Deflation - or, why did the price of gas plummet?

[KC]

What's Worse Than Inflation? Deflation.

The New York Times has an interesting article today about the rising specter of deflation — in which a lack of demand causes prices to fall. Falling prices sounds like a good thing for consumers who have been battered with rising costs over the past year — but experts agree — deflation is nothing but bad news. From the NYT:

Deflation accompanied the Depression of the 1930s. Persistently falling prices also were at the heart of Japan’s so-called lost decade after the catastrophic collapse of its real estate bubble at the end of the 1980s — a period in which some experts now find parallels to the American predicament.
“That certainly is the snapshot of the risk I see,” said Robert J. Barbera, chief economist at the research and trading firm ITG. “It is the crisis we face.”
With economies around the globe weakening, demand for oil, copper, grains and other commodities has diminished, bringing down prices of these raw materials. But prices have yet to decline noticeably for most goods and services, with one conspicuous exception — houses. Still, reduced demand is beginning to soften prices for a few products, like furniture and bedding, which are down slightly since the beginning of 2007, according to government data. Prices are also falling for some appliances, tools and hardware.
...
The new worry is that in the worst case, the end of inflation may be the beginning of something malevolent: a long, slow retrenchment in which consumers and businesses worldwide lose the wherewithal to buy, sending prices down for many goods. Though still considered unlikely, that would prompt businesses to slow production and accelerate layoffs, taking more paychecks out of the economy and further weakening demand. Full NYT Article Here (http://www.nytimes.com/2008/11/01/business/economy/01deflation.html?pagewanted=1&_r=1&hp&adxnnlx=1225553905-LoBtQ0O72Mg3vih4xIf2Yw)



Source (http://consumerist.com/5073406/whats-worse-than-inflation-deflation)

[Q]

Deflation is indeed a very bad thing in acapitalist context as it means many attacks on the workers in order to secure profits for the bosses. Deflation in a socialist economy however is a sign of progression, as it means that there is a bigger stock of products available then there is a need for it, thusly having enough for everyone. One more reason we need socialism, now.

[jake williams]

I actually follow the business papers and the last year or so has been really interesting. We went from panic about high oil prices to panic about our destroyed economy - destroyed partly by high oil prices.

[spice756]

The new worry is that in the worst case, the end of inflation may be the beginning of something malevolent: a long, slow retrenchment in which consumers and businesses worldwide lose the wherewithal to buy, sending prices down for many goods. Though still considered unlikely, that would prompt businesses to slow production and accelerate layoffs, taking more paychecks out of the economy and further weakening demand.


Funny just over a houing problem consumers and businesses do not want to buy :laugh:

But really they have money just do not want to buy .



Deflation is indeed a very bad thing in acapitalist context as it means many attacks on the workers in order to secure profits for the bosses.


The price will go down than after some months people will start to buy do to the low price.

And Inflation was a big problem in US do to major debt the US has.

[KC]

Eff double posts!

[KC]

The price will go down than after some months people will start to buy do to the low price.

The point of deflation is that people can't buy because of the fact that they have no money. Especially with regards to housing, where people can't get loans, not only because they might have gotten screwed by a subprime or prime ARM, but also because banks are being incredibly picky about who they hand out loans to nowadays due to the banks themselves almost running out of money.

The "solution" to deflation according to capitalists is to either decrease the supply of the commodity (such as what the oil companies and "cartels" are doing) to increase the prices again and/or getting the consumers to buy again, which in this particular crisis meant a "refund" program that completely failed. Overproduction is a *****.

[fabiansocialist]

The point of deflation is that people can't buy because of the fact that they have no money. Especially with regards to housing, where people can't get loans, not only because they might have gotten screwed by a subprime or prime ARM, but also because banks are being incredibly picky about who they hand out loans to nowadays due to the banks themselves almost running out of money.

The "solution" to deflation according to capitalists is to either decrease the supply of the commodity (such as what the oil companies and "cartels" are doing) to increase the prices again and/or getting the consumers to buy again, which in this particular crisis meant a "refund" program that completely failed. Overproduction is a *****.
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This used to happen in 19th century capitalist crises. Particularly the "Great Deflation" from 1873 to 1896. And of course the same occurred during the Great Depression in the 1930s. For the thirty-year period after WW2, deflation was kept at bay by a combination of Keynesian stimuli and a growing global economy. In the past thirty years -- the neoliberal era -- when Keynesian ideas have been discredited and eschewed, the deflationary wolf has been kept at bay by exploding debt. But this process of financialisation could only go so far, and now there's hell to pay.

As most of us on this forum know, this is a full-fledged crisis of capitalism -- one that may well be at least the equal of the Great Depression.

[spice756]

the thirty-year period after WW2, deflation was kept at bay by a combination of Keynesian stimuli and a growing global economy


What is Keynesian stimuli ?

Alot of people are scared to buy and invest money :crying::crying:and consumption of goods is slowing down to do less people buying.The businesses making less and lowering price to try to stay in business do to less people buying .

This manic mode is leading to a economic problems.

Anyway that is my interpretation.What is yours or the groups interpretation ?

[Die Neue Zeit]

"Keynesian stimuli" refers to deficit spending during slowdowns and recessionary periods, as well as to debt repayments during upswings and "the good times."

[fabiansocialist]

What is Keynesian stimuli ?

Alot of people are scared to buy and invest money and consumption of goods is slowing down to do less people buying.The businesses making less and lowering price to try to stay in business do to less people buying .

This manic mode is leading to a economic problems.

It's not "manic" -- it's rational for the individual investor, consumer, or factory owner. But the actions of millions of rational individuals add up to an irrational system -- a roller-coaster that oscillates between exuberant booms and suicidal busts, like a manic-depressive (and often the roller-coaster looks like it might be derailed altogether). Keynesian stimuli work like lithium for a manic-depressive patient -- they deflate some of the exuberance in the boom and mitigate some of the pain in the bust. In downturns, there is more government spending, to make up for the shortfall by consumers and businesses (not to mention the fillip it provides to that intangible known as "confidence" as it is known that there is always a buyer of last resort). And during booms, the government punctures some of the exuberance by taxing more (the proceeds of which go to pay back some of the debt incurred during the downturn).

This is some of the basic theory of Keynesian economics. But of course the core problem of capitalism -- not enough purchasing power by wage-earners -- cannot be deftly brushed under the rug like this, no matter that the government try to make up the shortfall in spending. In practice such government spending leads to a combination of stagnation (including gradually rising unemployment) and price inflation (just like lithium has its own unwelcome side-effects). This was one key reason why the neoliberal era was ushered in -- the old consensus around Keynesianism simply broke up. I'm oversimplifying, of course, but these are the main contours.

[cyu]

What is Keynesian stimuli ?

It's just the government spending money because everyone else is afraid to. You can spend it on anything you like, whether it's a lot of weapons, new vacation homes for business and political leaders, pundits and columnists who think of new ways to suck up to people richer or more powerful than them, a lot of public works, funding for the arts, digging up holes and filling them up again, scientific research, food distribution, etc etc. The goal is to get money flowing again - the money paid to the people doing these various jobs then is spent by those people to buy groceries, housing, etc etc.



a long, slow retrenchment in which consumers and businesses worldwide lose the wherewithal to buy, sending prices down for many goods. Though still considered unlikely, that would prompt businesses to slow production and accelerate layoffs, taking more paychecks out of the economy and further weakening demand.


There are two different ideas here that need to be separated. One is lower prices. The other is not having the money to buy anything.

The first is good - if everything were free or nearly free, then people can finally take a break and not kill themselves working so hard. Assuming the first is caused by high supply, then everyone can just take a vacation until the supply needs to be increased again.

The second is bad. If a lot of people are out of work and thus can't buy anything, then they need to start taking back the economy. Occupy land, resources, factories, office buildings, etc - put themselves to work and produce stuff. If they don't have cash, then they can either barter the stuff they're now producing or simply use that new stuff to back a new currency to trade with.

[Guerrilla22]

People simply didn't have the money to continue paying 4 to 5 dollars a gallon due to the slow down in the economy and subsequent increase in unemployment. The oil companies basically shot themselves in the foot, not that I care, or that it really hurt them too much.

[spice756]

It's not "manic" -- it's rational for the individual investor, consumer, or factory owner. But the actions of millions of rational individuals add up to an irrational system -- a roller-coaster that oscillates between exuberant booms and suicidal busts, like a manic-depressive (and often the roller-coaster looks like it might be derailed altogether).


What I was saying do to the housing crisis people are scared to buy and this is not good for the economy.It started with the housing the supply higher than the demad.

Than it was bad loans and people could not pay the loans off :scared:The banks almost gone under with out the bailout.The banks give too many loans and ran out of money.This would not have been a problem if people could pay their loans off on time.So people could not pay the loans off and the banks took their house.Many people living on the street or in cars do to the banks taking their home!!

Do to the housing crisis and crisis with the banks almost going under :ohmy:People got so scared they stop buying ,investing money that businesses was slow do to less people buying and investing money .

Now businesses are laying people off and slowing production do to less people buying and investing money.This is also having a effect on the stock market and the stock market is going way down.

Now businesses are buying less and businesses are not investing money like before.

[spice756]

Here is the post on the deflation problem.It should explain what deflation is.



+++++++++++++++++++++++++++++++++++++++

The growing threat of deflation

A widespread drop in prices might seem like a good thing to most consumers, but the Fed and economists see it as another reason to worry.
By Chris Isidore, CNNMoney.com senior writer
Last Updated: December 18, 2008: 10:03 AM ET

NEW YORK (CNNMoney.com) -- Lower prices are probably at the bottom of the list of most Americans' current economic worries. But for a growing number of economists, it's their biggest fear.
A widespread drop in prices is known as deflation. And typically, it's not just the price of consumer goods that fall. Home prices, stock prices and even people's salaries often head lower as well.

The biggest problem with deflation is that when businesses need to continually cut prices to spur sales, they eventually respond by cutting production. That results in growing job losses, and could, in the worst case scenario, even cause a depression.

And several economists say they are far more worried about the threat of deflation now than they have been in the past. The Federal Reserve may also be more concerned about deflation as well.

The central bank cut its key interest rates to near 0% Tuesday. In its statement, the Fed said it expects inflation to "moderate further" but it stopped short of suggesting that inflation would drop "to levels consistent with price stability" as it has in prior statements.

"I think the Fed's statement clearly reflected some alarm that there is a greater risk of not just deflation, but of depression," said Bernard Baumohl, executive director of The Economic Outlook Group, a Princeton, N.J., research firm.

Just a month ago Baumohl put the chance of a deflation at between 10% to 20% sometime in 2009. Now he believes there's a 30% chance of deflation.

Drops in consumer prices
Economists have reason to fear that a deflationary spiral is looming.
On Tuesday, the government reported that its Consumer Price Index -- a key gauge of inflation -- fell a record 1.7% in November. Over the past three months, retail prices have plunged at a 10% annual rate.
While much of that drop was caused by falling gasoline prices, the so-called core CPI, which strips out volatile food and energy prices, declined by 0.1% in November, the first decline in that reading since the severe recession of 1982.

Core consumer prices are now up only 0.4% on an annual basis over the past three months. That is below the 1% to 2% annual range that is generally believed to be the Fed's comfort zone for inflation.
It doesn't take much of a price decline to cause economic pain. During Japan's so-called "lost decade" that started in the 1990s, prices only fell by 1% annually. But those deflationary pressures resulted in a prolonged recession.

So far, few economists believe that a couple of months of price declines is enough evidence to suggest that the U.S. is now going through a period of deflation.

But economists think the Fed should try and nip deflation in the bud and that was probably the reason why the central bank cut interest rates by more than expected.

"They're not dismissing [deflation] the way they did in the past," said David Wyss, chief economist for Standard & Poor's.
Economists debate threat

Wyss said he doesn't believe that deflation is likely to take hold in the next year. But he cautions that if the current recession continues into 2010, "the risk is significant."

Of course, not all economists are voicing increased fears about deflation.
A senior Fed official told reporters on a conference call Tuesday that deflation is not now a major worry, but conceded that the central bank would continue to closely monitor prices to make sure it doesn't become a problem.

Rich Yamarone, director of economic research at Argus Research, said his firm's deflation index is showing less of a deflation threat today than it did in 1998 or 2002-2003, the last time many economists were fearing deflation.

Yamarone said the deflation fears proved overblown in those periods, and he's confident the threat of falling prices won't play out again this time.
"We believe that the market, the Fed and the business press are all going to get it wrong this time around as well," he said. He said the drop in commodity prices, particularly oil, has caused what will prove to be a temporary fall in other prices.

Bernanke's deflation views
Whether or not Yamarone is right may depend on how the Fed continues to respond to this economic crisis.
Fed Chairman Ben Bernanke has spoken frequently in the past about deflation and how he thinks it was a significant factor in the Great Depression, his area of expertise when he was an economics professor at Princeton University.

In November 2002, Bernanke, then a Fed governor, gave a speech about how to combat inflation. That speech may offer some hints as to how the Fed may fight deflation if it becomes more of a threat.
Bernanke became known in some circles as "Helicopter Ben" for his facetious suggestion in that speech that even if the Fed cut interest rates to zero, it could continue to battle deflation by other measures, including dropping large wads of cash from helicopters.

The speech clearly signaled that Bernanke was less scared of cutting rates to zero than he was by the threat of deflation, which he described in terms that appear prescient today.

"Deflation is in almost all cases a side effect of a collapse of aggregate demand -- a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers," he said at that time.

He said deflation would then lead to recession, rising unemployment and financial stress. And he added that while "deflation in the United States is highly unlikely, I would be imprudent to rule out the possibility altogether."
He argued that the Fed and Congress could take steps beyond cutting rates to ward off serious deflation. And he expressed confidence such measures would work, as long as they were taken before deflation took hold.

"Prevention of deflation remains preferable to having to cure it," he said in the speech.

And in his concluding remarks, he added that "the Federal Reserve and other economic policymakers would be far from helpless in the face of deflation, even should the federal funds rate hit...zero."
First Published: December 17, 2008: 2:50 PM ET


http://money.cnn.com/2008/12/17/news/economy/deflation/index.htm

[cyu]

The biggest problem with deflation is that when businesses need to continually cut prices to spur sales, they eventually respond by cutting production. That results in growing job losses, and could, in the worst case scenario, even cause a depression.


Assuming people are unemployed and poor, then there's obviously demand for goods. The real question is why aren't those goods being produced? One of the reasons might be that it's because the unemployed simply don't have the money to pay for the goods - a capitalist economy will only respond to demand that has cold hard cash to pay for the goods being demanded. In other words, demand is not measured in units of people, it is measured in units of money.

Another of the reasons goods for the poor aren't being produced is, of course, that most resources are controlled by the wealthy, and protected by men with guns. If you wanted to restart production of goods for the poor, you'd have to reclaim the resources from the wealthy and possibly capture the leaders who control those men with guns.