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posted by janrinok on Saturday February 21 2015, @08:30AM   Printer-friendly
from the what-me-worry? dept.

Some time ago we discussed negative interest rates here on Soylent News. At that time there was some discussion of deflation and why it is such a mixed bag for consumers, companies, and countries.

The Economist has an article that explains deflation rather succinctly.

It turns out that deflation is bad because we are all so burdened with Debt. Not only personal debt, but corporate debt, and national debts. You end up paying debts with money that is more and more dear as time goes on.

Deflation poses several risks, some well-understood, one not. One familiar danger is that consumers will put off spending in the expectation that things will get even cheaper, further muting demand. Likewise, if prices fall across an economy but wages do not, then firms’ margins will be squeezed and employment will stagnate or decline. (Neither of these dangers is yet visible; indeed, America and Britain are seeing strong employment growth.) A third, well-known risk is debt deflation: debts become more onerous because the amount that is owed does not fall, even as earnings do. This is a big worry in the euro zone, where many banks are already stuffed with dud loans.

But in addition, all tools of Monetary Policy become useless.

The least-understood danger is also the most serious, because it is already here. Deflation makes it harder to loosen monetary policy. All of which means that policymakers risk having precious little room for manoeuvre when the next recession hits.

While some have been eager to see monetary policy reigned in, we did see the effects of this during the height of the recent depression, (which some claim we are still suffering from).

The US Federal Reserve had run out points it could cut when lending money to large banks. There were periods in 2010 where the Fed was lending money to banks at Zero Interest Rate. The link explains a number of serious risks with this policy.

 
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  • (Score: 5, Interesting) by Justin Case on Saturday February 21 2015, @12:07PM

    by Justin Case (4239) on Saturday February 21 2015, @12:07PM (#147740) Journal

    This situation exposes the lies of those who are arrogant enough to think they can "run" or "manage" the economy.

    As a general rule, people don't care about doing good, only about looking good. So every politician wants to be able to brag "Look how great the economy was under my control!" And they perform stunts that make things look a bit better today while kicking the problems down the road a couple years.

    This can't go on forever because the pile of problems (e.g. debt) keeps getting bigger. They think "It worked last time so I can probably get away with it again." But each time around, the flip side of unwinding all this nonsense gets ever worse. And we've run up an enormous stockpile of badness lurking out there to spring its trap on us sooner or later.

    I don't recall the commandment, carved in stone, that said "Thou shalt have continuously growing economic activity." The natural way is for prices to fluctuate, supply and demand to adjust accordingly. This does an imperfect but pretty good job of communicating to producers and consumers that they should do more of this and less of that -- automatically, with nobody steering the ship. So the best thing politicians can do is leave it the fuck alone!

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  • (Score: 1) by dak664 on Saturday February 21 2015, @04:39PM

    by dak664 (2433) on Saturday February 21 2015, @04:39PM (#147801)

    " The natural way is for prices to fluctuate, supply and demand to adjust accordingly. This does an imperfect but pretty good job of communicating to producers and consumers that they should do more of this and less of that -- automatically, with nobody steering the ship. So the best thing politicians can do is leave it the fuck alone!"

    The Technocracy movement of the 1930s is still alive to some extent, and the study guide (written largely by M. King Hubbert) refutes the ideas of money and price. It asserts that both require continuous growth and the only sustainable economy is one based on a government-controlled energy currency.

    http://www.technocracyinc.org/ [technocracyinc.org]
    http://beta.technocracy.org/wp-content/uploads/2014/04/Study-Course-1-1.pdf [technocracy.org]