Deflation should be embraced, inflation should be rejected

The Angry Economist sums up much of the misguided fear that our economic and political "experts" have towards deflation.

Deflation is defined a decrease in the supply of money and results in falling prices. Each dollar has a stronger purchasing power. And just who wouldn't want this outcome ?

Well, our poorly schooled Keynesian economists warn that falling prices cause some kind of never ending deflationary spiral and a deficit in aggregate demand. Keynes asserted that people just won't spend anything under a scenario where all/most prices fell, and there would be pressure to cut wages as the outputs of industry fell in price. The so called spiral was as follows: Start->Inventories would grow, output would contract, employment would contract, incomes would fall -> Return to Start.

Keynes actually thought the laws of supply and demand didn't apply to labour like all it did with all other goods, and that wages could never adjust downwards to clear. So he blindly assumed unemployment would result and an economy would contract. When he suggested that this was the underlying cause of the business cycle and the great depression, the politicians swallowed every word of his.

This theory should have been flushed down the toilet in the face of reality. People always need to eat, they need clothing, work tools, housing, schooling and education. Not all purchases are speculative decisions. Sure, you'd think people might postpone many investment purchases if shares or property kept falling, but deflation isn't some never ending process. And real economic activity will continue despite the fall in speculative activity.

The kind of speculative activity that thrives under inflation - like the huge credit bubble that fueled the US property market till 2006, or the share market, or other asset bubbles across the world that occurred under inflation.

But returning to the fearmongering about deflation, The Angry Economist gives a great example of how misguided the arguments are:

The common wisdom is that deflation of the currency is bad. When money deflates, it becomes more valuable, even when you do nothing. So the theory is that people won't spend their money, because it will become ever-more valuable.

That theory cannot be true.

Look at the PC market over the last 30 years. In each one of those years, the PC became more reliable, faster, came with more memory and storage. The original MDA display was one color and text only. The CGA had 16 colors and 640x200 bits. The price -- of the computer you really want to have -- has stayed constant, at about $5000.

If the story told about deflation was true, then you would always be better off delaying your purchase of a PC by 6 months. You could be confident that the PC you would buy would be a more valuable PC.

Except ... that people did that very rarely, if ever. The standard advice was always "don't wait to buy a computer, because there will always be a better computer on the horizon."

So, in a situation where people can predict a constant stream of increase in value, people STILL made the trade. Thus, I think it's safe to predict that in a similar situation, where people could predict a constant increase in the value of their money, they would spend their money as needed.

The taxman strikes

I'm in a particularly foul mood, that has heightened my animosity towards government.

The Australian Tax Office has ever so kindly sent me a letter about my 2007-08 tax assessment, and my failure to disclose an interest amount I received from an Australian financial institution.

Their database matching system shows that I had only disclosed 2 out of the 3 sources that generated interest in that financial year.

Of course, it was a genuine mistake, and the letter says that no penalty will be applied but that in 28 days, I will be assessed for taxation on that income.

You know, being an enemy of socialism and having half a clue about all the theft and coercion it relies on, I see straight through their doublespeak and I simply interpret their message as follows:

" You trying to hold out on us slave ? Hand over the cash or go to jail !"

The Fed as Counterfeiter

The Mises blog has a great article that explains the complicated workings behind central banking, and how despite the complex mechanisms and multiple actions/strategies, they all combine to create a scenario where the government really can just print new dollars to finance its spending.

No wonder all the governments of the world are such big fans of central banking ... it gives them the 'flexibility' to just issue more debt, which gets exchanged for newly minted dollars, whenever it needs to spend on warfare, welfare, bailouts and special interests.

The mother of all Ponzi schemes

Is the modern Western welfare system.

The Mises Institute have a tragic/comic article about how today's welfare systems, social security, government backed pensions, medicare etc are completely out of hand and about as financially sound as Bernie Madoff's investments.

The money collected in taxes will simply never come close to covering the future liabilities in the form of pensions, medical coverage and government services.

And the article makes a very good point. That like all Ponzi schemes, the winners are the people who get in early. It presents this lucky lady, the first recipient of a social security cheque, as the prime example:

Social Security was a sure thing in its infancy. Just think of Ida May Fuller (1874–1975), a nonexempt legal secretary from Ludlow, Vermont. Ms. Fuller exemplifies the advantages of getting in early and getting out early. She paid a whopping $24.75 to participate in Social Security. Her first monthly Social Security check was issued January 31, 1940, for $22.54. Within three months, Ms. Fuller's investment was in the black. Over the ensuing 35 years, she would collect $22,888.92 in Social Security payments.

Andrew Sullivan - Democrat spokesperson

Nothing but praise for Obama's failures.. this shows just how unprincipled Andrew Sullivan has become in the past couple of years.

My own take on this potential disaster for the Democrats is best represented by my response to an Obama supporter who is intending to vote for Brown. Vote for him in 2012. Hold your nose and vote for Coakley on Tuesday. The message is already clear to Obama about the need to pivot quickly to debt and spending (something his record already proves he can do). But losing health insurance reform now, and crippling the Obama presidency as the far right wants, would be to throw away the last chance for a decade of any meaningful change.

If you voted for Obama in 2008, don't abandon him now.

Where do I begin ? Andrew Sullivan, the so called 'conservative', supports socialised health care, and a Democratic president. He openly opposes a sound Republican candidate without offering a shred of criticism, and suggests voters "hold their nose" and vote for the disgraced Democrat candidate... the states don't matter any more, what matters for him is power and Washington.

Some conservative !

Look out America, this is what socialised medicine is all about.

Socialism places equality above all else. Before prosperity. Before freedom. Before choice. Before people's preferences.

Socialised medicine isn't about helping the poor, but rather about tying the hands of the rest of society.

In Britain, the National Health Service reveals its nasty stripes in this telling encounter:

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That principle was illustrated by the case of Debbie Hirst, a British woman with metastasized breast cancer who in 2007 was denied access to a commonly used drug on the grounds that it was too expensive.

When Hirst decided to raise money to pay for the drug on her own, she was told that doing so would make her ineligible for further treatment by the National Health Service. According to The New York Times, “Officials said that allowing Mrs. Hirst and others like her to pay for extra drugs to supplement government care would violate the philosophy of the health service by giving richer patients an unfair advantage over poorer ones.” The right to health care is so important, it seems, that it can nullify itself.

Here's the elephant in the room

The Global Financial Crisis has not yet begun.

The US dollar, the world's reserve currency and supposedly every central bankers favorite store of wealth, is backed by enormouse debt, and a house of cards waiting to collapse.

It won't be long till the slow Japanese style deflationary slump kicks in as the debt burden continues to grow.

Nothing can go up forever, and eventually something's gotta give. Either the people cut their spending and repay their debts, or the government prints money like Zimbabwe and destroys the currency to keep them spending.

Mike Shedlock has the following post about an interesting Forbes article on the issue nobody in Washington wants to talk about:

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Not too long ago, a billion dollars in a governmental budget was a lot of money. Then we got into hundreds of billions. People understood that this was a lot, just because of all the zeros. Now, unfortunately, the number has become small: the world "trillion," as in $1.2 trillion for health care reform, seems so tiny. But it has 12 zeroes behind it, which is so easy to forget.

The total public debt is now at 141% of GDP. That puts the United States in some elite company--only Japan, Lebanon and Zimbabwe are higher. That's only the start. Add household debt (highest in the world at 99% of GDP) and corporate debt (highest in the world at 317% of GDP, not even counting off-balance-sheet swaps and derivatives) and our total debt is 557% of GDP. Less than three years ago our total indebtedness crossed 500% of GDP for the first time."

Add the unfunded portion of entitlement programs and we're at 840% of GDP.

The world has not seen such debt levels in modern history. This debt is not serviceable. Imagine that total debt is 557% of GDP, without considering entitlements. The interest on the debt will consume all the tax revenues of the country in the not-too-distant future. Then there will be no way out but to create more debt in order to finance the old debt.

An essay worth reading

The House that Uncle Sam Built is surely going to be an enthralling and worthwhile 20-page essay for me and my followers, with the following sharp and insightful opening paragraph:

The theme of “The House that Uncle Sam Built: The Untold Story of the Great Recession of 2008” is that government policy, not a failure of free markets, caused the economic trauma we have been experiencing. We do not live in a free market. We live in a mixed economy. The mixture
varies by industry. Technology is primarily free. Financial Services is primarily government. It is not surprising that the most government regulated and controlled segment of the economy, financial services, experienced the biggest problems. These problems were created by actions
by the Federal Reserve combined with government housing policy (especially the government- sponsored enterprises - Freddie Mac and Fannie Mae). Misguided government interference in the market is the real culprit in laying the foundation for the Great Recession.

Click here to download the entire essay.

Little Green Fanatics

Heh..

Charles Johnson has finally confessed and written a post titled "Why I parted ways with The Right"

After 2 years of leftist hysteria, and alienating all his collegeagues on the Right, he finally acknowledges his changing philosophy.

And what better way to prove his stripes with a post that actually attacks the ClimateGate scandal as a criminal conspiracy ... by the hackers and climate skeptics !

Well at least he's half right there.. better than his average batting record.

For a closer look at his political wingnuttery and environmental fanatacism:

... the CRU theft was a criminal attempt to sabotage the Copenhagen climate summit, and the entire right wing blogosphere is complicit in the crime.

Gee was Charles Johnson this angry about the hacked emails of Sarah Palin ?

All thats left is for me to ask - Whats next ? Will LGF be cheering Castro and Chavez, Keynesian economics, the UN and other idols of the left ?