Friday, September 24, 2010 - Deflation?

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SgtWs

Friday, September 24, 2010 - Deflation?

Post by SgtWs »

Sorry, no charts today……….. :(

Just watching and waiting………..

The Fed’s reiteration on Tuesday that they badly want inflation, has left many speculating just exactly what that means. Is the Fed fearing a surge in deflation?

This has prompted me to once again explore the deflationary topic again (for fun I have brought it up a few times in the recent past). What is the best move for our TSP accounts in a deflationary environment?

Please read the following NY Times article

Why Is Deflation Bad? By Paul Krugman – August 2, 2010

A number of readers have asked me to explain why deflation is a bad thing; and the truth is that while I’ve alluded to the issue a number of times, I’m not sure if I’ve ever laid out the whole case. So here goes.

There are actually three different reasons to worry about deflation, two on the demand side and one on the supply side.

So first of all: when people expect falling prices, they become less willing to spend, and in particular less willing to borrow. After all, when prices are falling, just sitting on cash becomes an investment with a positive real yield – Japanese bank deposits are a really good deal compared with those in America — and anyone considering borrowing, even for a productive investment, has to take account of the fact that the loan will have to repaid in dollars that are worth more than the dollars you borrowed. If the economy is doing well, all this can be offset by just keeping interest rates low; but if the economy isn’t doing well, even a zero rate may not be low enough to achieve full employment.

And when that happens, the economy may stay depressed because people expect deflation, and deflation may continue because the economy remains depressed. That’s the deflationary trap we keep worrying about.

A second effect: even aside from expectations of future deflation, falling prices worsen the position of debtors, by increasing the real burden of their debts. Now, you might think this is a zero-sum affair, since creditors experience a corresponding gain. But as Irving Fisher pointed out long ago, debtors are likely to be forced to cut their spending when their debt burden rises, while creditors aren’t likely to increase their spending by the same amount. So deflation exerts a depressing effect on spending by raising debt burdens – which, as Fisher also points out, can lead to another kind of vicious circle, in which depressed spending because of rising real debt leads to further deflation.

Finally, in a deflationary economy, wages as well as prices often have to fall – and it’s a fact of life that it’s very hard to cut nominal wages — there’s downward nominal wage rigidity. What this means is that in general economies don’t manage to have falling wages unless they also have mass unemployment, so that workers are desperate enough to accept those wage declines. See Estonia and Latvia, cases of.

Now, alert readers will have noticed that none of these arguments abruptly kicks in when the inflation rate goes from +0.1% to -0.1%. Even with low but positive inflation the zero lower bound may be binding; inflation that comes in lower than borrowers expected leaves them with a worse debt burden than they were counting on, even if the inflation is positive; and since relative wages are shifting around all the time, some nominal wages will have to fall even if the overall rate of inflation is a bit above zero. So the argument that deflation is a bad thing is also an argument saying that some economic problems get worse as inflation falls, and that too low an inflation rate may actually be economically damaging. That’s why the fact that inflation, while still positive, is below the Fed’s target is bad news; and it’s why respectable people like Olivier Blanchard have suggested that a higher target, something like 4 percent inflation, might make sense.

And no, 4 percent inflation wouldn’t turn us into Zimbabwe. I remember when we had stable inflation of around 4 percent – and it was morning in America.


AND...........here is an entertaining article from The Business Insider that is sure to spark a reaction from somebody.........

The 10 Most Socialist States In America Sep. 23, 2010

I work hard for my money. I leave my two gorgeous kids every morning to make money because I have to. So, I hate taxes. I hate politicians who waste my tax dollars. I hate politicians who can’t say no to wasteful spending, and then throw salt on the wound and increase taxes to escalate the rape of hardworking, law abiding taxpayers. So let’s take a look at the states that are doing this the most, the most socialist ones.

How do we know whether a state is socialist? Very easy. By definition, socialist states (or countries) tax and spend a higher percentage of their GDP. Instead of returning state revenue back to taxpayers, these states think they know how to spend hard-earned taxpayer dollars better. So we only need two pieces of data to determine which states are the most socialist: total state revenue and the state’s GDP.
Click this link to see the states…….

States

Methodology:

I used the Census Bureau’s total state revenue data from the Annual Surveys of State and Local Government Finances. The data is available for periods as recent as 2008 (the context of this year will make more sense when you see who the top state’s governor was at the time). Then I got my hands on the 2008 state level GDP data from the Bureau of Economic Analysis. Total state revenue includes all sorts of taxes including individual income tax, property tax, sales tax, and that of motor fuel, alcohol, tobacco, public utilities, etc. It also includes corporate taxes, and motor vehicle licenses, charges collected from highways, education, hospitals, airports, parking, parks, natural resources, housing, sewerage, garbage collection, interest earnings, special assessments, etc. There are only a few things that they don’t tax.

On top of these taxes, states also receive some revenue (sometimes multiples of what they collect in the state) from the federal government. These are federal tax dollars collected from residents of this country, and spent by these states instead of returned to taxpayers. That’s why they are included in the calculations. Did I tell you that I hate taxes?

Anyway, I divided the total state revenue by the state’s GDP and calculate the percentage of the public sector in the state’s economy. The larger this percentage, the more socialist the state is. Period. There’s no other way to look at it. Then I ranked all 50 states and DC to find the top 10 socialist, or red!, states of this country. You won’t believe who is number one. Or, if you’re educated, you already know.


Picture Porn from The Reformed Broker

Click the pic for a large version.......

Image

User avatar
idiq
Posts: 84
Joined: Fri Jul 02, 2010 10:12 am

Re: Friday, September 24, 2010 - Deflation?

Post by idiq »

Thanks for these Rodney... they're very informative. I TA a principles of micro & macro class and I'll share the linked NYT article, that question comes up all the time.

Also, love the picture of Palin at the end! DERP.
Last edited by idiq on Fri Sep 24, 2010 3:28 pm, edited 1 time in total.

SgtWs

Re: Friday, September 24, 2010 - Deflation?

Post by SgtWs »

You are very welcome. I think it is a great article to help people understand what deflation is and how it will impact them.

My best guess from what I know, as I have not been an investor through a deflationary environment, but if it got bad, would be to invest in the G Fund?

Thoughts anyone?

User avatar
idiq
Posts: 84
Joined: Fri Jul 02, 2010 10:12 am

Re: Friday, September 24, 2010 - Deflation?

Post by idiq »

SgtWs wrote:You are very welcome. I think it is a great article to help people understand what deflation is and how it will impact them.

My best guess from what I know, as I have not been an investor through a deflationary environment, but if it got bad, would be to invest in the G Fund?

Thoughts anyone?


I think there are a few ways to go... One would be G fund, a G / I fund split, or one of those + taking a TSP loan (at 2.5%?) and putting it in a savings account that pays higher than 2.5%... My credit union offers a checking account with 3.00% APY if it's under $25,000 - but you have to make 15 debit transactions per month.

This model works because the more you make, or really, higher your balance, the greater chance of spending money, and the CU gets a % of debit transactions as a fee, which should offset the interest they pay you at the end of the month.

Anyways, you'd gain half a percent in nominal interest there + difference from holding your money.

User avatar
jeffvan1
Posts: 491
Joined: Tue Feb 12, 2008 5:04 pm

Re: Friday, September 24, 2010 - Deflation?

Post by jeffvan1 »

Australian savings account via Citi and others pays almost 6% with total flexibility to withdraw money at any time.

User avatar
bigredned
Posts: 60
Joined: Fri Aug 06, 2010 2:05 pm

Re: Friday, September 24, 2010 - Deflation?

Post by bigredned »

LOL... DERP.

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TSPking
Site Admin
Posts: 1066
Joined: Thu Nov 15, 2007 7:02 am

Re: Friday, September 24, 2010 - Deflation?

Post by TSPking »

jeffvan1 wrote:Australian savings account via Citi and others pays almost 6% with total flexibility to withdraw money at any time.


Can you provide more information (aka link) on this? thank you...
TSPking

It's a gift...and a curse ~ Adrian Monk

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