[media]http://www.youtube.com/watch?v=PTUY16CkS-k [/media]

 

[media]http://www.youtube.com/watch?v=d0nERTFo-Sk [/media]

 

Cute. But they make some highly dubious assumptions, such as that deflation is a great thing because it allows us to buy more stuff. There are certainly some good arguments against QE to be made, but the argument that deflation is a positive is not one of them...

Andrew

 

At the start of QE rates have risen.

Deflation sucks, but inflation robs a select group, those who save. I hate being robbed.

 

Deflation is fine when it drops the money to it's NORMAL value, but not below. It does however hurt those that don't have squat.

 

Economists are like the weatherman. The difference is that the weatherman is fully aware he cannot control the weather.

 

Actually the average Joe gains the most during a deflationary cycle. The problem is the rap restructuring of business costs and the fear of delayed purchasing; as people wait in expectation things will get cheaper.

Deflation makes everyone wealthier, while inflation makes everyone poor.

Of the two, I would rather have a mild, 1-2% deflation then 2-4% inflation.

Consider for a moment my savings have to MATCH inflation not to lose value. So I am forced to work my funds just to keep up with the hidden tax. Deflationary periods drive up savings and those dollars grow in value.

Ideally, I'd like no change in value. But that would require a gold standard.

 

Neither of these is true. In fact, uniform inflation or deflation leaves everyone in statu quo.

 

I think the simplest explanation would be that in a highly levered society (or society with a lot of debt), inflation keeps the players in the game and the status quo going. This is the society we live in. Where mark to market does factor into a lot of things, inflation keeps a levered society afloat.

However, deflation in a levered society, crushes those that are in debt or levered up (banks are inherently levered due to the FRB system), because they lose any equity or "paper wealth" they have. This is why the Fed and our government is so terrified of deflation, because we have a HIGHLY levered society (3% down FHA loans are a great example how J6P is highly levered as well). Back in the 20's, the average downpayment on homes was north of 30% (at least from what I read a while back), and thus the system inherently was less levered, not to mention the banking/financial system was much less levered in some ways as well (Yes, the 10:1 leverage in the stock market was bad, but it wasn't as commonplace as today).

The reality however is, once debt saturation has hit a maximum, there's only one way to go with an interest bearing system, and that's deflation. This is why the Fed is desperately printing, hoping it'll work. It still remains to be seen.. Boom/busts are 100% inevitable and "normal" due to interest. The only question is how big/small they are due to the imprudent lending/fraud in the system. If we ever do have a balanced budget in this country (ya, it seems like a dream at this point), that >$1T subtraced directly from GDP is going to sting badly, at least in the short term.

 

You don't want deflation. The velocity of money is extremely critical and difficult to control. With deflation, the velocity of money beings to slow, often in a self feeding cycle. Transactions become less and less frequent. With fewer transactions comes a higher and higher spread. The higher the spread, the less efficient all market activity becomes. You can apply this to the housing market or the stock market, it works exactly the same way.

A real world application of this today are high ticket items, such as homes and cars. It's taking probably twice the time to sell a used car or house today as several years ago. That makes the seller's economic activity decline. Then he can't buy from another seller, and so on.

With the extraordinary decrease in new debt being produced at the consumer level and the velocity of money at depression era lows, the fed is shoving money down the throats of financial institutions mostly in vain.

You need a little inflation in an economy that uses debt/leverage. As long as the banks are responsible for bad decisions (no bail out, no monopoly so only a few % of overall citizen assets), the market based on economic factors (income expectations, etc.) will provide an interest and obligation level that clears the market place.