Saturday, May 25, 2013

Lance Roberts — Guest Post: The Fed's Real Worry - A Pick Up In Deflation

Good analysis showing that deflation is the looming threat rather than inflation.

Needless to say, the comments over there are a never-ending source of amusement, and this post was guaranteed to set a lot of people off who are expecting hyperinflation any minute now or are already seeing signs of it.

Zero Hedge
Guest Post: The Fed's Real Worry - A Pick Up In Deflation
Submitted by Lance Roberts of Street Talk Live blog


Unknown said...

Not a single respnse in the comments dealing with the content of the post, lots of sloagans and shibboleths. These people are brain-dead.

Ignacio said...

ZH is full of teenagers, goldbugs, and people who refuse to grow up (synonyms). What did you expect?

Clonal said...

Also, people think that deflation means a drop in prices. Deflation really is a reduction in the amount of money circulating. A reaction to this on the part of businesses can actually be to increase their prices, as they try to recoup their costs. They cannot reduce their prices, as that would cause them to take increasing losses, which will cause them to go bankrupt. Most of the deflation in prices comes from business filing for bankruptcy.

You end up with higher prices at much lower levels of economic activity.

This is one of the reasons that deflationary spirals are so deadly.

paul meli said...

Clonal...good description of what the real dynamic looks like.

Unknown said...
This comment has been removed by the author.
Clonal said...

Yes Paul, this dynamic is not talked about much. A successful business will raise prices, lay off employees, use up its stockpile of raw materials at a reduced rate, and it will survive. It will not buy new raw materials until it really needs to.

In the mean time, the economy will slowly spin down. When the time comes to repurchase raw materials, and if many other businesses are doing the same, the economy will stabilize at a much lower level of economic activity, and at much higher real prices (measured in multiples of nominal median income)

This is almost exactly what is happening today.