Peter Johnson

Salsman on “The deflation myth”

48 posts in this topic

On Thursday, November 11, 2010, the National Post (Toronto) published another opinion piece by THE FORUM expert Richard M. Salsman.

"Falling prices aren't necessarily bearish for jobs, profits or growth."

For those browsing using mobile devices or with limited Internet speeds, I also include a mobile version.

Long-time readers of Mr. Salsman will recognize his established concept of deflation (distinct from the way it is used in even respectable financial news media) as an increase in the gold content of a currency, as well as a mention of U.S. growth rates during the Roaring Twenties, and that actual deflation is bullish for prices of stocks and bonds.

However, Mr. Salsman has provided some new information about economic growth rates and inflation rates in the U.S. and various other countries in the decades between the U.S. Civil War and the First World War.

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On Thursday, November 11, 2010, the National Post (Toronto) published another opinion piece by THE FORUM expert Richard M. Salsman.

"------

Thanks for the link. It was very informative.

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Unfortunately, the link is down. Could somebody who has read it please provide a summary of Mr. Salsman's argument for deflation as he defines it being bullish for stocks? I am also interested in his other arguments, but this one in particular drew my curiosity.

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Unfortunately, the link is down. Could somebody who has read it please provide a summary of Mr. Salsman's argument for deflation as he defines it being bullish for stocks? I am also interested in his other arguments, but this one in particular drew my curiosity.

As always when it comes to Richard Salsman I recommend that you purchase his works and get an understanding of his ideas in an integrated manner.

With that stated, Richard Salsman defines deflation as an increase in the purchasing power of money. Of course Richard Salsman defines infation as the opposite, a decrease in the purchasing power of money. So, how can an increase in the value of one's money cause negative effects? It cannot. For example, on a personal level when the purchasing power of money increases (deflation) it means my cost of living goes down and I can afford to purchase or invest more. On a business level when the purchasing power of a businesses money increases it means a businesses cost go down and they can invest in future innovation and the employing of new people.

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It makes perfect sense, of course, since it is linked to reality.

There was a theory, now disproved, that inflation and unemployment were inversely related. This effect, called the Phillips curve (http://en.wikipedia.org/wiki/Phillips_curve), holds somewhat in the very short run, but completely disappears in the long run. Whilst it was the hot new thing back then, it was eventually ridiculed and is now taught as an example of something famous that did not work.

I think we live in a very exciting time, where for the second time (the first being with Reagan), people are challenging the Keynesian assumption that there is no difference between printed and earned (created, made, private) money, and therefore that printing money is the solution to all problems. If we win, we will see one of the most prosperous eras of civilization. If we lose, it will be a sad time indeed for the United States. I think Obama is helping us, though.

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The link works now.

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The truth of the myth of deflation:

low spending; high unemployment; wrecked economy

People just stuff money in mattresses knowing that every next day it will be worth more and prices of goods will fall. Disaster.

US companies stash one trillion dollars in cash: Moody's

(AFP) – Oct 27, 2010

WASHINGTON — US companies are hoarding nearly one trillion dollars of cash that they are unlikely to use for expansion amid a muddled outlook on economic recovery, rating agency Moody's said Wednesday.

"Companies will hesitate to spend their cash hoards on expansion until there is greater certainty about the direction of the US economy," said Steven Oman, senior vice president at Moody's Investor Service.

Rest of the story here

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cbell97, it is not clear to me what you are stating, where you stand. Can you clarify where you stand?

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cbell97, it is not clear to me what you are stating, where you stand. Can you clarify where you stand?

With the rest of Wall Street:

bernanke-hela379.jpg

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cbell97, it is not clear to me what you are stating, where you stand. Can you clarify where you stand?

I stand generally with Milton Friedman's monetarists in that if the money supply follows growth, then the economy will in fact be effectively laissez-faire with respect to government intervention in the money supply. The 1982-2008 economic period (without gold standard) is in many ways superior to the 1875-1893 (with gold standard but with an inflationary introduction of silver) period hailed as the golden age of laissez-faire capitalism, and the period of deflation after the 1893 Panic was a disaster in every respect which ushered in anti-capitalist progressivism and the period of deflation following on the 1929 crash was a disaster which ushered in New Deal socialism. Because there are now very few people alive who personally remember as working adults the awfulness of money/gold hoarding in the initial deflationary Depression but still very many who remember the awfulness of government-induced inflation of the 1970's there is a tendency to over-emphasize the latter when both are equally bad, but I, at least, took to heart my father telling me of his father, a decent hard-working man utterly and permanently destroyed by the fact that for years after 1929 no one wanted to spend money on anything above staple items and his businesses (lumber, construction, furniture) were ruined. I think inflation or deflation -- whatever the cause -- are to be avoided, and it is a fact that on a gold standard prior to 1888 the gold standard itself in growing economy was inherently deflationary and that a fiat-but-stable dollar policy is better than a money standard tied to a fixed commodity.

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cbell97, thank you for taking the time to exlain where you stand on this subject. With that stated, I have an extreme disagreement with monetarist and hence with your reversing the cause and effect relationship of an intrusive, ever growing government. Government controls cause the things that you mention not the other way around. I offer that you read Jean-Baptiste Say who is a much more integrated economist than Milton Friedman. I also offer that Richard Salsman is the best contemporary ecnomist and worthy of reding and integrating his works.

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cbell97, thank you for taking the time to exlain where you stand on this subject. With that stated, I have an extreme disagreement with monetarist . . .

Please consider reading this:

Supply side economics and deflation

<<While both agree that the government has a printing press, the Keynesian believes this printing press can help solve economic problems. But the supply-sider thinks that the government (or the Fed) is likely to create only problems with its printing press by either (1) creating too much inflationary liquidity, or (2) not sufficiently "greasing the wheels" of commerce with enough liquidity. A strict supply-sider is therefore concerned that the Fed may inadvertently stifle growth by contributing to deflation and encouraging investors to hoard dollars . . . >>

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cbell97, I have already read many things of that nature and found it to have contradictions and hence why I went searching for an integrated theory which is what I found in Say's writings/premise.

On the subject under discussion, investors only make money when they gain returns on their investment/risk. So, one should be asking, why would investors "hoard" their dollars when it is the only way that they can make a profit/wealth? Considering the government takes away almost all of their return through one form of taxation or another, it seems to me that it is a simple question to answer. Also, how can a country that is still priniting currency without any production to back it be going through inflation and deflation at the same time? The answer is it cannot.

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On the subject under discussion, investors only make money when they gain returns on their investment/risk. So, one should be asking, why would investors "hoard" their dollars when it is the only way that they can make a profit/wealth?

Which is why I found it necessary to point out the fact that hoarding appears to be going on and that is why the Fed is doing what it is doing: to make that hoarding less profitable by making deflation far less likely, even at the risk of creating inflation. Like supply-siders, I do not suppose that anything the Fed does will get at the fundamentals of our economic problems. That requires removing Obama and his czars from office and/or repealing and shredding forever Obamacare. I think the new GOP in Congress has six months to do the latter (plus tax cuts, deficit control, etc.), and failing that, one year to do the former or we may prove beyond a doubt American Exceptionalism by surviving Obama socialism past 2012.

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cbell97, I, once again, offer that you read or listen to Richard Salsman's works which you can begin by reading what he has written here on this forum.

http://forums.4aynrandfans.com/index.php?showtopic=204

http://forums.4aynrandfans.com/index.php?showtopic=3177

http://forums.4aynrandfans.com/index.php?showtopic=1956

http://forums.4aynrandfans.com/index.php?showtopic=179

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cbell97, it is not clear to me what you are stating, where you stand. Can you clarify where you stand?

I think inflation or deflation -- whatever the cause -- are to be avoided, and it is a fact that on a gold standard prior to 1888 the gold standard itself in growing economy was inherently deflationary and that a fiat-but-stable dollar policy is better than a money standard tied to a fixed commodity.

I think that you have an erroneous conception of what *constitutes* deflation, cbell97. Deflation is *not* merely having the money supply increase more slowly than the volume of production. Having such a situation merely brings about falling prices, not deflation. And falling prices are a *good* thing, if they are brought about by a free market. Falling prices mean that the value of your money, income and savings increase. Which means that your prosperity increases.

And having the money supply grow slowly, or even *decrease*, does not have to result in unemployment. All the wage-earners have to do in order to keep their jobs is to lower their wage demands, in dollars and cents, at the same rate as the difference between the growth of the money supply and the growth of the supply of labor. (So if the money supply decreases by, say 5%, and 10% more people are looking for jobs - due to, say, mass immigration - then all the workers have to do in order to avoid losing their jobs is, in principle, to lower their wage demands in dollars and cents by 15%. And if prices are falling, as a result of the same slow money growth which is making a fall in nominal wages necessary, then *real* wages will not fall just because the nominal wages fall.

Deflation is a decrease in the supply of money which is brought about in an *arbitrary* fashion, by the use of governmental force. It usually involves a fiat money system which has been *forced* on the country by the government. If gold is money, and the monetary system is also unregulated by the government, then *both* inflation and deflation will be impossibilities.

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cbell97, I, once again, offer that you read or listen to Richard Salsman's works which you can begin by reading what he has written here on this forum.

Salsman is someone who looks not at a problem but around it, perhaps seeing something else that strikes his fancy.

Scenario: You are President of the United States, and you get a phone call informing you that it appears that $5.5 trillion from the money markets will disappear by the end of the day, what do you do? Listen to Salsman's lecture on the benefits of deflation?

"On Thursday (Sept 18 2008), at 11 in the morning the Federal Reserve noticed a tremendous draw-down of money market accounts in the U.S., to the tune of $550 billion was being drawn out in the matter of an hour or two. The Treasury opened up its window to help and pumped a $105 billion in the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks. They decided to close the operation, close down the money accounts and announce a guarantee of $250,000 per account so there wouldn't be further panic out there.

"If they had not done that, their estimation was that by 2pm that afternoon, $5.5 trillion would have been drawn out of the money market system of the U.S., would have collapsed the entire economy of the U.S., and within 24 hours the world economy would have collapsed... It would have been the end of our economic system and our political system as we know it... "

Congressman Kanjorski told CSPAN in January 2009

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cbell97, I, once again, offer that you read or listen to Richard Salsman's works which you can begin by reading what he has written here on this forum.

Salsman is someone who looks not at a problem but around it, perhaps seeing something else that strikes his fancy.

No, Salsmans is someon whol looks at the whole situation and then offeres principled actions instead of pragmatic ones. At the root, the problem is caused by the government and then when they cause huge problems they blame everyone else. I was quite certain you would not take the time to rethink your premise and I will not waste my time trying to convince you.

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cbell97, I, once again, offer that you read or listen to Richard Salsman's works which you can begin by reading what he has written here on this forum.

Salsman is someone who looks not at a problem but around it, perhaps seeing something else that strikes his fancy.

Scenario: You are President of the United States, and you get a phone call informing you that it appears that $5.5 trillion from the money markets will disappear by the end of the day, what do you do? Listen to Salsman's lecture on the benefits of deflation?

"On Thursday (Sept 18 2008), at 11 in the morning the Federal Reserve noticed a tremendous draw-down of money market accounts in the U.S., to the tune of $550 billion was being drawn out in the matter of an hour or two. The Treasury opened up its window to help and pumped a $105 billion in the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks. They decided to close the operation, close down the money accounts and announce a guarantee of $250,000 per account so there wouldn't be further panic out there.

"If they had not done that, their estimation was that by 2pm that afternoon, $5.5 trillion would have been drawn out of the money market system of the U.S., would have collapsed the entire economy of the U.S., and within 24 hours the world economy would have collapsed... It would have been the end of our economic system and our political system as we know it... "

Congressman Kanjorski told CSPAN in January 2009

What does that have to do with not just printing a further 600bn (and reinvesting 250 of coupons) but using it to repurchase at a sweet spot of 5y (with yields already close to zero) when their own theories should say 30y (to impact mortgages)?

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cbell97, I, once again, offer that you read or listen to Richard Salsman's works which you can begin by reading what he has written here on this forum.

Salsman is someone who looks not at a problem but around it, perhaps seeing something else that strikes his fancy.

Scenario: You are President of the United States, and you get a phone call informing you that it appears that $5.5 trillion from the money markets will disappear by the end of the day, what do you do? Listen to Salsman's lecture on the benefits of deflation?

"On Thursday (Sept 18 2008), at 11 in the morning the Federal Reserve noticed a tremendous draw-down of money market accounts in the U.S., to the tune of $550 billion was being drawn out in the matter of an hour or two. The Treasury opened up its window to help and pumped a $105 billion in the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks. They decided to close the operation, close down the money accounts and announce a guarantee of $250,000 per account so there wouldn't be further panic out there.

"If they had not done that, their estimation was that by 2pm that afternoon, $5.5 trillion would have been drawn out of the money market system of the U.S., would have collapsed the entire economy of the U.S., and within 24 hours the world economy would have collapsed... It would have been the end of our economic system and our political system as we know it... "

Congressman Kanjorski told CSPAN in January 2009

What does that have to do with not just printing a further 600bn (and reinvesting 250 of coupons) but using it to repurchase at a sweet spot of 5y (with yields already close to zero) when their own theories should say 30y (to impact mortgages)?

I cannot figure out your question, but it looks like it would require a technical response I could not come up with in any case. The thread of my thinking here is that a government that has taken charge of the money supply cannot under circumstances allow systemic deflation but can allow for some inflation in which economic growth will follow even if it is not the [Keynesian) inflation that causes the growth. That is my response to both theory-minded libertarian ideologues (who, quite frankly, would not mind a little anarchy to fuel their ambitions, suspiciously a lot like those of practical-minded Soros socialists) and fair-minded ordinary folk worried about inflation alike. The above is an account of the collapse that led to the initial TARP plan under President Bush about which I dare say very few people who have an opinion on TARP are even aware. It is what is real deflationary hoarding that was the Panic of 1893 and the Crash of 1929. What the Fed did then in Sept 2008 and what the initial TARP did was to avoid the Depressions that followed 1893 and 1929, but there is evidence hoarding continues and under those circumstances no genuine recovery is possible.

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cbell97, I, once again, offer that you read or listen to Richard Salsman's works which you can begin by reading what he has written here on this forum.

Salsman is someone who looks not at a problem but around it, perhaps seeing something else that strikes his fancy.

Scenario: You are President of the United States, and you get a phone call informing you that it appears that $5.5 trillion from the money markets will disappear by the end of the day, what do you do? Listen to Salsman's lecture on the benefits of deflation?

"On Thursday (Sept 18 2008), at 11 in the morning the Federal Reserve noticed a tremendous draw-down of money market accounts in the U.S., to the tune of $550 billion was being drawn out in the matter of an hour or two. The Treasury opened up its window to help and pumped a $105 billion in the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks. They decided to close the operation, close down the money accounts and announce a guarantee of $250,000 per account so there wouldn't be further panic out there.

"If they had not done that, their estimation was that by 2pm that afternoon, $5.5 trillion would have been drawn out of the money market system of the U.S., would have collapsed the entire economy of the U.S., and within 24 hours the world economy would have collapsed... It would have been the end of our economic system and our political system as we know it... "

Congressman Kanjorski told CSPAN in January 2009

What does that have to do with not just printing a further 600bn (and reinvesting 250 of coupons) but using it to repurchase at a sweet spot of 5y (with yields already close to zero) when their own theories should say 30y (to impact mortgages)?

...It is what is real deflationary hoarding that was the Panic of 1893 and the Crash of 1929. What the Fed did then in Sept 2008 and what the initial TARP did was to avoid the Depressions that followed 1893 and 1929, but there is evidence hoarding continues and under those circumstances no genuine recovery is possible.

First off, you are wrong, hoarding is not what caused the Panic of 1893 nor the Crash of 1929. For a "real account" of what happened I refer you to Richard Salsman's lecture "The cause and consequences of the Great Depression." The economist that promote the ideas that your are repeating are fundamentally unsound and hence they have a total misunderstanding of the causes and it's effects.

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I cannot figure out your question, but it looks like it would require a technical response I could not come up with in any case.

Nothing that technical about it.

QE is always the same. You buy up debt with dollars. You can buy long term or short term debt. Your aim is to lower its yield i.e. make it cheaper. That's liquidity.

Everybody (and we lived through this QE and traded it, so I saw this first hand) was expecting Keynesian QE. I.e. stimulate the longer term maturities which are linked to mortgages (to boost Average Joe's cost of capital) but what Bernanke did was (promise to) buy up (it can still change and people are now trading THAT) very short maturities where yields were already at zero.

QE is not technically "printing" money since you are exchanging longer term assets for short term ones. However, it does screw average Joe (you and me) by devaluing what he presumably holds his savings in, USD, transferring his wealth (which is the desired effect) to those who were smart enough to hold government bonds in anticipation of the orgy.

Why am I bringing this up? Because the bailout has nothing to do with Keynesianism. The bailout, or rather the emergency actions you describe, are the result of decades of bad regulation of investment banks, tempering with the mortgage market especially (see: http://equityprivate.typepad.com/ep/2009/0...-a-wretch.html), tempering with interest rates, commerce, etc. - at which point they managed to find themselves in a situation where they needed to take emergency action, because unlike when J.P. Morgan organized the previous bailout to avoid a run on a fractional banking system that was fairly healthy, this time all the balance sheets were rotten and people were rightly questioning the credit rating of their bank. You cannot bring up emergency bailout as an example of necessary intervention when you are arguing for manipulation of rates and the money supply.

Some argue that a bailout was necessary. That can be successfully argued (the ubercapitalist J.P. Morgan made a good case for it a hundred years ago), but not then keeping management in place, keeping the same policies in place, not restructuring, and providing the banks with substantial capital and insurance when what should have happened is an orderly restructuring (see Lehman). The balance sheets are just as unhealthy now, and as we'll see as the MBS/loan putback/chain of title double layered mess breaks out, banks paying up another 150bn USD will wipe out their common equity and this time, there may well be no political capital for a further bailout.

That covers your bank bailout example - now please could you provide justification for the second round of QE we have just witnessed?

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The "hoarding" you refer to is more commonly known as a balance sheet recession (see Richard Koo: "Holy Grail of Macroeconomics") which is a fairly rare event that occurred in Japan in the early 90s and is finishing today. After an asset bubble, consumers and corporations pay back their excess debt, reducing the demand for private sector debt (as opposed to a Keynesian theory of banks being unwilling to lend). No liquidity injection will ever make debt cheap enough (Goldman Sachs calculated the rate at which corporates would be willing to borrow would be around -8%, yes negative, requiring 4 trillion+ USD QE) to stop this cash sitting on bank balance sheets. Koo's solution is to stimulate the economy by having the government borrow the cash instead, creating demand for capital and stopping it from sitting there unutilized. Somewhat of a case can be made for this to be done if the government is not levered, and if there is no market provider of solutions for very large scale, long term projects (which I think there always will be, regulation and authorization from the government being the main thing in th eway). I don't think it is wise, however, to try and stave off depression like Koo suggested for Japan whose yen will most probably be in the general area of the Italian lira by the end of the decade as a result if your country is indebted to the hilt already. Better take a recession on the chin, deregulate, lower cost of labour, make it attractive for new companies, etc. and watch normal, capitalist growth take over.

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See Canada as an example of a successful restructuring leading to rapid economic growth: http://www.investorsinsight.com/blogs/john...8/o-canada.aspx

Massive fiscal reductions, enormous economic growth, and the "loonies" up north going from third world to first world country in the space of a decade (much like Chile under Pinochet).

Doubt you'll ever see Krugman talk about this.

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