"... first by inflation and then by deflation, ..."

November 20, 2008 4:28 AM

Tangible evidence of deflation? The prices of commodities, houses and a wide range of consumer goods have collapsed, with observers predicting continued declines. While many point back to The Great Depression as an example of damaging deflation, the recession of 1920-1921, a frequently overlooked period in economic history, is perhaps the best example we've got of a deflationary wave similar to what might now taking place.

During the period 1920 to 1921, wholesale prices declined some 36%, "the largest one year decline on record" (Vernon, 2007)¹ [.pdf] . By contrast, US CPI declined 1% for the month of October alone (roughly 13% annualised), the largest drop observed in 61 years, and a rate that may accelerate as The Great Unwinding continues.

Deflation: The Good, The Bad and The Ugly. Excellent single link deflation Q&A.

¹Vernon, J., R., 2007, The 1920-21 Deflation: The Role of Aggregate Supply, Economic Inquiry, Volume 29 Issue 3, pp 572 - 580

posted by Mutant (92 comments total)

We're fucked. Fucked fucked fucked. Can't wait to read the links!
posted by gman at 4:34 AM on November 20, 2008

Mutant strikes again!

There was an NPR piece about this other day, maybe a week ago or so. They discussed the fact that a deflationary period is just awful for employment, because nobody opens up new businesses or hires new employees, they just wait for the deflationary period to blow over. Basically, if it costs you $100,000 to open a new business, it wouldn't make sense to do it in a deflationary period because in six months your business may only be worth $90,000. And why buy a car if you think the price will continue to deflate? Or a house? Or anything non-essential?

Anyway, it's not something I'd heard much about before but it sure sounds pretty scary.

Thankfully, though, the fundamentals of our economy our strong.
posted by billysumday at 4:41 AM on November 20, 2008

The basic problem with Deflation, as I understand it, is that as prices drop people hoard their cash rather then investing or spending, because cash itself is appreciating. There's no need to even put it in an interest bearing savings account. And that means less consumer demand and less investment. A nice little feedback loop.

That said, how much of the price drop can be attributed to lowered energy costs? I mean, I think I read somewhere that deflation including commodities was like 8% for October. The huge drop in gas prices has got to have put a lot of extra cash in some consumers pockets (like people who have to commute or drive fuel inefficient cars).

But since fuel prices have dropped, shouldn't the shipping costs on consumer items also have dropped?

It's interesting how the economy is kind of like a cell, where you have various positive and negative feedback mechanisms. Like the cost of Oil puts a damper on economic activity, but it itself drops if the economy tanks, which in theory would help the rest of the economy out.
posted by delmoi at 4:48 AM on November 20, 2008

High street sales rise defies gloomy sentiment.
UK retail sales drop not as bad as feared.
Britons not dropping and still shopping.
posted by i_cola at 5:03 AM on November 20, 2008

Morning Edition said something about it this morning. Something something "negative inflation" for last month or something. Can anyone else fill in the blanks?
posted by backseatpilot at 5:09 AM on November 20, 2008

In fact, the current economic woes look a lot like what my 96-year-old grandmother still calls "the real Great Depression." She pinched pennies in the 1930s, but she says that times were not nearly so bad as the depression her grandparents went through. That crash came in 1873 and lasted more than four years. It looks much more like our current crisis.
http://chronicle.com/temp/reprint.php?id=477k3d8mh2wmtpc4b6h07p4hy9z83x18
posted by robbyrobs at 5:13 AM on November 20, 2008

i_cola - those stats are not without doubters: "Alan Clarke, UK economist at BNP Paribas, said the ONS was “living up to its reputation as being a random number generator”. " from your first link...
posted by patricio at 5:19 AM on November 20, 2008

And why buy a car if you think the price will continue to deflate? Or a house? Or anything non-essential?

Or a laptop, or an iPod, or a plasma screen TV.

Wait a minute...
posted by ZenMasterThis at 5:20 AM on November 20, 2008

This is stupid. There was a simultaneous commodities and real estate bubble, and now the bubbles have popped.

The Fed did not hike rates over the summer, because it was a speculative bubble fueling the increase in consumer prices, not inflation, and needed to be dealt with in different ways than inflation. This isn't "deflation" or "negative inflation" - this is a price correction, and needs to be dealt with differently. It will only affect those who are paying off loans on the artificially inflated assets, and only to the extent of the assets they overpaid for. Sucks to be a home owner right now, but we've known that for almost a year.

There will be no across-the-board decrease in wages, just as there were no across-the-board increase in wages while the bubble was booming.
posted by Slap*Happy at 5:30 AM on November 20, 2008 [4 favorites has favorites]

as prices drop people hoard their cash rather then investing or spending, because cash itself is appreciating. There's no need to even put it in an interest bearing savings account.

I guess I don't understand the average consumer. If suddenly the money in my savings account can by a ton of shit that I couldn't afford before, like say a Plasma/LCD tv, home furnishings, tools, etc, I would be going ape shit at Circuit City, Home Depot, etc. In fact, I'm ramping up my carb intake to handle the marathon spending orgy I'm going to engage in as this shit keeps deepening. Why would people be hoarding if stuff is getting cheaper? It reduces the need to belt tighten.

Also, aren't expenditures for companies cheaper as well - labor, infrastructure, office supplies,etc - shouldn't that result in more wiggle room in budgets for stuff that may have been too expensive previously?

Why is everything backwards? When interest rates were high and I was getting 6% on my HSBC online savings, THAT'S when I was hoarding. I was like holy shit I can make 2000 grand in six months if I just keep piling cash in there. I must be from bizarro world.
posted by spicynuts at 5:38 AM on November 20, 2008 [1 favorite has favorites]

Er, what? Dollars are slowly getting more valuable when government spending is out of control, public debt is $10 trillion, revenues are stagnating, and we're cranking out T-bills that we've got to make good on? I think this is just the CNBC / egghead / pundit flavor of the week that will will fix itself in short order.
posted by crapmatic at 5:39 AM on November 20, 2008

There will be no across-the-board decrease in wages, just as there were no across-the-board increase in wages while the bubble was booming.

Well, there sure as hell was an across the board increase in wages during the dot com bubble. That pretty much propelled me from a bartender living pay check to pay check to an executive firmly in the middle class in about 5 years. But there was no decrease in wages when that bubble exploded like cheap bukkake film all over NYC. Maybe this time the wage decrease that should have happened then happens?
posted by spicynuts at 5:41 AM on November 20, 2008

at some point all the bailouts should stop the deflation (by increasing money supply). then we'll have to worry about hyper-inflation.
posted by bhnyc at 5:43 AM on November 20, 2008 [1 favorite has favorites]

And why buy a car if you think the price will continue to deflate?

My I'm not sufficiently versed in the intricacies of economics, but I don't buy a car because it's going to be worth a lot some day. I buy a car to get to work.
posted by DU at 5:44 AM on November 20, 2008 [2 favorites has favorites]

I guess I don't understand the average consumer. If suddenly the money in my savings account can by a ton of shit that I couldn't afford before, like say a Plasma/LCD tv, home furnishings, tools, etc, I would be going ape shit at Circuit City, Home Depot, etc. In fact, I'm ramping up my carb intake to handle the marathon spending orgy I'm going to engage in as this shit keeps deepening.

Well, you just answered your own hypothetical. It's not that people don't want to buy stuff, it's that they want to buy more stuff at cheaper prices, just like you. Say you have $30,000 to spend and you want to buy a new F-150 and a 52" plasma. Well, if you hold your money for two months, you can buy the truck and the TV for only $27,000. But why buy it at $27K? If you wait another month after that, it'll be $25K.

You say you're planning your spending orgy for when the shit keeps deepening - the problem is that it keeps deepening, and deepening, and nobody pulls the trigger, everybody waiting for the prices to stabilize before buying something that goes down even further.
posted by billysumday at 5:44 AM on November 20, 2008

That said, how much of the price drop can be attributed to lowered energy costs?

It's broken out in the link. Energy costs dropped 8.6%, and transportation costs dropped 5.4%. Everything else except apparel was positive. Housing actually went up from -0.1% to 0%.

Not exactly surprising news, considering I can see that gas dropped from $4 to $2 just by driving through downtown.
posted by smackfu at 5:49 AM on November 20, 2008

Call me when we hit bottom. My new Macbook pro and Iphone are waiting
posted by Xurando at 5:50 AM on November 20, 2008

As ZenMasterThis commented, plasma tvs and all technology have always been deflating. It's not that big a deal if trucks do too. The bigger problem is people don't invest because stock prices also go down (deflate). Without investment you get no new businesses. Japan had this with their "lost decade"
posted by bhnyc at 5:57 AM on November 20, 2008

This isn't "deflation" or "negative inflation" - this is a price correction, and needs to be dealt with differently. It will only affect those who are paying off loans on the artificially inflated assets, and only to the extent of the assets they overpaid for. Sucks to be a home owner right now, but we've known that for almost a year.

Jobless Claims Jump Unexpectedly to 16-year High

That's an across the board wage cut. To zero.

Those artificially inflated assets you are talking about include Cheerios, iPods, plasma TVs, plumbing services, etc. You are forgetting that this isn't the unwinding of the mortgage market. That unwound already. It's the unwinding of the yen carry trade that's been in place more or less for nearly 20 years. It is the end of profligate deficit spending to power economic growth. It's the end of 'buy now and pay later'.

Those going out of business sales? That's deflation. You want to see deflation at work?

Go to the forums at fatwallet.com and look at all the current and expired spontaneous sales that are going on. They come on for a day or two and then they end. 20% off watches - two days only. 10% off appliances overnight only. This store today, the other store tomorrow. Like a massive army firing potshots at the enemy to probe the response. A dodge dealership in Florida has a buy-one-get-one 50% sale on pickup trucks. Ford is announcing real employee pricing (A-Plan, not goofy X-plan) on all ford vehicles. All this a week before Black Friday. And during a season when the consumer is almost forced to buy something.

This is the suppliers probing demand to discover where the price might end up. How low they are going to have to go. This is price discovery. There is no such thing as 'sale price' or 'discounts'. That's advertising-speak. There is only price. The price three months ago is not the price.

At what lower price do X numbers of consumers purchase this product? What you are hearing from retailers and product suppliers is that the shift downward is 'seismic' (to use Best Buy's term). Deflation is not a gentle reverse of the economic engine. It's the economy in drive being pushed backwards, stripping the gears along the way. Deflation is destructive because it halts economic activity. Why produce if the price is falling? Why not just keep the money I have?

You could argue that the goods become cheaper to make because the price of materials is also deflating, except that labor is still a major production input, and you need to cut the cost of labor. But the labor in this country is in debt to its eyeballs, and the debt does not deflate. You owe $20,000 on a Visa, it doesn't matter what happens to the economy. You still owe Visa $20,000. And our government has that debt too. Recall that the flip answer to how do we pay of the federal debt is to inflate our way out of it. This is the opposite.

It's amazing to watch who in the media, business and in policy positions gets it vs. those who don't. Have you noticed that all these statistics coming out are about things being at 16-year highs or worst in 40 years, etc.

We are unwinding everything that enabled the economic system in place since about 1983. We need to unwind our ossified attitudes about money as well, if we want to survive.
posted by Pastabagel at 5:57 AM on November 20, 2008 [26 favorites has favorites]

My I'm not sufficiently versed in the intricacies of economics, but I don't buy a car because it's going to be worth a lot some day. I buy a car to get to work.

It's not the investment value, it's the initial cost that people are thinking about. If you think you need a car now but you might be able to squeeze another year out of the current car, and if you're already worried about your job because things are unsteady, deflation might make you wait a year. If everyone waits, nothing big sells and the economy has a rough time. Because your job is probably dependent on the general health of the economy, your job worries might become reality. So now instead of everyone buying stuff and keeping money flowing, people hesitate and then lose their jobs anyway and so don't have the money to buy that car (or anything else) after all. Maybe.

See you in the bread line.
posted by pracowity at 6:02 AM on November 20, 2008 [3 favorites has favorites]

I went to the ATM this morning and it said "insufficient funds"...

I'm wondering is it them or me?
posted by netbros at 6:09 AM on November 20, 2008 [8 favorites has favorites]

That's an across the board wage cut. To zero.

For other people.
posted by smackfu at 6:09 AM on November 20, 2008

patrico: I think he counts as the 'gloomy sentiment'. :-)

Mortgage market still weak despite 7% rise

Personally, I'm quite upbeat about the whole thing on a more long term basis. I don't think we'll ever learn not to live beyond our means but the juddering crash might make folks, from the top to the bottom of the economy, think a bit more in the future. Ha! Who am I kidding?

I was working in the back office of a large fund management company until being made redundant a couple of months ago. I hated the job but the money was good and the security helped as I renovated my flat. I now lecture in design at a university and have a bunch of other fun projects in the pipeline plus I can actually project manage my renovation properly. I'm poorer (at least in the short term) but the future looks good. And I'm waaaaay happier. Holy crap did I hate that company.

I made sure that all of my financial commitments were covered and have savings so I was well prepared for the changes. Not that I was expecting anything but I personally don't think it's that smart for an individual to overextend themselves financially, even in the good times.

Yeah, yeah, aren't I clever, yay me etc. Everyone is getting macaroni mosaic calendars for Xmas this year. Or maybe not?

It pisses me off that a lot of ordinary folks are going to get done over by a global recession. The problem is, if you want the benefits of the consumer capitalist economy, you really do have to take the shit as well and the most shit ends up lower down. 'Spread the wealth' anyone?
posted by i_cola at 6:14 AM on November 20, 2008 [1 favorite has favorites]

how much of the price drop can be attributed to lowered energy costs?

Tim has a handy chart. Looks like the Energy component of CPI is now, rather suddenly, about half of what it'd would've been previously, year-over-year. Still positive though, which probably means it has further to fall. Oil price was approaching $100 this time last year.

It is the end of profligate deficit spending to power economic growth.

Not if Obama has anything to say about it.

Should the government stop dumping money into a giant hole? Experts say "No way!"
posted by sfenders at 6:16 AM on November 20, 2008

I was like holy shit I can make 2000 grand in six months if I just keep piling cash in there.

$2,000 grand in six months? That's $4 million a year, buy as many TVs as you want.
posted by snofoam at 6:19 AM on November 20, 2008

Not if Obama has anything to say about it.

Should the government stop dumping money into a giant hole? Experts say "No way!"
posted by sfenders at 9:16 AM on November 20

A ha! Read the article very carefully. The stimulus he's proposing is band-aid stuff. Extend unemployment a little money here, a little money there. His big idea is of course universal healthcare but that is not economically stimulating the way defense spending is. Defense spending creates engineering jobs, factory jobs, management jobs, etc.

His idea for infrastructure investment is well placed but minuscule in comparison. But he has no choice because the money isn't there and no one will lend it to us. So the government turns to things it can handle like maintenance and caretaking, neither of which triggers growth.

But it isn't his fault, per se, because anyone would be faced with the same set of challenges.

The problem is that we the people are simply too dumb. Anyone know how to start up and run an LCD fab so we can make our own TV's? How about cell phones. Anyone know how cell phones work? Oh. Hey, we can make really efficient engines, anyone know about that stuff. Ok. Well, if those people need help processing their paperwork or running their call centers, send them our way.

The one thing Obama can do is make hard science and math education a priority, so that kids who graduate high school 8 years from now are fantastically more educated about math and science than we are. Science and math are the only way to growth for the US. There will be growth in China and Korea, because they make everything. But that doesn't help us. We need to stop abdicating production markets and get back in the game. Production, innovation, techonology. That is the way to growth. Not creative financing and retailing.
posted by Pastabagel at 6:34 AM on November 20, 2008 [18 favorites has favorites]

If suddenly the money in my savings account can by a ton of shit that I couldn't afford before, like say a Plasma/LCD tv, home furnishings, tools, etc, I would be going ape shit at Circuit City, Home Depot, etc.

I've certainly had a bit of that feeling already in regard to my investments. At least a TV doesn't drop 4% in value in a day.
posted by smackfu at 6:36 AM on November 20, 2008

You say you're planning your spending orgy for when the shit keeps deepening - the problem is that it keeps deepening, and deepening, and nobody pulls the trigger, everybody waiting for the prices to stabilize before buying something that goes down even further.

Yes but my impatience with holding off my desire is heightening. So there will be balance point..not months...weeks. At that point I say, this is enough of a bargain because I WANT IT NOW. I guess other people are more patient. The amount of debt people carry would say they aren't, but what do I know.
posted by spicynuts at 6:52 AM on November 20, 2008

It seems like deflation is a good thing for people with cash waiting to buy a house (assuming they can stay employed). What am I missing? It almost seems like being financially conservative could be a good thing. That can't be right.
posted by diogenes at 6:57 AM on November 20, 2008

At least a TV doesn't drop 4% in value in a day.

Value or price? Two different things. A TV pretty much drops 50% in value the minute you throw it in your trunk in the Best Buy parking lot. The value of a stock in this market is not necessarily related to its price right now.
posted by spicynuts at 6:58 AM on November 20, 2008

At least a TV doesn't drop 4% in value in a day.

Compare what it costs you on Sunday evening vs. the amount you could sell it for on Monday evening if you lost your job Monday morning. You have to be pretty sure of your employment before you run out and buy that cyclotron you've always wanted.
posted by pracowity at 7:02 AM on November 20, 2008

Ah. Slow typing. You beat me to it, spicynuts.
posted by pracowity at 7:03 AM on November 20, 2008

Production, innovation, techonology. That is the way to growth. Not creative financing and retailing.

I do think we have innovative people here in the USA, and we do well at technology too. The problem lies on the production side of things where so much is produced overseas for pennies on the dollar. Companies like Levi Strauss are now marketing companies, and don't produce anything. That really cool iPod that was designed by an American company? It's made in China. We do have more and more kids going to college, but we're running out of people that actually make things and have skills. Linemen are in short supply. Skilled maintenance people to work on the machinery in our remaining factories. That kind of thing. Manufacturing is a place where morons like me can work, and make a decent living. Ship all that work overseas, and we're left with crappy jobs in service and retail, until the economy collapses. Oh wait...
posted by Eekacat at 7:06 AM on November 20, 2008

Why aren't food prices dropping as well? As grocery costs ran up I stopped buying a lot of superfluous items that had substantially increased in cost--and those things still have the same high prices.

Conversely, I've gorged on tech-related items as prices have crashed down recently. The price drops are well beyond the usual tech/semiconductor-based deflation.
posted by aerotive at 7:11 AM on November 20, 2008

During each one of these posts I fight the urge to sign over all of my bank accounts and paychecks to Mutant, because he'll know what to do with my money, and maybe he'll let me use it sometime, and it will send me nice postcards telling me how it is doing.

Then again, I suspect that urge is what has us in this trouble in the first place.
posted by adipocere at 7:12 AM on November 20, 2008 [1 favorite has favorites]

Pastabagel: A ha! Read the article very carefully.

Yeah, I probably should have. Just picked one at random more or less, out of the endless sea of articles on the web talking about new United States (and world-wide) government deficit spending at a time of falling tax revenues. It sure seems like big numbers to me. $237 billion US federal government deficit in October alone, there are estimates all over the place that it'll reach a trillion dollars for the year. Huge deficit spending coming up, whether or not you think it will be effective. There are some pretty good arguments that it's necessary, though I guess everyone has their own ideas about how it could be better spent.

the money isn't there and no one will lend it to us.

That remains to be seen. Brad Setser thinks the strain on the Treasury market will be less than many people expect. So far the market seems to be mostly in agreement, albeit a little worried here and there.
posted by sfenders at 7:12 AM on November 20, 2008

Thank you mutant. Your posts are always fantastic.
posted by elmono at 7:45 AM on November 20, 2008

A TV pretty much drops 50% in value the minute you throw it in your trunk in the Best Buy parking lot.

Place it in the trunk gently and protect it with wadded blankets.It'll retain its value better.
posted by codswallop at 7:48 AM on November 20, 2008 [1 favorite has favorites]

I went to the bathroom a few minutes ago. My body weight dropped a pound or two. If that trend continues, I'll totally disappear within the next few days.
posted by Bovine Love at 7:51 AM on November 20, 2008 [4 favorites has favorites]

spicynuts has the truth with this comment. . . what we're getting now is the continuation of the 2001-2002 recession that was fended off by debt expansion, both consumer and governmental.

It wouldn't surprise me that since winning the 2004 election was paramount to our former political overlords that these two debt bubbles were intentionally allowed to inflate starting 2002. Greenspan caught a lot of shit for letting the economy wreck Bush Sr's first term, and no-way no-how was he going to allow that to happen again IMO.

$300 to $500B PER YEAR was being injected into the economy via debt expansion. M3 was around $7T in 2001, now it's twice that, $14T. Take $300B of refi cash outs and divide by $45,000/yr wage earners and you get over SIX MILLION middle-class jobs being directly supported by unsustainable debt draws.

Federal spending expanded from ~$2T to $3T in this timeperiod too. THAT trillion was good for over TWENTY MILLION jobs.

But now we find ourselves in a liquidity trap, like a late-stage junkie we're reduced to trying to find a blood vessel that can take the injection, and it's not going well.
posted by troy at 7:53 AM on November 20, 2008 [4 favorites has favorites]

> His big idea is of course universal healthcare but that is not economically stimulating the way defense spending is. Defense spending creates engineering jobs, factory jobs, management jobs, etc.

I wonder about that. Why wouldn't it be? Universal healthcare would mean even greater demand for general practitioners, nurses, health support systems, and so on, distributed across the country in ways that don't currently exist, providing thousands of dollars of care per person per year for fifty-something million people. That's billions of potential spending right there, with provable benefit.

The notion that universal healthcare isn't economically stimulating doesn't sound right to me. There would be hundreds of thousands of new jobs to fill, tens of thousands of new managers over them, tens of billions of dollars in materials to supply and consume. They're distributed across the whole country rather than concentrated in the few parts of the country where high-end engineering and building is done, which makes it harder to lobby for in a pork-barrel way but distributes the benefits to all parts of the country in ways that defense spending never will.

There are probably good arguments against universal healthcare but contending that as government spending it's not as good for the country as defense spending is not one of them.
posted by ardgedee at 7:56 AM on November 20, 2008 [3 favorites has favorites]

oh, I disagree with the comparisons to 1920, too. While I'm no historical economist, from what I've read the war was very inflationary and the general dislocation of having France & England by everything on credit while in a fight for their lives was an unnatural shock to the system.

You want a model, just look to Japan, 1989-2003. I lived there 1992-2000, so I got to see what a deflationary spiral looks like.
posted by troy at 7:59 AM on November 20, 2008

Universal healthcare would be hugely stimulating in another way too. If it were done right, we'd have an instant boom of small businesses. There are tons of people wth a great idea they could start on a shoestring, if only they weren't afraid to lose their employee health insurance.

The lack of universal coverage is a great big anchor chained to the economy in this country. Cut the chain, please.
posted by rusty at 8:04 AM on November 20, 2008 [6 favorites has favorites]

"I would be going ape shit at Circuit City"

Circuit City has filed for bankruptcy.

A plasma TV won't do you much good when you've been unemployed so long that you can't pay your cable bill. So be sure to get an over-the-air antenna while you still have money to spend.

I'll be hording cash. Spending money on luxeries when the economy takes a nose dive is GWB fiscal policy. That is - Really dumb.
posted by aapep at 8:04 AM on November 20, 2008

The notion that universal healthcare isn't economically stimulating doesn't sound right to me

yah, no shit. Now, there's a lot of administrative waste in our present horrendously inefficient mish-mash system, so eliminating that won't be a net stimulus.

But done right we should have a better distribution of wealth, more bang for our buck.

Right now we've got the made men -- the doctors, surgeons, medical goods and pharmaceutical honchos making more money than they know what to do with, the nurses generally getting the wages they demand.

Part of the problem is that the IMO free market directs healthcare assets into the "fun" (ie easy-money) fields like cosmetic surgery while preventative and GP care for seniors get the hind-teats.

BTW, there are now *NO* Medicare-MediCal clinics in Fresno. The whole system has been horribly hollowed out over the past 10 years. There's no money in treating old people and indigents, so doctors flee this market as fast as they are able.

If we ran our fire services like this we'd have 30,000 fire trucks in Mountain View and maybe 2 serving the nicer parts of the Central Valley.
posted by troy at 8:12 AM on November 20, 2008 [1 favorite has favorites]

His idea for infrastructure investment is well placed but minuscule in comparison. But he has no choice because the money isn't there and no one will lend it to us. So the government turns to things it can handle like maintenance and caretaking, neither of which triggers growth.

FAIL.

Everyone is lending us money. Why do you think the interest rate on treasury bonds is so low? Because demand for U.S. Treasuries is at an all time high as a "flight to quality" takes place. Buying a treasury bond means loaning the government money. Duh.

This idea that "no one will loan us money" is absurd. With treasury rates so low, it would be irresponsible not to borrow money (from what I've been reading).

Also, defense spending is ultimately a waste of money if we're not going to use that stuff, and we don't. Many expensive weapons systems become obsolete before they're ever used. We don't need steal bombers and super jets to fight insurgencies. I agree that it would be a problem to cut defense spending now, but it needs to be phased out when times are more prosperous, and switched to other things.
posted by delmoi at 8:13 AM on November 20, 2008

This idea that "no one will loan us money" is absurd.

30-day and 3-month money is no way to fund a government. Pros look at the 10 years issues.

Problem with cutting defense is that this is a "use it or lose it" sector. Once you lose a shipbuilder or aircraft manufacturer, it's very hard to re-create it.

But, yeah, once one understands that wealth is just that which satisfies our needs and wants, it becomes easier to see where to throw our capital IMO. What are our needs? Better schools, health care availability, alternatives to $5 gas and $10,000 seasonal heating bills, 21st century transit infrastructure, etc.

That we don't have the productivity or "money" to accomplish this is 100% bullshit. What we lack is the collective will, and the leadership that creates this.

Politics is the art of the possible, and, frankly the presidents since Nixon have rather sucked at their job in this area.
posted by troy at 8:26 AM on November 20, 2008 [1 favorite has favorites]

The problems in the US manufacturing sector aren't so much about a decline in innovation or capability (although there is that, too, but I think it's more a symptom of even deeper problems than the cause)--it's mostly about letting commitment to free-market ideology and economic globalization trump concern for US national interest.

For example, we should have long ago started putting more pressure on China to stop deflating the value of its currency while at the same maintaining huge trade imbalances with the US (since they basically import none of our manufactured goods, their deflated currency has disproportionate spending power domestically, which gives China massive competitive advantages in labor costs--not to mention the advantages of having abysmal labor and human rights standards). At a minimum, we could have imposed tariffs on goods manufactured in China until they agreed to level the playing field, which would have helped keep our own manufacturing sector competitive at least in the domestic markets.

Our own political leaders and economic policy-making bodies should not be in the business of playing advocates for the development of the "global economy"--they should be aggressively pursuing US national economic interests even if it means pushing back against our trading partners occasionally. In the long term, that's good for the global economy because it forces our potential trading partners to move up to meet our standards if they want to do business with us.

Deficit spending isn't the problem. It's the trade deficit and the labor cost race-to-the-bottom policies of recent administrations, along with the complete lack of any coherent, strategic vision for America's economic future. We don't need to isolate ourselves from international trade, sure--that would be disastrous--but we do need to preserve a degree of autonomy and domestic economic fitness. If you don't sit down at the bargaining table fully capable of walking away from a deal if it doesn't meet your needs, you'll end up with a bad deal every time. That's the position America has increasingly found itself in lately, economically, because of our dependence on our global trading partners, and that's in large part because we've neglected US national interest in the rush to globalization (at the urging of industry leaders with flashing dollar signs in their eyes over the prospect of being able to sell products for the same or even higher prices while at the same time slashing per unit production costs).

For decades now, our economic policies have ignored the need for the US domestic economy to maintain a healthy degree of self-sufficiency while remaining engaged in international trade.

His big idea is of course universal health care but that is not economically stimulating the way defense spending is. Defense spending creates engineering jobs, factory jobs, management jobs, etc.

Echoing what argedee said in response to this, focusing on health care can potentially create just as many opportunities, as could spending on an ambitious space program, massive public works programs, or any number of other focuses. There's nothing uniquely economically generative about defense-spending. In fact, we've been spending more on defense than ever before in US history throughout the Bush administration (not just on the special appropriations for Iraq, but generally). Fat lot of good all that "economic stimulus" is doing us now.
posted by saulgoodman at 8:31 AM on November 20, 2008 [10 favorites has favorites]

Pros look at the 10 years issues.

So look at the 10-year. Observe it's excitingly rapid rise in yield since 2002 as everyone begins to worry about the deficit. Not that I'd want to be long right now myself, but people with a lot more money than me sure are eager lately to express their continued support for the United States Treasury to go on issuing as much debt as it cares to.

Deficit spending isn't the problem.

I hope we can agree that household deficit spending has turned out to be a bit of a problem. Government deficit spending will become a problem before too long if it doesn't succeed in investing in sufficiently productive tihngs. On the other hand if it does succeed, it'll merely be a burden rather than a problem.
posted by sfenders at 8:49 AM on November 20, 2008

adipocere :>>Then again, I suspect that urge is what has us in this trouble in the first place.

There's a rabbinic quote about wealth and possessions that I've never really understood. It reads: "There are four types of person: one who says 'what is mine is mine and what is yours is yours' - this is the average type. One who says 'what is mine is yours and what is yours is mine' - that is an ignoramus. One who says 'what is mine is yours and what is yours is yours' - this is a righteous person. One who says 'what is yours is mine and what is mine is mine' - that person is wicked."

I also don't understand very much about global finances, but it seems to me that our economic wellbeing has been governed by a system - and people - who largely fall into the second category: ignoramuses who say what's yours is mine and what's mine is yours.

source.
posted by rongorongo at 9:02 AM on November 20, 2008

I was going to say Black Friday and Cyber Monday would save us all, but Pastabagel destroyed my snarky optimism quite nicely. I wonder how Buy Nothing Day(s) (US: Nov 28; International: Nov 29) will do this year.

I think the difference between Defense spending and Health Care spending is how it is spent. I don't know a lot about either field, but I imagine that there's a lot more tangibles constructed with Defense, while Health is a lot of paying people for services (along with the tangibles). Sure, you'll be hiring some more soldiers with ramped up defense, but you'll also build more bombs and jets. (Then again, I guess there'll also be more military research research spending, which is less tangible than service).

How about a new New Deal? Sure, there aren't as many small farmers to help out, but there are always public improvements to be made, which would employ a range of people, and it could focus in the more impoverished jurisdictions where taxes haven't been enough to keep the infrastructure in good shape.
posted by filthy light thief at 9:10 AM on November 20, 2008

His big idea is of course universal healthcare but that is not economically stimulating the way defense spending is. Defense spending creates engineering jobs, factory jobs, management jobs, etc.

So does universal healthcare. One of the big barriers to starting a small business is the relative unaffordability of individual health insurance in this country. People either have to factor in their personal health insurance costs or "bite the bullet" and take the risk of going without. By eliminating that barrier to entry, though, I think you'll see a lot more people taking their good ideas into the market, and potentially creating a whole lot of jobs there.
posted by deadmessenger at 10:17 AM on November 20, 2008 [1 favorite has favorites]

I hope we can agree that household deficit spending has turned out to be a bit of a problem.

Oh yeah. No doubt about it. But rampant speculative real-estate investment financed by deficit spending has turned out to be an even more massive problem. (But of course, some new virtual market had to emerge after the dot-com bubble burst, to keep our economy treading water as the aforementioned captains of industry sold us all those more cheaply-produced products at the same or higher prices, while investing their earnings in real estate of their own... In Dubai.)
posted by saulgoodman at 10:28 AM on November 20, 2008

delmoi: This idea that "no one will loan us money" is absurd. With treasury rates so low, it would be irresponsible not to borrow money (from what I've been reading).

That was the game-plan on the way up, because you were betting on the expectation that either the asset you're buying is going to appreciate at a faster rate than your loan interest (= net gain), or that your wages would be constant or go up, with no fear of job loss (= you don't have to save up before buying all the toyz)

But now, there's a higher risk of not holding a job, and the real estate you could buy now may still lose value over the next few years.

So nope, I'm certainly not planning a shopping spree anytime soon.
posted by Artful Codger at 10:43 AM on November 20, 2008

some new virtual market had to emerge after the dot-com bubble burst

do not underestimate the importance of real estate -- what classical economists called Land -- in our economy. It is, IMO, CENTRAL -- without understanding real estate economics one cannot understand economics at all.

One cannot be productive -- or even exist, really -- without using Land. Owning Land has been the sure way to enrich oneself for centuries, for to such ownership accrues the unearned increments that surrounding developing commerce and public infrastructure bestows to it.

The All-Devouring Rent is a central fact of economics. Tax cuts, welfare assistance, increasing wages, public infrastructure investment, interest rate reductions -- every surplus dollar that the consumer sees will end up in the landlord's pocket eventually, for the supply of Land is fixed and the demand for it is anything but.
posted by troy at 11:06 AM on November 20, 2008

Artful Codger, I don't know whether you understood or not, but fixed that for you just in case:

"That was the game-plan on the way up, because you were betting on the expectation that either the asset social spending, infrastructure programs, banks, wars, insurance and auto companies you're buying and/or investing in are going to appreciate pay off at a faster rate than your loan interest (net gain), or that your wages tax revenues would be constant or go up, with no fear of job loss Treasury bond auction failure (= you don't have to save up before buying all the toyz)"
posted by sfenders at 11:12 AM on November 20, 2008

Echoing what argedee said in response to this, focusing on health care can potentially create just as many opportunities, as could spending on an ambitious space program, massive public works programs, or any number of other focuses.

I'm pretty sure that the NHS here in the UK is one of the biggest recruiters in the country.
posted by axon at 11:14 AM on November 20, 2008

Here's something that I don't understand, and while I realize it's probably a derail, maybe someone can have a go at explaining it -

My wife and I have held X dollars in a (practically 0%) savings account for the last two years, trying to buy a house in Baltimore. Back in the spring, we thought we had a good prospect, so we went to several banks, and got quotes on mortgage rates.

Recently, we went back to get an update on the rates. In the interim, the fed has lowered its rates by, I don't know, 1 or 1-and-a-quarter percent. AND THE FEDERAL GOVERNMENT STARTED BUYING INTO BANKS TO FORCE THEM TO MAKE LOANS (I thought). Yet, all the rates I'm offered are a percent north of where they were in the spring. What is up with that? Oh, and everyone is busy floating plans to bail out people who bought homes years ago and got in over their heads (not that I'm bitter.)

If we did this big maneuver to partially socialize the banks, ostensibly to get credit going again, and the residential mortgage market is the root of the problem, why has the government allowed mortgage rates to continue to rise, and to decouple from the Fed's rates?
posted by newdaddy at 11:23 AM on November 20, 2008

I'm pretty sure that the NHS here in the UK is one of the biggest recruiters in the country.

Yeah. It used to be said that the National Health Service was the largest employer in Europe apart from the Red Army. Now the Red Army has disappeared...
posted by I_pity_the_fool at 11:41 AM on November 20, 2008

One cannot be productive -- or even exist, really -- without using Land.

Sure--land intended for valuable economic use has and always will be an indispensable economic resource. It's just common sense. Land as a fungible investment commodity, it turns out, maybe not so much.
posted by saulgoodman at 11:55 AM on November 20, 2008 [1 favorite has favorites]

newdaddy, why would you be bitter? If you had bought a home a few years ago, you would have taken a bath, but because you didn't, you didn't. If you wait a couple more years the price will still probably be lower.
posted by delmoi at 11:57 AM on November 20, 2008

I think the reason I'm bitter is that it looks like the banks pocketed the bailout money without doing anything to improve the credit market OR cleaning up their bad investments. And any extra lowering of the fed rate is going straight into the banks to shore up their balance sheets, and none of it is trickling down to me. From my vantage, it almost looks like banks are in collusion to prevent rate cuts from actually reaching the consumer.
posted by newdaddy at 12:08 PM on November 20, 2008

I think the reason I'm bitter is that it looks like the banks pocketed the bailout money without doing anything to improve the credit market OR cleaning up their bad investments

Oh yeah, that is annoying.
posted by delmoi at 12:14 PM on November 20, 2008

Yet, all the rates I'm offered are a percent north of where they were in the spring. What is up with that? Oh, and everyone is busy floating plans to bail out people who bought homes years ago and got in over their heads (not that I'm bitter.)

If we did this big maneuver to partially socialize the banks, ostensibly to get credit going again, and the residential mortgage market is the root of the problem, why has the government allowed mortgage rates to continue to rise, and to decouple from the Fed's rates?
posted by newdaddy at 2:23 PM on November 20

The interest on savings and CD's is rising because banks want cash deposits, pronto. (Again, fatwallet is your friend) They are essentially bidding for you deposits. Remember that the interest rate is the price of money. Everyone really wants money now, so they are willing to pay up for it. Ironically (or maybe not so much) the banks that got billions in the bailout are not the ones paying up for deposits, because they got their cash from the government! It's the smaller banks trying to outbid each other for your money.

Second, mortgage rates are tied not to the fed rate but to the LIBOR rate, a.k.a the London Interbank Offered Rate. LIBOR is not formally tied to or locked the Fed rates, but again, all interest rates are the price of money, so they all tend to move together. But the yawning chasm between the LIBOR and Treasury rates or Fed funds rates has been new unique occurrence during this financial panic, though, it has returned to somewhat normal levels recently.
posted by Pastabagel at 1:20 PM on November 20, 2008

I think the reason I'm bitter is that it looks like the banks pocketed the bailout money without doing anything to improve the credit market OR cleaning up their bad investments

It's possible that the banks have pocketed much more than the bailout TARP money. The Federal Reserve has given out Two Trillion Dollars in emergency loans on top of TARP's Seven Hundred Billion.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn't require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.

Two Trillion Dollars... who got the dough?
posted by Fuzzy Monster at 2:48 PM on November 20, 2008

newdaddy: That's exactly what the banks did. What they didn't pocket they paid out as dividends to stockholders.

What, you thought a Bush administration plan was going to work as advertised, for the benefit of us? No, true to form, it worked as planned, to the benefit of the rich.

This is the last great plunder before the crooks are out. And we have to suffer through exactky two more months of it.
posted by rusty at 3:47 PM on November 20, 2008 [1 favorite has favorites]

When prices fall because the central bank revalues the monetary unit of account, your gains in your capacity as a consumer are offset by your losses in your capacity as a producer. And everyone is both, so at best you break even.

What?

Let's say I take home $700 a week.

Of that, I stick $100 in my mattress, and spend the rest.

After a year, I've saved $5200.

But let's go back that year, and say that there was sudden deflation of 1%, like this October. This means the goods and services that I used to pay $600 a week for now only cost $594.

So I'm saving $106 a week, and after a year, I've saved $5512. $312 more than I otherwise would have, and in fact that $312 will actually buy what $315 would have purchased otherwise.

My yearly savings are worth approximately six percent more, in goods and services, than they would have been.

Where does the necessary $315 cost to make up for that come from, if "at best you break even"?

Yeah, maybe I get laid off due to the crappy economy. But maybe I don't.

Maybe I don't get a raise. But maybe I wasn't going to get one anyway.

Maybe I had a lot of money in the bank, and maybe interest rates fell, and maybe my loss in interest is at least as big as $315. But maybe I don't, and maybe they didn't, and maybe it wasn't.

Am I missing something basic and fundamental here? Or is this quote from the article just handwaving?
posted by Flunkie at 5:36 PM on November 20, 2008

You want to see deflation at work?

Go to the forums at fatwallet.com and look at all the current and expired spontaneous sales that are going on. They come on for a day or two and then they end. 20% off watches - two days only. 10% off appliances overnight only. This store today, the other store tomorrow. Like a massive army firing potshots at the enemy to probe the response.

Um, isn't that exactly what sites like fatwallet always have been? That's the whole point of their existence - to let people know where big, current sales are.

I don't follow such sites closely, but I looked at them enough times to know that there was basically never a time when you couldn't get 20% off watches from someplace or other.
posted by Flunkie at 5:53 PM on November 20, 2008

Apparently, it's all the fault of the War on Christmas.
posted by nax at 5:58 PM on November 20, 2008

The great thing about this market crash is that I'm discovering people who accurately predicted it. For instance, Googling [deflation 2008] took me to Mish's Global Economic Trend Analysis blog. Mish has been talking about deflation for most of 2008.
posted by A dead Quaker at 6:06 PM on November 20, 2008

One thing I've yet to see discussed is the possibility that it's all been bullshit this past decade or so.

I've seen people claim that things shouldn't be the way they are because, hey, look, the GDP is simply humongous! Why, tossing a few trillion here and there to banks and car companies is just piddle, compared to the GDP!

Well, fuck, who the hell is so stupid as to believe any of the numbers coming out of government these days?

F'rinstance, there's claims that productivity in the USA is high, that there's lots of wealth being created, etcetera. But how can that possibly be, when the USA no longer makes anything but cars and weapons?

As far as I can make sense, all real wealth is created by the transformation of raw materials, ie. rocks and trees, into saleable goods, ie. steel and televisions. But I don't think the USA has much of a mineral mining industry left, it doesn't have a competitive lumber industry, it grows mostly corn these days; what's it really got in the way of resource extraction? And as for manufacturing, fergeddaboutit: that's all been shipped off to the Chinese.

Most of the jobs seem to be in the services industry. That's a notoriously poorly-paying job sector. And in the end, because it doesn't add value to tangible goods, it ends up being a net loss of wealth. The services industry takes existing wealth, pockets 10%, and makes the purchaser feel good about himself. Doesn't actually make anything.

I know, this is all very simplistic... but there's gotta be a kernel of truth to it.
posted by five fresh fish at 6:22 PM on November 20, 2008 [2 favorites has favorites]

Alright. The world economy is now officially completely done for.

mutant is now sounding like Malor.
posted by sien at 6:57 PM on November 20, 2008 [1 favorite has favorites]

There is still one drastic way to pull out of a deflationary spiral...

Tax the hell out of the populace and expand the range of tax deductions. Make plasma TVs a tax deduction if you have to. Basically a "if you don't use it you lose it" attitude to disposable income to punish hoarding.

That'll get people spending again.
posted by Talez at 7:25 PM on November 20, 2008

One thing I've yet to see discussed is the possibility that it's all been bullshit this past decade or so.

What if the fundamentals of our economy are bullshit?
posted by fuq at 7:28 PM on November 20, 2008

A ha! Read the article very carefully. The stimulus he's proposing is band-aid stuff. Extend unemployment a little money here, a little money there. His big idea is of course universal healthcare but that is not economically stimulating the way defense spending is. Defense spending creates engineering jobs, factory jobs, management jobs, etc.

That article was about Obama's first press conference a couple weeks ago, so I wouldn't look to it as a firm policy statement. We should wait till Obama actually gets in office to start criticizing his policies.
posted by afu at 7:55 PM on November 20, 2008 [1 favorite has favorites]

Why aren't food prices dropping as well?

Food has been artificially cheap in the US for a long time thanks to government subsidies, mining of soil fertility and cheap fertilizer inputs, among other things. The rise in the cost of food is real, not financial hocus-pocus, and it is not going away.

Michael Pollan's Open Letter to the next Farmer-in-Chief
posted by BinGregory at 8:06 PM on November 20, 2008

How about a new New Deal?

Frankly, that's about the only thing I think will work at this point. But it has to be done really well, targeting creating jobs, education, retraining, bringing industry home. It can be massive in scope if it works, and I think it has to be massive to work. It still will probably be rough, as there are big holes left we have to uncover. But it could be better than the worst case scenario. I sincerely hope that Obama thinks long and hard about whom he's going to appoint and ask for counsel, and that he doesn't make decisions about the economy by seeking political consensus as much as finding the right answers. But I do hope he comes out right off the start with guns blazing, full-bore, complete big-ass economic package, like his speech on race, just lay it down in a big way with broad strokes and major money behind it, big gears turning. And then follow through all the damn way, because this isn't going to be easy.
posted by krinklyfig at 8:52 PM on November 20, 2008 [1 favorite has favorites]

As far as I can make sense, all real wealth is created by the transformation of raw materials, ie. rocks and trees, into saleable goods, ie. steel and televisions

yes, that's basically my reading. The service economy works in a vacuum only when there's no consumption of physical goods -- eg. a piano teacher bartering her services with a hair stylist.

But once the hair stylist reaches for the hairspray, a humongous chain of trade is accessed -- the metal for the can, the chemical contents of the can, etc etc have to come from somewhere, and a balance of trade is kept and must be honored eventually.

Adam Smith was curiously avoidant of actually explicitly defining wealth in _The Wealth of Nations_, but in passing he referred to it as "the annual produce of the land and labour of the society".

So according to him, wealth is labor applied to land. Henry George digested this and basically defined wealth as goods that serve as time-release providers of utility, "as coal stores the energy of the sun" in his words.

All wealth comes from the land in the end. And when you think about it, our bodies (and brains, if not our minds) are also from the land.

Now, the service economy exists to capture the surplus productivity of the wealth producers, and by the magic of specialization the service layer provides a higher standard of living for everyone, and can even increase the productivity of the wealth producers.
posted by troy at 10:57 PM on November 20, 2008

We are all Malor now.
posted by telstar at 11:36 PM on November 20, 2008 [1 favorite has favorites]

More evidence The Fed is very concerned about deflation, and not inflation (even the benign kind, let alone hyperinflation); St. Louis Fed President Bullard says they won't let it happen, even as J. P. Morgan (and several other banks) predict Fed Funds will be trading at 0% by the end of January.

Accomodative doesn't even begin to describe a monetary policy of zero interest rates.

Deflation seems to be on BOJ's radar (predicting a 1.2% drop in prices) as well Canada's (1% drop in inflation) and The UK

The Euro Zone seems to be the outlier here, as prices are falling but ECB doesn't believe this to be indicative of deflation.

Think about the vast sums of money the G20 have pumped into the financial system recently, either directly or indirectly; very few signs of inflation, and in fact in spite of the amounts involved we're still seeing prices crater.

Matthew Sharrat, economist from Bank of America, said it best: "inflation is very much yesterday's news".

What The Central Banks have to be extraordinarily vigilant about is when the pendulum swings back in the other direction. Then they've gotta be prepared to raise rates very fast - and perhaps very high.

But until then, we're just not seeing any inflation in the system. Very curious.
posted by Mutant at 1:26 PM on November 21, 2008

If I understood any of this, I'd be completely freaked out. But since I'm both perplexed and poor, I suppose I get to just stumble along until I actually lose my job. :D
posted by nax at 1:39 PM on November 21, 2008

as well Canada's (1% drop in inflation)

Come to think of it, that is a bit reassuring. As Carney was bragging about just the other day in London, Canada is not in any kind of severe recession yet, its financial system is not collapsing, it has not seen any great dramatic decline in consumer spending, no huge jump in unemployment.

So if even Canada is seeing consumer price declines, that just makes it all the more plausible that they are, at least so far, mainly a simple result of falling prices for oil and other commodities. It seems a bit unlikely that this will continue long enough to set off any real deflationary spiral. Certainly the price of oil can't fall at this rate for any more than another month or two at the very most, because unlike stocks, commodities rarely go to zero.
posted by sfenders at 3:56 PM on November 21, 2008

There was another period of longterm deflation during a really, really bad depression that occurred in the latter part of the nineteenth century.

In Global Capitalism : Its fall and rise in the twentieth century this is described as:

"From 1873 to until 1896 prices dropped by 22 percent in the United Kingdom, 32 percent in the United State, more elsewhere. This depression of prices that gave the episode its name caused serious problems. Prices and earning declined, but debt burdens remained constant. Expectations of further price declines caused uncertainty and pessimism. More important, the price declines were not across the board. The price of goods that entered readily into world trade fell particularly rapidly, such such raw materials as wheat, cotton, and boal by 59, 58 and 57 percent respectively. But the prices of otehr goods and services fell more slowly or not at all. For example, American farm prices declined by more than athird, mining prices by nearly half, but construction costs stayed constant. The price changes sparked social protests throughout the world's farming and mining regions".

This deflation was also linked to the gold standard, so central banks could not, as they can today, just print more money to create inflation, but it is another example of the problems deflation can cause.
posted by sien at 5:21 PM on November 21, 2008

such raw materials as wheat, cotton, and boal by 59, 58 and 57 percent respectively.

It is interesting to think about. In 2008, such raw materials as wheat, cotton, and oil have declined from their price highs earlier in the year by about 60, 50, and 66 percent respectively. I don't have price data for 1873, but in 1930, it looks like there were similarly rapid declines. Still, the similarity seems superficial. It was only quite recently that those commodities prices moved up by as much as, or more than, they're now down. There is no great surplus of wheat production today, no great surplus of coal or oil. To the extent that there is any it will be very quickly eaten up and burned through if financial market chaos continues to contribute to production declines.

Even if OPEC is incapable of soaking up any surplus of crude oil, if producers around the world were to suddenly stop investing in new production due to financial problems, world production could decline naturally by 5% per year without having to shut anything down. There has been no large build-up of inventories, there are only a couple months supply stockpiled, and this great cataclysmic decline in oil consumption that has astounded everyone amounts so far to a decline in world demand by roughly 0% (saved by zero?) Investment in new production has already been affected, with many projects that had been scheduled for the next few years now delayed or cancelled. Production from Russia and Mexico for example could fall rather quickly if they don't keep investing gigantic amounts of money. Unless something unprecedented happens, supply will easily fall faster than demand; there is not now, nor will there be any really big sustained surplus.

I believe we have a new world record in wheat production this year, but again ending stocks are not so excessively high by historical standards. Total grain ending stocks will probably rise this year, perhaps even all the way back to 2005 levels, leaving them well below what we had come to think of as normal. According to USDA, 1873 US wheat production was 273 million bushels, and was up to 500 by 1880. No production increase of that kind of magnitude (relative to total consumption) is going to happen anywhere in the world today. Nor are we going to see anything like the famous grain surplus of 1930. And in 1920 you had wheat collapsing like subprime housing is today, not like wheat is today.

Candidates for industrially important stuff we might have a surplus of are perhaps steel and lumber, though I don't know much about them. But the main things everyone seems to think we have a surplus of are residential and commercial real estate, financial services, and credit derivatives. Passenger vehicles as well, it seems; though the extent to which that problem was contributed to by the high gasoline prices is unclear. And then leveraged speculation generally, as in the "Great Unwind", which is proceeding rapidly across the board. Massive price declines in CDOs or emerging market sovereign bonds are not going to directly hit the CPI so much. It just seems to me from these past episodes of deflation that when you get a massive increase in the prices of energy, grains, metals, fertilizer, cotton, or commodities generally and thus sometimes also the innumerable things that are produced with their input, be that price rise caused by excess speculation and inflation or by some shock like the 1979 oil crisis, you are supposed to get overwhelming increase in production of those commodities as a response, leading to a price collapse. This time we still get something of the price collapse, (although oil for example could still enter 2009 at about the same price it did 2007,) but we did not get the surplus production that will sustain it.

If it was largely energy price declines which caused negative CPI this time, there's more of that to come along with the presumably longer lag time between some other commodities and the consumer prices they influence, so I guess we should have a few months more negative numbers unless something else changes. The US CPI has seen, more than once in the past few years, monthly readings that were about as far above any sensible target range as this one is below it. This one neatly cancels out the big increase of June. In fact what strikes me as notable about the CPI lately is the rise in volatility of its rate of change. Just eyeballing it on Macro Man's chart, it looks unprecedented at least since the 1950's. Perhaps, as seems somewhat reflected in popular sentiment, this is a sign of systemic instability that could flip either way, into inflation or deflation. Lets hope it is more like the swinging of a pendulum as Mutant suggests, and less like a bolt of lightning igniting a forest fire.

American farm prices declined by more than athird, mining prices by nearly half, but construction costs stayed constant.

If we do get an extended period of deflation, I think it will be something other than commodity prices that continue to do the declining, and thus something not yet strongly apparent in CPI.
posted by sfenders at 7:09 AM on November 22, 2008

Candidates for industrially important stuff we might have a surplus of are perhaps steel and lumber, though I don't know much about them.

With the pine beetle having swept through BC, and poised to sweep through the rest of the continent, there may not be a lumber surplus. Beetle-kill wood is unusable for construction lumber and plywood manufacturing. Also, mills in BC have been shutting down left and right: the industry seems to be in a sharp decline these days.
posted by five fresh fish at 8:15 AM on November 22, 2008

Also, one should keep in mind that agricultural production is heavily dependent on cheap petroleum, vis a vis fertilizers, drugs, shipping, etc.
posted by five fresh fish at 8:16 AM on November 22, 2008

David Altig considers almost the same kinda thing I was trying to think about the US CPI report in a slightly more mathematically rigorous way. It's the place to go if you want to read about the interquartile range of trimmed-mean estimators.

"... as I cut the data, it looks to me that the October CPI data is pointing to an inflation rate somewhere in the 0.5 percent to 1.5 percent range. "
posted by sfenders at 10:21 AM on November 22, 2008

One more thing to consider. As in 1930 and all the other examples, we have had a substantial amount of what can be viewed as over-production. Too much investment in US suburban housing developments for example. While that itself is probably not as economically significant to America as agriculture was in 1920, it is still no doubt a pretty big deal. But this time, much of the excess credit-created capital generated in large part by the housing bubble has been exported through the gigantic US trade deficit to stimulate the development of toy factories in China, resorts in Dubai, capital investment in Russia, et cetera. Some things more sustainable than others. So the problem may be larger than ever, but its effects will be distributed somewhat differently around the world this time, with some places better able than others to deal with the effects. There is the possibility for example that China will have great capacity to stimulate domestic demand due to their unique situation there.

Falling housing prices contribute to deflation, but not so much to consumer price deflation when nobody is buying houses any more. So it's not entirely unreasonable that they're not really counted in the US CPI. There can be deflation (destruction of money and credit) without prices falling much, and thus without as much risk of a real deflationary spiral that gets out of control.

mills in BC have been shutting down left and right: the industry seems to be in a sharp decline these days.

Same in Ontario and Quebec, for years now. It's out of phase with the rest, I guess. It does illustrate on a small scale how you can have one major industry very depressed without the whole regional economy completely collapsing, although I gather some individual towns have suffered badly.

we're just not seeing any inflation in the system.

It also occurrs to me to note that if it takes a 50% fall in commodities prices (CRB since June) to get 1% decline (even if it rises to 5% in coming months...) in consumer prices, it may be reasonable to suspect that there is still a whole lot of inflationary bias in the system. United States employment cost and personal income were still rising as of the latest measurements.
posted by sfenders at 6:22 AM on November 23, 2008

sien many thanks for posting that excellent citation to Frieden's book ; I looked at a copy, and was impressed enough to order one for myself, very nice.

On the heels of the G-20's meeting November 15th, APEC pledge to take "extraordinary" steps to curtail the crisis. Although they don't mention deflation, it's reasonable to accept they at least discussed the topic during their meetings. How much is anyone's guess - do they have to post minutes from these get togethers?

In any case its good to hear that between the G-20 and APEC meetings, attention is at least focused in the right direction.

Time weighs in on the global deflation, and captured an important element of the problems currently facing Central Banker's - GDP growth has largely been fueled by credit expansion, and "...credit expansion of 10% to 15% is needed to achieve real growth of 2% to 3%." .

But it seems few counterparties are lending which is difficult to understand considering how much money has been pumped into banks. As per Robert G. Smith (quoted in the NY Times),

“The brokerage firms are pulling in their lines and so are the banks. At the same time, there is nobody putting one cent of capital into positions. The name of the game, the stated goal of TARP, was to make loans. Regulators are inside these firms. Why is this not happening?”

These are such unusual times. Friday close we saw the US 3M T-Bill trading to yield 0.01%, absolutely amazing.


sfenders -- "It also occurrs to me to note that if it takes a 50% fall in commodities prices (CRB since June) to get 1% decline (even if it rises to 5% in coming months...) in consumer prices, it may be reasonable to suspect that there is still a whole lot of inflationary bias in the system."

Absolutely correct, there is a lot of inflationary pressure already in the system, but we're just not seeing it at the retail end of the pipeline. Very interesting, and I'm not sure if a falloff in demand explains it adequately.

In any case, there seems to be very little inflation from the consumer perspective, and absolutely no sign of hyperinflation in the system at all (in spite of how often we've heard it predicted).

A Zimbabwe like economic outcome is, at least at present, very far removed from the realm of possibility. In fact that hypothesis couldn't be more wrong.

That being said the Central Banks will have to be prepared to raise rates high and fast once the situation reverses. Lots of money sloshing about, once the economy starts to take off watch out.
posted by Mutant at 8:26 AM on November 23, 2008

It just occurred to me that Sharia banking is very likely doing just a-ok through all this. Quite well, in fact.

The paranoid in me wonders if this banking crisis was manufactured to eliminate Western-style banking systems. When the oil runs out, the mid-East will continue to make buckets of money by being the world's banking system.

The crew of corrupt assholes at the top of our Western financial food chain will be onboard with this, because (a) they're making out like bandits in the process and (b) they intend to retire to Dubai anyway.
posted by five fresh fish at 9:43 AM on November 23, 2008

Another economist attempts to define deflation:

So right now, the best definition of "deflation" is the definition which maximises the truth-value of the sentence: "Aggregate demand for newly-produced domestic goods and services depends on nominal interest rates plus expected deflation". In other words, we should choose a definition of deflation which would provide the best fit in an estimated aggregate demand equation.

... the CPI definition is designed to be useful for a very different purpose. (The best CPI weights are those designed to maximise the truth value of the sentence "If nominal income rises at the same rate as inflation, then utility is the same".)
posted by sfenders at 4:57 AM on November 24, 2008

five fresh fish, I love the way you think. That is positively scary brilliant.
posted by nax at 8:42 AM on November 24, 2008