Falling Prices

5 Key excerpts on "Falling Prices"

• 

  eBook - ePub

  The Inflation Myth and the Wonderful World of Deflation

  • Mark Mobius(Author)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  67

  *Murray N. Rothbard, economist, historian, and political theorist: “‘Deflation' is usually defined as generally Falling Prices, yet it can also be defined as a decline in the money supply which, of course, will also tend to lower prices. It is particularly important to distinguish between changes in prices or the money supply that arise from voluntary changes in people's values or actions on the free market; as against deliberate changes in the money supply imposed by governmental coercion.”68

  Central Banks Cause Deflation

  *Peter Cresswell: “There are two kinds of ‘deflation’: progressive and destructive. Central banks and their ‘stabilisation' make the first impossible, and the second more likely.”69

  Deflation Is Caused by an Increased Production of Goods and Services

  *George Reisman, professor emeritus of economics at Pepperdine University: “Deflation is usually thought to be a synonym for Falling Prices. There could be no more serious error in all of economics. Calling Falling Prices ‘deflation’ results in a profound confusion between prosperity and depression. This is because the leading cause of Falling Prices is economic progress, whose essential feature is an increasing production and supply of goods and services, which, of course, operates to make prices fall.”70

  People Should Accept Deflation

  *Carlos Ghosn, chairman and CEO of Groupe Renault: “To face deflation, you have to have people accepting it and not reacting to it.”71

  Deflation Is Bad

  *Robert Kiyosaki, founder of Rich Dad Company: “Deflation isn't good, and inflation is easier to cure than deflation.”29

  *Lawrence Summers, former director of the National Economic Council: “Deflation and secular stagnation are the macroeconomic threat of our time.”72

  *Jack Kemp, former US secretary of housing and urban development: “The real problem is deflation. That is the opposite of inflation but equally serious to the borrower.”

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Japanese Phoenix: The Long Road to Economic Revival

  The Long Road to Economic Revival

  • Richard Katz(Author)
  • 2020(Publication Date)
  • Routledge

    (Publisher)

  What this argument ignores is that the company’s costs are also falling by 5 percent. A company’s ability to pay debt depends on the ratio of operating profits to debt. Suppose a firm’s debt and its sales revenue both equal 100 yen and its costs are 95 yen. Thus operating profits are 5 yen, and they equal 5 percent of its debt. If interest rates are 3 percent, it can easily pay its debts. Suppose deflation means prices fall 10 percent. Then sales revenue, costs, and profits each fall by 10 percent. Revenue drops to 90 yen and costs drop to 85.5 yen, pushing operating profits down to 4.5 yen. As a result, operating profits now equal 4.5 percent of debt. With interest rates still at 3 percent, the company can still easily pay its interest bill.

  Of course, some costs are fixed and so deflation does hurt. There is also a lag between the time inputs are purchased and sales are made. But all this is small potatoes compared to the biggest hit to profits: the weak economy. Deflation was actually milder in 2001 than in 2000. Yet profits were up 25 percent in 2000 because the economy was growing, and down 11 percent in the first three quarters of 2001 because the economy was slowing.

  Good Deflation and Bad Deflation

  In defending its policies, the BOJ distinguishes between “good deflation” and “bad deflation.”

  Good deflation, previously called “price destruction,” comes when monopolistic prices are brought down to earth due to deregulation or globalization. A drop of 80 percent in long-distance call rates or the halving of fleece jacket prices due to imports from China are examples. In this case, a drop in prices actually adds to demand by increasing real consumer purchasing power. In economic jargon, it is a falling supply curve, which should stimulate growth in GDP, whereas bad deflation reflects a falling demand curve. We discussed some of this good deflation in Chapter 3 , p. 53 .

  According to economist Robert Feldman, almost all of the decline in the consumer price index (CPI) is concentrated in a few items subject to increased competition or deregulation, mainly clothing, telephone charges, fresh food, and personal computers. Ken Okamura, formerly of Dresdner Kleinwort Wasserstein, reports that of all the consumer deflation from 1998 to February 2001, 84 percent came from just food and clothing. In the wholesale price index, falls in communications, a newly deregulated sector, stand out. Feldman comments, “In one sense, there is no comfort in the fact that price declines are concentrated. If technology and globalization are pushing some relative prices down … there is no necessary reason for the aggregate price level to fall…. Thus, there is a macroeconomic problem. Having said that, the macro camp cannot find full justification for hand-wringing in these numbers either.”12

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  The Age of Deleveraging

  Investment Strategies for a Decade of Slow Growth and Deflation

  • A. Gary Shilling(Author)
  • 2010(Publication Date)
  • Wiley

    (Publisher)

  Five of the seven forms of deflation are in place, and are largely understood by investors. Increasingly, observers realize that cuts in wages and hours worked are being used to reduce labor costs in addition to layoffs (wage-price deflation). The collapse in 2008 in commodities, and more recent weakness, is obvious to all (commodity deflation). Commercial real estate deflation is increasingly seen as another serious threat to the financial system and adds to housing price weakness (tangible asset deflation). The 2000–2002 and 2007–2009 stock collapses as well as the more recent slide are vivid to most investors (financial asset deflation). The dollar's strength in late 2008 and early 2009 as well as in early 2010 is well known.

  The least accepted variety of deflation remains general price declines, or CPI deflation, as we've dubbed it. If we're right and the CPI and PPI fall chronically by 2 to 3 percent per year, that will be a big shock to almost everyone else who expects the opposite. Unlike CPI inflation, which is generally considered undesirable, deflation comes in two flavors: the good deflation of excess supply and the bad deflation of deficient demand.

  Good Deflation

  Good deflation is driven by new, productivity-soaked technologies that expand supply faster than demand can catch up. Actually, new technologies aren't really new by the time they generate good deflation. Think about computers. When first developed after World War II, they were physically huge and limited in potential size and computing power because, on a random basis, one of their thousands of vacuum tubes would burn out every minute or so and shut down the whole machine. Even after vacuum tubes were replaced by transistors, and later the development of PCs, computers had limited impact on the economy. Even though growing very rapidly in number and computing power, they started from a tiny base. Ditto for other post–World War II new technologies such as the Internet, telecommunications, and biotech. Only in recent years are they collectively becoming large enough to have importance. And deflation-spawning productivity simply gushes from these new technologies, both in their production and their use. Think about the explosion in computer consumption in recent decades while prices, adjusted for mushrooming computer power, simultaneously collapsed. Note that in the 1930s, productivity grew a robust 2.39 percent annually as the new techs of the 1920s, which I explore later, mushroomed, despite the dire economy. For example, after a setback in the Great Depression, telephone usage leaped as it proved too useful to avoid even in tough times (see Figure 8.8

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Microfoundations and Macroeconomics

  • Steven Horwitz(Author)
  • 2002(Publication Date)
  • Routledge

    (Publisher)

  These relative price effects, including those resulting from the erroneous market rate of interest, are one major reason why a policy of maintaining monetary equilibrium is so desirable. It is these relative price effects that are avoided by responding to a change in velocity with offsetting changes in the nominal supply of money. The attempt to move the general price level downward, resulting from uncompensated changes in velocity creates the kind of stickiness-induced problems we discussed at the outset of this chapter. The possibility of significant unemployment and reduced incomes resulting from excess demands for money is a significant reason to avoid such scenarios by encouraging monetary regimes that will produce offsetting increases in the nominal money supply. Even if the fall in the overall price level were to occur more quickly, we would still have the various relative price effects discussed above. The combination of price stickiness and the relative price effects that will occur when the stickiness is overcome is a powerful argument for attempting to avoid deflationary monetary disequilibria. Notice, however, that these arguments do not apply with equal force to productivity-induced downward pressure on prices. The explanation is that such price movements are supposed to be comprised of relative price changes—that is what non-uniform productivity increases are. Supply-side pressure on prices will never be market-wide because productivity changes are virtually never market-wide. Because such price changes are intended by producers, they both avoid the stickiness problem and pose no distortionary relative price effect problems. These relative price movements are desirable precisely because they reflect changes in underlying real variables, in this case factor productivity.

  We can also briefly note that deflation will involve coping costs that are parallel to those created by inflation. Some of the costs of unanticipated deflation will be different for particular groups, as, for example, the fall in the price level will lead to increased wealth for lenders and people whose income is fixed in nominal terms. Of course, borrowers and providers of fixed incomes may find themselves having to incur various costs in adjusting portfolios to compensate for the losses deriving from unexpected deflations. So too would we expect to see employers push for more frequent wage negotiations (shorter contract periods) so as to avoid giving real wage increases as the price level falls against contractually fixed nominal wages. And, as during inflation, both sides would want to invest in finding a measure of the price level that works in their own interest. Individuals will have to consider portfolio adjustments, as cash holding might look marginally more profitable, while nominal interest rates may be falling. More generally, any movement in the price level (even if expected in some cases) will lead people to undertake the sorts of defensive measures we discussed in the last chapter. This is true whether the price level trend is upward or downward.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Paper Money Collapse

  The Folly of Elastic Money

  • Detlev S. Schlichter(Author)
  • 2014(Publication Date)
  • Wiley

    (Publisher)

  An additional illustration of time preference and of the misconception that deflation drains present demand is provided today by those sectors in which productivity gains are so rapid and competition so intense that nominal prices for these goods tend to decrease over time even in a generally inflationary environment. In recent years, this has been the case for many products in the area of consumer technology, such as personal computers, laptops, mobile phones, and other handheld devices. In general, these sectors have experienced strong growth on the back of solid customer demand, despite the fact that every buyer knows full well that by not buying any of these goods today, he stands a good chance of buying the same, or even a more advanced product, for a lower price in the future. This is in fact a good example of personal time preference in action. The subjective benefit from obtaining the use value of the respective good now or in the near future is evidently deemed higher than the compensation for waiting, which is a lower price in the future.

  We conclude that today’s widespread fear of deflation is unfounded. It appears that after almost 100 years of global inflation, the possibility of an ongoing rise in the monetary unit’s purchasing power has become a strange and discomforting concept to many people, making them susceptible to the scaremongering of parties who have a vested interest in ongoing money expansion and inflation. However, if one thinks about it dispassionately and rationally, a continuous decline in nominal prices seems to be a more natural condition for a growing economy in which people get, on trend, wealthier, than the artificial weakening of money’s purchasing power through its constant overissuance by those who control the money supply.

  For a society to become richer means that things become more affordable. Today, a worker in an industrialized economy has to work, on average, fewer hours to be able to afford a new refrigerator or TV set than a worker 20 or 50 years ago, and today he would also acquire a hugely advanced specimen of this product. In a commodity money system with secular deflation, these advances in the efficiency of society’s resource use, the growth in its productive capacity, would be reflected in declining nominal prices. Instead, the discretionary and essentially arbitrary injections of substantial amounts of money, to the benefit of the money producers and unchecked by a limited demand for it from the public, constantly cause the medium of exchange to lose exchange value and cause prices to rise. Not only is this inflation in itself unnecessary and disruptive, but, as we have seen, the unavoidable distortions in relative prices that result from any money injection, and in particular from the vast ongoing money expansion common today, must also lead to economic dislocations and a progressively unbalanced economy.

  Sign up to read

  Learn more about book