I’ve been scratching my head for weeks now every time I read that deflation is bad. It’s like every business writer at every paper got a memo or something. Are they under the impression that inflation is inevitable or that each year products should go up in value? It’s absurd. The only relevant distinction I see is that U.S. debts are denominated in U.S. dollars, so that it really sucks when people can’t pay you back because the salaries they earn the goods they sell are priced lower, rather than higher, than in the past. It means that the debts effectively increase in value if value is measured as the amount of work (economic output) necessary to discharge the debt. So, deflation would lead to many more loan defaults, one would think, or (more likely) to the renegotiation downward of existing loans, so that a rough equality would be achieved in terms of the amount of work relative to the size of a loan. It makes you wish there were some more objective measure of value (like, I dunno, gold) to which we could benchmark debts.
In some sense, deflation would appear to help the little guy and hurt the big guy. The big guy owns stocks and has lent a lot of money at current prices and wants a certain number of dollars back at a certain value. But if prices of goods and services decline, doesn’t the big guy when he gets fewer dollars back (due to defaults and renegotiated levels of debt) have roughly the same amount of value to spend? So, what’s the difference? Can someone explain this to me in English?
My fellow Americans, we can’t continue in this mode of “Dumb as we wanna be.” We’ve indulged ourselves for too long with tax cuts that we can’t afford, bailouts of auto companies that have become giant wealth-destruction machines, energy prices that do not encourage investment in 21st-century renewable power systems or efficient cars, public schools with no national standards to prevent illiterates from graduating and immigration policies that have our colleges educating the world’s best scientists and engineers and then, when these foreigners graduate, instead of stapling green cards to their diplomas, we order them to go home and start companies to compete against ours.
One of my degrees is a specialization in the political, social and economic history of the 1930s. Prof. Krugman has nailed the central question about the current collapse. The 2008 economic crash is mimicking the 129-32 collapse. The remedies on the table - the best we have at hand - are the same as deployed by the New Deal. The circumstances as to the underlying capacity to generate jobs is far different - and that realization is like peering into an apparently bottomless black hole since there is no previous situation that is similar.
In 1933, the manufacturing plants existed - they were merely closed and shuttered for a lack of buyers for their goods. If a large enough portion of the populace regained income, they would be able to purchase the washing machines and cars made in US factories which would put the shopkeepers and manufacturing employees back to work and in turn those workers would have money to spend and generate more demand.
The problem is different this time. The US has stopped making things of value - real wealth that one can touch and use like steel, rubber, washing machines and other durable goods (which are different from a whole lot of cheaply made t-shirts and electronic toys.)
