In the 1970s the U.S. went through “stagflation” – stagnant economy, high unemployment and inflation (largely driven by high oil prices, an external real cost to the whole economy) all at the same time. Everyone who lived through it seems to remember it as a worst-of-all-worlds scenario. But, as anyone who lived through the Great Depression might remember, economic stagnation with deflation can be even worse, and that’s what we might be looking at now:
Is there anything anyone can do about this?
If not, how best to adjust to it?
It appears that Obama, like FDR, might be inheriting an economy that it will take more than one term’s work to revive.
I read that but find it hard to square with what I see. The computer industry has always been extremely deflationary. A computer bought today can be had for half the price next year. Yet the computer industry seems to have coped ok. Same with many other household products. And cars for that matter. The prices of cars might have stayed the same, but they are much better today than ten years or twenty years ago. More for the same amount of money. This is a form of deflation. And people are not going to put off buying food, or books, or CDs, DVDs, computer games, clothes, have their hair cut because it might be cheaper six months from now.
Yar, agrree. The great thing about deflation is that it actually subsidizes spending. You can spend and get more. Wait a little while and spending gets even better. Then, when you want more, your money can buy even better things. Deflation is great for spending, since few people go out and blow all their money at once.
What it’s not so good for is debt. People might hold off spending now in order to pay back debt faster. But this still means they can spend more later on. The best years of the American economy (the 19th century) tended to have long-term delfation. of course, this era was filled with boom-and-bust cycles. It was also hard on farmers who relied on yearly debt cycles. Still, the economic growth was truly incredible.
Inflation and deflation are monetary phenonmenon. The current fed chairman is on of the world’s leading experts in how deflation caused the Great Depression is unlikely to repeat the mistakes of the Fed of that era.
It seems likely to me that although the measures of inflation try to exclude oil and food prices, they are nonetheless measuring the byproducts of the huge drop in the price of oil.
As much as the Democrat party likes to pay lip service to FDR’s greatness, those Democrats in charge of policy won’t repeat FDR’s mistakes.
I don’t think that really follows. Sure the product has gotten better, and if you do a direct price comparison of a computer with the same spec the price goes down. However, a better comparison would be to look at computer or car classes. The price of a high end consumer computer has not been deflating. In 1990 it was about $5000 and now it is about $5000. Car prices are the same way. There may be new classes introduced (econobox computers for example) but they fill a different niche that expands a market, the do not replace old segments. It would be silly to compare 3.25" floppy prices in 1988 to their prices today. It would be much more accurate to compare them to DVD RW prices.
You are confusing deflation with planned obsolescence. Computers have roughly been the same price for the past 20 years. It will generally cost you around $1000 for a typical desktop computer. That model will no longer be top of the line in 6 months and obsolete in 5 years, however overall prices for new ones stay about the same.
The problem with deflation is that companies will not be able to sell their products for as much which will reduce overall revenue. This leads to a vicious circle of low sales revenues, low profits, low salaries, low purchasing power, back to low sales revenues.
I don’t think you’re keeping a close eye on things. A brand-new desktop, maybe not fully loaded for gaming, but still rockin’ awesome, can be had for under $700. Maybe even $500 if it’s on sale. I’ve seen brand-new-but-just-now-obsolete-ones go for low as $350. Even throwing in monitor and good sound system and a new graphics card, you can come out for less than $1000.
Plus, I’ve sene the price of computers change over my life. Around when I was born, a computer might have been 3-4 thousand. By the time I was 4, my parents could get Commodore 64 for much, much less. By the time I was double-digits, it was under 2000. When I hit high school, they were headed towards 1000. Now, well, we just covered that.
Well, any new invention will become relatively cheaper over time as the manufacturers gradually learn how to make it more cheaply. We’re not talking here about “deflation” in specific product markets but in the economy as a whole. That’s a systemic problem.
It’s odd… I just read a blogger who’s predicting hyperinflation coming up. For someone who knows as little as he does about these things, it’s awful confusing.
The behavior of any single industry isn’t especially relevant. It’s always possible that an individual industry will have price oddities.
“Deflation” in professional usage refers to a general decline in prices. And it is considered A Very Bad Thing.
Hopefully, we won’t repeat FDR’s mistake. The New Deal was far too timid. If FDR hadn’t scaled back his efforts in 1937-38, there wouldn’t have been another slump and we wouldn’t have needed the war to claw our way out of the Depression.
That’s not quite the case. The Fed has loose monetary policy from 1929-33 (though Friedman argued that it wasn’t loose enough). And once you have deflation, monetary policy becomes ineffective: even if nominal interest rates are cut to zero, real interest rates will remain positive.
Not to worry anybody, but we may be in a different sort of liquidity trap now. Last week, the 90 day Treasury bill rate was essentially zero. But despite Fed easing, mortgage rates have stayed roughly where they are for the past 6 months or so - and BAA rates have increased. Cite and graph which the reader can eyeball.
That said, since last October core prices have risen by 2.2%. And one month’s worth of data is not a trend.
The problem we face is getting the banks and credit markets to lend normally again. The solution will involve some combination of recapitalization, deleveraging and recognizing losses (as opposed to merely waiting until things improve) and possibly reforming the CDOs, SIVs in the like so they are easier to understand and therefore trade.
There’s also the Fed’s secret weapon, known as quantitative easing. I need to read more about that.