Money is created by people when they take out loans. People offer up an asset or a promise, which the bank takes and files, and then the bank simply increases the number in their account. That is all there is to it.

    This might be hard to accept at first, but this is simply how it words in this economic model.

    The amount of coins and dollar bills in the economy are a very, very small fraction of the total amount of money out there.

    Most "money" is actually bank credit, which is created when people go to banks, are approved for a loan, and then spend that "money".

    If you imagine all those loans, all of them in the country, all at once, that is basically the money supply.

    Behind each "dollar" (or bank credit) in a bank account, there is a loan document somewhere that was used to bring that "dollar" (or bank credit) into existence.

    If the size of all of those loans, let's just call this the "public debt" for simplicity, if that starts to shrink, for whatever reason, then that means that there is less money in the economy.

    Less money to spend.

    Less money to earn.

    At the moment, the money supply is shrinking because people are behaving perfectly sensibly.

    They see what is going on with the rising unemployment rate, the falling housing prices, the unstable stock market, the inability of the government to fix it, and the bad economic news that comes out on the TV, on the radio, and in print.

    What does a reasonable person do?

    How your thoughts for the future have changed since October 2007?

    (think about that for a moment or two)

    Now that you've done that, let's do a case study, and examine the top ten ways that I have changed my spending, and my thinking about what things are money.

    1. I don't think my house is a source of money anymore.

    I used to think it would increase in value, and that I was getting rich by just sitting on it, and that I could take out a huge home equity loan, and buy whatever I wanted.

    Now, I think that if I take out that "Home Equity Line Of Credit" that I've been approved for, that I would not be able to sell my house for that, which is to say, I'd be stuck in my house, unable to sell, with no money.

    In fact, I don't want to take any money, not even a penny, out on this "HELOC".

    True story: We were looking to buy a little summer cottage, and so we got this HELOC all set up, and we could have bought the place twice over by using that HELOC, but I thought to myself, no way, I'm not doing it, I'm not going to put myself in debt, especially if the job market gets worse, and my wife, or I, or both of us, could lose our jobs. No, I'm not using that HELOC, and I convinced my wife that we shouldn't use it.

    We weren't willing to bid much on the house, since we were only willing to buy it with money out of our current savings, and so it sold for LESS than it would have, less than if we had been confident about the future.

    2. I don't think that buying a house is a good idea.

    I used to think that I could buy a second house, fix it up, use it, and then sell it for a tidy profit. Hey, yo, let's "flip that house".

    Since 2006, I've seen that home prices were going down. And they just keep going down, relentlessly.

    Why would I buy until I was confident that they were moving up? How many months of rising home prices would that take? Six months? A year? Why would I buy when there was a good chance that it would be worth less in the future? Why not wait?

    And wait we did. We were looking for a second house, that summer home, for two years now, but the housing prices keep going down. Why would we buy?

    In looking over the place we were going to buy this summer, we figured up the various monthly and yearly expenses, including taxes, and realized that we were going to be paying $4,000 per year, every year, at a minimum, just to have it.

    Why not just rent some place for the week or two that my wife can take off in the summer, and stay at the parent's house for the few weekends that we might visit?

    Why saddle ourselves with another $4,000 annual obligation when the job market is looking worse and worse?

    We have enough bills as it is, plus two preschoolers to take care of.

    No, buying a house is not a good idea, and buying a second house is really not a good idea.

    3. I don't think I'll be getting any raises in the future.

    It used to be that I'd get a 3%, or a 2%, or even a 1% raise to the top step of the salary schedule at the school, where I teach.

    This year, in negotiating a "master agreement" with the Board of Education, it took us over a year just to get our wages figured out for that year. That was a year beyond the end of our previous agreement. Our negotiating team had to fight tooth-and-nail to get a compensation package that wasn't all that much worse than previous years.

    Then the state came and decided that since our state pension fund had lost billions since October 2007, and since the state was broke, that we needed to contribute more towards the pension that we had already been guaranteed, in a special teacher tax.

    The government showed that it could, in the swipe of a pen, decrease my salary, and our local negotiations really meant nothing.

    I will be bringing home less this year, and the state is likely to try to cut salaries again, as it becomes clear that the budget is getting worse.

    If I don't think I'll be getting any raises in the future, I'm certainly not going to spend like I'm expecting a raise, in fact, I started saving up, because we will need a cushion in hard times.

    4. I don't see my pension fund, or my social security, as money.

    A number of years ago, I was so excited about my state pension, that I "bought" five additional years of service credit, and sent the State thousands of dollars, so that I could either retire earlier, or have a bigger monthly retirement check. This was on top of the thousands that my school district already was sending back each month into "my" pension account.

    Now, with all the news coming out about how all of the states are broke, and the pensions are underfunded, I don't think that any of "my" pension money will be there when I'm old enough to retire.

    It's not "my" money anymore.

    I gave it to the State.

    It is gone.

    I will probably never get it back.

    So, I'm going to have to save for retirement myself, and not in a pension fund.

    By the same token, with all the news about the national debt and social security no longer paying for itself, I don't think that money will be their either.

    The reports showing that most young people don't expect it to be there, well, that just confirms to me that it probably won't be there.

    So, I'll need to start saving up more, on my own.

    5. I don't see my 403(b), mutual funds, or stocks as money anymore.

    At one time, we went to a "financial advisor" and agreed to set up a 403(b) investing in mutual funds. We believed that this was basically a sure thing, and sure, there might be dips and bumps, but it was definitely, DEFINITELY, better than keeping our money in a credit union savings account.

    But, with the stock markets crashing over 50% from October 2007 to March 2008, I don't have any faith that my 403(b), or my wife's large 401(k), which she automatically contributes to each pay period, will be worth anything.

    I don't even know how, or if, she could get out. Can she sell? I don't know.

    If the market crashes, it may never recover, and most or all of that "value" will be gone.

    So, we do not have that money for retirement either. Here, we have yet another incentive to save.

    6. I don't think the banks are safe anymore.

    I used to think that they were great places to put money, to save up, and at one point we had over a year's salary in our bank account. I suppose I thought that because I'd opened a passbook savings account when I was about 5-years old, and was always taught to save up for a rainy day.

    Now, I see that the banks are being bailed out left and right, and that they are paying their employees huge salaries for doing nothing but draining money from the person on the street.

    Lehman's failed.

    AIG failed.

    Northern Rock failed.

    Fannie and Freddie failed.

    And the rest are dead-men walking, "zombie" banks.

    If any bank tried to sell all of it's assets today, or even over the next month, or even the next year, (in the open market, that is), it would get far less cash back than what it owes to it's depositors.

    The banks are "insolvent".

    They are bank-rupt.

    But the government keeps on trying to "help them".

    Plus, more banks fail every single week. Here is the list:

    And, when a local bank failed a few weeks ago, a bank which was flagged as "in trouble" on; and one that I had used as an example of a bank that would fail, well, when it failed, I FELT the failure.

    Add to that the fact that the FDIC has used all of its money and is itself broke and is now relying on the government so that it can prevent a bank run.

    And still more: I've learned that most banks only have as much actual cash as what is in the ATM machines and in the cash drawers.

    There are no piles of cash in the vaults.

    Maybe, MAYBE, there is enough for a week or so of typical withdrawals, based on what they know people tend to take out in cash each week. But that amount is a tiny fraction, well less than 10%, of what the depositors believe to be in their accounts.

    Finally, I've learned that depositors like us can only take out a certain amount of cash in a given day.

    At my credit union, the limit is $10,000 cash a day.

    At a smaller local credit union, the limit is $600 per day.

    If I had a lot of money "in the bank", I would not be able to get it out all at once.

    All of these facts about banks combine to make me think that my deposits are not safe, and are not money in the same way as I used to think of them.

    Obviously, I still think it is slightly safer, or more convenient, to have "money" in the bank, but only barely so. If I could figure out a way to save that money myself, and keep it safe from theft or fire, then I would only have as much in the bank as was necessary for paying bills.

    7. I don't think of my gold coins as money anymore.

    I used to think, when their prices were going up, that gold coins were so great, and a great investment. In fact, I bought in 2005, and now in 2010, those few coins have more than doubled in "value". There are websites galore that say "Buy Gold", and signs in shop windows that say "We Buy Gold", and everyone seems to think that "gold is REAL money".

    But, I've very recently realized, that if there were a banking system failure, and people only had cash and gold coins to use as money, that the value of those coins would drop like a stone, because all the people that end up running out of cash would then be pulling out their coins to use as money, and this would happen all at once. The value of the coins would fall rapidly as they flooded the market, and my "doubling of value" would end up being "took a bath".

    Interestingly, the American Gold Eagle 1-ounce coins do have a $50 mark on them. Perhaps they will not fall in value below that. That is some cold comfort with gold selling for over $1,200 per ounce right now.

    The fact that I have them in the bank, and the bank could close at any minute, makes me less and less confident that I could use them as money. Also, the last time there was a major crash in the markets, back in 1929, the President of USA ordered all the safe-deposit boxes sealed, and all the gold coins confiscated and sold for a rate that the Government selected. (See EO 6102)

    8. I don't think of our personal possessions as money.

    I used to count the cars, the appliances, the electronics, the furnishings, the lawn tractor, even my clothes, as money. I could put them up for sale, and get a decent price, especially for the cars. In fact, I vaguely remember making a spreadsheet on the computer, listing all these sorts of things as part of my "net worth"./b>
    Now, everyone is starting to look broke.

    There are tons of used cars on the market.

    People only want things for free off FreeCycle or Craigslist.

    My DVD collection isn't work $20 per DVD, like I used to figure. The video store chain in my area went out of business, and those same DVD's wouldn't even sell for $5.

    I've been to some garage sales this year, and second hand stores, and arts and craft shows, and flee markets, and I start to recognize that most of this stuff is literally value-less, despite what it might have sold for in the past.

    My personal possessions are no longer money.

    9. I don't think I'll get any inheritance anymore.

    For a couple of years, I received an "inheritance" check from my grandmother. Her stocks were doing well. Her house was increasing in value. She was healthy and happy. And this could have continued; I expected that, and I think my family did as well.

    Now, my grandmother is in the medical care facility which costs thousands of dollars per month.

    The stocks had to be sold, and they had lost lots of value before that.

    My grandmother's house has now been vacant for years, and the most recent attempt to sell it, for a new lower price, fell through.

    I won't be getting any more checks.

    In fact, my wife and I have talked about saving up some money for my grandmother, in the case that she completely runs out, because her diminishing cash reserves are going fast.

    By the same token, I know that my parents are healthy and will live for another twenty or more years, but I no longer see their house as increasing in value until then.

    No, the values of homes are falling everywhere, and unlikely to even return to those 2006 levels. Some housing bubbles are so big that it has taken hundreds of years to return to the same level.

    So, that "inheritance", that is even less money in the future.

    10. I'm not spending money.

    A while back, my wife and I made a nice long list of home improvements, trips we'd like to take, things we'd like to buy, and painted some pictures in the air of a fancy-dancy future: a new barn, a new carpet, a new hardwood floor, a new addition, a new fireplace, etc.

    We aren't spending on those things because we think we need to have some extra money saved up, in the event that one or both of us lose our jobs, as we would need if for food, health care, taxes, and all those other bills.

    We are saving.

    We are not spending, not really.

    Everyone is Doing It

    If this story resonates with you, it is because parts of it resonate with all of us.

    We are the ones that have the capacity to spend, and yet, we save instead.

    We could increase the money supply by signing up for loans, and buying things, but we are not.

    We are doing what anyone would do.

    The prudent thing.

    The logical thing.

    The sensible thing.

    The responsible thing.

    But, we are all doing this at the same time, including all of the businesses, and that is causing the money supply to shrink, day after day, and each new day makes us want to save more, and each new day we feel more that we need to get out, or stay out, or debt.

    All of that money we are saving, those of us lucky enough to be able to save, that money goes into the banks, the same banks that are insolvent, and they can't get rid of it, because no one who is sensible will borrow it. They won't touch it with a 10-foot pole.

    The banks, which are insolvent, with less assets than they owe in deposits; when they get in money, they have to find something to do with it, so they buy treasury bonds, which "earns" the banks interest, and which are very safe bets. Contrast this to the choice of offering up some subprime loans, or alt-A loans, or jumbo loans, or any of those. They aren't stupid. They know that they might not be able to sell those things anymore. They know those mortgages would be risky at best. They do the prudent thing and raise lending standards, and looking elsewhere for the profits.

    "Go Out and Spend"

    Savings in a bank, just like savings under the bed, are not being used to buy things, so it is as if that money did not exist. It has the potential to be money, but if it is not spent, then it can not be earned by someone else.

    This lack of spending is slowing of the speed at which money moves in the economy. It is the same as if there were actually less money.

    Right now, both things are happing at once. The money supply, or credit supply, is shrinking because few loans are being created, and consequently, that money is not being used to purchase things AND the "velocity of money" is slowing because people are not spending at the rate that they once did.

    Now, these two are really the same thing, what we're talking about is how much you are buying this year, as compared to, say, 2006. And not just you, of course, but everyone. And we're not just looking at "net income" paycheck money here, no, we're also looking at how much you, and me, and other people, are spending out of credit sources... whether they are increasing their debt load to buy things, like in 2006, or decreasing their debt load by paying off that debt, and not spending, like now.

    Most important to this is that so many people continue to pay down the principle on their mortgages, while very few new mortgages are being created to make up the difference. The money goes into the banks, and never comes out.

    As mortgages are paid down, the mortgage documents, also known as promissory notes, are worth less, their value as an asset is less.

    An example, image that a person pays off $500 in principal on their mortgage. Now, that mortgage document is worth $500 less than the day before. If no one takes out a loan of at least $500 to replace that, then this $500 is gone from the money supply.

    Recall, that it is the total value of all the mortgages, the public debt, that determines the money supply.

    As everyone is "getting out of debt", the money supply is shrinking.

    Money is literally debt, in this peculiar economic model at least.

    And as we all do this very, very, sensible, reasonable, logical paying down of debt, preparing for tough times, so too does everyone else, which means that people are spending less, and the businesses then are earning less, and then they have less to pay employees, and then those employees are either laid off, or their hours or wages are cut, and then we see the unemployment report on the TV, and we all tighten our belt one more notch, and then we save a bit more, and we spend a bit less, and the businesses...

    This is self reinforcing vicious cycle, which is self reinforcing. It is a positive feedback mechanism.

    There is not a single things that the political candidates, or the bank presidents, or the Federal Reserve chairman, or the Treasury secretary, or the President of the USA can do to make us stop acting sensibly.

    What is deflation?

    It is being sensible, all at once.

    ### Aaron Wissner ###


    A change in the perception of the future, from "the future looks bright" to "the future looks bleak" is not trivial, particularly in this economy. It means everyone goes from "spending mode" to "saving mode", and that change has real impact on spending, and on jobs.

    I could have also mentioned that people no longer want to have as much on their credit cards, and there are probably other things I missed.

    For additional clarity, I'm going to paste below a few things that I wrote on Facebook this week, all about deflation.

    Snip 1

    If it were 1930, then certain things would work to pull the economy out of recession, eventually, that it. But, in this case, we're in for the "long ride down" (at best), because energy supply will decline really rapidly from here on out. Nicole [Foss] talks about all of this in her talk, and in the podcast. [Other "economists" are] attempting to hold one value constant, which they may not even realize is a significant value, but in fact, that value is critical, and declining. ...

    What [Nicole Foss] is saying is that the money/credit supply is falling so rapidly, that no efforts to increase it can compare. Also, velocity is slowing, as everyone is trying to pay down debt. That contracts the money supply because once the money goes into the banks, it never comes back out. It is essentially destroyed, taken out of circulation. Recall that the velocity used to be something like 105% of net take home pay. Now, not only is it more like 98%, but the total net take home pay is less.

    Snip 2

    It doesn't matter one lick what QE happens. The only thing important is your spending, my spending, the people's and business's spending. It doesn't matter how low the interest rates go, that won't convince us to spend, in fact, it will do just the opposite. The same with businesses, they are run by people, and those people aren't dupes. They see the writing on the wall, "Tough Times Ahead: Get Ready!"

    It does not matter how much the banks might be agreeable to lend. It only matters how much people spend. Spending IS the economy. Money has to be SPENT to be EARNED by others. If it is not EARNED, then it can not be SPENT again. ...

    This all happened before, this part of [this recession]. Read Kenneth Galbraith's book, the Crash of 1929. It is the exact, same thing, this part of it anyway. Find a source. Work it out. I know you can do it.

    Don't buy into the BS dished out by the people that HAVE to say that it is getting better. They either have to say it to keep their jobs, or they need to say it to make money, or they want to say it for airtime, or they think that they should say it, because in their uninformed way, they think it might make things better.

    And don't think that [deflation] won't happen. People have put in their bets that things will come crashing down. Now, they are on the TV telling us that it is looking bad. What do you think all these "investors" are telling their clients? Short the stock, that's what they're telling them. Then they're on TV saying it. It doesn't matter what you or me nobodies say, they are the ones with the bully pulpit in this here deal.

    Snip 3

    The panic will be here no matter what we say [on Facebook]. We can shut our traps and watch it happen, or we can open our mouths and watch it happen. There is no way to stop it. There never is. That is what a market bubble is all about. I'd rather be a bit ahead of it, than a bit behind. In fact, I'd rather be a year early, than a second late.

    Snip 4

    There is no way to prevent the collapse of the money/credit supply.

    Money/credit is not metal, paper, or electronic data.

    Money/credit is faith. It is belief. It is trust. It is confidence.

    The money/credit supply is the aggregate total of this amongst the people. As belief/confidence/faith/trust/whatever-you-what-to-call-it, "consumer sentiment", whatever, it is declining, and rapidly, by the day.

    Every day that people wake up without a job, they lose a bit more faith.

    Every day they wake up and they see their family and friends struggling, they lose a bit more faith.

    Every time they see a news article about the economy that is glaringly false, perhaps days or months later, they lose a bit more faith.

    Every time they see government impotence to "fix it", as the classic Saturday Night skit went, they lose a bit more faith.

    Loss of faith has positive feedbacks.

    Take a look at Nicole [Foss]'s chart on this; the chart helps to illustrate what I'm saying. Or look at the chart I just posted from Nicole. It is very similar.

    Snip 5

    Well, it appears that we're in a downward contraction, and I don't see any way to resist that for long. The stimulus appears to have attempted to resist, but as others have mentioned, it was like going down a skip slope, and going over a flat area before continuing down the long slope to the bottom.

    As for the unemployment insurance payments, if the recipients are paying off debt, then the money is vanishing, wish no support to the economy, because whatever goes into the banks in repayments or interest, well, that money can not come out, because all of the banks are insolvent as it is. [Actually, I've revised that thought a bit, I don't think are interested in borrowing and getting in debt, as I mentioned in the article above.] I suppose [the unemployment checks] may delay the contraction of the money/credit supply a bit, if less people default. This is the same concern with raising interest rates, as then the ARM people will start defaulting en masse. [Raising rate would be economic suicide, the economy is painted into a corner... and the paint is on fire.]

    As for businesses, surely the greater fraction of unemployment checks goes to buying food, fuel, electricity, phone, rents, and other "retail" activities. Withdrawing those funds would primarily hurt businesses, and not large corporations so much as small businesses. More specifically, discretionary, non-essential businesses, would feel the greatest impact, which would lead to many more business failures, putting the banks even deeper into insolvency, and pulling the system down even faster. Unfortunately, these are the positive feedbacks we are seeing regardless of policy.

    Another area of spending is on taxes, I'm thinking mainly of property taxes, but sales taxes and income taxes as well. As less money flows to the unemployed, less is available to go to property taxes, which is straining the municipalities, like the township I live in, and less sales on "discretionary" means less sales tax revenue, especially since food is not taxed. So, for sales tax, as a person's purchases decline, their amount of sales tax paid declines even more quickly. This is generally what has happened to the State of Michigan, and in the same way, for other states.

    So, I think you are asking if 99 weeks of unemployment is too long... I don't know how to answer that. I guess it depends on whether you desire the effects I've mentioned above. It has been suggested that a catastrophic collapse of the economy can be avoided, but I don't see how decreasing money to small businesses and local governments would improve the odds.

    If you are hoping to maximize the probability that things will at least keep functioning, then I'd be on the side of extending unemployment benefits indefinitely, or as some have suggested, simply creating a standard payment amount that goes to all citizens.

    Now, what would be better, would be putting these folks to productive work, assuming that they aren't already engaged in raising children and/or taking care of the elderly or infirm. There is an infinite amount of work that needs to be done.

    You'll recall that the USA was in a similar situation before, and it eventually became obvious that jobs had to be created, so we created the CCC, which was much more comprehensive than most people know.

    Unfortunately, there is still a problem, and this is in the area of how the federal government "finances" this spending, and this is a point of study for me, and why the various monetary improvements are of interest.

    [It has been pointed out to me that the CCC, social security, and etc. can be seen as serving this peculiar sort of economic system, to try to keep people having faith in this sort of system, and preventing them from thinking about better, more effective systems. That is a good point, and I don't want to overlook it, or to forget it.]

    From a Friend: The Emperor Has No Clothes (EHNC)

    I note that there is adult language in this one.

    [The] emperor has no clothes:

    When Lehman collapsed, the international banking system buckled and actually stopped for a short period of time, until the Fed and ECB was able to, through joint effort, liquify the system. The EHNC moment was where everyone realized they had assets that were worthless because the system was illiquid, their hedges (insurance) were worthless because the issuers were bankrupt, and the cash they had on hand, which in some instances was substantial, was still no where near the leveraged liabilities on their balance sheet. At that point, there was panic. There was horrific [fall in the value] of assets - some assets went for pennies on the dollar of paper worth, and fractions of what they would be worth just weeks later. This is really well outlined in the book "Too Big to Fail" by Andrew Ross Sorkin.

    When Greece finally acknowledged their debt and structural issues, the EU nearly dissolved - in a single weekend. Fifty years of progress were nearly erased over and economy the size of Michigan's. The EHNC moment was when the European leaders looked at each other and realized "shit (merde, shitzer), we have no rules to handle this." The EU was a collection of self interested entities that decided to have a common currency. Now they had to go through the process of assumption, something we here in the US went through in the 1790's. In particular, Angela Merkel, prime minister of Germany, nearly killed her political career to help pass a package of aid. If Germany or France had given Greece the finger, this would have been worse than Lehman.

    In both of this instances, LIBOR skyrocketed. In both instances, the financial community pissed their pants. And in both instances, the Fed, the EU and the IMF stood up and soothed the markets.


    Don't take my word for any of this. Don't be a dupe. Do the math yourself. Work it out. I'm just one person. I could be completely wrong. I don't think I'm wrong, obviously, but neither do most people, and yet most people are wrong. Most people were wrong that buying houses was a good idea. Most economists were wrong to say things would keep going up. So, I might be totally wrong as well. Be a critical thinker. It is only through looking at the facts and applying logic that one can deduce logical conclusions.

    Here is my list of most of the people I've been listening to about this.

    I try to listen.

    It takes a lot of time to listen.

    These, amongst others, are the ones I've listened to.

    I seem to recall a quote that an effective learner spends most of the time listening.

    Since I can't seem to find that quote, here are a couple others.

    “A good listener tries to understand what the other person is saying. In the end he may disagree sharply, but because he disagrees, he wants to know exactly what it is he is disagreeing with.” -- Kenneth A. Wells

    "A good listener only talks if they can improve upon silence." (or something similar)

    "An essential part of true listening is the discipline of bracketing, the temporary giving up or setting aside of one's own prejudices, frames of reference and desires so as to experience as far as possible the speaker's world from the inside, step in inside his or her shoes. This unification of speaker and listener is actually and extension and enlargement of ourselves, and new knowledge is always gained from this. Moreover, since true listening involves bracketing, a setting aside of the self, it also temporarily involves a total acceptance of the other. Sensing this acceptance, the speaker will feel less and less vulnerable and more and more inclined to open up the inner recesses of his or her mind to the listener. As this happens, speaker and listener begin to appreciate each other more and more, and the duet dance of love is begun again." -- M. Scott Peck, MD

    “A good listener is not someone with nothing to say. A good listener is a good talker with a sore throat.” -- Katherine Whitehorn

    A Parting Thought

    Very, very few people seem to understand deflation at the moment. Most reporters and commentators on TV, radio, and in print think it has something to do with things getting cheaper at the store. This is an eventual effect of deflation, on some items, but since the total amount of money that is flowing into people's pockets is decreasing by the day, falling prices really don't mean much, because the ability to purchase those things, even at falling prices, becomes less and less. This is another positive feedback. But, it is not deflation, it is simply an effect of deflation.

    For a very clear, concise, down to earth look at what is going on with deflation, may I suggest the following:

    I suggest starting with "The Modern Day Paul Revere" interview.

    It is a good interview, and the interviewer asks the basic questions about what is going on with the economy.

    After that, try reading "The Automatic Earth" where Nicole writes as Stoneleigh along with her writing partner Ilargi writes about these things.

    A final, final parting thought: this economic system, which has boom and bust "cycles", or mania/collapse phases, is not the only economic system. There are many other possibilities. We should all be asking ourselves, are we satisfied with this peculiar economic and monetary system?

    Interest Links about the Total US Savings Rate

  2. #22
    Join Date
    Sep 2008
    Phoenix, AZ (getting cheaper by the minute)

    Default Re: Stoneleigh takes on John Williams: Deflation it is

    Quote Originally Posted by Rajiv View Post

    I really don't thonk that this belongs in "Junk Economics" even though you put it here to make a point. There was a good guest post at TAE today on deflation. I am linking to the original blogpost - Deflation and You: A Guide to Understanding this Peculiar Economic Model

    I am posting all of it, as it is extremely clear and good, and needs to be read along with EJ's latest.
    You know Rajiv/TPC, i keep looking at this and one side of me wants to believe this viewpoint but the other side just doesnt understand why people think that people saving money or spending/not spending has anything to do with inflation/deflation.... If you travel outside the US you will see plenty of examples where people save money, don't use credit or whatever and inflation still rages on, examples, Argentina, China (where i believe i read that inflation is ~8%), Egypt...

    One example i am intimately familiar with is Egypt since i go there every couple of years... Acknowledged Inflation is ~18%/anum... Every two years i go and while there, i buy Egyptian cotton undies They damn near double in price every time i go.... A beggar will practically spit in your face if you attempt to give him 1 Egyptian pound, it is now up to about 5 for the beggar... Almost everything is more expensive there every time i go, people still save, but they would laugh at you if you asked if they held savings in Egyptian pounds, almost all families own some form of gold, or dollars....

    In my mind, inflation and jobs/employment/personal consumption/spending are not tied at the hip...... Too many examples to disprove that theory... If lending doesnt free up then leveraged assets will go down (housing), but IF the dollar tanks, then imports become more expensive and thus input costs increase, while local products/services can be sold cheaply...

  3. #23
    Join Date
    Sep 2008
    North Texas

    Default Re: Stoneleigh takes on John Williams: Deflation it is

    Quote Originally Posted by Rajiv View Post

    I really don't think that this belongs in "Junk Economics" even though you put it here to make a point. There was a good guest post at TAE today on deflation. I am linking to the original blogpost - Deflation and You: A Guide to Understanding this Peculiar Economic Model

    I am posting all of it, as it is extremely clear and good, and needs to be read along with EJ's latest.
    Yes - that post of Aaron Wissner is a fine post. I also first read it on The Automatic Earth (TAE). That TAE link, for completeness, is August 16 2010: Deflation and you: Acting perfectly sensibly.
    Most folks are good; a few aren't.

  4. #24
    Join Date
    Sep 2008
    North Texas

    Default Re: Stoneleigh takes on John Williams: Deflation it is

    Quote Originally Posted by karim0028 View Post
    You know Rajiv/TPC, i keep looking at this and one side of me wants to believe this viewpoint but the other side just doesnt understand why people think that people saving money or spending/not spending has anything to do with inflation/deflation
    We are discussing two separate event patterns that some might call deflation.
    1. Less money being spent, paid, lent and borrowed.
    2. Lower prices for the things we purchase.

    The first of these has been happening for the last couple of years.

    In good part for that very reason, the second of these has not been happening.

    We had a mass production, long supply chain, mercantile economy tuned for good times, cheap credit, high volume and constant growth. This economy has become "detuned". The economic engine is running rough. Vendors have to charge more just to meet expenses, given their unchanging fixed expenses, lower sales volumes and higher cost of goods (from their suppliers, in the same boat.)

    Some call the first deflation and cry out: behold the deflation!

    Some call the second deflation and cry out: B.S. - this is no deflation!
    Most folks are good; a few aren't.

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