Forget Inflation, Deflation Is a Bigger Danger

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We used the stimulus unwisely and we have not cut spending. We owe more and more and have less and less. When we are afraid to spend our money, the business firms stop producing and continue to lay off employees. Even if the government gave us another stimulus ( a very large one), it would not help. We would save it. When there is nothing left to buy and a few people still have money, they will start to spend and slowly over a long period of time things will straighten out. The only thing that could prevent this unhappy eventuality is if our government would drastically cut spending and give us a stimulus that had good targets. Targets to employ people not to put money in the pockets of congressional friends.

nana of TX 5:57PM August 24, 2011

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Hotel Muenster of 10:25PM April 01, 2010

In the long run (when many of us will be dead), there inevitably will be a period of roaring inflation--the result of all the paper money we are (and continue to be) printing. But that will be in the long run...
In the short run, as Mr. Zuckerman warns, we probably will have deflation. And it probably will be similar to what happened in Japan (i.e. mild deflation during a prolonged period of economic stagnation).
PREDICTED SCENARIO
The currently increasing high unemployment will trigger a call for the Fed to further lower interest rates--but it will be obvious that the FED really can't, since nominal interest rates already are near zero. This will trigger a cascading/self re-inforcing downward contracting spiral in the economy.
But what will prevent another Great Depression will be a stepped program of massive government stimulus spending. But at each step, because of cries from the ignorant opposition of wasteful government spending, the stimulus spending will be only enough to bring the economy back from the brink of another Great Depression, but not enough to jump start the economy. So at each step, the government stimulus will be too little, and too late.
Before it is all over, I predict we will slowly have built a plethora of bridges to nowhere to prop up the sagging economy. And our debt will balloon.
The only way out of the resulting burgeoning mountain of debt will be a period of painful inflation--that de facto takes the wealth from the owners of wealth to pay for the country's debt. But during this time, unemployment will fall dramatically--since it will be cheap to hire labor. People will be working for peanuts since the value of their labor will constantly be depreciated by the inflation.
Only those who own real estate will economically be kept whole (that's why, I think, they call it REAL estate).
The only way to prevent this is for the government to now undertake a massive program of stimulus spending to jump start the economy. Now before the pernicious spiral sets in.

Steve Wang of PA 4:06PM November 10, 2009

So..." the Fed has been pumping money through the banks" at no cost to the banks meanwhile the Fed is now paying interest to the banks for their reserves at the Fed. So it who is surprised that that they have not loaned that money to businesses or consumers, but rather just increased their reserves at the Fed?
Until that cycle gets broken, there will not be inflation. When the Fed stops paying interest on reserves... look out inflation will come like a freight train.

Brian of NE 1:09PM November 03, 2009

"Keynesian", obviously not "Keynesion".
Greets.

Sebastião Xavier Esteves 11:56AM November 03, 2009

Clearly investment seems to be the path to follow, yes most small business owners are still paying debt and right now it is easier to maintain profit margins through lower prices and cost cuts. However, this will not last forever and Gvt will certainly push for incentives on investment (tax breaks,subsidies...) which in turn will enable these small businesses to hire more (work market demand increases), naturally wages will grow and therefore consumption should follow.
Moreover, current interest rates do not put an incentive on savings, so clearly once debt is paid off and if interest rates do not increases (a decision which seems to have been wisely put off until mid 2010), invesment will foster.
The only thing that can contradict this course of events is the power of expectations, as we have all learned from this Great Recession, these play a far greater role than any Keynesion or Neoclassical model (for more on this I recommend the following article: http://www.ft.com/cms/s/0/f71cfc6a-c7e6-11de-8ba8-00144feab49a.html)

Sebastião Xavier Esteves 11:53AM November 03, 2009

Continued from part I
Finally, it is no easier to stop inflation once it starts than deflation. Once it becomes clear that the government has engineered a destruction of dollar value, all economic actors take note. That is the exact process that is currently driving stock and commodity values higher. TO reverse the liquidity flood that has been unleahed, the government will have to apply extreme pressure. The economic shock will reignite those fears of deflation, default, depression, poverty. And now, thrown into the mix will be a greater risk of government default. Consider what our national debt service will be when interest rates hit 10%, 15%. We won't even be able to pay interest, much less principal. The political will to end the stimulus will be very weak. Our federal reserve has lost its independence from the political process. There is serious doubt they can end the stimulus even if they so desire.
There is no free lunch. We will experience inflation or deflation, because the debt load is too great to service in current value dollars. Both paths will lead to hard times. What we must decide, and soon, is which set of economic incentives we want to loose upon the post-crisis world, those favoring resopnsible behavior or those punishing it.

fred of MI 9:49AM November 03, 2009

You have made the case that deflation is more likely than inflation, not that deflation is a bigger danger. There's nothing here about the dangers of either, so I'll explain this to you.
Inflation destroys the accumulated wealth of savers. Good citizens who have played by the rules, kept a job, lived within their means, planned for their own retirment instead of depending on government to provide...these folks will be crushed by inflation. They will come to understand that acting responsibly was a huge mistake, and they will pass those lessons on to future generations. Meanwhile, those who accumulated too much debt, took unwise risks, played the grand lottery, lived for the moment...they will be rewarded and prosper. They will get the same treatment as major financial institutions over the past two years, gains privatized, losses socialized via inflation. So, what is the danger of inflation? Very simple. It creates a set of incentives that are inconsistent with a stable economic system and a stable society.
What about the dangers of deflation? I suppose that the depression is the best model, and it's those black and white images of poverty that stoke our fears of deflation and our determination to avoid deflation at all cost. Unfortunately, deflation due to too much debt can result in deflation, and the only other alternative is to decrease the value of that debt via inflation. Once their is too much debt to repay there are only two options, inflate or default. Deflation also causes consumers to save their money, repair their balance sheets. It causes frugal behavior. It rewards those who have been prudent, who have planned for the future. It punishes those who have taken on too much risk and it stops the cycle of ever increasing debt loads because lenders once again treat their capital as a precious asset. In short, deflation is very painful due to severe economic slowdown, but it is a natural response to periods of excess. We have had the excess, now we want to mitigate the pain.

fred of MI 9:46AM November 03, 2009

Yeah, because bankrupt, out of work with no credit citizens will spend so much money...
Deflation is here and will get worse. Levered at even a conservative 10:1, 313 billion less credit shrinks broad money supply by +3T.
They can't stop the deflation train.

C of PA 9:20AM November 03, 2009

If, as Zuckerman says, both consumers and businesses are reining in their borrowing, then at some point consumers will have the wherewithal to start spending again, and businesses will not have the productive capacity to keep up. Therefore, inflation.

Martin of FL 6:31AM November 03, 2009