- Thanks to Greg Mankiw for linking to me.
- Against my better aesthetic judgment, I have bowed to presbyopic pressure and inverted the text and background colors from white-on-black to black-on-(almost)-white. As a note of protest, I am retaining an ever-so-slight bluish tint in the background color and changing the navigation bar from blue to black. Personally, despite having outlived the days when I could read a menu in a dimly lit restaurant while wearing unifocal contact lenses, I don’t find black-on-white or black-on-almost-white-with-a-very-slight-bluish-tint any easier to read than white-on-black, but OK: as the new kid on the block, I’m not in a position to resist the prevailing social ethos.
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Modeling problems in credit markets
48 minutes ago
2 comments:
hello
I am a student pursuing graduation in Economics. I have subscribed to your blog. Looking forward to some interesting discussions (given my limited knowledge).
Akshay
Enjoyed reading this post - much obliged. A few points I'd like to offer into the discussion:
"Stopping deflation should not be very hard at all, if you’re willing to accept the side effects of your deflation cure."
True, but a focus on aggregates obscures the situation, and the 30's is an unfortunate example of this. Deflation is more undesirable for those laboring under debt, and clearly less so for net savers. Where inflation is most needed - or rather, most desired - is in the sphere of asset values that have been borrowed against. That the government can force general inflation, no one should doubt. But can it convince consumers, once bitten, to reinvest in gangrenous markets such as (in our case) housing, debt offerings, etc., where reinvestment is most needed?
To put this another way, general inflation is no cure for localized deflation - if we can even call this deflation, since it is less a monetary issue than one a demand. It does no good to raise prices when costs also are raised. The only effective way to improve the situation is to reduce supply to match demand.
As you say:
"The easy way to stop deflation – the drug to try once hair loss and vomiting become less of an issue than the disease itself – is to reduce supply rather than increase demand."
Since you cannot selectively increase demand in one area with monetary policy, this is really the only way to effect a lasting change. But this is precisely what deflation accomplishes; bankruptcy, default and forced liquidation, and a reduction in supply.
What government prefers to do - and what Hoover in particular attempted - is to reduce supply without reducing capacity (thereby avoiding wage and/or job cuts). Rather than letting farmers go out of business, you can buy their supply and hold it, or burn it, or some other contingency (which will in all likelihood backfire, as it did under Hoover). Or you can invoke cartels (like Roosevelt) and use bureaucratic inefficiency and non-competition to raise prices.
But this is wasteful and self-perpetuating, addresses effects rather than causes, and it is the diminishing returns involved with such solutions rather than deflation itself which leads to a "spiral of death."
So when you say that
"Naturally, reducing aggregate supply – trying to make the economy produce less at any given price – is not going to be directly conducive to economic recovery."
I disagree strongly. This is the only meaningful step towards economic recovery; it is wasting increasingly large sums in an attempt to preserve excess capacity that delays, and in some cases prevents, economic recovery.
It's for this reason that I think the calls of inflation versus deflation in the current environment are misleading. Many assets are falling against the dollar because they are cancerous; but the increasing weight of liabilities on the U.S. gov and the dollar itself mean that, in a broad context, the dollar cannot be called "strong". It is entirely possible that some assets will increase in value against an increasingly risky currency, even if in the aggregate we see PPI go lower.
Perhaps we're finally beginning to see - and be cognizant of - the inadequacy of terms like deflation and inflation in describing economic reality with any accuracy.
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