Monday, February 22, 2010

The Deflationary Blues

So Krugman has been moaning and groaning recently that we might be going into deflation. At which point, "Yippee", sez Joe the Plumber. "Deflation! Prices go down!" Uhm, really? Actually no. In real terms, prices don't do shit during deflation. Deflation is only nominal where prices are concerned.

For example, let's talk about a sandwich shop. You're trying to sell sandwiches. Your sandwiches were selling for $8 last month. Now they're selling for $4 because of deflation. You had to sell 100 sandwiches to buy groceries and clothes for your family when they were at $200 last month. Now you can buy those same groceries for $100. Question: How many sandwiches do you have to sell this month in order afford groceries for your family?

Yep, 100 sandwiches. STILL. So yes, prices went down. But your WAGES went down too, because you can't sell the stuff you make for as much money, for no gain -- or loss -- at all.

So who benefits during deflation? Well, let's look at your mortgage. You bought your house last month for $200,000. That would have required selling 100,000 sandwiches last month to pay off your mortgage. But now you can only sell your sandwiches for $4 because of inflation, and would have to sell 200,000 sandwiches to pay off your mortgage! So your mortgage debt inflated! As did your rent payments on your store. If you had to sell 1000 sandwiches to pay the rent on your store last month, now you have to sell 2000 sandwiches -- your rents inflated too! (At least until the end of the lease period).

So let's recap:

  1. Real prices -- the number of units of labor it takes to buy the groceries, clothes, etc. it takes to live -- stay constant during deflation. If it took 20 hours of work per week to put food on the table and gas in the car before deflation, it still takes that much after deflation, because lower PRICES means lower WAGES too (by definition, since money you're paying for goods and services is someone ELSE'S wages, and money *they* are paying for goods and services are YOUR wages!).
  2. Debts inflate during deflation, because you took out the debt in cheaper inflated dollars, but now are paying them back in more expensive (harder to come by) deflated dollars. So if prices and wages deflate by 50%, your debts *DOUBLE*. If it took 20 hours a week of work to pay your house note and car note before deflation, now it'll take FORTY hours a week of work to pay them.
  3. Lease payments inflate during deflation, because they are essentially a debt obligation -- you have an obligation to pay that amount of money to the landlord for the duration of the lease, regardless of what happens as far as inflation and deflation goes.
Given all that, who would want deflation? I mean, who amongst us here has no debt, other than that old crank who is sure to spout out now that he bought his land free and clear fifty jillion years ago back when you could buy land for cheap and now he's on Social Security so he doesn't care? If you can afford to buy a car and a house outright, cash upfront, then you don't need to be reading this blog because the only way you can make that kind of dough in our feudal economy is to be a leech (otherwise known as "the executive class" or "the owner class") who leeches off of the workers who actually create the goods and services that you "own". People who make their living by honest work don't get that sort of money in our modern-day economy. Once upon a time they did, but those days are decades in the past now. So if you're an ordinary person with a mortgage and a car note, deflation ought to be scaring the shit out of you.

So who would want deflation? Well, there's one group of people that loves deflation: That above-mentioned investor class. They don't owe money, they own money. So now you know the plan, the end game, why our oligarchs are trying to force the economy into deflation: Their plan is the same as their plan has always been. Since they were the ones with money to begin with, they simply bankrupt everybody in the country, then buy up the actual physical assets -- the land and buildings and machines and so forth -- for pennies on the dollar. Deflation is a way to transfer real wealth (actual *stuff*) from the debtor class -- who are no longer able to repay their debts in deflated dollars -- to the creditor class -- i.e., our Republican overlords.

For example, see 1930's Sheriff's sales of foreclosed farms. Often a 1,000 acre farm would be sold for $20 to the only person who showed up with cash folding money -- generally one of the state's high and mighty, aiming to add more to his empire. In some places the people had enough and gathered at these auctions to make sure that anybody who dared make an insulting bid of that sort would be beat up and terrorized rather than allowed to buy properties for pennies on the dollar, but this was not common, because usually the Sheriff worked for the oligarchs, and protected the oligarchs.

So now you know what happens if our economy goes into a severe deflationary spiral: the oligarchs own everything and the rest of us... serfs. Slaves. Living only where our oligarchs allow us to live, doing whatever job our oligarchs tell us to do, for whatever pay (or not) that our oligarchs feel like offering. We've been moving that way for a long time, but our 1930's experience temporarily moved us away from the brink. But the 1930's experience has been forgotten by today's Americans, who seem all too keen to go sell themselves into serfdom if falsely promised "lower prices!"...

-- Badtux the Economics Penguin


  1. This comment has been removed by a blog administrator.

  2. Fuck you, spammer, and fuck your mother, and your father, and every motherfucking bastard relative offspring of yours. You are scum, a ratbastard stealing *MY* blog for your commercial advertising, trespassing on MY property. You are a criminal, a thief, and should be ashamed of yourself, but I doubt that you are because that would, like, require that you have an actual conscience. SO it goes.

    - Badtux the Pissed Penguin

  3. So (spammers notwithstanding):

    It seems like you're saying that (to coin a phrase) the Means of Production must Belong to the Worker. Otherwise we're just de facto using Our Blood to grease the Wheels of Capitalism.

    Sing it, 'Tux.

  4. Yes indeed, sing it!

    Lower prices are not at all low when all of the things which make them possible (for a time; this cannot be indefinite) are taken into account. But Joe the Plumber doesn't have the attention span to read further than see the word 'deflation' and think his prayers are being answered. I guess because he's sold (no pun intended) on consumerism being the solution to a shit economy.

    For starters.

  5. Sator, that commie Thomas Jefferson envisioned a nation of small yeoman farmers and self-employed tradesmen. Unfortunately that vision proved incompatible with the scale needed to do things like a railroad network or a $5 billion semiconductor foundary, so we developed an "owner class" like Paris Hilton that does no work, but sits at the top of the heap accepting welfare payments from those of us who *do* work (but they call those welfare payments "profits" so that makes it okay, alrighty then). And we developed an executive class that is little different from the owner class in its sense of entitlement, which produces no real wealth (all it does is move around wealth created by the worker class -- you and me) but which somehow feels entitled to use its power at the top of the hierarchy to enrich itself far beyond its contribution to the success of the company. Indeed, the bankers whose failed speculative policies almost destroyed the world economy? Bonuses. Duuuuuude!

    Unfortunately my conclusion is that the majority of the hairless monkeys who infest this planet actually feel this is a *desirable* situation, because it gives them an alpha male to look up to and adore, just as if they were a troop of hairy monkeys out in the wild. Thus why every attempt at a distribution of wealth that gave wealth predominantly to those who create it, rather than to those who manage or "own" it, has eventually failed. Stupid-ass monkeys. Grrr! But WTF, 2 million years of evolution can't get wiped out by 40,000 years of language and civilization, I suppose...

    Sara, it is clear to people like you and me that if prices are lower, someone, somewhere, is getting paid less money than they were being paid when prices were higher. But we understand that goods don't just come out of the ether. Somebody, somewhere, makes them. Yet somehow the Joe the Plumber dumbasses of the world can't figure out that *they* are going to be one of the people being paid less if prices go down. What a bunch of morons... they make Sarah's Trig look like a genius by comparison, at least *he* has an excuse for not thinking too clearly, but Joe and his ilk have a perfectly good bunch of grey stuff up between their ears -- that, apparently, they have no desire to ever use.

    - Badtux the Grumpy Penguin

  6. Thomas Jefferson had the right idea of curse. But bring up our founding fathers emphasizing the freedom of being self-sufficient, and there's a crowd of people who flunked history who think the problem is the founding fathers were commies, divorced the country from religion, whathaveyou.

    I am actually of the mind that the small yeoman farmers and tradespeople are what will save us ultimately, but that would probably take a revolution. Until then, I'll be an urban farmer in eastern Contra Costa County.

  7. And they inflated the prices to begin with.

  8. From Thomas Jefferson -

    "The rich alone use imported
    articles, and on these alone the whole taxes of the General Government are levied.
    The poor man, who uses nothing but what is made in his own farm or family, or within his own country, pays not a farthing of tax
    to the General Government,.... Our revenues liberated by the discharge of the public debt, and its surplus applied to canals,
    roads, schools, &c., the farmer will see his government supported, his children educated, and the face of his country made a paradise
    by the contributions of the rich alone, without his being called on to spend a cent from his
    earnings." * —
    To General Kosciusko. Washington ed. v, 586.
    (M. 1811)

    Now depending on your bias, you can construe that TJ would be on this side or that in the economic system we live in - so different from anything he could have imagined. But from the quote above, there's little doubt where he would lay the yoke of taxation.

  9. Well, in those days, there was no income tax, only tariffs.

    The other bad thing about deflation is high real interest rates, so the wheels of the economy don't (can't) get greased.

    I'm delighted you brought up Paris Hilton, but vaguely disappointed at then lack of a Lada Gaga Reference.

    JzB the high real interest trombonist

  10. capitalism is neither a system of morality nor a system of governance. it is a system of production and distribution. capitalism has no conscience.

    capitalism is actuated by profit and greed.

    capitalism can be grafted onto any form of government; democratic or totalitarian.

    China is the most recent example of capitalist endeavor grafted onto a Communist totalitarian government.

    capitalism, of course has been nurtured by the U.S. for a long time in nations where governance has been right wing totalitarian, i.e. fascist.... and certainly was no stranger to the monarchist imperial colonialism which existed as late as the early 20th Century.

    being a Liberal, i believe capitalism is a good thing. however there can be too much of a good thing.

    capitalism, as an economic engine, has tragic flaws when allowed to operate laissez faire, it operates as you might imagine a gasoline engine possessing an ineffective regulator.... that is, it operates, but somewhat erratically, revving wildly, sputtering, choking and sometimes stopping all together.... simply consuming fuel.


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