We are not in a recession - we are in deflation

[Thickasabrick]

I don't think many people are that familiar with deflation so I'm posting a portion of the Wikipedia definition. This isn't to be confused with falling prices - although that does happen eventually, it's the really bad kind where the money supply dries up. Our economy is based on credit and people buying stuff. Providers of all that credit don't want to grant it anymore without huge collateral. I think we are in for a couple of really painful years. For interesting reading, read about Japan's 10 year run with deflation. The highlight and emphasis is mine.

As with inflation, there are economists who regard deflation as a purely monetary effect, when the monetary authority and the banks constrict the money supply, and there are those who believe that price deflation follows dramatic falls in business confidence, which may reduce economic output, and result in contraction wherein the quantity and velocity of money, i.e. the speed with which money is circulating. In recent years, economists have also started to use the term inflation and deflation in relation to assets (i.e. as a short-hand for price inflation or price deflation), such as stocks and housing (production goods).

During deflation, while consumers can buy more with the same amount of money, they also have less access to money (e.g., as wages, debt, or the return realized on sales of their products). Consumers and producers who are in debt, such as mortgagors, suffer because as their (money) income drops, their (money) payments remain constant. Central bankers worry about deflation, because many of the tools of monetary policy become ineffective as inflation drops below zero (deflation). Deflation may set off a deflationary spiral, where businesses slow or stop investing, because the investment risk is perceived as higher than just letting the money appreciate due to deflation. (The deflationary spiral is the opposite of the hyper-inflationary spiral.) Similarly, in deflation consumers have an incentive to delay consumption, which may contribute to the deflationary spiral.

Deflation is generally regarded as a negative in modern currency environments, because a deflationary spiral may cause large falls in GDP and take a very long time to correct.

Deflation should not be confused with disinflation which is a slowing in the rate of inflation, that is, where the general level of prices are increasing, but slower than before.

In monetary theory, deflation is defined in terms of a rise in the demand for money, based on the quantity of money available. The Quantity Theory of Money is founded on the Fisher equation (also called the equation of exchange)

[Usrename]

1. I think we have stagflation.

And devaluation.

[Thickasabrick]

7. Interest rates typically do not fall during stagflation. Japanese

situation where the interest rate was like 0% for years is a great model to look it.

[Selatius]

21. Stagflation, at least in the US, was brought about by energy price shocks.

Whenever energy price shocks hit the markets, producers find the cost of production spirals upward due to the fact that any large venture requires fuel to operate. If that fuel becomes more expensive, either the producer eats the cost or pass it on to consumers. If producers pass on the price increases to consumers, consumers cut back as their money does not go as far as before. It's an environment where prices rise yet economic output slows or even contracts. The term "stagflation" was coined in the 1970s as a result of the Arab Oil Embargo and later the 1979 Iranian Revolution that toppled the pro-US dictator there. With Iran now hostile, it's oil was essentially cut off from US markets.

[Usrename]

26. Money supply.

What would people think if we were allowed to have the M3 statistics from 2006 to the present?

[Selatius]

28. One site I follow has a sobering graphic up:

Found at this page:

http://www.shadowstats.com/alternate_data

The guy who runs the site says he goes through the government's numbers and checks the footnotes. He says the footnotes tells him how they arrived at their numbers. Then, using them, he removes the junk from the numbers to get at something he believes is more relevant to reality.

Inflation according to Shadow Government Statistics:



"The CPI on the Alternate Data Series tab here, reflects the CPI as if it were calculated using the methodologies in place in 1980."

[Usrename]

29. It's about what I would expect. Thanks for the interesting post.

It seems to be all smoke and mirrors now.

We are a banana republic, both in our penchant for fascism, and in our economic policy.

[rpannier]

2. I watched an economist on ABC (Asia-Pacific) News today talk about the issue being solvency

not liquidity.

He said there is money out there, but that many of these brokerage houses, banks, etc have bundled their 'investments' in such a 'shaky-fashion' that it leaves them with very little room to maneuver because they have little to use to get loans.

In the past, they've been able to get loans on their name alone. Because there was confidence in the banking and lending community that these places would make smart and careful business decisions.

Now there isn't that confidence.
And they've pretty much used up all their assets that would normally be used as collateral.

[Greyhound]

9. It's called "good will" and they've pumped that well dry.

These "pillars of the financial industry" have shown themselves, time and again, to be nothing more that thieves. They always got a pass in the past because they generally stole from "little people", grand mothers and the like, but this time they stole from "people that matter" and there will be a heavy price. Unfortunately, our "leaders" have decided that we will be the ones to pay that price.

[rpannier]

11. Funny...

When you or I make a bad business decision it's our own damn fault and we need to accept the consequences for our actions.

When the rich and powerful make bad business decisions, it's up to us (the middle and lower classes) to bail them (the rich) out because bad things could happen if we don't.

[Thickasabrick]

12. I'm glad you brought that up. Bear Stearns refused to help out

during a past melt-down when they were very much in a position to do so. I do not see why we are helping them out - they have always been hard nosed jerks.

[rpannier]

15. My friend that's called...

sound business management... When they're screwing someone else.

When they're in trouble the definition of sound business management is...giving them billions to bail them out (Kind of like United Airlines)

[Selatius]

22. Sound business mgmt indeed. Rule 1: Enrich shareholder value. Corporations aren't charities.

The infamous case of Dodge v. Ford saw the Michigan Supreme Court deciding that shareholders decide first what happens to net profits at the end of the year. Dodge wanted the profits declared as dividends, while Ford thought it should be reinvested in the form of higher wages and bonuses for workers.

Since that case, it has been considered standard operating procedure to defer to shareholders demands first, especially those who sit on the Board, and usually that means cutting costs elsewhere, especially with the truly unimaginative and conservative shareholders on the Board, and if money is given over to philanthropic ventures, it's usually done so only to get a tax write-off. Failure to live up to it can result in a lawsuit on your head like Henry Ford discovered the hard way.

[Greyhound]

23. "We" are helping them out, read giving them billions, because "our leaders"

are them. I think it is past time that we realize, just as Warren Buffet pointed out almost a decade ago (and really long before that), that we are in a class war and only their side is waging it!

If we are to survive as a nation, we have to just acknowledge that the ruling class is the problem and the enemy. It is us against them and it is a fight to the death.

[Taverner]

3. No it is called Stagflation

Stagnant economy

Inflation

Sucks to be us right about now

[nashville_brook]

25. what i see on Zillow doesn't look like stagflation

[debbierlus]

4. What we have is repukethieflation pillaging syndrome

[Greyhound]

14. Appreciate the sentiment, but we must disabuse ourselves from the notion

that the Democrats are different from the Republiks in this regard. It is us and them, rich and poor, that is all that matters.

[FogerRox]

16. .... under the mantle of regressive taxes, among others.

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x3024820

[bicentennial_baby]

5. Deflation of the currency, stagflation in the economy, and we won't know

if it's a true recession until the 2nd Quarter numbers are in, unless they restate the Q4 numbers for 07, in which case we could know once the Q1 numbers are in. Only time will tell.

[BeatleBoot]

6. Stagflation more than deflation - for now...

Not being at all critical - you make a great case for deflation

But the one sentence that really jumped out at me as something that I do not see happening is:

During deflation, while consumers can buy more with the same amount of money , they also have less access to money (e.g., as wages, debt, or the return realized on sales of their products).


I see this a repeat of President Ford's "Whip Inflation Now" (WIN buttons). Since our government no longer "fixes prices" like back in the Nixon days, we rely now on the legacy of Paul Voelker (and subsequently Greenspan)at the Fed.

Gasoline is the biggest draw on discretionary spending and its getting worse. Food prices are rising. But wages are falling.

We have less money to buy the things that are rising in price. Stagflation.

Not to say deflation may follow, but for the time being I'd side with the Stagflation argument.

And we all know what follows sustained deflation....and that's the big "D".

Depression.

[Thickasabrick]

10. Good points...I think when we see the interest rate at 0% for a

couple of months and the economy still sucking - we will know. I think a key takeaway for whatever we are in is to start saving like there is no tomorrow and start living frugally - like your parents...or grandparents had to when times were tough.

[BeatleBoot]

18. Thank you and you have even better points

noting your post above about Japan.

You are spot on about saving and being frugal.

My Dad grew up during the Depression (WWII Vet) and he taught me to live frugally for sure.

Can I give you a real live specific example without laughing?

You know when a bar of soap widdles its way down to a little piece of soap? Start mashing those little guys together until you have a Soap Ball.

I grew up with one the size of a softball (it was Lifebuoy back then) and I have a live one in my bathroom right now (Irish Spring and Ivory mix).

Waste not want not.

Many more stories, but I will spare you !

[Thickasabrick]

19. LOL...that was great. I just threw away piled up soap slivers yesterday

I'm feeling so guilty. I learned something today - thanks! No more throwing out soap....but my slivers are extremely hard - that is going to take some doing pressing them into a ball - but I'll give it a try.

Please feel free to share more "frugal living" stories - or even start a new thread!!

[Viva_La_Revolution]

20. I mash the little sliver onto the new bar...

but I remember Gram making the soapball back in the 70's when things got tight... :)

I'm actually making a list of things like this, more stories would be great. :D

[angstlessk]

8. well, if we MUST go with a one word simplification of what is happening

I think DEPRESSION fits the model much better!

beyond the psychological reference see the economical definition:

Other
Depression (geology), a sunken landform
The Great Depression, a severe economic recession in the 1930s
In meteorology, a depression is an area of low atmospheric pressure
In economics, a depression is an economic downturn more severe than a recession

http://en.wikipedia.org/wiki/Depression

[techtrainer]

17. The Great Depression was a deflation

They are the same thing. Once you are in a deflationary spiral, it is very hard to get out.

[JackRiddler]

13. The operative terms are bankruptcy and economic disaster.

That's what it used to be called, back before euphemisms were devised. Disaster, generated inexorably by the inherent workings of the real-capitalist order, plays out differently each time. This time the assets will deflate, or rather go poof. The currency will dive, causing consumer price inflation, followed by a depression in production globally, with unpredictable prognosis given the instability of the empire and the planet facing an even more dire ecological disaster. This one will be the Big One. All the bullshit that will be swept away may not be much of a consolation. We'll decide we should have had the revolution in the 1960s instead.

[girl gone mad]

24. My vote is in the stagflation column, for right now.

We have some asset deflation, most prominently housing. We also have stagnant wages. At the same time, energy and commodities prices are climbing. Our deflating dollar has kept the prices of certain assets high, as foreigners continue purchasing our goods at a discount.

We could see further asset deflation. Then again, some assets might outperform the dollar over the long term.

[roamer65]

27. So far it is like the 1974-75 stagflationary recession.

The 1974-75 recession was preceeded by a comparable spike in the M3 money supply. Bernanke is just about as incompetent as former Fed chief Arthur Burns (a Nixon lackey).