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Peter Schiff: Meet "lowflation" - Deflation's Scary Pal

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http://www.zerohedge.com/news/2014-04-07/peter-schiff-meet-lowflation-deflations-scary-pal

In recent years a good part of the monetary debate has become a simple war of words, with much of the conflict focused on the definition for the word "inflation." Whereas economists up until the 1960's or 1970's mostly defined inflation as an expansion of the money supply, the vast majority now see it as simply rising prices. Since then the "experts" have gone further and devised variations on the word "inflation" (such as "deflation," "disinflation," and "stagflation"). And while past central banking policy usually focused on "inflation fighting," now bankers talk about "inflation ceilings" and more recently "inflation targets". The latest front in this campaign came this week when Bloomberg News unveiled a brand new word: "lowflation" which it defines as a situation where prices are rising, but not fast enough to offer the economic benefits that are apparently delivered by higher inflation. Although the article was printed on April Fool's Day, sadly I do not believe it was meant as a joke.

Up until now, the inflation advocates have focused their arguments almost exclusively on the apparent dangers of "deflation," which they define as falling prices. Despite reams of evidence that show how an economy can thrive when prices fall, there is now a nearly universal belief that deflation is an economic poison that works its mischief by convincing consumers to delay purchases. For example, in a scenario of 1% deflation, a consumer who wants a $1,000 refrigerator will postpone her purchase if she expects it will cost only $990 in a year. Presumably she will just make do with her old fridge, or simply refrain from buying perishable items for a year to lock in that $10 savings. If she expects the cost of the refrigerator to decline another 1% in the following year, the purchase will be again put off. If deflation persists indefinitely they argue that she will put off the purchase indefinitely, perhaps living exclusively on dried foods while waiting for refrigerator prices to hit zero.

Economists extrapolate this to conclude that deflation will destroy aggregate demand and force the economy into recession. Despite the absurdity of this argument (people actually tend to buy more when prices fall), at least there is a phantom bogeyman for which to conjure phony terror. Low inflation (below 2%) is even harder to demonize. Few have argued that it has the same demand killing dynamics as deflation, but many say that it should be avoided simply because it is too close to deflation. .....

With inflation it's starting to sound like the tale of goldilocks, we need inflation not too low and not too high, but just right to meet all of our future liabilities....

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With inflation it's starting to sound like the tale of goldilocks, we need inflation not too low and not too high, but just right to meet all of our future liabilities....

Well, to be fair, if you're going to have a debt-based monetary system, what else is going to work?

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Well, to be fair, if you're going to have a debt-based monetary system, what else is going to work?

stop excluding FAILURE amongst the lenders.

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The idea you would hold off on a $1000 purchase simply because it would be $10 cheaper next year is ridiculous

thats why you need to buy your house NOW...it will be 6% more expensive next year....see the turn of logic?

It fails to mention that next year everyone will be 6% poorer.

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The idea you would hold off on a $1000 purchase simply because it would be $10 cheaper next year is ridiculous

Well, I held off 6 months and paid £7k (end or financial year 2014 price) instead of £21k (3rd quarter 2013 quote) for an item. The seller needed to sell.

Edited by LiveinHope

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Well, I held off 6 months and paid £7k (end or financial year 2014 price) instead of £21k (3rd quarter 2013 quote) for an item. The seller needed to sell.

Have you bought a house oop north?

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stop excluding FAILURE amongst the lenders.

Do you mean defaults? Is there anything 'funny' that happens in a debt-default (e.g. it just transfers the debt rather than cancels it)?

If I borrow £100 from the bank, lend it to Fred and Fred defaults, I still owe the bank £100. If I default, what then? That £100 is still out there - is it now debt free or does the bank just issue more debt to cover it?

Edited by tomandlu

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Do you mean defaults? Is there anything 'funny' that happens in a debt-default (e.g. it just transfers the debt rather than cancels it)?

If I borrow £100 from the bank, lend it to Fred and Fred defaults, I still owe the bank £100. If I default, what then? That £100 is still out there - is it now debt free or does the bank just issue more debt to cover it?

of course I mean defaults

if a bank has £100 cash and lends it all out, its no problem if the £100 was the banks in the first place..no-one else is hurt.

if a bank hypothecates its deposits and lends them all out, and them by buying back the debt through off balance sheet schemes designed to show the bank has a load of assets now to cover the liabilities it has, then it is clear that at somepoint, those self same assets will at some point become valueless.

So it was with the credit crunch...layer upon layer of such "assets" filling the books and bamboozling everyone including the regulators, all based on the £100 cash the bank borrowed from you.

The only way to unwind all these "promises" is for them to resolve...and that means default and failure of the holders.

Instead, they are printing to cover the cash losses held by these asset holders.

That means we are all going to get it in the neck, meanwhile its trebles and bonuses all round.

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Isn't 'lowflation' what we normally call disinflation? If so, then it's everywhere in 2014 (below). Surely the principal argument against it is that 'everything' is traded on margin i.e. with borrowed money. If prices don't rise continuously then investors will need to take a loss to keep their margin accounts in good order. The market can stand only so much of that before disinflation becomes outright deflation.

disinflation.png

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Do you mean defaults? Is there anything 'funny' that happens in a debt-default (e.g. it just transfers the debt rather than cancels it)?

If I borrow £100 from the bank, lend it to Fred and Fred defaults, I still owe the bank £100. If I default, what then? That £100 is still out there - is it now debt free or does the bank just issue more debt to cover it?

The bank's profits take a hit unless it can recover the cash. If you'd borrowed £100,000 rather than £100 then they'd seize control of the asset with which the loan was collateralised.

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The latest front in this campaign came this week when Bloomberg News unveiled a brand new word: "lowflation" which it defines as a situation where prices are rising, but not fast enough to offer the economic benefits that are apparently delivered by higher inflation.

It's not convincing.

If there are so many "economic benefits" to high inflation then the UK should have been doing well in the years of above target inflation but instead it's been struggling.

That is the recent years of highflation as well as during the earlier periods of highflation for example in the 80s and 90s. That's now helped to result in part time work, zero hours contracts, survival on benefits, manipulation of statistics and all the rest along with a standard of living (for most people) which in financial terms is quite average for a developed nation and effectively well below average when taking into account quality of life, congestion, housing, future prospects etc.

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Isn't 'lowflation' what we normally call disinflation? If so, then it's everywhere in 2014 (below). Surely the principal argument against it is that 'everything' is traded on margin i.e. with borrowed money. If prices don't rise continuously then investors will need to take a loss to keep their margin accounts in good order. The market can stand only so much of that before disinflation becomes outright deflation.

disinflation.png

True, but I suspect the biggest factor is that all deficit spending governments need inflation above 2% to cover their cost average debt repayments from bond issuance.

It's also why the 'growth' mantra is constantly being spouted.

We are currently importing "growth" in the form of East Euroepans.

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The idea you would hold off on a $1000 purchase simply because it would be $10 cheaper next year is ridiculous

Even economists know about time preference, so I assume they are just BSing us.

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Even economists know about time preference, so I assume they are just BSing us.

I think the deflation argument is extended too far (and is largely to cover the real reason - our debts, including government debts, are unsupportable without inflation), but it's not complete nonsense. Inflation = buy in bulk, deflation = buy only what you need. I still can't work out if that makes any difference though.

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I think the deflation argument is extended too far (and is largely to cover the real reason - our debts, including government debts, are unsupportable without inflation), but it's not complete nonsense. Inflation = buy in bulk, deflation = buy only what you need. I still can't work out if that makes any difference though.

Undoubtedly true. They're trying - and failing, largely- to orchestrate an orderly reflation because the alternative is a disorderly default/hyperinflation.

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Fed could cut rates to combat joblessness: Kocherlakota

Tue Apr 8,

(Reuters) - The Federal Reserve should do more to boost both inflation and jobs, a top Fed official said on Tuesday, including possibly pushing its main interest rate even lower or cutting the rate it pays banks on excess reserves kept at the U.S. central bank.

..."Low inflation in the United States tells us that resources are being wasted," he said, including the productive potential of Americans who cannot get jobs because demand for goods and services is so low.

in full: http://www.reuters.com/article/2014/04/08/us-usa-fed-kocherlakota-idUSBREA371LP20140408

Every time I read this guy's views he winds me up. Let low inflation/deflation break up companies and allow new entrants/jobs to be created on people who don't need a certain income to pay other's people's VI high/higher prices.

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Every time I read this guy's views he winds me up. Let low inflation/deflation break up companies and allow new entrants/jobs to be created on people who don't need a certain income to pay other's people's VI high/higher prices.

I thought the whole 'inflation leads to employment' fallacy was generally abandoned after the 70s stagflation event....a new generation of Keynesians seem to have emerged and never borthered looking at history.

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I thought the whole 'inflation leads to employment' fallacy was generally abandoned after the 70s stagflation event....a new generation of Keynesians seem to have emerged and never borthered looking at history.

It's a huge disservice to Keynes to call them Keynesians: They're Krugmanites.

The US has pursued a largely Krugmanite agenda for the last four decades. The result has been economic stagnation for 90% of Americans, and riches beyond the dreams of avarice for the top 10% (below). Worse still is Japan. From World No. 1 to hamstrung loser and national bankruptcy in a generation, Krugman's shaggy silhouette casting baleful shadows halfway round the world.

income-top10a.jpg

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