My goodness. The folks at The Motley Fool are musing over the same issues as the authors mentioned in my two previous posts:
The exact mechanisms of deflation are not fully understood, and modern economists still argue as to whether deflation is a cause of economic strife or merely a symptom of it. In either case, deflation has a strong association with very challenging economic times.
Theoretically, deflation is caused by either a decline in prices driven by lower demand, by sudden increases in the money supply, or by technological advances that lower production costs. When prices decline, commodity businesses suffer because the price of the goods they sell declines, crimping profits. Deflation causes businesses of all types to pay higher real wages for their workforce, forcing management to cut salaries or lay off workers to offset the decline in pricing power. Borrowers also suffer, as the amount they must repay becomes higher in inflation adjusted terms than they originally anticipated when they borrowed the loan.
Deflation driven by technological advancement is a more hotly debated topic, and can be viewed as a positive phenomenon for consumers and businesses thanks to lower prices coupled with higher productivity.
Regardless of whether it’s a cause or an effect, deflationary environments tend to correlate with high unemployment, wage decline, and increased credit risk in the financial market. That’s a recipe for economic trouble every single time.
It sounds to me like we have all three of those causes of deflation to contend with. China’s demand for raw materials has declined now that they’ve increased their productive capacity beyond what anybody will want for the foreseeable future.
Is a “sudden increase in the money supply” really necessary? Maybe it’s more like pulling on a rubber band. The rubber band will stretch up to a point and then snap. The force applied caused the snap but for a while there it looked as though the force could be applied forever. Economics always and everywhere is the study of human behavior. It isn’t physics.
As to social and political problems created by technology, I remain skeptical. When you subsidize antiquated products, services, and methods of production it produces deadweight loss. The deadweight loss results in less economic production than would otherwise have been the case and fewer jobs are created. If buggy whip and carriage manufacturers had been subsidized strenuously enough, the automobile industry would never have gotten off the ground.
Read the whole thing it’s an interesting post. Something to keep in mind: the Long Depression of the post-Civil War period wasn’t caused by events in the United States and didn’t end because of anything done here. It was a result of things that happened in Europe and was one of the early signs of globalization.
Seriously OT, but short of an alien invasion, is there any way this election could be more bizarre?
Everything just shifted. Social issues just leapt to the top of the agenda. We could get an ‘abortion’ election.
Something occurs to me. For the moment we have an 8-person, Democrat-friendly SCOTUS. So until Scalia is replaced, good times for Democrats.
And the more the GOP stalls, demagogues and generally overplays this issue – and God knows they will – the more the focus turns to social issues, to gay rights, abortion, environment, and to Occupy Wall Street issues like ‘corporations are people,’etc… All of which are electoral winners for Team Blue. In any head-to-head where abortion, gay rights, the environment and Citizens United are front and center, Democrats win.
The smarter move for the GOP would have been to agree to an Obama nomination. That costs them the Supreme Court, but doesn’t hurt them electorally. Might even help. And if they win the White House, well, they’ve only lost the Court until RBG dies.
But if they stall for 10 months, then lose the election, they’ve lost the SCOTUS for at least 4 and probably forever years.
Thank God they’re stupid.
I don’t know Michael. It will still likely be a turnout election. Before this I thought it would be turnout to vote against the other candidate. People disliking Trump so much they would vote for anyone else, or people hating Clinton so much they would vote for anyone else. This could change the dynamics so that people think they are voting for SCOTUS, not just against the bad person they hate. I suspect it will balance out.
Steve
Steve:
I think polling would have us ahead on the issues of abortion, gay rights, etc… I’ve seen very little discussion from the GOP field this year of social issues other than immigration. They don’t want the country thinking this election is about abortion or the environment or Citizens United, and we know that because they aren’t talking about these things and we are. They want this to be an immigration, economy, commander-in-chief election.
Now the entire GOP has jumped out there to say to hell with the constitution, the government, and whatever SCOTUS cases they want heard for at least a year, all we care about is, um, talking a whole lot about the SCOTUS, Citizens, abortion, same sex marriage… I think it was a blunder.
Keynes argued depressions resulted from price and wage stickiness, that employers and workers resisted adjusting these downward preventing market clearing. This continued until unemployment and spending declines broke both groups of their power to resist. At this point adjustments would occur but always lagging markets and the result was what Lerner called “lowflation” and a sub-optimal employment equilibrium. Eighty years later the analysis is, I think, good as any since developed.
BTW, note that Ben’s explanation and mine are congruent. That shouldn’t be surprising. In the olden days when I took economics Keynes was king and his explanation for the Great Depression is ingrained in my bones.
My answer is more targeted towards the reasons for the stickiness. Producers aren’t willing to write off their losses.
In this particular case the implication is that there is so much deadweight loss involved that it will be a good, long while before the losses are all written off. Also, the general level of debt is a lot higher now than it was 80 years ago. The abuse of Keynesian strategies over the greater part of the last century will make them much less effective than was the case in the past.
“Theoretically, deflation is caused by either a decline in prices driven by lower demand, by sudden increases in the money supply, or by technological advances that lower production costs. ”
I’ve never heard of increases in the supply of money causing deflation. Unless he wants to make a convoluted argument about low interest rates turning into technological advance investments turning into,price decreases, but that’s double counting.
In any event, I think the cause of wage stickiness is obvious.
As far as producer prices are concerned, as a practitioner it has been my experience that defending the price point is paramount simply because it is so difficult to reclaim the ground lost, and has much more to do with customer psychology or B to B negotiations than it does writing off investments. However, it’s usually a very transitory and losing proposition. Except for end game products your customers and competitors will tell you the price, in an open market. You get to choose your share position.
Recall from a recent post our friendly pepper farmer who pulled land from production? That’s the opposite effect, where his labor costs increased (a negative technological event if you will) but customers were price sticky upwards and balked, and he was left with pulling down production.