Tuesday, July 8, 2014
How the Government Can Deal with Deflation Without Over Reacting and Tilting the Economy into a Hyper Inflation Spiral
How the Government Can Deal with Deflation Without Over Reacting and Tilting the Economy into a Hyper Inflation Spiral Deflation is Real. It Happens. it Can Cause Massive Economic Dislocation and Foul the Banking System with Bad Loans Made Unpayable. There is Cause to Fear Deflation but Not If it is Temporary Lex Loeb Contributor Network . The fear economic fear mongers are at it again selling fear in the hopes of profiting from yet another unnecessary panic. The horses feel safe in the barn and might not leave even if the barn goes up in flames. The sophisticated sophists of wall street and main street are doing the one two dance telling people to buy gold as to prepare for deflation which they say naturally will lead to pre world war two German style hyper inflation. People are getting junk mail that tells them to buy promising gold mines to prepare for the coming total apocalyptic collapse of the economy and the Obama administration is taking about making the best out of every crisis to turn the country upside down stealing Chrysler bond holder's net worth and taking away General motors dealerships to give to their friends. Everyone can see that the Obama administration would make the best of a new great market collapse and subsequent great great depression to consolidate power for generations with more just pretend socialism where the party big wigs get rich the way the insiders in the Castro administration does in Cuba. All of that is cause for some fear but that still does not mean it is going to happen , should happen or has any reasonable probability of happening. Sure the economy could be in better hands with a more liaise faire government but The Obama administration is beginning to realize that creating artificial crisis and taking unfair advantage is not going to win them votes in coming elections. The public is on to the fact that Bush or Bushes can't be blamed for everything as it turns out that the last phony crisis ended with banks mostly not ever needing the TARP money distributed. The public clearly sees the Goldman Saks People with as much influence in the Whitehouse after Bush as before if not even more and chief fear monger George Soros has a hotline directly into the obama whitehouse. Back to the subject of deflation. The previous statement is important because deflation is about expectations and government has everything to do with expectations businesses have on how they invest, hire and spend. Deflation happens when people put off purchases till later instead of spending immediately and inventory piles up in the mean time. It has recently occurred mostly because of the devaluation of the Euro against the US dollar. That helped secure greater purchasing power for US consumers which is not a bad thing. It also made US companies more able to invest funds in European business which is also not a bad thing. A little price competition benefits consumers and gives them greater purchasing powers for the dollars they earn on an hourly basis as workers or from investments. Not a bad thing. Not everything is showing signs of deflation. One item that seems to be up a bit more than expected is gasoline. Gasoline is pretty basic to a lot of economic activity as a basic cost. It could be subject to deflation and would be if deflation was systemic enough or if the economy just freezes up in a worse leg down in a recession. Fears of worse recession get laid directly at the feet of the Obama administration that has systematically raised every tax and cut services just as the states including California have done. Government's mantra of Less is More is pure BS and everyone knows it . There is no worse cartel than government running public transportation or a water bureau and forcing people to use less services at higher prices. That is the Obama/ democrats solution to all the world's problems. complain about big business and then nationalize it to try to profit from it and to add to their power by eliminating competition because the government can have a cartel and is not subject to anti trust laws. That is the real fear in the economy from the smallest business to the largest and worst of all for foreign investors who think twice about putting dollars in an economy that the obama administration wants to turn into a banana republic economy like Argentina or Venezuela. It is bad news even for silicon valley. Why invest your money in the next Intel start up when you can take your money to Israel and it might even be safer there even under threat of missile attack and Iranian nuclear war. There are two kinds of deflation to worry about. The first is industrial deflation. It is maybe the more dangerous kind because it causes wholesale prices to fall such that many businesses that hire huge numbers of people will have to lay off huge numbers until inventories are used up. Some problem with this has occurred with outsourcing industry overseas to places like China, eastern Europe, Vietnam etc. There you get duplication of production in competition and commodities fall in price according to how much supply there is available for consumption before it can be consumed. This could even be happening to the petro industry because higher prices per barrel have inspired more production to go on line or for more future oriented exploration. Major industrial corporations cannot meet their obligations to pay back loans or to pay pension benefits if their business freezes up due to an deflationary spiral. In commodities it would happen world wide and not just in the USA. The only evidence of this happening at the moment is duplication of production in China as the outsourcing industrial capital of the world. The Chinese under central authority have overly stocked commodities in a similar way that they among others have hoarded gold while the price was rising should that ever all come on the market at once deflationary forces would be felt--at least temporarily. Commodity prices are global. Eventually the oversupply would be sold off and mills shut temporarily or for good would eventually reopen. Bargains would be available in not just commodities but in companies with industrial facilities. The second kind of deflation is consumer level retail deflation. It would result from an industrial deflationary spiral. It would actually be beneficial to consumers and to the Government as well. Because a dollar buys more and not less. Government can print extra dollars to "stimulate" the economy and they will be absorbed not producing any detectable inflation. The cost of the debt the government racks up does go up in a deflationary period but the interest rates tend to be low if not negligent. Government money printing is just a temporary fix. If government tries to take control of the entire economy because of a lingering recession , the recession will just go lingering on for decades or half a century the way it did in communist countries. The cheap money trick only works for a while. Is the solution for consumers gold? Not in deflation. Gold is a whipsaw commodity that will only prove itself as the ultimate capital investment if hyper inflation begins but that would be about the time the government would start trying to confiscated it. Then where could you sell it? To Whom? Gold is an unfair market currency for most investors to be in. It is easy to buy at a high price but hard to sell at a higher price since dealers tend to have a wholesale supply to continue to sell. The gap between dealer buy and sell prices can be double digit. One would think that there would be a market to sell 10 k gold near the price of the actual gold in grams but there the dealers discount the value to buy it to a level below the intrinsic value of the gold in some cases as if as currency a known amount of impurities subtracts value as a medium of exchange. Praying for gold to save your finances with Glen Beck is absurd. One would think the big gold dealers would get to gather and create a market to buy everything by weight at a commodity quote system for all listed purity levels of gold but they don't. Part of it is it is illegal to be a cartel as per anti trust laws and the other part is the government does not want competition for dollars with a real monetized gold market. Government does damn well with treasury bonds in a deflationary fear cycle and won't want any competition. There are a few dealers who actually do pay interest on gold they hold but it is very risky business. As for solutions for deflation that is one of them. Government can monetize gold by offering to let the treasury buy gold at monetized prices and then pay interest on that gold with the gold as principal that is returned. Other solutions for deflationary fears and banking crisis problems due to loans that become unpayable is for government to write a simple new banking law that lets borrowers take more time to pay back their loans in a grace period such that they only pay interest and not principle until the strength of the economy resumes. Yes it slows the economy down but that is what the green earthers want to do anyway. If the economy crawls it is not frozen up and in crisis. in return for giving borrowers more time to pay back loans or to skip payments or just principal, lenders get tax free status or tax credits for future earnings. Government tends to push the economy right over the edge by panicking along with businesses and consumers instead of realizing that in slow times a lot of people just need temporarily reduced payments and more time to make them. Giving borrowers three months to pay what is owed in a month can help them get back on a good footing for when it goes back to monthly at the original rates. Banks should have the benefit of the government allowing them to report they are still solvent then for a reasonable period of time. The time delay effect will work wonders for keeping the banking system alive when deflation would ordinarily sack it. Investors in banks can expect for dividends not to be paid in challenging times and they should know this is because they own businesses not abstract stocks for the sake of being stocks. Government should also help the public to realize that deflation is a great bargain time to buy and invest to get someone spending and not waiting to spend later on. Banks having the extra time to give their lenders to pay takes the heat off of them to need to foreclose sending gobs of properties back on the markets that already have too much supply in the deflationary spiral. Some might argue that this is the system that created the zombie banks in japan in their last great deflation. It is and it is not the same thing because bad loans are only being delayed not by an FDR banking holiday but with terms borrowers and lenders can rework their relationships. Inflation is inevitable with the central banks printing money and this will undermine the deflationary spiral if not too heavy handed or hyper inflationary. Deflation can be more benign and lead to lead to many positive things happening in the economy. It could result in lower cost health care services that people can more readily afford and lower health care premiums for a change. It can result in lower home prices so younger people can actually buy homes without going into debt for the rest of their lives or maybe several lifetimes. The temptations of government intervention has a poor track record in history. Markets themselves are better at undoing deflation. What government can do is spend money on lasting public works that really has always been their basic responsibility instead of trying to go create new cartels like their failed public transit programs. The temptation of Government is to get congress to give it a few trillion dollars out of thin air and then waste the money on digging holes and then filling them in or on Cuba style arts programs which are basically the same thing except with creating high priced entertainment the public is less interested in than Hollywood films. Making the most of deflation is what businessmen should do and government should not get in their way if they have the funds to play the game of going out to buy deflationary bargains. Once government puts itself into a position to own everything everything belongs to everyone and no one and no one gives a damn. The values will stay on the deflationary cycle and the products will appeal to no one even if the public is forced to buy them like the cartel heath care system the obama administration is fond of where they force people to buy health insurance at what ever rates they arbitrarily set. The best economy runs on expectations that of profits that can be made not on big government caring for everyone's needs based on whom ever they tend to favor more than everyone else. The motivation to get in line at a government office to take what ever they will give you is not as great as the motivation to get what you can by any legal means you can in a market economy. So all those people trying to sell you stuff you don't need and don't want bother you? It might bother you more to have thousands of bureaucrats telling you what you can have and what you can't have based on junk they put in your files. Deflation is not as bad as being something to fear for the sake of fear but it is when government goes to take advantage of it to inflate their political power in society. Deflation can be good for the economy if government helps give businesses a break when it occurs as they should because the government claims that having central banks and the federal reserve is insurance against it when it does not always seem to be the case. The idea that borrowers should be taken advantage of because of systemic deflation or that the banks should be taken advantage of is absurd when there is a solution of expanding the time to pay back existing contracts before the laws related to default take effect. State governments and the federal government know they get to print tons of money in deflationary periods so why not offset that with lower taxes to get the economy moving? Did you see one single state in the union allow people more time before they foreclose on properties for property taxes dues? No . Not one single state did that in the last housing crisis! Not even the most socialistic one. They do nothing but want their money even if the cost is a total economic meltdown. It tells you very clearly that reliance on big government or even state or local government for a break in a recessionary period is when the states will do the most to take advantage of the citizens who do the most to keep the taxes coming in there in the best of times. If systematic deflation does arrive it would be a nice for legislative bodies across the country to consider these proposals and to put themselves on a tax diet to help the economy out. That ultimately tells you how good the government is. If government takes a major recession or deflation as an excuse to expand and not to contract along with the rest of the economy in order to get it going again it is a sure sign of very bad government that needs to be replaced. Deflation is usually worldwide but if it is like the Japanese experience, there the solution would have been to allow a lot more foreign investment to come into the country and buy up assets. The Japanese government resisted the idea for protectionist reasons and paid a horrible decades long price of deflation as a result. Our government talks of repeating that same mistakek and raises taxes instead of lowering them also killing foreign and local business incentives when most needed. .