1-Jul-10 News -- World economy in deflationary spiral

[vincecate]

'53's point about production is valid, "supply of goods and services" would be another way to say it.

Is the idea that we can get inflation even with the same money supply if production goes down? Not sure I understand yet.

At least 3/5ths of what the Federal Gov't spends is merely a transfer of money, goods, and services from taxpayers to potential voters. Most of the rest goes to defense and debt service. Under these conditions, wage/price controls and rationing seems a more likely hazard than hyperinflation.

Wage and price controls have been tried many many times and these alone have never stopped hyperinflation. I don't think they even helped with regular inflation in the 70s. But they will probably be tried again, and fail again.

[Tom Acre]

Is the idea that we can get inflation even with the same money supply if production goes down? Not sure I understand yet.

Wage and price controls have been tried many many times and these alone have never stopped hyperinflation. I don't think they even helped with regular inflation in the 70s. But they will probably be tried again, and fail again.

Change in prices are dictated by the availability of goods and services and the ability and desire of people and entities to purchase same. If you don't understand, how can you so strenuously insist that hyperinflation is on the horizon?

In general people, companies and gov'ts are short on money, jobs, equity and assets, so for instance, with the Fed Gov't taking over healthcare, its inevitable that the Federal gov't will impose heavy price controls on medicine and medical services, which will in turn cause shortages and rationing. And gov't intervention could easily extend into other areas depending on how bad the economy gets.

[thomasglee]

In general people, companies and gov'ts are short on money, jobs, equity and assets, so for instance, with the Fed Gov't taking over healthcare, its inevitable that the Federal gov't will impose heavy price controls on medicine and medical services, which will in turn cause shortages and rationing. And gov't intervention could easily extend into other areas depending on how bad the economy gets.

I'd like to reiterate that I'm still a novice at understanding economics. Therefore, please don't be too harsh with me if I sound foolish but....

My understanding is that whenever there is a shortage of anything (especially products and/or services) it leads to an INCREASE in cost. If the government implements the controls you postulate, wouldn't that create, for lack of a better term, a black market for those services at inflated prices?

[Tom Acre]

...My understanding is that whenever there is a shortage of anything (especially products and/or services) it leads to an INCREASE in cost. If the government implements the controls you postulate, wouldn't that create, for lack of a better term, a black market for those services at inflated prices?

Price controls cause shortages precisely because they distort markets. For instance, in this case, medical providers wouldn't be able to increase charges. If they could, whatever specific good or service would become lucrative and producers and suppliers would enter the market eventually stabilizng.

Many times grey and black markets emerge b/c of rationing. But almost all industries are regulated and medicine more than most; so it would be marginal. The people who are imposing this upon the country won't be affected. They will either get preferential treatment in the system or are wealthy enough to go on a "medical vacations" to Costa Rica or the like.

[vincecate]

Change in prices are dictated by the availability of goods and services and the ability and desire of people and entities to purchase same. If you don't understand, how can you so strenuously insist that hyperinflation is on the horizon?

You can think of it as the government is printing huge amounts of money and bidding up the prices on many things, which then in turn drive up prices on everything else. Going back to Bernanke's gold analogy, imagine the government in a gold standard economy has a magic gold making machine and they are buying up huge amounts of stuff using newly made gold. Prices in terms of gold would go up. Paper money is like gold money with a magic machine. I don't insist that hyperinflation is coming to the US dollar. There is a slight chance that things will get really bad and then people will elect Ron Paul in 2012 and he will save things. But I do think there is a high probability of hyperinflation.

In general people, companies and gov'ts are short on money, jobs, equity and assets, so for instance, with the Fed Gov't taking over healthcare, its inevitable that the Federal gov't will impose heavy price controls on medicine and medical services, which will in turn cause shortages and rationing. And gov't intervention could easily extend into other areas depending on how bad the economy gets.

I agree that government takeover of medicine will lead to shortages and rationing. I expect the "medical tourism" industry in places near the US to grow rapidly. Anguilla, where I live, has a plastic surgeon that is mostly for US customers. Cuba has some really good medical tourism stuff going on. This site says it can cost 1/4 or even 1/10th as much and you don't have to wait months:
http://www.cubamedicare.com/

[Tom Acre]

... the government is printing huge amounts of money and bidding up the prices on many things... I don't insist that hyperinflation is coming to the US dollar. There is a slight chance that things will get really bad and then people will elect Ron Paul in 2012 and he will save things. But I do think there is a high probability of hyperinflation.

Well over half of gov't spending goes to SS, welfare, healthcare, basically transfering money, goods and services from one group to another. Aside from energy and food (mainly due to global demand), prices are actually going down. Almost all of the rest of gov't expenditures go to infrastructure, defense, administration and debt service (and making sure they and their friends don't bear the losses they've brought on themselves). So despite QE and other actions, it isn't "bidding up" prices. Add the fact that the Fed has done all it can do (and perhaps more) and is facing more and more scrutiny and add the fact that voters are increasingly against profligate government spending, its just hard to see how they will "bid up" prices in the future.

Hyperinflation doesn't appear to be a logical possibility. Perhaps we'll see significant inflation in some areas of the economy, like gas and oil if war breaks out in the middle east and Iran tries to shut down the Persian Gulf (that would only be an overall drag on the economy). But hyperinflation, Ron Paul or no, doesn't seem likely.

I agree that government takeover of medicine will lead to shortages and rationing. I expect the "medical tourism" industry in places near the US to grow rapidly. Anguilla, where I live, ...

I could even see it expanding into private "total health maintenance plans" whereby the wealthy pay into something not classified as medical insurance that thereby skirts all rules and regulations but which of course will be tax deductible, and which actually is medical, wherein they take annual trips, get checkups, get everything taken care of, lounge around, play golf, etc. (catastrophic care included).

[vincecate]

Well over half of gov't spending goes to SS, welfare, healthcare, basically transfering money, goods and services from one group to another.

But when it prints new money it is not transferring the money from anyone. It is taking wealth from the group of existing dollar holders. So it does transfer wealth from one group to another. But it is a hidden inflation tax that takes the wealth.

And if you want to think of it as people on SS and welfare who get to spend the new dollars and put pressure on prices, fine.

I don't see prices going down (except for houses) and would like to see better data on that.

[Tom Acre]

...
But when it prints new money...

What is your current conception of how money is created?

[vincecate]

...
But when it prints new money...

What is your current conception of how money is created?

http://pair.offshore.ai/38yearcycle/#moneylaundering

I prefer to think of the Fed as part of "the government". The point is that they are not "taking money from one group and giving it to another", they are making like $1.5 trillion in new money each year.

[Guest]

Can you explain in your own words your current conception of how money is created?