Mainstream financial reporters are generally so oblivious to what's
going on in the world that they almost always act like they've never
heard of the word "deflation."
In the past few years, there's been an explosive bubble in commodity
prices, thanks to surging demand in China's bubble economy. And yet,
the CPI (consumer price index) has increased only modestly in that
period. It never occurred to them to wonder why those commodity
increases didn't send the CPI to over 10%, as happened in the 1970s.
Now, with China's economic cooling, commodities demand on the margins
is crashing, and commodities prices are falling at the same time.
Suddenly WSJ is dicovering deflation:
As usual, there's no historical sense of what's going on. They> Falling prices in commodity markets have helped ease inflation.
> Fed officials generally consider price stability to be an
> inflation rate between 1.5% and 2%. Their preferred measure of
> core inflation, which excludes food and energy, stands above 2%
> now, and is expected to remain above that mark as price increases
> from earlier this year advance through the product pipeline.
> The economic slowdown and declining commodity prices have eased
> the nation's consumer inflation rate, which surged to 5.6% over
> the summer. Annual inflation in the U.S. is likely to turn
> negative for at least several months next year, on declining
> energy and food prices.
> With the unemployment rate rising rapidly and capital markets in
> turmoil, "pretty much everything points toward deflation," said
> Paul Ashworth, chief U.S. economist at Capital Economics. "The
> only thing you can hope is that the prompt action of policy makers
> can maybe head this off first."
> The Japanese economy in the 1990s and the U.S. during the 1930s
> illustrate how deflation can choke a weak economy and spiral out
> of control. A sagging economy exerts downward pressure on prices
> because of weak demand for labor and goods. Broad-based declines
> -- particularly in a credit crisis, which can push asset prices
> down sharply -- can also force down wages, preventing consumers
> and, therefore, companies from paying their debts. Falling prices
> also encourage businesses and consumers to save rather than spend,
> because money would be worth more after prices decline. The
> restrained spending, in turn, hurts the economy even more.
> Federal Reserve Chairman Ben Bernanke, in a speech as a Fed
> governor in 2002, said deflation in the U.S. is "highly unlikely"
> but added, "I would be imprudent to rule out the possibility
> altogether." The reason, he said at the time, was the Fed "has
> sufficient policy instruments to ensure that any deflation that
> might occur would be both mild and brief."
> http://online.wsj.com/article/SB1224287 ... lenews_wsj
mention the deflation of the 1930s without wondering whether the
inflation of the 1970s and the deflation of today are part of the
same cycle.
Mainstream economics has a flat view of time. In their standard
models, every decade is pretty much like every other decade. 50 year
olds in one decade are the same as 50 year olds in another decade.
Businesses created in one decade are identical to businesses created
in another decade.
That these assumptions are totally absurd. 50 year olds in the
1970s, who lived through the Great Depression, are going to have
completely different attitudes and behaviors towards money and
spending than 50 year olds today. And yet, as incredibly simple as
this observation is, mainstream macroeconomics is totally oblivious
to it.
What American companies are suffering from today is what I call the
"Crusty Old Bureaucracy Effect." I came upon that name several years
ago, when I read someone criticize a company has having a "crusty old
bureaucracy."
In fact, most major businesses were formed (or recreated) in the
1930s depression. They were young and productive for decades, but
today these companies have almost ground to a halt, as the
bureaucracy prevents change.
The result is that today's companies cannot produce products that
people actually want, and so demand for these products is falling,
and prices are falling as well.
Today we have two different forces affecting prices: the Crusty Old
Bureaucray Effect is lowering demand, while commodities prices affect
supply. When commodities prices were rising, these two forces worked
in opposit directions, keeping the CPI relatively stable. Today, the
two forces are working together, pushing prices down so much that
even the Wall Street Journal seems to have noticed.
Sincerely,
John