Talking heads on CNN are solemnly discussing the possibility of deflation. This remains, however, just a possibility. The fall in the CPI was driven almost entirely by energy prices, without which the price index was flat.
This is still good news for households that will be paying less for their energy, at least until OPEC gets its act together. But it does not necessarily herald a general fall in the price level, which is what creates the deflationary traps economists worry about.
Copyright © 2009 by The Atlantic Monthly Group. All rights reserved.
So... this is pretty much good news all around?
That seems like a peculiar reading of the data. It's like saying 'If you excluded the parts of the CPI that are falling, the CPI would not be falling.' Megan McArdle's argument borders on tautology.
But the thing is that there is deflation, as reflected both in commodity prices and asset prices. The credit contraction is also a monetary contraction. This means that the appropriate response is for the Federal Reserve to try to offset that contraction with a rapid increase in M1.
There are two serious problems at the moment. One is a "real business cycle" brought on by excesses in the housing market and poor risk management at financial institutions. The other is the monetary contraction and deflation caused by the contraction of credit. The latter, at least, the government can address easily by printing money and tossing it from helicopters. The former problem is not so easy to fix.
I curious to see how this works out. In trying to raise prices by reducing output, OPEC is acting like the near monopoly it used to be.
It's a big risk--do they see defections that erode their influence further? Or do they bring other oil exporters (Russia being the most obvious candidate) into the fold and make themselves stronger?
This may be do or die time for OPEC.
I seem to remember reading reports about how a lot of the recent price increases in commodities and goods was due to the increase in the cost of energy. So wouldn't a decrease in the cost of energy also result in a decrease in the cost of commodities and goods? If so, I'd expect there to be some delay as the new prices work through the pipeline. Perhaps that's why we're not seeing those effects just yet.
Social security and lots of other government programs promise COLA (cost of living adjustments).
Let's see if, in a deflationary environment, negative COLAs are applied, or if there's a ratchet in the welfare state - benefits can go up, but they can't go down.
Amusing NPR reporting, though. When CPI is going up, they ALWAYS follow the initial number with "but excluding the volatile food and energy sectors it was ..."
Nary a word this time. I'm puzzled.
I don't get it.
Supposedly, our recession has been triggered by the credit drying up. The banks won't lend because they think it's too risky.
Normally, risky loans incur a higher interest rate. Our central bank (and the others) are deliberately holding down interest rates.
How is this supposed to induce the banks to lend?
BobW - that's because of the tyranny of Greenspan and his "low interest rate" religion. There is no rational basis for a central bank dictating what the interest rates should be. It's just more central planning. I can't believe that Greenspan once subscribed to Ayn Rand's Objectivism.
Banks don't care about the total interest rate, they just care about the spread between what they're borrowing at to what they're lending at. If the Fed reduces the bank borrowing rate, it allows banks to get their risk premium while having borrowers pay a lower overall interest rate.
I have been advised that the current applicable Federal laws regarding social security do not authorize negative COLAs. I am not an SS recipient.