Tuesday, June 08, 2010

Let's get rid of an economic canard

K-Rod cited a yahoo finance report of how once again, lumber prices (and hence the building industry) are not doing so well. The article was good as far as it went, but then it went too far and cited the idea that deflation is even worse than inflation for the economy as a whole.

Really? For contrast, here is a graph of the CPI since 1913. Notice that the last significant deflation we've seen in our nation occurred in the 1920s and 1930s. The 1920s, of course, were the Roaring Twenties, and the 1930s were the Great Government Caused and Sustained Depression.

Not that I'm biased, of course (I am), but reality is that the data do not support the idea that deflation is an enemy of the economy; it's associated with both booms and busts. Savers love deflation, and borrowers hate it. The traditional bias against deflation comes from the fact that (see Harry Browne's works on the subject) that a wartime boom caused by spending features inflation, and the postwar bust--or hangover from the wartime boom really--tends to feature deflation. Keynesian economists--often untrained in logic--confused correlation with causation, and therefore assumed that deflation was the enemy, while the real problem was government.

Hopefully my gentle readers can do bettter than Keynes, Hoover, Obama, and Roosevelt in this regard.

5 comments:

K-Rod said...

Deflation can be tough on businesses that have to hold a lot of inventory. Add on a large tax and regulation burden and you put them out of business.

But the Carter malaise of high unemployment, high interest rates, and high inflation was no picnic.

What if government kept all taxes low and then raised them for certain sectors depending on growth? Higher gains taxes for certain stocks back during the tech dot com bubble? Higher taxes for real estate flippers during the housing bubble?


And we should never buy into the notion that any company is too big to fail.

K-Rod said...

It would be interesting to see a more granular chart down to the year between 1920 and 1940.

Bike Bubba said...

I think you hit on the real issue; high tax and regulatory burden.

I'm not totally persuaded that deflation is that much of an issue for holders of commodities, either; yes you get a "paper loss" as you sell things for fewer dollars than they were purchased for, but the dollars you get buy more. No biggie....

...unless you bought those commodities on credit, and need a number of dollars to pay it back.

Bike Bubba said...

And higher taxes to reduce volatility; government has been trying to do that since 1913, and where are we now, and what interesting event started in 1929? It's simply beyond their pay grade--see Hayek and von Mises and the difficulty of insufficient knowledge.

K-Rod said...

It sure is above their pay grade. Anyone with half a brain new the irrational exuberance of the tech dot com stocks would end in a crash. And the recent housing bubble. Duh!!! I bought my house back in the mid 90s and haven't once thought of selling.