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Why be worried about deflation?
Allan Sloan is a senior editor-at-large at Fortune
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TEXT OF INTERVIEW
Scott Jagow: Today, Japan's economic minister said he's worried about deflation. Everybody seems to be throwing that word around these days.
Fortune Magazine's Allan Sloan is here. I know you're not worried about deflation. Why not Allan?
Allan Sloan: Deflation is something that happened back in the Depression, and the prices of everything collapsed and then the banking system collapsed. It also would have fed on itself, but that was back in the day when the Federal Reserve board was due and was worried about things like balancing the budget instead of making sure there was enough money in the system to make things work. And if you look at the trillions of dollars the central banks of the world have put into the world financial system, I don't think you're going to worry about there being an insufficient amount of money.
Jagow: Yeah, there's been plenty of that. But do you have a concern that deflation will cause some problems with the economy?
Sloan: The prices of some things will go down. And the prices of commodities are going down. Which is great for you and me, because we're consumers of commodities, not so great for the farmers. The prices of houses have gone down, though that may finally be stabilizing. So to some extent, falling prices could be a problem. But that's sort of a localized problem for different markets. The guys in Washington with interest rates now, what, the short-term interest rate is what, 1 percent? And they're worried about deflation. I mean, they couldn't be printing any more money.
Jagow: But doesn't printing money constantly cause problems on its own?
Sloan: Well yeah. That's why I'm not worried about deflation. To me, the thing I would worry about down the road is inflation, but I wouldn't worry about it now. Right now, you've got to save everything. But you remember when oil prices went up, gasoline prices went up, it's oh my God! Then the consumer price index has dropped, it's deflation. I mean, there must be some series of events that people would consider OK, but I can't find it.
Jagow: Allan Sloan from Fortune Magazine, thank you.
Sloan: You're welcome, Scott.
Deflation is not a threat, like many so called "experts"-charlatans are trying to portray it in the media.
Deflation is good as it makes things more affordable and helps average person on the street who has seen his earnings decrease for decades now. The only people that benefit from CPI increases caused by monetary inflation are the bankers. Because they need people to take on more new debt to keep paying interest on the old debt. Once this pyramid stops growing, the banking cartel is in trouble. They can't make anymore money.
As far as economic growth is concerned it is not at all related to inflation. From 1866 to 1897 USA experienced regular deflation and economy consistently grew at 4%.
Deflation helps Americans without mortgages and other debts. It increases the purchasing power of paper money. Older Americans tend to gain and younger ones lose. Americans with car payments and mortgages who lose their jobs will suffer the most.
When the economy heats up again and the trillions of paper dollars circulate, inflation will spike. Young Americans with mortgages will benefit as retired persons see the purchasing power of their savings melt away.
Politicians have spent trillions of borrowed dollars needlessly. Failed firms should declare bankruptcy and not be bailed out with taxpayers money. This will be more obvious in about 15 years when interest payments on the public debt exceeds a trillion dollars per year. We may have to declare national bankruptcy. The dollar has lost 96% of its purchasing power since 1913 and has only a little bit left to go.
Allan Sloan is correct. It is too early to start ringing the 'deflation alarms'. The pullback in prices we are seeing in the stock market, housing market, commodities market, etc... are a needed correction to normal levels.
The combined logic of many whom recognize an economy chock full of inflated valuations with the expectation they will trend in positive territory escapes me.
Another classic example of our own myopic tendencies.
I wouldn't be so quick to start writing the obituary on deflation! Of all the money that the government has thrown at the problem, most of it seems to have fallen into a liquidty trap. Between the banks hoarding money, and paying off thier bad bets on credit default swaps, there doesn't seem to be enough money left over to get any type of inflation going. We haven't even seen the end of the mortgage meltdown, let alone the commercial real estate meltdown, the pension plan meltdown, or the state and local government meltdown. Not to mention credit cards and auto loans. On top of it all is the psychological perception caused by falling prices. It's way too early to declair victory over deflation!
