I’m going to go all out here and reveal my ignorance of general economic theory. Anyone should feel free to bitch slap me back into reality. But before you do be sure to read to the end to see what my real point on this is (’cause I’m gonna ramble for a minute).
Deflation has been widely cited as something to avoid, a negative. What is it?
In economic theory, deflation is a general reduction in the level of prices below zero percent annual inflation. Deflation should not be confused with temporarily falling prices; instead, it is a sustained fall in general prices once inflation passed zero percent to the downside. Since this idles capacity, investment also falls, leading to further reductions in aggregate demand. This is the deflationary spiral. (Wikipedia)
Haven’t we been seeing this is some sectors for years? For example, the items no longer manufactured in the US — textiles, electronics, etc — those prices have fallen. It’s idled capacity in the US, changed investment in the US and eliminated aggregate demand for US provided versions of these.
Yeah, I get that I’m contextualizing it, localizing it to a certain impacted area, which may certainly be abusing the concept of “deflation” a bit more than I should, but if we look at deflation and the deflationary spiral from within these localized contexts, can’t we argue that there are entire populations formerly tied to these now outsourced industries that have been in stuck in this for years, ever since off shoring proved useful?
So then here’s my (first) point on this. If it’s fair to look at these already offshored industries as deflationary spiral microcosms, isn’t it fair then to also ask if some of the pundits flogging this particular demon are looking at it from within their own context? And if so, isn’t it fair to also then assume we have to be ridiculously careful about how we look at this issue right now?
In other words, we have to be open to the idea that some of the people getting us hyped up over potential deflation are simply working in industries that no longer provide the value they once did. Think auto industry. Think financial advisers (and thanks Kate for your earlier insightful comments on the financial industry).
My second and final point on this is that the government — our government — of, by and for the people — should err here on the side of the people employed by these industries and not on the industries themselves. Businesses will look out for themselves.
The government can spend a lot of (our) money putting industries on life support only to see them fail anyway. Or, they can spend a lot of money on the people employed by those failing industries and see at least some of them make a healthy transition to whatever is next. Spend the money on education — help people get degrees, help those with degrees get advanced degrees, help people through the inevitable change. It will be hard. Better now than later.
Wide spread, cross context deflation is certainly and issue to be wary of. At the same time the government and the people need to look at industries that are still growing. We can’t simply raise the specter of “deflation” and start running around like chickens with our heads cut off. It won’t work.
PS Full disclosure: I’m lucky enough to be in one of those growing areas, an industry radically transforming IT spend, so my perspective may be slightly skewed. For those who aren’t — I’m sorry. I know it’s tough out there.
8 comments ↓
Education and opportunity are key. When the people are educated, they will figure out the next step.
That’s a really great point.
As I see it, we’re in the midst of creative destruction of the structure of our economy. The equation of “economics of scale” have reversed, and now favor small, nimble businesses. It’s time to let the big old dinosaurs die off so us mammals can step into the sunlight.
We’ve got a ton of problems to solve in the world, and far too many smart people who have been essentially locked up in large companies with creative ideas stomped out by bureaucracy. Think of what we could do if we unleashed that talent on the marketplace, matched them with people with business savvy, and gave them a little cash–best use of bailout money possible. Let GM die, we have other problems to solve. But help the people who have a rough transition ahead.
Hadn’t thought about the deflation angle on this until you brought it up… and I think you’re absolutely on target…
Thanks for the comment JL. Side note: I’m actually a blood descendant of that other John Locke, the philosopher guy.
In tech, we talk about people who spread FUD — fear, uncertainty and doubt. I don’t doubt for a minute that the deflationary spiral can be problematic, but I can’t say enough how easy I think it is to abuse the concept for you own purposes.
From within the tornado, the sky really is falling. But the tornado isn’t everything even if it is everything to you. (Which is sad.) OK, that analogy is mediocre at best. Time to sleep. Cheers!
I agree completely. And it may be that people wind up on a different side of the consuming fence where other things become more important. Could be interesting.
[Reid] There’s a fair amount of simple partisan echoing in here. I almost deleted it but decided I’d err on the side on inclusion. I’ve added my own follow up at the end.
I came across this and I thought I’d put in some thoughts….
The constant drop in prices in tech industry is not deflation; it’s been due to innovation and productivity improvements.
It’s easier to explain inflation and then come back to deflation. Inflation is when prices go up for no apparent reason…it’s a cycle that can’t really stop on its own and affects all parts of the value chain.
One way it happens is when too much money is in the system. For example, inflation is growing rapidly in Venezuela as oil prices are low. Chavez has to fund his Socialism with something so he’s printing money. (Few people want to invest in Venezuela because of the Socialism so he has to have the presses running.) As he prints more money, people realize that it’s not worth as much – especially people/countries that trade with Venezuela. What happens is people are driven to think that “Chavez will just print more so what I have isn’t worth as much.” (This is inflation.)
For the US, US and foreigners still like investing here so they buy our treasuries at an auction. As our deficits get out of control – which will be hard not to happen with this new crew – we’ll have to offer higher interest rates for people to buy them. When that stops working, we have to go to the presses too. This could be likely as Washington is spending far more than anytime in the past while actively making it harder for businesses to succeed. Will there be enough buyers for the debt?
As this all plays out, inflation creeps in. As we are in a deep recession, it gets very hard for governments to stop the presses. So it all compounds.
Deflation is when the money supply contracts and when most prices just start dropping. It kills companies because they can’t profit – so they cut back and lay more people off, further lowering demand for many products. It’s a spiral because money is scarce and people know that prices will keep dropping – so they delay purchases a bit.
As the delays pile up, more people are laid off and innovation starts to suffer.
I think we’re close to a deflationary mode because everyone is expecting the government to stimulate the economy but the government is just spending more money that we don’t have and it is about to put in more anti-business policies.
Once people realize that this government is not out to help people and businesses, the spiral will start. Once the rest of the world starts to catch on and realizes that we have no way possible to pay back all of this new humongous debt (because the US growth engine will have been killed by the liberals), they’ll slow down buying our treasuries. That’s when interest rates start going up.
If the rest of the world was strong, the dollar would start dropping too, but the rest of the world has some even bigger problems. (More later.)
Our government will keep on spending money that we don’t have and, as the business graveyard gets bigger, even less tax money will come in. This is when inflation kicks in. It will be a very low growth economy with high inflation – just like the 70’s under Jimmy Carter.
High tech will get clobbered because it depends on velocity and the government is doing everything possible to slow things down with tax increases and more regulations. (Remember, you tax something when you want less of it over time.) The high tech industry won’t be able to drop prices fast enough so many high tech companies will choke.
Innovators will be punished with high marginal tax rates and higher capital gains taxes. CEO’s will be blamed (worse than now), too.
As for the rest of the world, expect more rioting this summer as countries can’t hide any more. Greece and Iceland were just the start. Watch for Spain. Many countries were funded by sending exports here. As we aren’t buying as much and Obama is looking to slow down free trade (payback to the unions, etc.), a world-wide depression will ensue.
It’s not a pretty picture, but this is the direction we voted in.
Thanks for coming by and for chiming in. Your comment completely skipped the idea of whether or not we’ve been going through context specific deflationary spirals, which was my point. As I read it, your comment feels like a partisan ramble. I’ll offer a couple of thoughts to see if I can get the conversation back on track.
“The constant drop in prices in tech industry is not deflation; it’s been due to innovation and productivity improvements.” Yes — but no place did I talk about the tech industry experiencing a context specific deflationary spiral. And when I said “electronics” — to clarify, I mean that simply outsourcing assembly jobs to Thailand or Mexico — moving those jobs around is neither innovation nor a productivity improvement.
“It’s a spiral because money is scarce and people know that prices will keep dropping – so they delay purchases a bit.” Yes — but that’s always true. Moreover, it’s OK for people to delay purchases. Getting back to the context specific — people within specific contexts always have a different take on things. Look at Wal-Mart. Wal-Mart sets the expectation that it will always drive down prices. People wait for prices to come down. Is that a localized deflationary spiral? And since prices are coming down, does that mean that people who can shop at Wal-Mart settle for less?
“Our government will keep on spending money that we don’t have” — you only get to say this if you have also said it about Bush referencing the wars in Iraq and other spending. If you have never had a problem with that spending, you should probably revisit your thesis on this one. Likewise if you never had a problem with implementing tax cuts back when the budget was balanced but we still had a national debt in need of retiring.
Finally, the main question is where to invest money. Do we invest our national treasure trying to save non-human economic entities? Or do we invest in developing our fellow humans? Are they so tightly correlated that we can’t separate the two?
Personally, although I love business (I work in one, I owned one for 11 years, I’m something of a Harvard Business Review fan boy), I’ll vote for the fellow humans. It’s a better long run decision. The companies will take care of themselves.
Thanks, here are some thoughts:
1) You said “Your comment completely skipped the idea of whether or not we’ve been going through context specific deflationary spirals, which was my point.”
I thought I was clear in that deflation is a monetary or economic phenomena. Sorry. Also, look at the definition you quoted from Wikipedia: “Since this idles capacity, investment also falls, leading to further reductions in aggregate demand. ” Then you talk about “textiles and electronics” and I brought up high tech.
I don’t think there was idle capacity or a slowdown in investment in those areas “over the years”. Electronics and high tech went through a revolution in productivity increases and advances. What am I missing?
So I think what we all saw was just massive productivity improvements due to a free market. This is especially true for electronics and high tech. For textiles, mechanization has helped over the years, but there is still a lot of manual labor involved. As there is little value-add in many textiles, the manufacturing moves to where it can be done commensurate with the value.
Regardless, based on the definition of deflation, it’s a phenomena in the economics of the entire economy.
2) Regarding delaying of purchases. This relates to the velocity of commerce. As deflation kicks in, people slow down. We’re somewhere close to this mode now. I was in a Target last Friday night and you could hear a pin drop near the back by automotive and luggage. It was noticeable. This is not good. (I wonder what March’s layoffs will look like?)
3) I don’t know where the Iraq war fits in, but, in general, I didn’t like Bush’s spending – the war included. Now, did we get something for it? It remains to be seen. Whatever people think of the war, the state of things now is that Bush left Obama with a wonderful opportunity for the future. Will the government seize the day or squander it by coddling the very dictators that keep hurting people??! I hope they work to stop the terror supporting parts of Iran and Syria. Imagine if Obama can achieve a victory over these elements!!! This would allow for dealing with the Palestinians, too.
4) I take exception to the words “national treasure” when talking about money. It’s all our money. “National treasure” makes me think someone found it in a shipwreck. I just want to be clear on where the money comes from. It’s ours.
5) I agree that we should invest in people.
But what are “non-human economic entities”? They’re made up of people! And they are started by people! Government has people in it (of course), but the leaders are supposed to be stewards of our assets, not rulers. Do we invest in people which includes ventures created by people who employ other people and who create things? Do we invest in the government (which doesn’t create much)? That’s really the question.
The “non-human economic entities” are okay as long as they are guided and controlled by people that have our values and know what is right and wrong. We get in trouble (Enron’s, some Wall Street outfits, Cool County government, Blago’s, Stroger’s, etc.) when these people or people who control these organizations don’t have our values and don’t follow the rules.
Humans have grown precisely because certain civilizations do subscribe to values and ideals (and they teach their kids) and others have not.
I have two examples of “how the rules make the system work”: cars and music. If we stop teaching kids how to drive (but allow them to drive), soon there will be all sorts of problems as they cause accidents. It will take time, but the problems will get worse until the teaching is started again.
In music, no matter how crazy, far out, creative, etc. a musician is, they all seem to follow the basic rules of music. Otherwise, it’s just bad music. When a musician is “off” (because of too much partying, etc), what do people do? They complain that the music sucked.
Life is the same way, isn’t it? So it’s okay to invest in the “non-human economic entities” as long as the people running them subscribe to our values.
If people aren’t following the rules (or don’t even know the rules), then investing in fellow humans is tougher. In this case, we have to go back to the basics and teach the foundations of our society.
Hey DW –
First — thanks for the additional reply. I am now convinced that you weren’t just trolling blogs pasting some text in. I know how long writing a comment can take and I appreciate you taking that time here.
Second — what I hear you saying at a high level is that the idea of localized, context specific deflationary spirals don’t yield a lot for you. OK. That’s OK. It’s an “in progress” thought for me and — as I started off the original post admitting — I’m not exactly an economic wunderkind.
Finally, on a lot of the rest of this, you and I don’t agree. The the concepts that I think would be worth exploring are:
a) non human legal entities — are they the same as an individual human simply because they are created by and run by humans? (sorry to sound so The Terminator here — it sounds more contrived than I want but oh well.)
b) this notion of “have our values” — I’m curious as to where you draw the line here — “have our values” can also be code for “is like me” which can be very broadly or narrowly defined. So before jumping to conclusions (which yeah OK I do that too often) I’ll just ask: what do you mean? A particular flavor of religion? The highly individual freedom of expression in which everything is OK as long as it doesn’t cause physical harm to another?
OK, off to work. Cheers.
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