No Government, No Force

Deflation Vs. Inflation: The Great Debate Rages On

Deflation Vs. Inflation: The Great Debate Rages On – Marc Courtenay — Seeking Alpha.

As we celebrate the 4th of the July in the USA we find ourselves at a tipping point that will impact our financial conditions and quality of life for many years to come.
Most of you know I don’t create or sell any of my own trading services and I’m known for fiercely independent analysis. If I were selling a product or a service in the western world in the summer of 2009, would I be able to keep my prices at current levels? Would I have to lower them in order to keep up with the competition and/or accommodate the sinking incomes of my customers?
Robert J. Samuelson wrote an insightful article in Newsweek magazine recently titled “Deflation and Inflation? The Fed Could End Up Facing Both”.  What he wrote speaks to the confusing and paradoxical nature of the bizarre times we are living in.
“To make sense of today’s most perplexing economic debate–whether we’re flirting with inflation or deflation–it’s worth recalling what happened after WWII. Under intense political pressure, President Truman lifted wage-price controls. All heck broke loose.

“Suppressed during the war, wages and prices exploded. Autoworkers, steelworkers and others went on strike for higher pay. In 1946 and 1947, consumer prices rose 8.5% and 14.4%, respectively.

“What’s instructive,” writes Samuelson, ” is that prices then stabilized. There was no wage-price spiral as occurred in the 1960s and 1970s. True, a mild recession in late 1948 and 1949 helped temper price increases. But inflation subsided mainly becuase people dindn’t expect it to continue.
They’d lived through the Depression, when prices declined. Except for wars, American prices were usually fairly stable.
The lesson for today: psychology matters [that is why consumer confidence, or the lack thereof, is so important]. What economists call “expectations” shape how workers, managers, investors behave. If they fear inflation, they act in ways that bring it about.
“The converse is also true, as the late 1940s show. The lesson provides context for today’s debate. Are the Federal Reserve’s easy-money policies laying the groundwork for higher inflation?
“Or, will these policies prevent deflation–a broad decline of prices–that would deepen the economic slump?” Samuelson goes on to give the numbers we have all read a hundred times including “…to lower long-term interest rates, it’s [the Federal Reserve] pledged [to buy] $1.25 trillion of mortgage securities backed by Fannie Mae and Freddie Mac and $300 billion of long-term Treasury bonds.”
We all know these steps are without modern precedent. We also have been told that the billions and billions of bailout dollars that have been “loaned” to the banks have not made their way into the US economy yet.
Not FTA, which speaks of the confusion of investors and why the bailout dollars didn’t help, quite true. It is not so complicated as it seems. Let’s have some good discussion here without snide comments, please.
Also see our submission to Digg — some good comments also started.
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1 Comment

  1. FTA “In “normal times”, banks wouldn’t hold the trillions in bailout funds for a New York minute. They would loan it out over and over again. The bank loaning-multiplier would thus go to work and the trillions of dollars would get leveraged (via derivatives) many times over.”

    Apply the K.I.S.S. formula here. The big bucks “loaned” to the banks was to get the banks in conformity with their margin requirements. That did nothing to add lendable funds to the bank portfolios, it only served to artificially avoid bank takeovers which the FDIC could not afford. So it did nothing to make more money available for loans.

    It is the simple insanity of manipulation by Gov and the Fed.

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