I keep rereading your posts.

Do you disagree that future price expectations play a sig role in current consumption? Do you disagree that the deflationary environment in housing and auto is keeping many consumers on the sidelines? Do you disagree that the economy will not be able to recover until housing bottoms?

I think its widely accepted economic theory that inflation itself is not detrimental, its the variability in inflation. Meanwhile, deflation is always bad, and variability in deflation is even worse.

they definitely can.

no


well housing is far from the only problem but no, i dont disagree. For housing to bottom though prices need to fall quite a bit, though.

And for each paper like this, I can find 100 to state the opposite.

Dont you know its a common strategy to challenge conventional wisdom when trying to make a name for oneself in academia?

i thought its common strategy to suck up.

i doubt many economists who hold austrian views consider that an asset to their academic career within the mainstream.

aside, its not quantity of papers, its all quality. if the argument was right only one of those hundred, the simplest, is necessary.

What do you mean can? A part of the market expects a non-essential good/service to be sig cheaper in the future. All else being equal this will lower consumption. I'm failing to see where this basic logic breaks down in your mind.

So now youre arguing against strength in numbers? Majority rule?

Do you have any opinions of your own or do you try to hold the minority opinion as a debate exercise?

It has to do with the interest rate not being able to fall below zero. I'm really not sure why this is hard to understand. The interest rate is how we can compensation for inflation. We can't compensate for deflation the same way and cash-hoarding becomes massively profitable. In short, monetary inflation, when correctly anticipated, presents no problem if all agents are rational. Because of agents aren't perfectly rational, we want the inflation rate to be generally low, but there's no problem with it in general. Deflation presents a problem that is insurmountable.

I mean there is no real counterargument here (actually there are esoteric economic situations where deflation would be beneficial but I'll leave that as an exercise for the reader) unless you want to do another "let's change everything about this world that we know of and we'll have different problems."

You have to think in terms of goods and services. Drop in prices of goods and services in terms of monetary units = deflation. If storable commodities assume the status of monetary units, then deflation is simply inflation in commodities > general inflation.

the interest rate also compensates for the cost of opportunity.

what do you mean cant compensate for deflation. this whole concept is nonsense from what i can see. Explain how this adversely effects anything. Holding cash and renting cash dont change in their relative profitability due to deflation either. If the value of money is increasing at 5% a year then how does this necessarily discourage me from issuing. If i issue a loan the money i receive will still increase at that rate, plus whatever yield i charge for the cost of opportunity and default.

deflation for the most part is always good unless confiscatory. there is no need to stretch reality to see this and there many historical examples to show some of the strongest growth through deflationary periods.

oh god forbid people can purchase more. if millions of good fall from the sky im sure you'll see this as bad considering the price of goods drops in terms of money.

your confusing the terms and their placement. it would be inflation of the commodities only relative to the currency the commodities replaced. if the commodities go up in value and they are the monetary unit then it is deflationary by definition. there is no monetary inflation from this from the consideration of the commodity as the monetary unit.

Ok I need to move on before Zygote convinces me everything I've learned for 20 years is wrong.

Seriously bro, this ability to argue what seemingly fails basic logic is a real talent. You really should be in sales.

Well "eventually" is a long time.

This is not a particularly well-researched view - I spent zero time specifically looking into this topic, but rather came to this view through observations in many different areas - but this is I think what's been going on. First, Japan started the deflationary spiral with all assets at extremely high valuation and extremely high prices for everyday goods and services. Thus there hasn't been any valuation floor effect that cushions the crash. Wat we would expect in that case is the correction happening as a combination of yen weakness and deflation. The main apparent reason why it's taken this long for the prices to correct (and we may not be done yet) is that the yen has not really weakened during this time! The reasons for this are not clear but there are a few clear implications. Despite the yen being extremely overvalued, Japan remained competitive in the global markets. To me this is the real puzzle. A lot of people wonder, why are the Japanese saving money when the interest rates are low but I think that's the wrong question to ask, because the entire world is saving money at the same rate. Because of interest rate parity, the only real choice you're making is one of currency. So if the rest of the world isn't abandoning yen, why should the Japanese?

That takes us to, why has demand for the yen stayed so high, when it was clearly overvalued? Well, I don't have the trade balance or net investment position but I'm pretty sure they're net positive in both over the past whatever # of years. And it's not like Japan is a tax haven or anything (again, AFAIK). What does this tell you? Something in Japan, despite the overall strength in yen, is undervalued from a global perspective. Japan has no real exportable commodities, so it comes down to labor + public infrastructure (because private capital investments are global). In solving a problem like this, where things aren't at what we consider to be an equilibrium, you need to isolate exactly which agents are acting irrationally, either in underpricing or overpricing something. Now we're down to two - Japanese workers selling their labor too cheaply and the Japanese government providing cheap public infrastructure and the combination that resulted in reduced domestic demand, but higher competitiveness abroad. The latter shouldn't be a huge factor since infrastructure expansion and deficit spending are inflationary, especially without the former.

And by the process of elimination, that's my conclusion - the prolonged period of deflation in Japan was caused by an inflexible labor market and/or the collective unwillingness of Japanese workers to demand fair pay. One prediction this view would make is that despite the recession, the unemployment rate must have stayed low, because labor is so cheap. And again, I don't have the #'s but I'm pretty sure this has been the case.

Government just simply wants to induce consumption and risk taking.

nobody seems to want to take a shot at this due to the fun involved in bickering so i'll give it a whirl.

first, japan had a huge hangover of bad debt (read: deflation as it gets written down). they had(have) a sickeningly rigid labor market. they are far larger savers than borrowers. and the economy failed to respond to monetary intervention despite low rates (still no capacity utilization like you'd expect w/ rates that low).

Barron

Ok that helps thanks.

I was thinking about the carry trade today (I know I'm late to the party) - If I can borrow cheaply in Japan and invest at higher rates elsewhere and also buy yen / currency futures at the same time - What kind of profit can I squeeze out at no currency risk and some currency risk? How has this not pushed up rates in Japan?

FYI the guidelines for the Reserve Bank of NZ is to keep inflation between 0 and 3% over the long run.

ZOMG cheaper goods!

The government wants to print money for numerous reasons.

A bunch of economists -- some combination of misled/ignorant/dishonest/or simply incorrect -- think this is a good idea.

When you become unemployed cheaper isn't a very good consolation prize.

Jimbo

Deflation is also bad because people are stupid.

If the US has a deflation of 3% and a big factory like GM cuts salaries by 2% all the redneck workers will start rioting in the streets even though they get more.

none, in expectation. the carry trade is precisely due to UNHEDGED flows (otherwise the net purchase of yen is 0)

Barron

PS - i know you are mathematical so:

F(t1) = $/Yen*(1+rUSD)/(1+rJPY)

so you are borrowing in yen and earning in dollars... what does that leave you with in terms of the above equation? (i.e. nothing since you earn rUSD-rJPY and the futures price is specifically priced to take into account that differential). "carry trade" only earns w/ unhedged flows.

But the spread b/w Japanese rates and some other countries is as high as 7%. How is that not hedgeable at a smaller cost?

Because that is reflected in the forward rate. This is just the arbitrage principle - the forex market is ridiculously easy to arb. Put yourself in the shoes of a global bank with presence in multiple countries that needs to fund its assets as cheaply as possible and/or needs to get the highest return on its excess reserve/cash as possible. You can see that they have a nearly cost-free way of taking advantage of any arbitrage opportunity. Thus, for almost anyone else, a carry trade is simply a bet that the strengthening implied by the forward rate doesn't happen for the lower yielding currency. This is what I meant earlier by the Japanese "saving" being not an issue - it's the forex market that should adjust, not individual savers.

In general, there's no easy arb in the fixed income world that doesn't leave you with a huge liquidity hole.

So technology is evil? How bout free trade?

Both reduce prices, and cause short term unemployment.

Deflation is a natural and beneficial phenomenon. I have yet to see a convincing argument that disputes this.

Then you are much uninformed to be posting on this topic. Are you a meteorologist too?

Jimbo

Sorry to disappoint, but I'm actually quite informed. I'm one course away from completing my Econ degree. But that's really irrelevant. I just want to see the argument, not ad hominem attacks.

Read up:
- http://mises.org/article.aspx?Id=1241
- http://mises.org/article.aspx?Id=1040

Well then since you are almost an economist tell me why deflation is good in your own words. Not by referencing some voodoo Austrian economic websites.

Jimbo