Re: [A-List] FW: znet/weisbrot on deflation - critique?

["Anyutka" <annewilliamson@xxxxxxx>]

Sorry, Jim, but your analysis is based not on a critique of capitalism, but
on one of central banking.  Only in a monetarily, centrally-planned economy
(which central banking creates) in which the medium of exchange is declared
to be such by a government with a printing press and is bereft of commodity
backing and therefore enters the economy as debt, is deflation a threat.
Under free market capitalism (which by definition requires commodity-backed
money, which is based on an asset, not debt) deflation is a boon - it clears
out malinvestments, thereby freeing capital for productive pursuits
beneficial to all.  As prices fall due to increased productivity and
efficient capital allocation, the value of money grows.  (As a consequence,
so do domestic savings - the only investment capital of which any nation can
truly be assured.)  This is especially important for the working class, who
pay the greatest price in a fiat system which can only work - temporarily
and inefficiently - under a regime of perpetual inflation, i.e. theft.
Funny how nobody gets this right - people cheer when the value of their
homes rise, but are supposed to be threatened when the value of their money
does the same?  The only ones truly under the gun from deflation are the
govt and their bankster allies - all scam artists, villains, and rogues
living well off the labor of others. -A.

----- Original Message -----
From: "Craven, Jim" <jcraven@xxxxxxxxx>
To: <a-list@xxxxxxxxxxxxxxxxxxx>
Sent: Friday, July 11, 2003 2:50 PM
Subject: [A-List] FW: znet/weisbrot on deflation - critique?


>
> There are several reasons why deflation, especially sustained, may cause
> some problems for capitalism that monetary policies or indeed fiscal
> policies cannot fix. First of all deflation, or sustained decreases in the
> general price level (as opposed to disinflation or decreases in a positive
> rate of inflation) can produce dislocations in the following ways:
>
> A) Because some business costs are relatively fixed and locked-in in the
> short-run (e.g. interest rates fixed for terms of loan agreements, rents
> fixed for terms of rental agreements, wage rates fixed for terms of
> empoyment agreements) sustained deflation can cause a profits squeeze
> leading to cumulative and self-reinforcing downward effects: e.g.
Deflation
> leads to disinvestment or putting off planned investment, leading to more
> layoffs, leading to falling real incomes leading to falling aggregate
demand
> leading to more deflation and falling aggregate supply (partially
cushioning
> the fall in the general price level) and even further rising
unemployment...
>
> B) Deflation can lead to expectations effects on the demand side (when
> people expect lower prices or lower future incomes they decrease present
> demand in anticipation of the future low incomes and/or future even lower
> prices thus creating feedback and self-fulfilling/reinforcing effects on
the
> demand side leading to the same on the supply side);
>
> C) Everybody wants to go to heaven but nobody wants to die. Everbody wants
> the prices of what they sell to go up while the prices of what they buy to
> go down but deflation doesn't work that way often. When the general price
> level is falling, or better the weighted-average price level (itself a
> highly suspect construct), it does not mean that every and all prices are
> falling. Often businesses may find that prices of what they sell are
falling
> while input prices are not falling as fast, not falling and/or even rising
> causing profits squeezes and or on the worker side even more dramatic
> decreases in real wages thus feeding into the cumulative and
> self-reinforcing spiral downward;
>
> D) Falling general prices might stimulate some sales (in the conventional
> models, a falling general price level stimulates increases in Aggregate
> Quantities Demanded leading to increases in real GDP and employment,
leading
> to increases in employment and real incomes, leading to increases in
> aggregate demand, profits, investment and ultimately  short-run aggregate
> supply--the anti-Keynesians start out with supply-led growth) depending
upon
> the overall domestic and global contexts operating. For example, with
> widening income/wealth inequalities (U.S. is number one out of 22
> industrialized nations in wealth/incomes inqualities), with masses of
people
> maxed-out on their credit cards, with real tax burdens being increasingly
> dumped on the so-called middle-class and below, with increasing
uncertainty
> about the future (employment, real incomes, prices, interest rates, costs
of
> education, globalization effects, downsizing, outsourcing etc) among the
> general mass-demand-producing segments of the population, tax cuts,
> expansionary monetary policies leading to even lower interest rates etc
may
> not and will likely not have the usual intended effects of stimulating
> employment, output, investment, savings, moderate/necessary increases in
> prices, increases in aggregate demand and short-run aggregate supply etc.
> For example, with the last supposed "tax cuts" and rebates, only about 17%
> of those who got them spent them; the rest went into drawing down debt not
> into spending as predicted.
>
> E) Often deflation is portrayed as having some positive effects on
> international trade side and making prices of exports more competitive
> globally and making imports relatively more expensive and less
competitive;
> this is supposed to simulate net exports and even reverse some slides in
the
> general exchange rate of the dollar. This assumes that prices and relative
> prices are the only or even significant basis for global demand for
exports
> and imports. In the context of global recessions and widening global
> inequaltiies in wealth/incomes, no matter how far prices fall, they may
well
> not have any stimulative effects on net exports--especially in the context
> of nations, like U.S. citizens, maxed-out with their own credit cards;
>
> F) Deflation can have effects on preventing future investment, business
> start-ups, etc; plus, deflation is usually associated with the most
extreme
> troughs of a typical business cycle (in most recessions at most we find
> disinflation but actual deflation is rare since the Great Depression) thus
> having negative effects on both investor and consumer--and
> saver--expectations and psychology; Further, even those deflation,
> especially unexpected, favors lenders at the expense of borrowers (at
least
> in theory), and helps to lower real interest rates, the bottom line is the
> bottom line and now matter how much taxes are cut, no matter how low real
> interest rates go, this will not likely simulate significant investment in
> real plant and equipment, output and jobs in the context of global and
> domestic masses suffering falling real incomes and increassing debt and
> unable/unwilling to demand any real output that could be produced (who
will
> start up a business, no matter how cheap the borrowed money with little
> prospects of effective demand); this will but stimulate more wealth/income
> inequalities and the increased hegemony of financial capital over
industrial
> and agricultural capital--more paper chasing and short-run speculation.
>
> I could go on, and notice I am looking only from the standpoint of
> contradictions in bourgeois economic theory, when we bring in a full-blown
> Marxist analysis, departing from the linear and unidirectional "chains of
> causality" and ultimate "independent/dependent" variables of bullshit
> neoclassicism, it gets even worse--or better from the standpoint of
> destabilizing the whole system.
>
> Got to run, more later, this is just for openers.
>
> Jim C.
>