1921: The Depression That Cured Itself

[WallStreetVixen]

btw arguing with someone who was reading magazines like Bloomberg Businessweek at the age of 8 for the weekly school journal and is learning from his father who worked on the GE audit staff (and traveled the world making multi-million dollar deals) on economics is like arguing with Shakespeare on what he was writing about in Hamlet.

Um, so?

My granddad is Carl Ichan....

 

[WallStreetVixen]

In the real world, wages tend to rise with inflation, and debt will be paid back with cheaper dollars.

That is not true. Wages rise in spite of inflation, not because of it. In a natural business cycle, companies will have to raise wages as a result of the tight labor market. This in itself creates the inflation. Even in a healthy economic, market forces will require that wages must fall, which is why inflation, even just a little bit, is necessary.

 

[Threegoofs]

That is not true. Wages rise in spite of inflation, not because of it. In a natural business cycle, companies will have to raise wages as a result of the tight labor market. This in itself creates the inflation. Even in a healthy economic, market forces will require that wages must fall, which is why inflation, even just a little bit, is necessary.

Notice I didn't attribute cause. So your strawman isn't true, my statement is.

Wages tend to rise with inflation.

 

[WallStreetVixen]

Notice I didn't attribute cause. So your strawman isn't true, my statement is.

Wages tend to rise with inflation.

No one attribute anything to you.

The facts are wages rise with or without inflation.

 

[Threegoofs]

No one attribute anything to you.

The facts are wages rise with or without inflation.

Wages tend to rise with inflation. Right.

 

[WallStreetVixen]

Wages tend to rise with inflation. Right.

Actually, it's the other way around, which was the point.

 

[JP Hochbaum]

Periods of deflation are relatively rare, so that is a blanket loaded statement.

Historically, there are really 4 examples of economic deflation, both with past and modern economies. Empirical evidence shows that deflation is just as beneficial to economic growth as inflation.

You must have missed the numerous recessions caused by the gold standard in the 19th century? Massive drops in gold prices? Economic history is important.

The gold standard and the Great Depression | Econbrowser

and the periods of deflation are not as rare as you may think. Just look at the list of recessions here, and almost all of them are caused by deflation:

http://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States

 

[Gimmesometruth]

Um, so?

My granddad is Carl Ichan....

Is that how granddad spells his name?

I bet he was a major funder....for 4chan.

 

[Gimmesometruth]

Um, so?

My granddad is Carl Ichan....

What is interesting is that Michelle, 31, his only daughter, and his only son, Brett, who is 34, don't have any children of their own.

 

[Reformedfindlay]

Deflation is just as beneficial to economic growth as inflation.

That is outright wrong.

Nearly every single time there was ever deflation there was a recession.

Inflation is good, so long as it is stable and relatively small. Deflation is NEVER good.

 

[WallStreetVixen]

You must have missed the numerous recessions caused by the gold standard in the 19th century? Massive drops in gold prices? Economic history is important.

The gold standard and the Great Depression | Econbrowser

The Gold Standard wasn't introduced until the late 1800's, so what recession are you referring to? Your source only references the Great Depression, of which the Gold Standard was abolished.

How does that prove your point?

and the periods of deflation are not as rare as you may think. Just look at the list of recessions here, and almost all of them are caused by deflation:

List of recessions in the United States - Wikipedia, the free encyclopedia

You're confused. The reason why deflations are considered rare is because there are rarely any situations where deflation occurs without any drop in aggregate demand.

In your "list of recessions in the united states" wikipedia source, the economy contracted, then prices fell afterwards. Stating, 'almost all of them are caused by the deflation' is more than just inaccurate. It's false.

 

[WallStreetVixen]

Inflation is good, so long as it is stable and relatively small. Deflation is NEVER good.

The problem with absolutely statements is that it only needs to be proven false with just one example.

That is outright wrong.

Nearly every single time there was ever deflation there was a recession.

You're not saying anything of value. All you are really saying is that prices fall when recessions occur, as they always do. That is the natural part of the self correcting business cycle.

It's completely different from suggesting that deflation causes recessions. Empirical evidence shows that is false.

 

[JP Hochbaum]

The Gold Standard wasn't introduced until the late 1800's, so what recession are you referring to? Your source only references the Great Depression, of which the Gold Standard was abolished.

How does that prove your point?

The Gold standard was abolished AFTER the depression bottomed out.

You're confused. The reason why deflations are considered rare is because there are rarely any situations where deflation occurs without any drop in aggregate demand.

In your "list of recessions in the united states" wikipedia source, the economy contracted, then prices fell afterwards. Stating, 'almost all of them are caused by the deflation' is more than just inaccurate. It's false.

"The panic of 1785, which lasted until 1788, ended the business boom that followed the American Revolution. The causes of the crisis lay in the overexpansion and debts incurred after the victory at Yorktown, a postwar deflation,"

"Just as a land speculation bubble was bursting, deflation from the Bank of England"

These are just the first two examples, and they both list the CAUSES being deflation...

 

[JP Hochbaum]

The problem with absolutely statements is that it only needs to be proven false with just one example.

You're not saying anything of value. All you are really saying is that prices fall when recessions occur, as they always do. That is the natural part of the self correcting business cycle.

It's completely different from suggesting that deflation causes recessions. Empirical evidence shows that is false.

Switzerland went into a near recession from that deflaiton, lol.

Switzerland has found itself on the brink of slipping into recession, as the country’s economy saw an unexpected contraction in the second quarter.

The latest statistics released on Tuesday showed Switzerland – which seemed to be the last outpost of stability in Europe -is slowing down together with the rest of its European neighbors.

Compared with a year earlier, the Swiss economy still managed to expand by 0.5%, but it contracted 0.1% from the first quarter.

Crisis contagion: Swiss economy gets closer to recession amid global slowdown ? RT Business

 

[JP Hochbaum]

And we were a metal backed currency for most of the 19th century.

http://fas.org/sgp/crs/misc/R41887.pdf

You keep making bad claims and being proven wrong. You really need just some understanding of economic history before jumping in like this.

 

[WallStreetVixen]

The Gold standard was abolished AFTER the depression bottomed out.

The Great Depression is known as a decade long phenomenon. What does the Gold Standard have to do with the Great Depression, or its causes, at all?

"The panic of 1785, which lasted until 1788, ended the business boom that followed the American Revolution. The causes of the crisis lay in the overexpansion and debts incurred after the victory at Yorktown, a postwar deflation,"

"Just as a land speculation bubble was bursting, deflation from the Bank of England"

These are just the first two examples, and they both list the CAUSES being deflation...

How does that show anything? It just says that there was a post war deflation, not that it was the cause of the crisis. Aside from those being examples from a Wiki article, I fail to see how those are examples I can seriously consider. Very little is actually known about the Panic of 1785, but what is know the panic of 1785 was the result in a period of over expansion and an American Industrial Boom which eventually resulted in a bust. The bust resulted in a short revival of trade and depressed business activity that was considered very serious, it was considered 'The Panic of 1785.'

As far as your second example, all you managed to do was copy and paste "deflation from the Bank of England." What did that have to do with the crisis in the United States, which was essentially caused by land speculation?

I'm not sure if you are trying to find anything genuine, or just doing a search on the word 'deflation' and hoping it gives your point validity.

 

[WallStreetVixen]

Switzerland went into a near recession from that deflaiton, lol.

Switzerland has found itself on the brink of slipping into recession, as the country’s economy saw an unexpected contraction in the second quarter.

The latest statistics released on Tuesday showed Switzerland – which seemed to be the last outpost of stability in Europe -is slowing down together with the rest of its European neighbors.

Compared with a year earlier, the Swiss economy still managed to expand by 0.5%, but it contracted 0.1% from the first quarter.

Crisis contagion: Swiss economy gets closer to recession amid global slowdown ? RT Business

When did that happen? Switzerland effectively had falling prices in Q4 2011. GDP was 0.8% annualised within the same quarter. Before Swizterland experienced deflation, GDP growth was falling from 3.8% in Q4 2010 to 0.8% a year later. As far as I can see from the data, GDP never contracted. If it did, it was most likely revised upwards. Prices fell at an annualised rate of 0.6%, while GDP grew at an annualised rate of 1.6%.

I don't know what your argument is. Switzerland almost had a contracting economy when deflation occurred, but didn't, so that still proves that deflation is bad for economic growth?

Yeah... Very Convincing...

 

[JP Hochbaum]

When did that happen? Switzerland effectively had falling prices in Q4 2011. GDP was 0.8% annualised within the same quarter. Before Swizterland experienced deflation, GDP growth was falling from 3.8% in Q4 2010 to 0.8% a year later. As far as I can see from the data, GDP never contracted. If it did, it was most likely revised upwards. Prices fell at an annualised rate of 0.6%, while GDP grew at an annualised rate of 1.6%.

I don't know what your argument is. Switzerland almost had a contracting economy when deflation occurred, but didn't, so that still proves that deflation is bad for economic growth?

Yeah... Very Convincing...

Holy cow, are you able to read a graph? This shows exactly that deflation caused a slow down in growth! lol. You're flaming and trolling now man.

 

[WallStreetVixen]

Holy cow, are you able to read a graph? This shows exactly that deflation caused a slow down in growth! lol. You're flaming and trolling now man.

Did you read anything I said? Economic growth slowed BEFORE deflation official occurred. I explained this using simple numbers.

GDP growth slowed from Q1 - Q4 2011 from 2.9% to 0.8%. During this period, prices were still rising. Prices fell around the Q4 of 2011. After that, GDP still taped off slightly from 0.8% - 0.5%, then grew rapidly for more than 9 financial quarters.

This information is easy to decipher. All you need to do is pay attention.

 

[JP Hochbaum]

Did you read anything I said? Economic growth slowed BEFORE deflation official occurred. I explained this using simple numbers.

GDP growth slowed from Q1 - Q4 2011 from 2.9% to 0.8%. During this period, prices were still rising. Prices fell around the Q4 of 2011. After that, GDP still taped off slightly from 0.8% - 0.5%, then grew rapidly for more than 9 financial quarters.

This information is easy to decipher. All you need to do is pay attention.

Oh I am reading it, look at Jan 11 thru July 11, inflation at 1% for only a very brief period, that means deflation was already occuring, as the 1% inflation was a minor anomoly.

 

[JP Hochbaum]

You really need to learn the side effects of deflation:

"Problems of Deflation

Discourages consumer spending. When there are falling prices, this often encourages people to delay purchases because they will be cheaper in the future. In particular, it can discourage consumers from buying luxury goods / non-essential items, e.g. flatscreen TV) because you could save money by waiting for it to be cheaper. Therefore, periods of deflation often lead to lower consumer spending and lower economic growth; (this in turn creates more deflationary pressure in the economy. Certainly this fall in consumer spending was a feature of the Japanese experience of deflation (Japanese financial crisis).
Increase real value of debt. Deflation increases the real value of money and the real value of debt. Deflation makes it more difficult for debtors to pay off their debts. Therefore, consumers and firms have to spend a bigger percentage of disposable income on meeting debt repayments. (in a period of deflation, firms will also be getting lower revenue, and consumers will likely to get lower wages). Therefore, this leaves less money for spending and investment. This is particularly a problem in a balance sheet recession where firms and consumers are trying to reduce their exposure to debt. Europe has a big burden of government debt, deflation will make it more difficult to reduce debt to GDP ratios.
Increased real interest rates. Interest rates can’t fall below zero. If there is deflation of 2%, this means we have a real interest rate of + 2%. In other words saving money gives a reasonable return. Therefore, deflation can contribute to an unwanted tightening of monetary policy. This is particularly a problem for Eurozone countries which don’t have recourse to any other monetary policies like quantitative easing. This is another factor that can lead to lower growth and higher unemployment.
Real wage unemployment. Labour markets often exhibit ‘sticky wages’. In particular, workers resist nominal wage cuts (no one likes to see their wages actually cut, especially when you are used to annual pay increases. Therefore, in periods of deflation, real wages rise. This could cause real-wage unemployment. Unemployment in Europe is a major problem – and low inflation is one reasons.
EU unemployment

More difficult for relative prices and wages to adjust. If the average prices or wages are increasing by 3%, it is easier for some goods to rise by 0% and some to rise by 6%. With inflation of 0%, it is harder to get this relative change in prices or wages.
Deflation can become entrenched and difficult to end. The experience of Japan in the late 90s and 00s, was that when deflation became the new norm, it was very hard to change inflation expectations and regain normal growth."

You are making the mistake that deflation = cheaper things, without considering that wages fall and unemployment rise.

There is some good deflation, when economies of scale causes price decreases, or new technology makes things cheaper to produce.

 

[WallStreetVixen]

Oh I am reading it, look at Jan 11 thru July 11, inflation at 1% for only a very brief period, that means deflation was already occuring, as the 1% inflation was a minor anomoly.

How do you figure that it was an anomoly, simply because inflation was lower than 1% during that period? Very slow rising prices doesn't indicate that the economy is experiencing deflation any more than very slow GDP growth indicates that the economy is contracting.

 

[WallStreetVixen]

You really need to learn the side effects of deflation:

"Problems of Deflation
[snip]

Yeah, yeah, yeah, I've read that all before. Unemployment occurs, investments take a beating, consumer spending is discouraged. To which I say:

1) There is very little evidence to support the assertion that personal consumption is discouraged when prices fall. In theory, it makes sense that people will wait if they anticipate that prices will fall further. In the real economy, that isn't want happens. The downward spiral of prices is merely the logical implication of assumptions about expectations within formal economic models. If you assume that the agents operating in an economic model suffer from expectations that are self-reinforcing, then the model will produce a downward spiral. However, economics teaches us that it is very wrong to assume.

2) Unlike personal consumption, investment is actually something that suffers during deflation. People, especially those in debt, will indeed delay purchasing real estate if they expect better prices next year. History also shows people are reluctant to buy stocks and bonds if they fear lower prices. Asset prices, while significant, are not a representation of consumer prices in the CPI.

3) It has already been explained, by me, that market forces require that wages must fall, whether in expanding economies or contracting economies. Aside from the fact that employees are reluctant to take on changes in their wages, wages already have a difficult time adjusting to changes in market forces. Because of this, employees are laid off during recessions. However, it's not the deflation that causes the unemployment, but the economic slack in the economy.

Recession -> Unemployment -> Falling Prices.

 

[WallStreetVixen]

And we were a metal backed currency for most of the 19th century.

Soooo? You started this tirade about the Gold Standard, not me. Now you want to expand your goalpost to other metal backed currencies?

http://fas.org/sgp/crs/misc/R41887.pdf

You keep making bad claims and being proven wrong. You really need just some understanding of economic history before jumping in like this.

Again, you started the quip about the 'Gold Standard.' Your own source just shows that the Gold Standard (The True Gold Standard) began in 1879, which already supported my claim that the US didn't adopt a Gold Standard until the late 1800's. So including this particular point, I've been right on the money.

 

[JP Hochbaum]

Yeah, yeah, yeah, I've read that all before. Unemployment occurs, investments take a beating, consumer spending is discouraged. To which I say:

1) There is very little evidence to support the assertion that personal consumption is discouraged when prices fall. In theory, it makes sense that people will wait if they anticipate that prices will fall further. In the real economy, that isn't want happens. The downward spiral of prices is merely the logical implication of assumptions about expectations within formal economic models. If you assume that the agents operating in an economic model suffer from expectations that are self-reinforcing, then the model will produce a downward spiral. However, economics teaches us that it is very wrong to assume.

2) Unlike personal consumption, investment is actually something that suffers during deflation. People, especially those in debt, will indeed delay purchasing real estate if they expect better prices next year. History also shows people are reluctant to buy stocks and bonds if they fear lower prices. Asset prices, while significant, are not a representation of consumer prices in the CPI.

3) It has already been explained, by me, that market forces require that wages must fall, whether in expanding economies or contracting economies. Aside from the fact that employees are reluctant to take on changes in their wages, wages already have a difficult time adjusting to changes in market forces. Because of this, employees are laid off during recessions. However, it's not the deflation that causes the unemployment, but the economic slack in the economy.

Recession -> Unemployment -> Falling Prices.

SO we are almost in agreement. I do think economic slow downs or downturns aren't CAUSED by falling prices, but falling prices turn economic downturns into recessions and depressions.