"Lowflation"

jnpy!$4g3cwk

macrumors 65816
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Feb 11, 2010
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Paul Krugman's latest editorial is a discussion of inflation. Krugman looks at a recent IMF report that analyzes "lowflation" -- inflation that is above zero, and, therefore, presumably, avoids the dangers of deflation, yet, is still very low.

First, let’s talk about the case for higher inflation.

Many people understand that a falling price level is a bad thing; nobody wants to turn into Japan, which has struggled with deflation since the 1990s. What’s less understood is that there isn’t a red line at zero: an economy with 0.5 percent inflation is going to have many of the same problems as an economy with 0.5 percent deflation. That’s why the I.M.F. warned that “lowflation” is putting Europe at risk of Japanese-style stagnation, even though literal deflation hasn’t happened (yet).

Moderate inflation turns out to serve several useful purposes. It’s good for debtors — and therefore good for the economy as a whole when an overhang of debt is holding back growth and job creation. It encourages people to spend rather than sit on cash — again, a good thing in a depressed economy. And it can serve as a kind of economic lubricant, making it easier to adjust wages and prices in the face of shifting demand.

But how much inflation is appropriate? European inflation is below 1 percent, which is clearly too low, and U.S. inflation isn’t that much higher. But would it be enough to get back to 2 percent, the official inflation target in both Europe and the United States? Almost certainly not.

You see, monetary experts have long known about the case for moderate inflation, but back in the 1990s, when the 2 percent target was hardening into policy orthodoxy, they thought that 2 percent was high enough to do the job. In particular, they thought it was enough to make liquidity traps — periods when even an interest rate of zero isn’t low enough to restore full employment — very rare. But America has now been in a liquidity trap for more than five years. Clearly, the experts were wrong.

Furthermore, as the latest I.M.F. report shows, there’s strong evidence that changes in the global economy are increasing the tendency of investors to hoard cash rather than put funds to work, thereby increasing the risk of liquidity traps unless the inflation target is raised. But the report never dares to say this outright.
 

ElectronGuru

macrumors 65816
Sep 5, 2013
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You see, monetary experts have long known about the case for moderate inflation, but back in the 1990s, when the 2 percent target was hardening into policy orthodoxy, they thought that 2 percent was high enough to do the job. In particular, they thought it was enough to make liquidity traps — periods when even an interest rate of zero isn’t low enough to restore full employment — very rare. But America has now been in a liquidity trap for more than five years. Clearly, the experts were wrong.
The more I look for them, the more cause and effect errors I'm finding. He's saying that we followed the economic rules and they didn't work and we therefor we need new economic rules. But we didn't follow the rules. We allowed people to borrow who shouldn't have borrowed, we allowed people who should not own those loans to own them, then we set the whole thing to boil with low rates when we didn't need them. The only rules that need changing are the laws we repealed to make all that possible.
 

Dmunjal

macrumors 65816
Jun 20, 2010
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Paul Krugman's latest editorial is a discussion of inflation. Krugman looks at a recent IMF report that analyzes "lowflation" -- inflation that is above zero, and, therefore, presumably, avoids the dangers of deflation, yet, is still very low.
Does anyone believe we only have 1%? How much have food and energy prices gone up the last few years? How about healthcare and education? How about rent? I'd like to honestly hear anyone's real world opinions about how expenses in life are only going up 1%.

Here are some real world data:

http://www.shadowstats.com/alternate_data/inflation-charts

If we calculate CPI the way it was done in 1980, we are closer to 10%. Some may recall that during the late 70s, we were officially in inflation fighting mode (WIN) at rates similar to this.

So, which is it? Why has the CPI been altered twice in the last 30 years? Maybe the government wants more than 2% (really 5% or more) to help repay their debts? If they can double prices in 20 years, they can cut their debt in half.

Too bad for consumers in the middle and lower class, though who see their real purchasing power decline over time. Though the 1% has done just fine under a high-inflation scenario has their assets have grown more than the inflation rate.

Nice policy, Mr. Krugman. Thank you for shilling for the 1% and getting the rest of the NY Times audience to continue to believe in your propaganda.
 
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Desertrat

macrumors newbie
Jul 4, 2003
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Terlingua, Texas
Deflation is bad for governments and banks. It's good for Joe Sixpack, who's unimportant to Krugman and other sycophants of banksters and governments.

And I think that John Williams is an optimist. :D

The old rule of 72: 6% inflation means your buying power is halved in 12 years.
 

zin

macrumors 6502
May 5, 2010
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Does anyone believe we only have 1%? How much have food and energy prices gone up the last few years? How about healthcare and education? How about rent? I'd like to honestly hear anyone's real world opinions about how expenses in life are only going up 1%.
What if they changed the system because the older one was in fact less accurate?

Inflation and wage growth rates are two different things. Perhaps people feel the expenses are higher not because the inflation rate is higher but because their wage growth is significantly lower (and negative growth in some cases).
 

Dmunjal

macrumors 65816
Jun 20, 2010
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What if they changed the system because the older one was in fact less accurate?

Inflation and wage growth rates are two different things. Perhaps people feel the expenses are higher not because the inflation rate is higher but because their wage growth is significantly lower (and negative growth in some cases).
It is possible but not likely.

I'll ask you directly. Do you believe costs of your daily expenses are up only 1% a year these past few years as the government tells you it is?

Here are some real world examples.

http://www.thepeoplehistory.com/pricebasket.html
 

zin

macrumors 6502
May 5, 2010
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It is possible but not likely.

I'll ask you directly. Do you believe costs of your daily expenses are up only 1% a year these past few years as the government tells you it is?

Here are some real world examples.

http://www.thepeoplehistory.com/pricebasket.html
Alright, I concede the point. If those figures are right then it appears the inflation rate as reported by the Government isn't accurate, even when you consider earnings growth.

Then what is your position on the solution? I am already aware of your views on the Federal Reserve. Wouldn't it make sense, however, for the Federal Reserve to raise interest rates?
 

Dmunjal

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Alright, I concede the point. If those figures are right then it appears the inflation rate as reported by the Government isn't accurate, even when you consider earnings growth.

Then what is your position on the solution? I am already aware of your views on the Federal Reserve. Wouldn't it make sense, however, for the Federal Reserve to raise interest rates?
The Federal Reserve can't raise interest rates as they might sabotage the recovery and the Treasury needs low interest rates to pay off our $17T debt.

This can go for years as is the case with Japan. The economy will continue to stagnate and inflation will continue to rise and our standard of living will continue to fall. This was called stagflation in the 70s.

Higher interest rates will slow inflation but will also cause a short painful recession to help recover from some of the malinvestments. No politician wants that. But that is the right medicine for the economy.
 

Ugg

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Apr 7, 2003
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The Federal Reserve can't raise interest rates as they might sabotage the recovery and the Treasury needs low interest rates to pay off our $17T debt.

This can go for years as is the case with Japan. The economy will continue to stagnate and inflation will continue to rise and our standard of living will continue to fall. This was called stagflation in the 70s.

Higher interest rates will slow inflation but will also cause a short painful recession to help recover from some of the malinvestments. No politician wants that. But that is the right medicine for the economy.
Japan's problem is a lack of people. When your birth rate is essentially negative and you have the highest percentage of over 80s in the world, it's not at all surprising that Japan is suffering deflation. Everyone wants to say that economic laws are static, however, the world has never before faced a period of time where natural population growth has been so low. Economists need to face up to that. When Obama took office there were any number here (remember Mr. Gold? Aka itcheroni. I wonder what happened to him...?) who were claiming that hyperinflation was going to destroy the global economy? It never happened and it won't unless population growth skyrockets.

Whenever economics fails to take into account the very people it is supposed to serve, it always fails.
 

Dmunjal

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Jun 20, 2010
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Japan's problem is a lack of people. When your birth rate is essentially negative and you have the highest percentage of over 80s in the world, it's not at all surprising that Japan is suffering deflation. Everyone wants to say that economic laws are static, however, the world has never before faced a period of time where natural population growth has been so low. Economists need to face up to that. When Obama took office there were any number here (remember Mr. Gold? Aka itcheroni. I wonder what happened to him...?) who were claiming that hyperinflation was going to destroy the global economy? It never happened and it won't unless population growth skyrockets.

Whenever economics fails to take into account the very people it is supposed to serve, it always fails.
Then how do you explain hyperinflation in Zimbabwe, Argentina, and Weimar Germany? There were no population issues. Population can affect deflation and inflation scenarios but it all starts from cheap money and the boom-bust cycle.

Japan had the ultimate boom in the 80s and they still haven't recovered because they refuse to let banks and businesses fail.

We are making the same mistakes.

Economies need to cleanse every once in a while. Preventing this adjustment just makes things worse in the long run.
 

Ugg

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Apr 7, 2003
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Then how do you explain hyperinflation in Zimbabwe, Argentina, and Weimar Germany? There were no population issues. Population can affect deflation and inflation scenarios but it all starts from cheap money and the boom-bust cycle.

Japan had the ultimate boom in the 80s and they still haven't recovered because they refuse to let banks and businesses fail.

We are making the same mistakes.

Economies need to cleanse every once in a while. Preventing this adjustment just makes things worse in the long run.
Zimbabwe and Argentina were due to governments trying to suppress normal economic activity for political gain.

Weimar Germany's hyperinflation was caused by the outrageous war reparations and by the influx of people from Eastern Europe along with a typical post war baby boom.
 

Dmunjal

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Zimbabwe and Argentina were due to governments trying to suppress normal economic activity for political gain.

Weimar Germany's hyperinflation was caused by the outrageous war reparations and by the influx of people from Eastern Europe along with a typical post war baby boom.
Read your history again. They all printed their currency into oblivion.
 

Bug-Creator

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May 30, 2011
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Read your history again. They all printed their currency into oblivion.

Yeah, but atleast with the Weimar Republic it was more of a symptom than the cause.

Noone in Germany or outside trusted the Reichsmark as it was known that those reparations were beyond the means of an enconomy strangled by civil unrest (sometimes even civil war) harsh sanctions and occupation of it's industrial core.

So everybody tried to transform RM into either $ or goods the moment they got it.
Interestrates skyrockecket and with everyone kneedeep in debt printing more and more money was the only/easy solution.

Only when the reperations/sanctions could be eased by renegotiating it made sense to replace the Reichsmark with the new "Rentenmark".
 

Happybunny

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Sep 9, 2010
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Yeah, but atleast with the Weimar Republic it was more of a symptom than the cause.

Noone in Germany or outside trusted the Reichsmark as it was known that those reparations were beyond the means of an enconomy strangled by civil unrest (sometimes even civil war) harsh sanctions and occupation of it's industrial core.

So everybody tried to transform RM into either $ or goods the moment they got it.
Interestrates skyrockecket and with everyone kneedeep in debt printing more and more money was the only/easy solution.

Only when the reperations/sanctions could be eased by renegotiating it made sense to replace the Reichsmark with the new "Rentenmark".
That period has done more to transfix the German Governments ever since to achieving low inflation.

Although not as bad now, the German Central Bank and the Euro Central Bank always sees inflation as a very big enemy.
 

Dmunjal

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Yeah, but atleast with the Weimar Republic it was more of a symptom than the cause.

Noone in Germany or outside trusted the Reichsmark as it was known that those reparations were beyond the means of an enconomy strangled by civil unrest (sometimes even civil war) harsh sanctions and occupation of it's industrial core.

So everybody tried to transform RM into either $ or goods the moment they got it.
Interestrates skyrockecket and with everyone kneedeep in debt printing more and more money was the only/easy solution.

Only when the reperations/sanctions could be eased by renegotiating it made sense to replace the Reichsmark with the new "Rentenmark".
The reason no one trusted the Mark is because they kept debasing it.
 

Happybunny

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The reason no one trusted the Mark is because they kept debasing it.
The main reason that they kept debasing it was that both the French and British were making totally unreasonable war reparations demands, the more they demanded the more the currency was debased. It's not ROCKET science.
 

Dmunjal

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The main reason that they kept debasing it was that both the French and British were making totally unreasonable war reparations demands, the more they demanded the more the currency was debased. It's not ROCKET science.
Agreed. Who cares what the reason is. They did it. Just like we're doing now. Our reason is the Iraq war. In the 70s,it was the Vietnam War.
 

Bug-Creator

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Agreed. Who cares what the reason is. They did it. Just like we're doing now. Our reason is the Iraq war. In the 70s,it was the Vietnam War.
There was a REASON do it in the 20s, but Iraq-war is just an EXCUSE and so was Vietnam.

Politicians were just to cowardly to tell the population the real cost of those wars (read raising taxes) while Weimar Germany simply didn't have the means to either pay up or even raise taxes (the goverment was very weak, making Germany would today be called a failed state).
 

Dmunjal

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Jun 20, 2010
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There was a REASON do it in the 20s, but Iraq-war is just an EXCUSE and so was Vietnam.

Politicians were just to cowardly to tell the population the real cost of those wars (read raising taxes) while Weimar Germany simply didn't have the means to either pay up or even raise taxes (the goverment was very weak, making Germany would today be called a failed state).
I don't disagree with the political differences between these examples. I'm just saying there is a cause and effect of printing money and inflation that is common to all.
 

Desertrat

macrumors newbie
Jul 4, 2003
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Terlingua, Texas
alent, it's not a matter of reducing expenses. It's about rising prices at a faster rate than rising incomes. Regardless of one's thrift, the standard of living declines.

A major reason that we're not seeing a very-high rate of inflation is because the "Banksters" are sitting on the money and not making loans. The reason that loans aren't made is that there are few borrowers: Who wants to borrow if you can't make a profit from investing the money? Businesses aren't expanding; they're contracting. (Look at the number of closings in retail corporations.) The money is thus not getting out into the public at large via wages and salaries.

As far as Germany's debt for reparations from WW I, I have read that the dollar amount was greater than the above-ground non-jewelry gold in the world--but the debt was to be paid in gold. So, print Marks, buy gold; Marks decline via Economics 101 and so the Big Oopsie. The Versailles Treaty was thus causal to the politics which led to Good Ol' Adolph Schickelgruber.
 

Dmunjal

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Jun 20, 2010
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I found this good response to the "Lowflation" article.

http://www.valuewalk.com/2014/04/lowflation-deflation-peter-schiff/

The fact of the matter is that all the QE from all the central banks (trillions) is not having the desired effect of creating enough inflation so they've now resorted to raise the level of propaganda (thanks Paul Krugman!) so that policy makers can be free to print even more.

Sorry Joe Sixpack!
 

jnpy!$4g3cwk

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Original poster
Feb 11, 2010
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I found this good response to the "Lowflation" article.

http://www.valuewalk.com/2014/04/lowflation-deflation-peter-schiff/
Attacks the basis of the article using fairy-tale straw-men arguments.


The fact of the matter is that all the QE from all the central banks (trillions) is not having the desired effect of creating enough inflation so they've now resorted to raise the level of propaganda (thanks Paul Krugman!) so that policy makers can be free to print even more.

Sorry Joe Sixpack!
The difference between us on this is not that I am in favor of inflation. Or deflation for that matter. I think we need to let economic history be our guide on that. In fact, that is the difference right there:

I don't think the value of money is a moral issue. I think fiscal and monetary policy should be determined pragmatically.

For myself, a little inflation reminds me that money should either be invested or spent, not stuffed in a mattress. But the real test is what works.
 

Dmunjal

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Jun 20, 2010
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Attacks the basis of the article using fairy-tale straw-men arguments.




The difference between us on this is not that I am in favor of inflation. Or deflation for that matter. I think we need to let economic history be our guide on that. In fact, that is the difference right there:

I don't think the value of money is a moral issue. I think fiscal and monetary policy should be determined pragmatically.

For myself, a little inflation reminds me that money should either be invested or spent, not stuffed in a mattress. But the real test is what works.
You know what? I agree with you. I'm a pragmatist as well. And a little inflation is not bad at all. But here's where we differ. I believe the Federal Reserve is ABUSING the power of printing money for its own purposes to the detriment of the middle class. This is not just a ideological issue for me but a personal one for me and my children.
 

jnpy!$4g3cwk

macrumors 65816
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You know what? I agree with you. I'm a pragmatist as well. And a little inflation is not bad at all. But here's where we differ.
Hey, we're agreed! :)

I believe the Federal Reserve is ABUSING the power of printing money for its own purposes to the detriment of the middle class. This is not just a ideological issue for me but a personal one for me and my children.
I disagree. When, and, I do say "when", not "if", when the time comes, when inflation is already up significantly, and, we have a sudden big increase in the cost of energy (e.g. oil shock of 1978-1979), I expect the Fed to sell its bonds, pull money out of circulation, and raise interest rates. If it doesn't, that would be an abuse of power.