Tuesday, March 26, 2013

Gary Schilling — The Benefits of Chronic Deflation

There is an important distinction between good deflation caused by excess supply and bad deflation created by deficient demand.
Good deflation is the result of new technologies that power productivity and output as the economy grows rapidly and as supply outpaces demand. The bad kind stems from financial crises and deep recessions, which increase unemployment and depress demand below the level of supply.
The Benefits of Chronic Deflation
A. Gary Shilling | President, A. Gary Shilling & Co

Gary Schilling has made accurate forecasts in the past, but his understanding of monetary economics is primitive.

His point on good and back deflation is well taken, though. The most significant way to achieve good deflation going forward is to develop low cost alternative energy sources whose actual cost is not obscured by unacknowledged externalities. The cost associated with carbon-based energy is turning out to be exorbitant and the non-financial consequences unsustainable. This is a no-brainer that needs to be on the front burner.

Instead, Schilling wastes ink on "excess reserves."


Ignacio said...

I've a lot of doubts that we have ever experimented good deflation in the last century.

Any increase in productivity is translated in higher corporate margins and profits which benefit mostly capitalists.

Sure we have a wider catalogue of products available for purchasing and (very arguably) of better quality or more advanced. But the purchasing power has not increased that much in decades (I'm talking here since post-WWII), considering that what a single salary could buy 50 years ago now you need a couple of middle class workers to acquire the same amount of goods.

A lot of inflation has been hidden and charged in several asset classes, specially real estate. Which have been rolling over over time until the crisis made them explode.

Now that the prices have truly deflated in some sectors, large parts of the population have to 'enjoy' more hidden inflation with increasing taxes or commodity speculation due to dumb policy, and anyway do not have the income to buy these goods. And the winners are again the wealthy, which have enough purchasing power (actually more, due to the appreciation of liquidity) to make acquisitions at lower prices.

Overall, in aggregate, we haven't been able to enjoy these supposed increases in productivity in decades. Anyway productivity/efficacy and efficiency is not the same, and inflation/deflation is more a function of the second than the first. And in the second, while there has been improvement in some areas, we are in no way in the position to sustain the current levels of waste, more if we want to extend western standards to the rest of the planet.

Tom Hickey said...

Good deflation can be equated with rising standard of living, and the standard of living has been rising globally across classes. Even Marx admitted that capitalism increases the standard of living for workers. Capitalism has issues but it has brought good deflation in terms of living standards, even though it has resulted in other problems.

Tom Hickey said...

If the rate of productivity is greater than the rate of compensation increase plus profit margin increase, then the living standard rises.

Ignacio said...

Globally, yes. In developed nations, no.

I disagree we have had rising living standards in developed nations since 50-60 years ago.

We have to work more to acquire the same stuff we could acquire 50 years ago, we live more stressful lives and mental health issues have increased over this period of time.

Neither we are more 'happier' in average, neither we can acquire the same with less work. Most 'economic' problems that existed 50 years ago, still exist in developed nations, some of them have even aggravated.

If indeed our efficiency and productivity has risen, looks like a scam to me.