Mish makes a pretty good case that the U. S. went through a period of deflation that ended in 2009 and that it has returned now:
From a practical standpoint of economic analysis of the economy, debt-deflation (deflation) and consumer deleveraging is of paramount importance and is likely to remain of paramount importance for some time, no matter what definition one assigns to the process.
Austrian economists, as well as hyperinflationists with myopic eyes focused solely on money supply instead of debt, and everyone with ill-conceived notions of the power of the Fed, better figure that out in a hurry or they risk more horribly blown macro calls.
Read the whole thing.
I largely agree with him and, indeed, find it a bit hard to see on what grounds one might disagree. I’m still concerned about hyperinflation but my concerns are policy concerns, not money supply ones. I don’t believe that the historical shows a progression from inflation to hyperinflation but, rather, hyperinflation is sui generis.
I disagree with a lot of his solutions, but agree with a lot of his diagnosis. The key to a banking crisis is to avoid them. Once created, there is no easy solution. The inventory of unused real estate is too big to be overcome quickly. Too much wealth was lost. Too much of that wealth was not real, and things are actually worse in Europe. In some ways, I think I am more pessimistic than Verdon.
Steve
The housing market won’t come back, at least not come back as it was, for the foreseeable future. Accomplishing that shouldn’ t be a policy objective. It’s a waste of effort.
The demand for houses is composed of two components: demand by consumers who have enough money to buy a house (desire and willingness to pay) and speculators/investors who buy houses for resale. The second will never come back at its former level, at least won’t come back in my lifetime. That’s what a bubble means. Too many speculators in the market. It wasn’t people who wanted to plant tulips in their yards who made the tulip bubble.
The factors that will prevent the recovery of the consumer housing market are the high level of unemployment and underemployment, fear, historic debt levels, sticky prices, and tougher credit requirements. We might be able to address some of those factors but we probably can’t address all of them.
The short version is the housing market ain’t coming back. This is the new normal.
Just a drive by, but………..I seem to recall that a large portion of CPI is housing related. Hence, “headline” inflation would naturally be depressed right now in the figures, but things people are actually buying – the proverbial food, clothing and not shelter could be inflating much faster.
Its also hard for me to imagine that the way out of the debt problem, in addition to tax hikes and bending the spending curve downward, will not involve inflating away a portion of the obligation. Without getting into the mechanics of compounding, 3% x 10 years is 30% of the problem resolved.
Inflation is harder to start than it’s being made out to be and even harder to control once started. They can’t do much with interest rates at this point. They’re on the floor already. Essentially, the easiest way at this point is just to print a lot of money and start buying things with it.
Problem is it would take a heckuva lot of printing to start up real inflation. So little of the money supply is actual hold-in-your-hand money these days. I have no confidence whatever in our government’s ability to keep inflation down to a manageable level. And I doubt that creditors would be amused.
So, yes. Moderate inflation could solve a number of problems while creating more for the most vulnerable in society. Is it really possible to constrain inflation to moderate?
I also don’t think inflation will do much in the near term to address the issues I brought up in an earlier comment here. Housing is moribund. Ain’t coming back. Even with inflation.
A rather non-standard definition. If this is the case we could very well have had periods of very high inflation…why he doesn’t call these hyperinflation is intriguing. He appears to have an unstated assumption in there somewhere.
Hard to argue with people who make up definitions for already established words.
Essentially, the easiest way at this point is just to print a lot of money and start buying things with it.
Problem is it would take a heckuva lot of printing to start up real inflation.
Well, the government could print money and buy excess hosuing units. There’s a LOT of that around. They could even pay to have stuff torn down. Then hold on to the property and sell it back into private hands when market circumstances warrent.
Not that I’m recommending this (I haven’t really thought about it), but it would be one way to do it.
Hard to argue with people who make up definitions for already established words.
That is a problem reading Mish and Steve Keen.
What the….
Okay, so credit influences prices (both for consumer goods and assets) as well as job creation…okay, but then he doesn’t think that people should look at just prices when prices often contain the very information he’s talking about.
Really? I’m thinking it isn’t so neat that it can all be encapsulated in 2 sentence paragraph…or if it can, get that man a Nobel!
But…you just said credit impacts prices, so if I’m worried about prices aren’t I also worried, implicitly, about credit?
Again, many people who voiced fears of a bubble did look at just prices…housing prices, which is where the bubble was.
I dunno I came away less satisfied and it didn’t really taste all that great either. He might be right, but I think he got there with the goofiest of reasons.
That’s an interesting idea for a post, Steve. “Have we already experienced hyperinflation?” I can certainly see an argument that we’ve experienced high inflation.
I had the same thought you had on inflation Steve. Prices are the end result of what he talks about. His general point about no hyperinflation like people predicted stands.
Part of the Reagan recovery success was due to sustained moderate inflation. Mild inflation and currency debasement have been the historical norm when faced with large debts. We are not going to clip coins, but mild inflation should help debtors and provide creditors with the haircuts they need (deserve?). While Sumner thinks this is easy to do, I think that I am also a little skeptical now.
Steve
I think you might want to extend the time horizon you’re considering and think about the actual mechanics of what happened in the late 70s and early 80s. In 1979, 1980, and 1981 inflation was running over 10% per year. In 1982 it was just under 7% and dropped from there to 4 or 5% for several years.
Throwing the economy into a tailspin to bring inflation down to tolerable levels over a period of six years is a different critter than pushing it up to 4% and keeping it there. You can accomplish the former by maintaining high interest rates. You can’t get to 4 by lowering interest rates.
Mmmm…I think it depends. 10 years ago you probably could, of course controlling it–i.e. the fine tuning view–is another issue altogether.
Right now? No.
That’s my point. Real interest rates are already below zero. There isn’t much of anywhere to go.