Deflation?

source

A key index of prices paid by consumers showed the largest year-over-year decline since April 1950, primarily due to sinking energy prices, the government said Wednesday.

The Consumer Price Index, the Labor Department's key measure of inflation, has fallen 1.3% over the past year.

That's the largest decline in nearly 60 years, and is due mainly to a 27.3% decline in the energy index.

On a monthly basis, CPI rose 0.1% in May, after remaining flat the previous month. Economists surveyed by Briefing.com expected a 0.3% increase.

from CNN

My thoughts: Double digit inflation will shock people who were not paying attention as the Fed ran the printing presses at full speed.

Inflation Remains a Greater Threat Than Deflation

The Consumer Price Index (CPI) data for December has made many commentators raise the fear of a coming deflation. There is only one problem with these concerns: There are no deflationary forces at work. If anything, a huge inflationary process has been undertaken by the Federal Reserve over the last several months.

The Department of Labor reported January 16 that the CPI for all urban consumers (seasonally adjusted) decreased by 0.7 percent for December and was a mere 0.1 percent higher than a year earlier. Prices have not declined significantly, and the trend certainly has not been deflationary.

Since the time of Adam Smith, economists generally have defined inflation or deflation as a rise or fall in the money supply (broadly defined)...

As shown in the chart below, the Monetary Base (dollar cash held by the public and bank reserves held at the Fed) increased from $871 billion in September 2008 to nearly $1.7 trillion in December 2008. This amounts to a 95 percent increase in only four months. M-1 (Cash and demand deposits) increased by 40.2 percent and M-2 (M-1 plus and variety of forms of demand and savings deposits) grew by 17.4 percent at annualized rates of increase over this period...

By any definition, there has been no monetary deflation that would have decreased the amount of money and credit in the economy. The current monetary expansion comes before any reestablishment of a non-crisis demand for money by consumers, producers, and financial institutions. And its magnitude warns of a serious danger of significantly rising prices in the future if the Federal Reserve fails to reverse the expansion.

The threat facing the economy as a whole in 2009 will be the consequences from this vast inflationary increase in the monetary aggregates.

read the entire essay

Deflation: Don't Panic

Yes, we need to get "inflation back into the system", but lets do it in a way that will cause another giant asset bubble to form without causing inflation to "runaway".

That really worked out well last time.

Get ready for all kinds of crazy-talk this spring - heaven help us if the annual change in the CPI dips below minus one percent, or minus two percent...

Yes, people saving money is a bad thing - they must be compelled to "shift out of cash". We need another bubble to rescue us from the fallout of the last two.

from The Mess That Greenspan Made

My thoughts: After the media whips up the deflation panic, we can expect 15% inflation by 2011.

Is Deflation a Threat?

If we follow a hands-off policy, the majority of experts tell us, the banking industry, the financial markets, and much of the rest of the economy will be wiped away in a bottomless deflationary spiral.

The present essay argues that this is a half-truth. It is true that without further government intervention there would be a deflationary spiral. It is not true that this spiral would be bottomless and wipe out the economy. It would not be a mortal threat to the lives and the welfare of the general population. It destroys essentially those companies and industries that live a parasitical existence at the expense of the rest of the economy, and which owe their existence to our present fiat money system. Even in the short run, therefore, deflation reduces our real incomes only within rather narrow limits. And it will clear the ground for very substantial growth rates in the medium and long run.

We should not be afraid of deflation. We should love it as much as our liberty.

read the entire paper (pdf)