The Wall Street Journal today has an article titled "Global Deflation Pandemic Begins to Brew". It talks about falling price levels in Europe and even in China. The article concludes by saying:
"But if deflation does take root, it could prove devastating for investors. Deflation can cause stock prices to decline as companies are unable to boost prices; corporate bonds also suffer from rising bankruptcies.
Behind a global deflation virus is a collapse of demand in the U.S. Unless the economic engine in the U.S. can get cranking again, deflation could keep spreading."
As I was told once at the Federal Reserve Bank, "inflation bad, deflation badder." Could we really be facing a worldwide deflation? And if so, what would that mean to our decisions to spend and save? What about mortgages on houses that lose value? If you didn't like what has been called the bursting of the housing bubble and that is a key cause of our current recession, what becomes of the US and world economy when it expands and spreads?
On the other hand, look at this graph:
This is scary. If inflation can be caused by increasing amounts of money chasing a constant amount of goods, and if our national production levels are not increasing, we're building a tremendous monetary pressure that seems to have the possibility of causing hyperinflation. This almost looks like a Zimbabwe situation shaping up.
I wish I had the answers. I just know I get to teach a fascinating subject now and for the next few years, even if none of my theories work anymore.
As I was told once at the Federal Reserve Bank, "inflation bad, deflation badder." Could we really be facing a worldwide deflation? And if so, what would that mean to our decisions to spend and save? What about mortgages on houses that lose value? If you didn't like what has been called the bursting of the housing bubble and that is a key cause of our current recession, what becomes of the US and world economy when it expands and spreads?
On the other hand, look at this graph:
This is scary. If inflation can be caused by increasing amounts of money chasing a constant amount of goods, and if our national production levels are not increasing, we're building a tremendous monetary pressure that seems to have the possibility of causing hyperinflation. This almost looks like a Zimbabwe situation shaping up.
I wish I had the answers. I just know I get to teach a fascinating subject now and for the next few years, even if none of my theories work anymore.
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Stephen Colbert's guest last night was Chris Anderson, author of a book called 'free.' He had some pretty radical ideas, pretty much all concerning hyperdeflation (in fact, comlete deflation: free).
ReplyDeleteAnderson pointed to thigns like blogs, wikis, and social networking sites that offer their products for free, but still turn a profit. 'How can this be?' he asks. I haven't read the book and I'm not saying I agree with anything he says, I just know that I can read it if I want to, with just a couple clicks:
http://www.scribd.com/doc/17135767/FREE-full-book-by-Chris-Anderson-Read-in-Fullscreen
How can something be "free" and "turn a profit"? Doesn't that just mean that the payor and the consumer are not the same person/entity? And isn't that (as I personally believe) the main problem with our health care system - the consumer (the patient) is not the payor (the insurance company or the government). For markets to work as a way of allocating resources and indicating preferences, this separation is what creates the distortion.
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