Deflation risk called impossible

James Hamilton has this very interesting point to make; that deflation is impossible given an all-powerful unlimited FED.

He's right, but this view is extremely dangerous, and I say runs a severe risk of violent revolution given the current cheap-labor movement.  

If we don't have massive deflation soon, we're going to have continued stagflation: wages falling behind inflation in real cost of living (using Roosevelt's, not Reagan's, CPI). Americans cannot compete with third world wages in production- in fact, we've had that for 40 years now as factory jobs have moved overseas and been replaced only with extremely low-wage service industry jobs. The real cause behind falling house prices isn't just the subprime bubble and crash- it's that housing is now unobtanium for a large percentage of the US population when you take away con games like the subprime mortgage market.

Food & fuel are also now quite problematic- a person can't afford to live 5 miles out in the country and have an inner-city minimum wage job, there's no way to get to work. Food prices are increasing fast enough that we're seeing charity organizations, last resort for the poor, running out of food in the food banks.

Yes, he is absolutely right that deflation is not to be feared, that the FED can control the deflationary rate. Yes he is right that deflation is not a reasonable forecast because of this. But we're coming very close to the point of the lack of deflation causing a civil war, it's already to the point where a lack of deflation is causing suicide. Suicide is anger turned inward- revolt is anger turned outward. Is that what we really want? Is protection of the already rich so neccessary that we're going to allow it to cost us human lives?



Yes, just like deflation in Japan worked so well.

Deflation of 0.5% causes far more damage to the economy than inflation of 5%.

And while the Fed has extremely strong power to curtail expansion, by pushing the cash rate as high as it needs to be to do the trick (witness the Fed sabotaging the Carter administration in 1980), once the central bank has pushed the cash rate down to 0.1% nominal, there's nothing more that pure monetary policy can accomplish ... if a lower interest rate is needed to forestall the very serious damage done to the economy by deflation, its not technically feasible for pure monetary policy to push it any lower.

And no matter what the interest rate, there is also the basic assymetry: you can prevent credit-worth borrowers from borrowing, which is where rubber meets the road for the contractionary monetary policy ... but you cannot force credit-worth borrowers to request loans.

Pure monetary policy on its own has much less clout when faced with a downturn spiraling out of control than when faced with an upturn spiraling out of control. That's why government spending is needed.

But will that all matter

If the inflation caused by the attempts to avoid deflation, ends up basically pricing a huge percentage of the population out of the ability to live?

Credit-worthy borrowers asking for loans isn't the problem, because they're credit worthy.

It's the fact that the difference between wages and costs is quickly pushing 60% of this nation *below* credit worthyness that is the problem- and if we end up in a situation where 60% of our population is roaming the streets looking for "foreclosed" houses to squat in illegally, whether your bank account is insured will be the LEAST of your problems.

Maximum jobs, not maximum profits.

But except for an ideological monetarist position ...

... if we are going to adhere to a reality-based view of the economy, the risk of hyperinflation is not in the domestic arena where the Fed dominates monetary policy, but in the international arena where the government cannot mandate the acceptance of US$.

Credit-worthy borrowers asking for loans isn't the problem, because they're credit worthy.

The problem is the lack, whether because of a smaller percentage of credit-worth borrowers requesting loans, a smaller number of credit-worthy borrowers, or both. When there is a lack of credit-worth borrowers, then pure monetary policy will tend to be ineffective.

But will that all matter
If the inflation caused by the attempts to avoid deflation, ends up basically pricing a huge percentage of the population out of the ability to live?

But if we are at the edge of deflation, we are at not risk of substantial demand-driven inflation, which is the kind of inflationary impulse that can spiral out of control.

With respect to imported inflation, the policies required to get a handle on the blown-out current account deficit are the same now as they were four years ago ... serious investment in improved fuel efficiency in transport, residences and agriculture and serious investment in harvesting of renewable domestic energy sources, to both reduce our structural import dependence and to establish a position in new manufacturing economies with strong export opportunities over the next two or three decades.

consumer credit worthy

Last night I read a few articles claiming to get even a car loan they wanted to see a FICO of 750, which is ?? < 40% might be even lower of all consumers as a credit score.

So, banks are assuredly tightening up who can go further into debt.

(of course considering making it illegal for these creditors to due universal default or magically raise interest rates to 20%-30% or have massive punitive fees can't cross anyone's mind!)

Then, on green jobs what isn't getting advertised is the reality that R&D, right now, is being offshore outsourced in droves and there is nothing to stop further R&D, say in alternative energies from also being offshore outsourced.

Believe this or not the Democrats have nothing, absolutely nothing tying R&D tax credits or funds to hiring US citizens for jobs in the United States. McCain believe this or not has a clause which says they get the money only for jobs created in the US (which doesn't imply US citizens but at least jobs here).

We recently had a mass exodus in Pharmaceutical research jobs being offshore outsourced and that never gets a mention that there are thousands and thousands of Chemistry, Materials Science, Biology type PhDs out of a job in America as a result.

Japan and Asia are already way ahead on battery research than the US as well, although deploying some of these technologies, especially building a power grid (we need a new power grid generally) to transport wind farm energy not only is a much needed investment, that would at least give blue collar jobs, assuming our government doesn't trade those jobs away through guest worker Visas, which believe me, they very well might do.