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Deflation, the Fed's new worry
The U.S. Federal Reserve Building in Washington, D.C.
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Kai Ryssdal: The Federal Reserve has been doing its darndest to get things going again. It has flooded the financial system with money -- liquidity, as we've been telling you. It's lowered interest rates to encourage more spending -- and that has got a lot of people worrying about whether all that cash would lead to inflation. Not only has that not happened, now there are some within the Fed saying the big worry could be just the opposite: Deflation. Not just lower prices, but lower prices over a prolonged period of time. Officially, prices aren't just falling yet. But some experts think it's time to come up with a plan just in case.
Here's our senior business correspondent Bob Moon.
Bob Moon: From a consumer standpoint, deflated prices may sound like a great idea. If you want people to buy things, after all, just lower the price. But there's a big difference between throwing a sale, and making declining prices a regular fixture.
Tom Porcelli is an economist at RBC Markets. He points to the way the Japanese economy has languished for the better part of two decades.
Tom Porcelli: People had come to expect in Japan that prices would continue to fall, and so it becomes very self-fulfilling. If you think prices are going to continue to fall, then you'll put off purchases.
It can become a vicious cycle -- especially vicious when falling prices turn into falling profits. Companies produce less and cut more jobs. But how might the Fed reverse that cycle?
Barry Bosworth is a financial policy expert at the Brookings Institution. He says the central bank may have already spent the he ammunition it might normally aim at deflation.
Barry Bosworth: In an inflation episode, it raises interest rates. In a deflation episode, it would lower interest rates. The problem is it hit zero, and it can't really do any more than that on the interest rate.
Bosworth is evidence of the way opinion is divided over how much of a threat deflation might be. He's doubtful that American consumers are simply holding off, waiting for better prices. He says they're still spending where they can -- just not where they can't.
Bosworth: The housing market's been devastated. People aren't holding off there. They just don't have the money to buy a house, and a lot of other people are in trouble paying for the house they have.
Bosworth says the way to get people spending again is focusing on what's really a stagnant economy -- and getting more people back to work.
I'm Bob Moon for Marketplace.
The fear of deflation sounds to me like the unrealistic fear of the sky falling. We've had decade after decade of inflation with negative results. How about seeing what happens with a year or two or three of deflation and see what happens? The problems Japan has had with deflation may not be a universal experience. If the sky does indeed start to fall in the USA, then we can concern ourselves with stopping deflation. If instead we find things leveling out, with neither extreme deflation nor extreme inflation, would that not be something to be desired?
@Silby
That is true. The current deflation is a good deal based on prices being too high at 2007 in general. However, while inflation always 'runs out of steam' eventually, deflation can act like a siphon and never really want to stop.
As for what to do about it, to be honest, exports, new markets, and teaching people to save are pretty much it. The last one is the biggy since deflation means saving and keeping your money relatively liquid becomes much more important now and that you don't need to take on as much risk to gain the same reward.
Governmentwise, the best option will be a bit from the left and a bit from the right: Leftist welfare systems to handle the inevitable job losses and income swipes the lower income brakets will take (not enough employment to "make them take jobs" and little worry about inflation anyway) and Rightist cost cutting and low taxes.
Note that welfare programs don't cost much as far as the government is concerned (Millions to the government = pennies to Joe Average) and there's not much point to trying to "push the economy" when taxes end up stifiling it. Poor end up protected, Rich finds it easier to earn and hold money since they don't have to dump the money somewhere just to fight inflation, Middle class learns to live with less (the "wait till later for cheaper prices" issue, which is something we've been trying to teach them for decades!).
I guess it also does mean that having more republicans in congress isn't a Bad Thing now so long as they aren't hard right enough to try neutering the entire fed and dumping everything to the states. Wonder where all those 'flat tax' people went off to?
"He (Bosworth) says they're still spending where they can -- just not where they can't."
Isn't that a good thing. Wasn't it the overinflated lifestyles we were living that helped fuel this recession? So now it's a problem when we are fiscally responsible?
Also I would not call decreasing prices, deflation to a point. During the early 2000's prices were higher but I believe it was not only the housing market that was overinflated. Our economy was INflated. Prices need to come down to there true value. Only then will people start investing again.
As was expressed in the earlier comment "some of the fundamental ideas of our culture are flat out mistaken." We often make reference to "The Big Picture" It seems reasonable to introduce it at this point only to bring to the forefront the perception referred to in that comment. It seems as though the big picture is so big that it's hard to get a good look at it. With our former Fed chairman an idea that he regarded as fundamental was that markets correct themselves. If you've seen or get to see the PBS Frontline episode "The Warning" in it you see the same former chairman make a retraction to admit that it's possible that economic beliefs that he had for so many years were flawed. While the full logic was: markets correct themselves they dont need regulation, it could be that in the big picture the mistake on which to apply the correction can be of any magnitude or severity. I can't believe all the crying and anti-correction efforts that ensued with the overall intent of maintaining artificially high prices. The high price of what? The factor that constitutes the criteria determining whether you have a sufficiently sized paycheck: A home. The reason the paycheck needs to be addressed here is because of the forced cut in pay we all must accept in order for the correction to play out in the big picture. Along comes the forclosure, the most effective tool reversing homes from their artificially high prices and along with it all the crying and denial. The diapers wet thru a half an hour ago. The government steps in. Henry Paulson leads that whole Keystone Cops scene where congress follows him down that $700B daisy path and then the Barney Frank cartoon comes on. With that done the government deems itself equipt and dedicated to tampering with the correction in the housing market. It does so all in the name of staving off that forest fire called depression thats always looming. I liken it to a forest fire because it compares to the fire that so badly burned the Sequoia Forest after years of tampering prevented fires which occurring naturally would've eliminated the brush that without the fires grew extensivly endangering the forest even more. Keep on pretending we can keep trusting the bandaids. How could slump, tank and plummet not be in store for this fiction based economy?
Given the track record of Marketplace and its pundits over the past several years, you really would need to grade your perception of what was happening as completely confused.... I'm of the opinion that it's not actually your fault, but that some of the fundamental ideas of our culture are flat out mistaken. They only applied to a world of limitless opportunity like we had for past several hundred years. I think we are in a new kind of world now, and our elemental cultural models of "how to do it" no longer really apply. Look, Keynes and Ken Boulding and I may all qualify as "real nuts" in a variety of ways, but there's nothing the least bit nutty about the details we each independently arrived at describing what happens to the financial system at the physical limits to economic growth. We all agree for our system the economies all run out of money, and that there is a crystal clear choice on what to do about it. You'll have better luck talking to me than to John or Ken, because they're both gone. What they'd also tell you is that the procedurally simple solution is conceptually very difficulty to understand, because it requires you to suspend your belief in the trusted habits that got us to this present global economic impasse. Why the economies run out of money at the physical limits of multiplying material wealth is that savings keeps growing and absorbing it all. The producing economy then finds it impossible to finance the ever growing savings of mostly institutions that expect to passively make ever more money that way. I can lead you through it. The problem is NOT with the economy or the earth , really. phil www.synapse9.com/blog for other fragments... fyi
"People had come to expect in Japan that prices would continue to fall, and so it becomes very self-fulfilling. If you think prices are going to continue to fall, then you'll put off purchases."
This meme about consumers holding off with purchases when prices are falling is repeated in each and every story about deflation. If this were true, the consumer electronics business have frozen over twenty years ago.
How about running a story testing this "fact"?
Personally I buy things when I need/want them. Also I save more today because I expect that some of my wealth will be inflated away in the future.
