And we have been keen to sort out the inflation vs deflation issues too.
Irving Fisher wrote in "The Debt-Deflation Theory of Great Depressions", Econometrica, 1933:
Assuming, accordingly, that at some point of time, a state of over-indebtedness exists, this will tend to lead to liquidation, through the alarm either of debtors or creditors or both. Then we may deduce the following chain of consequences in nine links: (1) debt liquidation leads to distress selling and to (2) Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes (3) a fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be (4) a still greater fall in the net worth of business, precipitating bankruptcies and (5) a like fall in profits, which in a "capitalistic", that is, a private-profit society, leads the concerns which are running at a loss to make (6) a reduction in output, in trade and in employment of labor. These losses, bankruptcies, and unemployment, lead to (7) pessimism and loss of confidence, which in turn lead to (8) hoarding and slowing down still more the velocity of circulation.
The above eight changes cause (9) complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.
There were some new rounds of deflation discussions among Paul Krugman, Brad DeLong and Greg Mankiw yesterday ... Robert Ophele of Banque de France has his "Deflation or disinflation?" opinion at VOXeu.org yesterday, or Sheldon Liber with "Pick your economic poison: Inflation vs. deflation" at BloggingStocks, also yesterday!
Enrique G. Mendoza has more on Fisher's debt-deflation at VOXeu.org today here.
And here is one more post "Thinking about debt deflation" by David Merkel at The Aleph Blog with an excellent compilation of links!
Hoooh, be careful!
Fisher begins with "state of over-indebtedness", and
ReplyDeletebegins his chain of events to deflation.
However, his caveat to the end result being deflation is stated just prior to #4:
..."Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise..."
Our government has been inflating and reflating on a continuous basis with Bush's stimulus checks to all citizens, then TARP, then Obama's Stimulus Package in Feb. '09 - followed by a most-alarming fact that the FED began monetizing our debt (quantitative easing). This is so inflationary, there almost cannot be an argument.
Yes, interest rates (long-term) remain low, but as Milton Friedman stated, history shows that after flooding economy with more money (dollars), it can take up to 2 years for the interest rates to climb.
People are hunkering down, but not hoarding. There is a state of mind out there that nothing catastrophic can happen to the U.S. economy that we cannot withstand. So, the party goes on.