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Thoughts from the Frontline

The Last Argument of Central Banks

November 10, 2014

For a central banker, deflation is one of the Four Horsemen of the Apocalypse: Death, Famine, Disease, and Deflation. (We will address later in this letter why War, in the form of a currency war, is not in a central banker’s Apocalypse mix.) It is helpful to understand that, before a person is allowed to join the staff or board of a central bank, he or she is taken into a back room and given DNA replacement therapy, inserting a gene that is viscerally opposed to deflation. Of course, in fairness, it must be noted that central bankers don’t like high inflation, either (although, looking around the world, we see that the definition of high inflation can vary). In the developed world, 2% inflation seems to be the common goal. You wouldn’t think that 2% a year is a significant change in the overall price structure, but the panic among economists that would ensue with a 2% price deflation would border on hysteria.

Inflation and deflation are often topics of discussions as I travel, but I find that there is general confusion about what inflation and deflation actually are. This is understandable, since many economists don’t agree on the definitions, so they are often talking about totally different phenomena. In this week’s letter I have for you a brief essay on the topic of deflation. Depending on your view, you might find some of my thoughts controversial,…

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Ricjhard Brown

Nov. 15, 3:37 a.m.

John, what is the thyroid that was given to Melissa. My wife was taking Armour Thyroid which her neuroligst will not prescribe. He gives her the synthesized which leave her tired and weak. Armour Thyroid was also made from pigs.

Frances Shepperdson 77737213

Nov. 13, 4:08 a.m.

  I just calculated the average yearly wage 2009 as $51252 and 2013 as $50544, but when you consider that many jobs are now under 30 hours per week due to Obamacare, that yearly income becomes$36644. That’s deflated earnings and deflation of product cost, much less spending power.
  Every store I deal with has the new hours in place and heaven help you if you want to extend those hours to consult on a purchase with one of those timed employees.

Giovanni Isaksen

Nov. 12, 6:18 a.m.

Great article. A question or two though-

In the section under ‘So Who’s Afraid of Deflation?’ Should the second sentence read ‘One major cause of [bad] deflation is decreased….’ And should the third sentence to deflation instead of inflation as in ‘This bad type of [deflation] is typically associated with…’?

Thanks in advance for clearing that up.

Robert Watkins

Nov. 11, 7:36 a.m.

Some might scoff at allowing fuel, food and housing within the CPI formula,  but wouldn’t it have given us a heads up as to how over heated the housing market was before things went so badly wrong??

I guess most would have us ignore important things that have a direct correlation to bubbles!

James Fordwood

Nov. 11, 4:27 a.m.

Absolutely loved the article!!  Basic Economics made readable and, with current illustration, totally understandable!  Now I have to remember!!  Thank you.

s.england@comcast.net

Nov. 11, 4:16 a.m.

If you think inflation is now showing up in financial assets rather than the CPI you should also agree that there was no inflation in the 1970s when a rising CPI was offset by falling financial asset prices.

Right?

Fred Pollack

Nov. 10, 11:18 p.m.

Saturday’s FT had an interesting editorial (http://www.ft.com/intl/cms/s/0/42ee8892-6671-11e4-8bf6-00144feabdc0.html): “A world still reeling from mistakes on fiscal policy” - the opposite of what you would expect to read in the WSJ (and by Mauldin).  It relates to the importance of getting monetary and fiscal policy being consistent.  It covers various economies.  Here is the key excerpt w.r.t. US:

“Within the rich world, the US recently exited QE3, its third bout of quantitative easing. It might not have had to go so far had fiscal policy, expansionary immediately after the crisis, not encountered severe congressional dysfunction with fights over the debt ceiling and the fiscal cliff. Estimates by the Brookings Institution suggest fiscal policy subtracted nearly a percentage point of US gross domestic product growth a year between 2011 and 2013. Congressmen and senators complaining about the effects of QE3 might reflect on their own part in making it necessary.”

W.r.t. deficit, in the fiscal year, just completed, the Fed budget deficit (as percent of GDP) was lower than 7 of the 8 years that Reagan was President.

Shawn Heneghan

Nov. 10, 10:31 p.m.

Thanks for a wonderful article.

Henry Mortimer

Nov. 10, 1:36 p.m.

Deflation is the ultimate enemy of debt. Deflation never occurs without an excess of debt; but when it does it takes no prisoners - it bankrupts those who cannot pay without mercy. That is why it is so feared - particularly in economies where debt is the only driver.