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Home Publications Blogs Beat the Press Deflation Phobia on the NYT Editorial Page

Deflation Phobia on the NYT Editorial Page

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Tuesday, 18 February 2014 08:12

It's baaaaaaaaaaaaack! Those silly warnings about the menace of deflation, this time in a NYT editorial. Come on folks, this one is really simple; the problem of deflation is an inflation rate that it is too low. Even an economist can figure this one out.

When you have near zero inflation many prices are already falling. What's the difference if the price of 55 percent of goods and services are declining instead of 45 percent? Besides these are all quality adjusted prices, so in many cases the actual purchase price of most items might be rising even in a period of deflation.

This matters because it leads people to believe that keeping the inflation rate above zero is somehow an accomplishment, with things getting bad only if the aggregate figure goes negative. This is not true, there is no magic to zero. The problem in the euro zone and in the United States is that inflation is too low. If it goes negative then it will be an even bigger problem, but that is only because it will be a lower inflation rate, crossing zero means nothing.

Comments (10)Add Comment
Bumping Up Against Zero Lower Bound Is the Real Problem
written by Robert Salzberg, February 18, 2014 7:59
The FED is de-fanged if they cannot stimulate the economy by lowering interest rates. As long as we're near the zero lower bound the FED's power is greatly diminished.
Misguided Interest Rate Target?
written by jonny bakho, February 18, 2014 8:22
Do you think that an interest rate target of 2% is too low.

One problem with too low inflation is it hinders relative prices and wages from easily resetting. After decades of wage stagnation and deflation a more rapid inflation of wages, especially at the low end, at more than 2% would not be a bad thing. Recent calls for hikes in MinWage propose greater than 2% wage increases.

Is the Fed 2% target too low? Would a 4% target work better? Many people associate a higher inflation target with increasing risk of runaway inflation. IMHO, this view is seriously flawed but seems to have become conventional wisdom.
...
written by skeptonomist, February 18, 2014 8:31
How do the NYT editors - or anyone else - think interest rates could be lower in Europe? The European overnight interbank rate Eonia, which is the equivalent of federal funds in the US, is currently 0.15%. It has been near zero for a long time. Long-term rates have been very low in the sound countries like Germany, although the ECB has not been doing quantitative easing in their bonds.

The main interest rates in Europe have nowhere to go, although the ECB probably needs to stay ready to buy bonds of the weaker countries if necessary.
Avoid fiscal policy, aggregate demand, economic stimulus, tax reform, etc.
written by jaaaaayceeeee, February 18, 2014 9:18

We must avoid an ever growing list of reporting no-no's, so long as we can lead, " ...people to believe that keeping the inflation rate above zero is somehow an accomplishment, with things getting bad only if the aggregate figure goes negative".

Otherwise, we could risk changing the purchased status-quo, with reforms like even openly debated legislation!
Could someone tell the NYT that our real problem...
written by ifthethunderdontgetya™³²®©, February 18, 2014 9:45
.
is people don't have enough jobs and money?

P.S. And they can blame their good fiends on Wall Street for both.

to Prosecute Big Bank Executives
By Editor Filed in News October 7th, 2013 @ 6:28 am

Andrew Ross Sorkin, a financial columnist for the New York Times recently said this:

“If there’s one question that I get just about more than any other, ‘So why didn’t anybody go to jail, and did nobody try?’ And there’s an answer to that too. A lot of people had an incentive to try to find a way to bring not justice, but to put people away. Prosecutors, law enforcement, journalists — it would have been a better story. But for the last five years we’ve tried, all of us have tried, to find that criminal element.”

To Sorkin, William Black says — found it.

Black is a former litigation director of the Federal Home Loan Bank Board — and was a central figure in bringing hundreds of savings and loans crooks to justice.

Black knows how to prosecute corporate crime.

He’s author of The Best Way to Rob a Bank is to Own One — which will be released in an updated form in January 2014.

Black is currently an associate professor of Economics and Law at the University of Missouri Kansas City.

“Sorkin is wrong about incentives and quite wonderfully wrong,” Black told Corporate Crime Reporter in an interview last week. “The Financial Crisis Inquiry Commission emphasizes that the belief in self correcting markets was prevalent throughout the regulatory agencies. They believe that fraud was impossible, because markets were self correcting. Fraud might exist for a short period of time, but it couldn’t be serious because markets were so incredibly effective in eliminating fraud. If it was here today, it would be gone tomorrow.”

But prosecutors don’t think in economic terms. If you ask SEC enforcement officials or federal prosecutors about what you just said, that would be totally foreign to them. They think in terms of the facts and the law, don’t they?

“It’s important to understand that what you have just said is not accurate. I can tell you that at a deep level, this is absolutely critical to how they think. And this is throughout the regulatory agencies and it is handed down through their economists.”

“For example, it was long the dominant view at the SEC. And there is stuff throughout the Financial Crisis Inquiry Commission report about how it was dominant throughout the Federal Reserve Board and how it crushed efforts to supervise. It’s not just some kind of academic curiosity that doesn’t exist at the pointy end of the spear. It makes sure that the pointy end of the spear ain’t there.”

“Let’s look at reporters like Sorkin. His incentive structure is actually opposite of what he said. His incentive structure is to have access, to be able to eat lunch with Jamie Dimon. And if Sorkin were the kind of reporter who asked questions, he would not have that access.”

http://www.corporatecrimereporter.com/news/200/billblacksorkin10072013/
~
Sorry...
written by ifthethunderdontgetya™³²®©, February 18, 2014 9:52
..
I only meant to cut and paste a bit of that link. But there's even more there, check it out!
~
Author
written by Jerry Wyant, February 18, 2014 10:40
Some background that might be helpful for people to understand the concept of this post: Inflation itself, as it is defined, creates no problems in the economy other than those associated with price change, and those associated with abnormal (expected) inflation. Otherwise, inflation is just a sustained change in the average level of prices. The real problems come into play because inflation is not simply everything being "average"; different prices change at different rates and sometimes in different directions. It is this variation from average, this redistribution, that causes the real problems in terms of inflation. Once this information is understood, then the point of this post should be very clear.
...
written by urban legend, February 18, 2014 2:43
But if deflation infects housing, the impact can be severe. For someone with 20% equity, a 2% decline in house prices, since the loan balance doesn't decline, would mean a 10% decline in the value of that equity. How can we say that's not worth any concern when that's most of the wealth of most homeowners?
?
written by Squeezed Turnip, February 18, 2014 8:26
...
written by urban legend, February 18, 2014 3:43
But if deflation infects housing, the impact can be severe. For someone with 20% equity, a 2% decline in house prices, since the loan balance doesn't decline, would mean a 10% decline in the value of that equity. How can we say that's not worth any concern when that's most of the wealth of most homeowners?


That 10% decline isn't realized by most homeowners, though, only by sellers. What would actually hurt would be wage deflation.
Deflation?
written by Thomas Bub, February 19, 2014 2:01
Apparently those writers at the Times have not been grocery shopping lately.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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