Is deflation possible?

it seems like more and more “experts” are now saying that deflation will be the big subject in 2009 and not inflation. With commodities prices slowing down and a possible downturn in the world economy, concerns about inflation is being replaced with worries about deflation. Even the market doesn’t seem worried with inflation as the TIPS market (inflation expectations) is at its lowest point in over 4 years. My question: is deflation even possible when central banks can print money at will?

Deflation is possible. And for the most part, central banks tend to print more money as a last resort. And not even then that actually happens. At least, not anymore. Printing alot of money can lead to hyperinflation. A case Brazil knows too well, i think they had record percentages as high as 200% per day (maybe even more). People would rush to the groceries store and pick up everything they can because the next day prices would increase dramatically. But to answer your question: Yes. They even talk about it on the econ chapter on money supply.

question is will an increase in money supply from printing money cover the impact of the loss of money suipply from all the write-downs (Range being: $1 trillion to $2 trillion)?

the bigger question is: will it help if Bernanke was throwing money from the top of a helicopter and ppl dint spend or invest it (cuz they think goods will get even cheaper)

onlygodknowswhy Wrote: ------------------------------------------------------- > the bigger question is: will it help if Bernanke > was throwing money from the top of a helicopter > and ppl dint spend or invest it (cuz they think > goods will get even cheaper) There would have to be a major shift in mentality in America for that to happen. Unlike Japan, the US has always been a consumption economy. Consumers don’t mind going into debt to maintain or increase their standard of living. Seeing as to how 70% of GDP is related to the consumer, how bad would the growth rate get if people stopped spending?

Just look at the Japanese economy post their early 1990s real estate crash as an answer to your question.

The Japanese tried to do this in the 1990s. What happened is that people took advantage of the free money, exchanged it for other stuff, and created the carry trade. The result was all that money did little to help the Japanese economy. However, it is still a bit of a puzzle why it has worked out the way it did. In theory, all those people selling the Yen should have depressed the currency and made imports more expensive and made it more profitable to build stuff in Japan; exports should have benefited, and Toyota and Honda have done well. All of this should have made the economy recover. However, japan as an island nation presumably imports lots of key materials, so maybe it all balances out after all. Can anyone else shed light here? I’m not too familiar with Japan.

EMRA32 Wrote: ------------------------------------------------------- > Deflation is possible. > > And for the most part, central banks tend to print > more money as a last resort. And not even then > that actually happens. At least, not anymore. > > Printing alot of money can lead to hyperinflation. > A case Brazil knows too well, i think they had > record percentages as high as 200% per day (maybe > even more). People would rush to the groceries > store and pick up everything they can because the > next day prices would increase dramatically. > > But to answer your question: Yes. They even talk > about it on the econ chapter on money supply. I think the US is in the “printing as a first result”, rather than the last. Where do you think the liquidity is coming from, air?

Its worth noting that the US doesn’t actually have to “physically print” money because of its central banking system. Zimbabwe on the other hand actually fires up the HP inkjet. Thanks to Mugabe, eleventy-billion doesn’t sound quite as ridiculous as it once did on Celebrity Jeopardy.

well hasnt the credit crunch deflated housing?it definitely is not over by any means.it can surely overshoot on the downside.

dlpicket Wrote: ------------------------------------------------------- > Its worth noting that the US doesn’t actually have > to “physically print” money because of its central > banking system. Zimbabwe on the other hand > actually fires up the HP inkjet. Thanks to Mugabe, > eleventy-billion doesn’t sound quite as ridiculous > as it once did on Celebrity Jeopardy. 100% agree… It is an electronic transaction. Nothing complicated. Non-the-less, it devalues the currency much the same.

bchadwick Wrote: ------------------------------------------------------- > > Can anyone else shed light here? I’m not too > familiar with Japan. There is a neat article in the Economist today comparing Japan (1985-1995) to today’s USA. http://www.economist.com/finance/displayStory.cfm?source=hptextfeature&story_id=11964819

I asked my colleague yesterday, and he said that there was too much excess credit created in Japan during the bubble. When the bubble burst, the government injected money like mad. This increases the credit supply even more, and the demand hasn’t manage to take catch up.

onlygodknowswhy Wrote: ------------------------------------------------------- > the bigger question is: will it help if Bernanke > was throwing money from the top of a helicopter > and ppl dint spend or invest it (cuz they think > goods will get even cheaper) “If the Fed cannot reverse this slowdown in credit expansion, then the deflationary unwind will kick into full gear.” http://www.minyanville.com/articles/Bernanke-dollar-Fed-fre-fnm-fannie/index/a/18613 The Fed is out of Bullets!

bchadwick Wrote: ------------------------------------------------------- > The Japanese tried to do this in the 1990s. What > happened is that people took advantage of the free > money, exchanged it for other stuff, and created > the carry trade. The result was all that money > did little to help the Japanese economy. > > However, it is still a bit of a puzzle why it has > worked out the way it did. In theory, all those > people selling the Yen should have depressed the > currency and made imports more expensive and made > it more profitable to build stuff in Japan; > exports should have benefited, and Toyota and > Honda have done well. All of this should have > made the economy recover. However, japan as an > island nation presumably imports lots of key > materials, so maybe it all balances out after > all. > > Can anyone else shed light here? I’m not too > familiar with Japan. wicked smart. DIFFERENCE BETWEEN JAPAN AND US http://beta.minyanville.com/articles/index/a/7832