I can't imagine energy staying this low for very long. 80+% is fossil: increasing consumption, finite supply. Short term booms and busts are possible, but I fail to understand how the laws of physics permit a secular bear market in energy until we have something really replacing fossil fuels.
Conventional wisdom seems frequently wrong in economics. If deflation is now the expectation, inflation might be around the corner.
This is only true in a trivial sense. As it should be clear by now (although to be fair it also should have been clear 30 years ago), more effective extraction methods are developed at a steady pace.
[EDIT: since this has been confused multiple times, let me clarify that "trivial" and "absolute" are not antonyms.]
No, it is very true in an absolute sense as well. It's just that border keeps on shifting but underneath that there is a very real finite amount that exists, and not all of that will ever be extracted.
I was thinking of exactly that absolute sense. I consider that sense trivial, in that it won't ever affect our economic situation. (I assume we'll have some other way of making plastics centuries from now when extraction tech finally stops improving.)
> I consider that sense trivial, in that it won't ever affect our economic situation.
It is already affecting our economic situation in a very real sense and it has done so catastrophically on several occasions in the past.
Imagine a world where oil costs $500 / barrel and you're looking at a totally different world than the one we live in today. That would completely alter the balance of power.
Well, let's not bicker. If you're contemplating sustained (not temporary spikes!) $500/b then you don't agree with TFA's claim that "energy prices are going relentlessly down", although you state above that the feasible extraction "border keeps on shifting". Presumably you envision some factor that will stop innovation in extraction, which would be interesting to learn.
We are awash in energy, that's not the problem. The problem is in capturing that energy and that energy comes in many forms and only oil currently allows you to project power on a global scale.
"It's raining soup, and all we have is forks"
And energy prices for say electricity could be going down while energy prices for petroleum could be going through the roof. Utility pricing for energy is historically coupled to the oil price but that won't be sustainable as an ever larger chunk of the energy consumed electrically is generated by renewables or nuclear.
The big wildcards are:
- ITER
- further dramatic reduction in solar panel pricing
- mass transportation using electricity
- battery technology
- the first successful long range electrical airplane
Imagine a world where there exists a perfect substitute for oil at $150 / barrel through some form of magical synthesis using renewable energy sources.
Today, that world would look almost identical, since oil has never been expensive enough to justify using such a hypothetical technology. But it would never look like the naiive "oil is a finite resource and must therefore always increase in price" world foretold by peak oil doomsayers.
Since supply is absolutely finite and EROEI declines over time (easy reserves are used first), fossil fuel extraction as a general economic phenomenon is basically a bubble. Bubbles have a way of going higher and further than anyone expects. As they do so, everyone gets their turn to look like a fool. Initially the bubble skeptics look like idiots and the believers are repeatedly proven right as the bubble builds and builds. Then the bubble pops and the situation inverts. When bubbles do pop they often do so rapidly and destructively.
To the extent that our civilization is dependent upon fossil fuels, complex technological civilization is therefore also a bubble.
I'm really surprised this doesn't scare the crap out of more people. It's really simple math and physics, and most of the people here have lived through two economic mega-bubbles so you all know what a bubble looks like. You've all seen how "it's different this time" until it isn't, and then crash.
If we're still 80+% dependent upon fossil fuels and a real crash comes, this could be an extinction level event. It would likely trigger a global thermonuclear or biological war, since game theoretically the rational course of action would be to attempt to exterminate the rest of humanity as quickly as possible so you have some chance of survival in the face of a rapidly collapsing resource base. A likely scenario would be a brutal Darwinian war of all against all played out in a matter of years, and given our capacity for destruction it's possible that nobody would win.
Slower but equally catastrophic scenarios are possible too. An oil crash could lead to immense expansion of the use of coal and coal-to-liquids technology, which would cause exponential increases in CO2 emissions per unit energy generated. As EROEI crashes, we just dig up exponentially increasing quantities of carbon since the net energy profit per unit is declining. If we think we have a carbon problem now, imagine the emission curve going hockey stick. This ends with planetary desertification, an anoxic event, or some kind of chaotic flip to a new ice age.
This IMHO is the existential threat faced by humanity in the 21st century. Given the likelihood that similar deposits of easy energy are found elsewhere in the universe, I personally think this is a good candidate for one of the "great filters."
(I've speculated that the first great filter is warfare, the second is ecology, and the third is a non-expansionary planetary utopia -- leading to gradual disengagement, birth rate collapse, and fade to black. A pleasant extinction event if you will.)
The Pacific Ocean is finite, but if I try and empty it with a bucket or even a fire truck, it might as well be infinite.
Most explanations of 'peak' hydrocarbons make two errors - the first is that they don't understand what reserves are, and the second is that they don't factor in technological innovation as a cost reducing force. People like to throw around 'moores law' as applying to solar and that it will cause it to overtake other energy - but what they forget is that moores-law changes also apply to extraction technology, mind that EROEI continues to favour hydrocarbon based technology, and will do so for a long, long time.
The development and adoption of technologies that will (and must[1][2]) replace fossil fuels are accelerating[3][4]. The combined effect of better technology and legislation will drive demand for fossil fuels into the ground over the next few decades. There is some speculation[5] that this is why Saudi Arabia won't cut production to drive oil prices back up.
For example Germans have the electrical energy equivalent of 21 nuclear reactors installed on their house roofs in the form of solar cells nowadays. Sustainable energy has very low variable costs.
I feel like this is a blind spot of VCs - thinking that every oscillation in something - like the current price in oil - is the "new normal" - when it is just as likely to go back to where things were before in 3-5 years.
I think it's just to get their name on a few soundbites rather than actually believing what they say. It's harmless to call something the "new normal". Even if it proves to be temporary it's relatively easy to spin it so that you were correct anyway.
A slow and steady deflation is the natural state of affairs when productivity is advancing and the social environment is relatively stable. Economists panic about things getting cheaper because they are compromised by the current banking system, which is based on fractionally reserved debt and requires inflation to stave off a general run on fictional assets.
Consider: computers have been getting cheaper for a generation and its been one of the greatest economic boons in history.
I'm aware of the standard economic criticisms of deflation, I just don't agree with them. The massive deflation shock of the Great Depression was due to the preceding leverage boom, and should not be used for a general analysis of deflation without considering that boom.
Deflation is usually good. Things we want cost less of our labor. The benefits are widely distributed with no early receiver advantages as there is with inflation. This is a good thing.
The problem with deflation is that we are a nation of debtors. Deflation causes debt to become more expensive, thus raising defaults and all of the ripples that follow.
edit: I should clarify that I don't completely disagree, just that debt is the real problem. No one wants to endure the short term pain so we keep "kicking the can down the road" as they say.
I agree, I think we are probably too far gone at this point. There will almost certainly be a massive deflationary shock anyway, because total debt isn't expanding at anywhere near the rate necessary to keep up with the pre-2008 curve. (Last I saw, about a year ago, the gap was 30 trillion dollars between the L1 total debt and the extrapolated pre-2008 L1 curve.)
Regardless, I think its important to point out that a slow and steady deflation is actually an ideal or at least a reasonable state for an economy.
Reasonable yes, but I don't think you can go as far as to say that it's ideal.
The ideal state for an economy is one where the rate of inflation/deflation is determined by the market. This would happen if central banks were disbanded and the production/circulation of currency was left to a (regulated) private sector with a healthy number of competing companies innovating to have the best currency on the market.
What we are seeing now is a natural adjustment to years of accumulating debt under an artificial, inflation-targeting central banking system. Central banks have tried their best to prevent deflation in order to support the debt-driven "fractional-reserve" system that has created an unsustainable network of debt that is no longer tied to the productivity of real assets. A system of competing private currencies would remove artificial signals manufactured by central bank monetary policy and gov. fiscal policy.
Sure. I'm saying, ceteris paribus, advances in technology should make the things we want less expensive. That's generally (though not always) why we bother to pursue them.
I'm curious how competing currencies would work in practice. Are businesses required to accept any currency? Can anyone create their own currency? How do you regulate private currencies?
1. No. Businesses (by federal law), aren't even required to accept dollars now.
2. Yes, but would you use Honest Achmed's Used Cars and Dollars?
3. (Private) Ratings Agencies would rate currencies and maybe each other. The market picks the winner based on trust, convenience, or whatever else it cares about.
In practice, I'd expect an 80/20 rule. Two currencies would make up 80% of all transactions in a given region, with a rather large tail (gold/silver/basket of commodities backing, fixed exchange rates, etc). Multiple currencies is nearly unworkable with paper money, but quite trivial with digital paper money.
Hayek also wrote a great paper on the subject in 1990. In it he quite presciently predicts the current conundrum of the euro zone and makes the case for competing physical currencies. He realized that this would never happen in his lifetime but went through the the intellectual steps nonetheless. Virtual currency could make his thesis possible.
I believe the "ideal" - at least when you assume central banking - is a perfect fit between the expansion of the money supply and the "value" it represents - IOW, a dollar/pound/ruble means the exact same thing, year by year. That would amount to population grown ( which is lagged by the age at which people go to work ) and productivity growth. I believe that describes "zero inflation" but it's sort of hard to say.
It is possible that the previous evils of deflation no longer apply ( because technology) , but I'd rather not find out through experiment.
Also the biggest tickets to middle class wealth in the last few decades have been pensions and home equity. Home equity being the ability for a young couple to borrow money at a low rate on a stable asset that appreciates at a higher rate (over a 30 year time horizon). Pensions have been removed. If housing price growth stops as well, that's a significant double blow.
Housing and rental costs have been a substantial drain on what would otherwise be the new middle class. For the most part they don't (yet) own homes, lower prices can only help them.
Consider how much doesn't get invested by the poor and middle class into education, paying down debts, or retirement savings accounts. It feels rather absurd to suggest that they would somehow benefit from continually raising the price of something they need to buy.
Precisely. I understand it like this: if the United States has some $18tn of debt and it has to pay this back in dollars that are more valuable than they were when the debt was issued, that debt load quickly becomes unserviceable. However, if they successfully inflate away some significant percentage of the value of the USD, the nominal debt remains the same but it becomes lighter in real terms.
Pippa Malmgren - correctly, I think - describes this inflating away the value of the currency (and by extension, all outstanding debts) as just another form of default, and one that has been used many times in history. It's just more stealthy than saying "we can't pay, so we won't pay" or something similar[0].
But government debt is DESIGNED to be inflated away. The U.S ran a then-terrifying $2B deficit during WWII. The whole point of government debt is that GDP rises eclipse it over time.
I am rather shocked that anyone can't tell the difference between the effects of mild inflation on debt and default.
Debt is not a blood oath - it's just a tool. We're better off if we can use this tool and use it properly. With deflation, that's harder.
The markets, however, figure that out, and price that in. Which is why countries with weak currencies don't have an option to borrow in their native currencies.
You seem to be conflating the cost of some goods going down with deflation.
Wages would fall with the deflating currency. Goods would not cost less of your labor. They would cost the same.
The benefits are distributed only to those who already have money. Those who are in debt are harmed.
Not to mention, those standard economic criticisms that you don't agree with. Even the working rich with a respectable bank account are harmed in a deflationary spiral.
The deflation has to be severe enough to cause people to substantially change their behavior. Suggesting that deflation always leads to a deflationary spiral (which you implicitly did) doesn't hold.
Remember, wages are sticky so people aren't necessarily going to be making less money, just that stuff will be cheaper.
As things get cheaper, it's possible that sales volumes will go up (econ 101). That could then offset any reduction is gross profit, if there is any. There may well not be, because the reduction in the output price might simply be from the reduction in the material input price.
Massive deflationary shocks cause a lot of problems. But how do you get deflationary shocks? By trying desperately to pretend deflation isn't happening for many years, and then eventually the market stops believing you (you being the central banker) and prices adjust to a more realistic level.
Perhaps the folks who are trying like mad to prevent a mild deflation are in fact the cause of the deflationary spiral that's a problem. Perhaps in their absence we'd just have mild deflation that doesn't cause the whole world to blow up all at once.
Wages are already falling in real terms in many cases. There is a certain part of human psychology that locks onto numbers (I was paid x, therefore I should continue to be paid x) which perhaps explains the aversion to deflation.
I think part of the problem is that endless credit growth is what constitutes economic growth, instead of increasing productivity as it should be. So by preening and saying we cannot accept lower prices, we ignore the obvious long term benefits of stable and falling prices.
There are winners and losers in deflation, just as there are winners and losers in inflation. It's better to take a neutral view of the distribution of benefits because someone wins or loses either way, and it helps to think more clearly when you realise everyone has a bias based on which camp they are in. What should matter for the sake of the debate is whether everyone would be better off overall.
Computers have decreased their prices in real terms, not nominally. An Apple II was originally priced at $1300. Do computers now cost $13? They would if you had deflation or if they had been cheaper in nominal terms.
Computers haven't become cheaper in terms of their price-tag, but more affordable thanks to your increased nominal income (inflation!) and because they have become cheaper relative to other other goods whose prices have increased more.
Of course computers do a lot more today than 30 years ago, but I'm sure that more suitable examples can be found (digital watches anyone?). And think of the debt the computer manufacturers could pay more easily thanks to all that inflation!
The price of an apple 2 computer, with no monitor, was $1300. You can get a 21 inch imac for $1100 today. 18% nominal deflation! Apple must be absolutely broke!
Look, I know. I went to the same "inflation is necessary" schools you did, and listened to Cal Econ professors patiently explain to me how without it we'd all be rooting around in the dirt, eating grubs. At some point I just stopped believing that.
That's with only 4KiB of DRAM; per Wikipedia, $2,638 for 48KiB (and it was indeed very expensive back then). And using tape cassette for storage like other computers of that era. Add quite a bit for 1 or 2 floppies, and I found a reference to a 10 MiB (true MiB! :-) Covrus hard disk that went for $5,350 in apparently 1980.
I stopped believing when nobody could provide me with an economy that collapsed due to deflationary spiral, but dead economies from inflationary spirals happen several times per century, right up until the current day.
There is, however, evidence of periods in the Roman Empire where price stability lasted for spans of several emperors (the ones that didn't debase the currency). But when emperors decided to debase the currency, those long periods of price stability were destroyed in the blink of an eye.
Many economists tie themselves in knots trying to explain how inflation has complex causes, but it is 'always and everywhere a monetary phenomonen'
Deflationary economies are far more rare, and relatively difficult to achieve. Deflation isn't achieved by a lack of confidence in a market, and that's the key distinction and why you'll never find a "deflationary spiral" that leads to the collapse of a country. All you'll find is stunted growth and unemployment.
"An Apple II was originally priced at $1300. Do computers now cost $13?"
There is a hard limit in price set by a few things such as the cost of raw materials that go into any piece of tech, but other than that, you may consider that we have "computers" (well, devices actually) priced around $13 at par with or surpassing many capabilities of Apple II.
Deflation of some things (like common inputs to creative endeavours) will increase our general ability to create little monopolies where we have much better pricing power.
For example, every time we cut the price of a 3D printer in half we bootstrap thousands of new creative into a position where they can have much stronger pricing power by doing something very, very, different.
Things do not cost less in real terms under long-term deflation, because your nominal wages and assets will fall at the same rate as the prices of the goods you buy.
Inflation vs. deflation matters because of the incentives they provide for asset balances, not because consumer goods are more or less expensive.
Inflation incentivizes storing value in investments, which makes capital available for innovation. Deflation incentivizes storing value in currency, which does not. Which is better for long-term economic growth?
The G7 between them have been deflationary exactly twice in the last 100 or so years that we've been keeping good records on this. That's twice, for less than a decade each, in 700 country-years of economic experience.
That includes time on the gold standard, time on fiat currency, pre-euro, post-euro, WWI, WWII and the cold war. Early industrial to post industrial, pre-computing and high frequency trading. Only a couple times through all those crazy situations was deflation a thing.
So an extremely rare and divergent situation is the 'natural' state of affairs? Are we talking in the eating nuts and berries sense of natural here, or what?
Well, they've also got horrible growth and debt problems, but I was trying to point to probability of the scenario -- Japan is indeed one of the two cases I was thinking of but thanks for correcting me from a decade to ~~20 years (1995 will always be 10 years ago).
So out of 700 country-years across the G7, we've got Japan deflationary for 20 with a mediocre-to-lousy economy, and the US deflationary for maybe 5 if we round up, during the great depression.
From those datapoints, I'm supposed to conclude that deflationary at 25/700 is the 'natural' state of things, rather than exceptional, and additionally that it's a good place to be?
> From those datapoints, I'm supposed to conclude that deflationary at 25/700 is the 'natural' state of things, rather than exceptional, and additionally that it's a good place to be?
I'm not sure what you're supposed to conclude. It appears, from my rough estimation, that as economies develop (as Japan's did, as the rest of the first world is currently) they'll reach an economic equilibrium which appears to be deflationary in nature. If you continue to become more and more productive, and there are only so many consumers and so much to consume in they physical world, prices should go down.
Well, there's your rough estimation, and there's actual statistics recorded in, for instance, the G7 over the last 100 years[1]. They disagree. Did something change where this is the 'new normal' and I'm just misunderstanding you, or are you claiming all the statistics were recorded wrong?
[1]You can use a different basket of countries if you want but changing political situations tend to overshadow the economics everywhere else.
The G7 is not limited to US & Japan. Why don't you include those other 5 countries when talking about the great depression of the 1930s ? Why don't you include the 2008 and 2014 deflation in most of those countries ? Do so and you'll get close to 100 years.
The problem I see is the lost generation. Everything was set up expecting inflation. And a whole generation looses out on reasonable opportunities in life as result. A similar thing seems to be happening in Europe and the US.
Being able to afford pension payments that will result in a worthwhile retirement. Being able to afford an average house with an average wage. Being able to go to university without crippling debt.
Just think in simple terms: as technology allows us to produce more of what we want with less labor and time, ceteris paribus, prices should fall relative to our labor and time.
A man gathering berries by hand makes for expensive berries. A man harvesting berries with basket and stick technology will make the price for them fall. What's true for this primitive example becomes even more powerful as you move up the production and technology chain: a woodworker with proper power tools can make chairs far more affordable to other people than someone working with simple hand tools can.
So, yes, everything else being equal, the advance of technology will cause prices to decline over time and this is a natural and good thing. It's a measure of the level of corruption in economic discourse that this strikes intelligent people as a novel or insane concept.
Deflation doesn't mean a thing about prices of goods relative to our labor and time. It speaks to the nominal relationship between units of currency and prices of goods, labor, and time. Goods and labor are on the same side of the equation, although labor's price moves a little more slowly.
You could argue that the economic conditions today - a technological revolution, widespread social reorganization, whole industries replaced, and increasing automation - have much more in common with the late 19th century than with all of the 20th century.
I think whether or not deflation is "good" depends on how you feel about wealth distribution.
Inflation is a tax. Politicians don't like raising taxes, because it's unpopular. The government still needs money though, so they inflate the currency which redistributes the money from the citizens to the government. Government redistributes the wealth back to citizens through services which usually provide more to the less wealthy members of society.
I think wealth distribution is a good thing and I'm not opposed to it being done in this manner.
Yes. Yes. Yes! I've read the first 5 paragraphs of this and I'm pretty sure I've found my kindred spirit. Anyone know the best way to contact this guy?
I think this line of reasoning conflates deflation caused by a massive deleveraging crisis and deflation caused by more of the economy jumping on the train of dramatic price decreases that the technology industry has always dealt with.
Our global deflation problem is caused by too much debt. Debt can't increase faster than the economy indefinitely because it becomes impossible to pay back. But it had been increasing in that fashion for quite some time before the financial crisis. We're now living in a world where debt isn't growing at those fast rates, and central banks have been trying to keep the economy going without it.
Central banks have kept the economy going by buying low-risk assets with new money, which makes the value of assets in general go up. They've also set interest rates to zero, which makes it attractive to borrow money. Asset holders feel richer and spend more money than they would otherwise. Investment opportunities become more attractive because it's cheaper to borrow money to take advantage of those opportunities. We get economic growth. These were reasonable actions for our central banks to take.
But eventually, the actions of our central banks will need to be reversed. Low interest rates and quantitative easing in perpetuity will eventually cause inflation when the economy gets healthier, or asset prices will get too high for people to continue to expect future gains. This is why the Fed is planning on raising interest rates this year. The problem is that raising interest rates will cause people to stop expecting higher asset prices as well, and they will sell.
Deflation in the long run is something to worry about, but it's strange for me to hear long term worries when we have more serious short term worries. How do you stop our extraordinary monetary policies without dramatically popping the asset bubble and causing the problems that our policies have been avoiding for six years?
The Fed is still not even hitting its own 2% inflation target. Long-term inflation indicators are showing we'll have below-target inflation for a long time. People have been saying inflation is right around the corner ever since QE started, and it's nowhere in sight.
I would argue exactly the opposite -- deflation in the short term is something we should absolutely worry about. We know very well how to put a lid on inflation once it starts, but for now we have exactly the opposite problem.
Imminent inflation isn't the only problem to worry about. The main problem is investors believing that the market has topped. If we keep rates low and the world's central banks keep buying assets, eventually prices will reach a point that people stop believing. The other option is that when expected inflation goes up, people will predict that interest rates will go up, and as a result, they'll believe that the market has topped.
If asset prices drop precipitously, we might be back in 2008 (or worse).
The longer we stay in a zero-interest rate environment the more distorted things become, particularly here in the Bay Area.
Every day more and more cash pours into the Bay Area because it's one of the best risk-adjusted investments. Be it tech, real estate, or biotech, everything is booming. Without an alternative things will continue along this path. There's just more money here now than there otherwise would be. Some call it a bubble, some don't—it doesn't really matter.
From a certain perceptive, it's a good thing. If things stay like this perhaps the giant pool of money will continue to pool around things that are relatively riskier than the traditional financial instruments.
This seems strange to us, but maybe this is actually a better allocation of capital. Maybe we are just moving into a world where a relatively higher portion of the world's capital flows into biotech instead of treasury bills.
With inflation running so low in the U.S. for so many years, it's easy to try to extrapolate this trend as the new norm. And, yes, there are technology pressures that push costs down (i.e machines replacing workers, Moore's law, etc.)
However, there are two big factors that argue against long term deflation:
1) Employee wages: Built into the compensation system is a review process that rewards workers for their work. To date, this process includes a wage increase in the form of a "raise". In an era of full employment, periodic raises push costs up, which leads to increases in prices, which leads to inflation. To change this, the compensation system would need to be changed or employment severely reduced.
2) Central Banks: Most central bankers will use all their tools (in the form of monetary fiscal policy) to prevent long-term deflation. So, there will likely be a major counter-acting force from large governments over time.
> To date, this process includes a wage increase in the form of a "raise". In an era of full employment, periodic raises push costs up
Not inherently, I don't think. If every employee started on $10 and got a $1 raise every year until they retired, and there was a 1:1 ratio of joiners to retirers, there's no overall inflation. Individuals' wages might rise over time, but the average wage doesn't have to.
> Most central bankers will use all their tools (in the form of monetary fiscal policy) to prevent long-term deflation.
Empirically, central bankers respond to a bursting asset bubble by blowing a bigger asset bubble. Dotcom bubble crashes, blow a housing bubble. Housing bubble crashes, blow an everything bubble.
I think this only holds true if needs (or perhaps, desires) remain completely static. If standard of living never increases and what we want to do with resources never increases. If you want to compare Moore's law, technically the 5khz speed of the ENIAC would cost pennies today. So, why do we spend hundreds of millions on super computers? Simple, we already did what 5khz did for us, now we want to do more. If commodities are cheaper, new industries will spring up that make use of that pricing. The builders of the ENIAC may not have envisioned people coding in their basements to make a nice living, but that's what they paved the way for. If there are deflationary effects in action, though there will probably be down sides, I'm excited to see what new industries pop up from it.
It's worth noting that the price rise is in large part due to the switch away from coal[1] towards more expensive nat'l gas and renewables. A big chunk of the cost "increase" can be attributed to actually paying the cost of externalities (i.e. the costs of coal-burning to others is not reflected in the price).
You are right though, it does make the claim that "energy prices are going relentlessly hard" odd without further context; presumably he was talking about a more apples-to-apples comparison of how each type of energy is dropping in price (oil prices dropping, renewables getting cheaper), but that the mix is shifting towards types of energy that are more expensive (and have less externalities) so _residential_ energy prices reflect more of the cost.
Can someone explain this to me? The government seems to report that inflation is very low, bordering on deflation.
But what I see is the cost of these things skyrocketing: education, housing, and health care. That is -- the things that real people actually need! I don't care about the cost of cell phones and TVs and so forth. Or even gas (for me). Those are a drop in the bucket.
Education: I graduated in 2001 from an Ivy League university. It cost $32K a year as far as I remember. The same thing costs $50K or so now? That's a pretty astounding increase in such a short time.
Housing: Obviously situations are different throughout the country, but in the wealthier areas like NYC and the Bay Area housing prices seems out of control. I feel like housing prices aren't falling in the US in general besides economically distressed places like Detroit, but I could be wrong.
Health care: Costs also seem to be rising quickly, but admittedly that is probably because health care is generally much better than it was 50 years ago and people will pay anything to survive, and they are surviving in greater rates (e.g. compare Iraq veterans to veterans of previous wars.)
Sure all of these are just anecdotes. But I think there is something to the experience that education, housing, and health care are increasing in cost. Probably the main reason is that they are NOT as affected by globalization. And they are essential to life.
Lumping everything together under "inflation" or "deflation" seems misleading. There are many different parts of the economy and they have different properties.
Education, and Health Care are still very labor intensive. The benefit the author talks about wrt Moore's law hasn't yet made a serious dent in either... quite simply, computers haven't displaced humans yet, as they have in many other fields. Nearly everything else has become more industrial over time, making it relatively cheaper.
Education may never be fully automated - it is still (over-simplifying it a bit) one prof talking to a bunch of students a couple of times a week. On-line courses are fantastic, but young people still need coaching and inspiration coming from other humans.
What is interesting is that, while the model of education has not changed, higher education costs had increased by 8-10% above inflation over the past 20 years.
The money was not spent on research/learning. It went to build up spa-like amenities (gyms, swimming pools, etc), but primarily to administration personnel. Loads and loads of senior vice presidents and chancellors. But wait, the best paid profession in education? University sports coaches: http://deadspin.com/infographic-is-your-states-highest-paid-...
I hope online courses can provide some deflationary effect, and force re-focusing on research and learning which should be all that education is about.
They're lying, by intentionally either miscalculating inflation or not counting things that are inflating a lot. This isn't unique to the Fed of course, seemingly most governments and central banks do it (whether China or Venezuela). By lying they acquire room to inflate at a higher rate, to fake growth, bury entitlements, devalue debt, and trick some of the population into thinking things are getting better (while the real standard of living declines or moves sideways).
The Bay Area (and probably New York) are alternate housing realities that have nothing to do with the larger picture of the economy.
And housing costs in the Bay Area can mostly be explained by a bizarre alliance between left progressives and wealthy homeowners who both somehow think of the view from their bedroom windows as a basic human right.
IANAE. Education and housing could both be considered assets (i.e. you put money in, then get it out again later, plus/minus some gain). Not that I'm implying that either are currently a good investment, just that wrt to deflation, they should be thought of assets. I would assume that in a deflationary environment (with static wages) disposable income would increase, which would cause money to flow to assets, and push up their prices. Again, IANAE.
The most commonly referenced measure of inflation is the Consumer Price Index, tied to the increase in price of a "market basket of consumer goods and services." The BLS chooses sample goods/service in categories like housing, medical care, apparel, etc.
I believe the core CPI figures leave out food and energy, since their prices are sometimes more volatile. So, the CPI does include healthcare and education, but I suppose those price increases must be outweighed by price decreases in other sectors.
[edit] In addition, there are "weights" for goods in different categories. Ex. in the document I found from 2013[1], the weights add up to 100, with housing-related items having a total weight of ~41.4. Healthcare is 7.5 and education 7.0.
So, the actual CPI numbers are somewhat manufactured. The weights correspond to what the BLS predicts the average family spends, proportionally, on those different goods. If your expenditures don't match those proportions, you will "feel" inflation at a different level in your own purchasing.
This is the difference between macroeconomics and microeconomics. Macroeconomics studies the economy as a whole using a set of very broad principles, while microeconomics looks at smaller segments with their own domain-specific rules.
Education: There is an artificial restriction on the number of "good" universities. As demand for Ivy League schools increases, supply does not, so people are willing to pay more and more for it. It takes many years to build up a school's reputation. Also, the US Government guarantees student loans, so while the financial system would normally correct this by appropriately incorporating risk when issuing loans to students attending sub-par schools, they do not in this case. But some pull-back is happening; specifically with law schools.
Housing: This is a relatively recent issue, but essentially it's the same thing as education: there are only so many "desirable" places to live, but an increasing demand for them. The supply of housing in popular areas can't increase as quickly as demand; it can take a decade or more just to acquire the land to build a dense multi-family structure on top of a block of row homes. The bay area also has a lot of problems in that it tries to protect existing communities by making it pretty difficult to build anything, which ultimately just drives up the price of housing. NYC has other issues because globally, wealthy people see it as a status symbol to have an apartment in Manhattan and London. They buy it as an investment and often don't use it, but this prices out people who live in the area.
Health Care: This is a whole other subject; pricing in health care is largely NOT driven by supply and demand. It's closer to extortion; if I tell you that you're going to die or be disabled unless you pay me $50,000; you're going to pay me. Congress has shown little appetite to actually fix the problem: there are too many middlemen with opaque pricing, and consumers will pay whatever they have to when it comes to their health. Prices will continue to rise until people start to demand action.
Inflation is measured by a basket of goods that are weighted by consumer expenditure on them. In short you can make your own index that measures changes in the important for you prices - "yourflation", but that is not what inflation is and there is no conspiracy there.
In my country in addition to the headline CPI number there is another basket with items consumed by the poor and also a calculator on the website which helps you figure out your personal inflation by having you specify on what you spend your money on. You could try the BBC version for the UK: http://www.bbc.com/news/business-22523612
The issue is that you are not average, which is what the CPI uses. The average American doesn't live in NY or SF and doesn't pay student loans for an elite institution.
Here's the issue I see: the rich cities have decoupled from the rest of the American economy. Rich cities are experiencing very high inflation, while poorer parts of the country experience no inflation, or even deflation.
The Fed only has one lever. It cannot make money expensive in SF while making it cheap in Detroit.
When I visit family in Idaho, I'm sort of shocked how rich I am. But in Seattle I'm squarely middle class. The divide seems to be growing very quickly.
When I visit family in Idaho, I'm sort of shocked how rich I am. But in Seattle I'm squarely middle class. The divide seems to be growing very quickly.
Last year authorities in the Houston metropolitan area, with a population of 6.2m, issued permits to build 64,000 homes. The entire state of California, with a population of 39m, issued just 83,000.
Want to be rich? Get out of Seattle, California, and New York.
Oh look, this comment again. California doesn't need a bunch of new permits yet because since the boom & bust there have been literally entire neighborhoods of unfinished (builder went bankrupt or whatever) residential construction. On top of that you can build pretty much wherever you want east of the 5.
It's hilarious that you mention parking minimums; a friend of mine moved his industrial business to Idaho because, hey, cheap real estate. Then found out the building he bought wasn't going to work unless he spent some ridiculous 6 figure sum building more parking spaces, the number of which is determined by building square footage and not the actual number of people. It's definitely not a California-only thing.
There's probably a causal relationship between the effects you describe. Because the Fed sees prices as deflating in Idaho or Detroit (flyover country is a large portion of the aggregate stats), they pump more money into the economy. They pump more money in by dealing with financial firms in NYC, who then invest that money in VC firms in Silicon Valley, who fund startups because that seems to be where most of the money congeals. As a result, prices rise dramatically in NYC and the Bay Area, but very little of the money actually gets to the Midwest, South, or Mountain states.
"Helicopter" Ben Bernanke was roundly mocked for his comment that the Fed should just throw money out of helicopters, but that would probably be both more equitable and yield faster, more easily controlled effects on the economy.
Take a look at Matt Yglesias's The Rent Is Too Damn High (http://www.amazon.com/dp/B0078XGJXO); many "fun" municipalities like Seattle have restricted development to the point that housing is extremely expensive. If you move from Seattle to, say, Houston or Dallas, you'll probably see your effective rent shrink by 35 – 50%.
Secondly: see Tyler Cowen's books The Great Stagnation and Average is Over. Those books are too sophisticated and deep (though they're quite readable) to summarize here, but the shortish version is that Western economies are undergoing a lot of profound shifts driven by a combination of technology and Baumol's cost disease.
in the last couple years have been rent, medical, and dental in that order
Alex Tabarrok's Launching the Innovation Renaissance is also good: regarding medicine and dentistry, part of the issue is Baumol's Cost Disease and part of it is the powerful lobbies that restrict entry into those fields through licensing regimes and other means.
Finally, a general note: be wary of any answers in this thread that don't cite any sources and ideally those sources should be books. The issue is too complex for simple answers, and the simple answers that one tends to hear also tend to be wrong or missing a lot of important information.
Education: I graduated in 2001 from an Ivy League university. It cost $32K a year as far as I remember. The same thing costs $50K or so now? That's a pretty astounding increase in such a short time.
An increase of 56% in 14 years is only 3.2% per year. Sure, that's more than the 2.0% average inflation rate, but I wouldn't say that it's an astounding increase.
That's probably true, but at least in my school, the greatest increases had been in the last few years. When I graduated in 2008, 2009 tuition was increasing something along the lines of 7.4% Probably the majority of that 14 years it went up relatively slowly and has gone up much more lately.
> But what I see is the cost of these things skyrocketing: education, housing, and health care. That is -- the things that real people actually need!
You have to be careful about that, because in those areas there are confounding factors. I went to Georgia Tech in the early 2000's, and paid about $60k for my degree. Today it'd cost well over $100k. But it's also a totally different product. More services, fancier buildings, smaller classes, etc. Also, these institutions aren't growing as more and more people go to college. Instead, they're lowering admissions rates and becoming more elite products. The admissions rate at many top universities is half of what it was when we went to college.
Same thing with healthcare and housing. People are using more and better healthcare than before, and living in bigger houses. I grew up in an 1,100 square foot three-bedroom built in the 1960's. Such a common floor plan at the time that my wife grew up in an almost identical house on the other side of the country. That's about the size of your typical two-bedroom apartment in this area now. And the neighborhood is also a different product. What was a sleepy D.C. suburb 20 years ago is now at the heart of urbanization in the area. Rents in places like New York and San Francisco and DC are skyrocketing, but again they're much more desirable products today. When I was growing up in the 1990's, middle class people didn't go to D.C. except to work or see the museums. They wouldn't dare live there.
You can get a great education today, but there are essentially no more spots at the Ivies than 20 years ago, so if you want the best-in-breed college degree[1], it's much harder because there is more competition.
You can get housing much easier than a generation ago, although there is a trend to be bigger. If you want to be in the best area[1], there are only so many spots and they are not being produced anywhere near enough.
If you want 1960s health care today, it's dirt cheap. But most people want the latest and greatest in health care, personally delivered by doctors. Labor is expensive.
That dollar-for-dollar oil prices have not risen nearly as much as you might think since the 70's, especially not when compared to other items such as real-estate or food.
One of my favorite economists has argued that whether you have 1% deflation, 0% inflation or 1% inflation isn't that different. Most prices aren't really changing - you don't get much of the effects mentioned in the post or most of the comments.
But getting the economy to 5% inflation? That brings a lot of dynamism back!
Saving is the way to bet on deflation. If you really want to bet on deflation simply sell all non-necessary assets now, hold your wealth in cash or 10 year T-bills (not short-term interest bearing debt which are highly-correlated to the rate of deflation), and watch your cash/bonds appreciate relative to the goods you've sold.
I just kicked off a kickstarter to try to builds some experiments to deal with a lot of these issues. So far I'm not hopeful that there is enough interest in looking at these things differently to get it funded, but I'm going to build it anyway.
Core CPI is around 1.7% in the US right now. Energy is affecting the non-core value (currently at 0% or slightly negative). The non-core value is typically very volatile.
The Fed has a target of 2% inflation. Krugman makes good arguments that the target should be 4%.
Meanwhile the Fed is talking about raising interest rates later this year (which is deflationary).
There are two clearly different views forming and it will be interesting to see how it plays out.
Canada has a target 'between 1 and 3%' and our core is currently sitting at 2.1%. We just had a interest rate decrease.
Some recent comments from Krugman about why we didn't see deflation during the recent recession:
>What if we have seen peak energy prices on our lifetime? What if we won’t see long term rates in the US of 10% again in our lifetime?
It's predictable that financial operators will, at some point during a cycle, begin to wonder if current conditions will persist forever. What's fascinating to me is that smart people have to relearn the lessons from not too far back, as if it's all new material. "The new normal" ended a long time ago for many asset classes.
As a credit to Wilson, he's not cheerleading for the ideas in his post. Nonetheless, the questions he raises mirror the idea that the dollar was dead (Protect your wealth with Bitcoin!) or the earlier idea that real estate prices will only go up. Or that the New Economy wasn't bound by the old rules. The peak oil idea was popular in 2006, and celebrities wanted to get paid in Euros during the crisis.
The global economy is dynamic. Times change. Stuff repeats. This time is not different.
Stuff doesn't repeat, it rhymes. We may see the economic cycle upturn again, but interest rates might not go along for the ride this time. For example, in the 70's, stagflation was pretty different that time. Also the balance sheet recession in Japan was also pretty different.
We're riding some major trends in increased productivity that may go exponential, so if that's the case then yes, this time it is very different and the downward pressure on rates from this might put us into a secular deflationary period of a pretty long time. Nobody is saying we'll never see a period of rapid inflation or high interest rates, but merely saying that we may be in a secular period that lasts long enough for that not to matter for anyone alive today.
A persistently deflationary economy would be horrible:
When everyone expects prices to fall in the future, everyone becomes less willing to spend today. Sitting on cash becomes an investment with a positive yield. The less everyone wants to spend on goods and services, the less businesses sell of everything, and the more they have to compete by lowering prices further, making everyone less willing to spend... a vicious circle of economic contraction.
Businesses normally find it very, very difficult to cut employee compensation in line with declining prices, so they end up cutting costs by firing people instead, making everyone less willing to spend, so businesses sell less of everything, forcing them to cut costs futher... contributing to the vicious circle of economic contraction.
A deflationary economy is a negative-sum game in which everyone loses.
Sure it's cheaper, but if you wait another month it will be even more cheap. The longer you can hold of spending, the more you get for your money. Contrast that to a sale. During the sale, things are cheap now with the expectation they'll be more expensive later. Holding on to your money is now costing you buying power.
By that logic why do people buy iPhones? They can wait another year and get the same model cheaper or get a much better one for the same price.
The iPhone 6 just had record sales so empirically there are other factors for consumer purchases that are stronger than the "waiting for items to be cheaper" factor.
It is a fallacy because most consumption can only be postponed for an indefinite amount of time. If I need a fridge because my old one is broken or I just moved house, then I need a fridge. I'm not going to go without for 6 months because I think fridges will be cheaper then. We all purchase phones, computers, cars and sofas knowing that, in x months time, it's likely that the same item will be cheaper or same price but with more features.
It is true that major investments like new factories might conceivably become cheaper but this also ignores opportunity cost - in the same way, with inflation, new factories are more likely to become more expensive, so it's logical to think that in inflationary times, the countryside will be dotted with idle factories built as a hedge. This doesn't happen because of a variety of factors, not the least of which is that people make investments because they expect to see a big margin difference between keeping the cash and having that investment make cash for them. You don't built a new factory because you think you'll make 3% more than bank interest, you do it because you think you'll make 20-50% return on the cash.
The deflationary spiral postponed purchases explanation is a bit like the efficient market hypotheses - plausible sounding but ultimately and empirically not true in practice.
This is the standard story about deflation, but the idea that a slightly deflationary environment will suddenly change purchase behavior has always struck me as a bit academic. The average consumer doesn't buy stuff because they think inflation is going to cause it to become more expensive in the future, they buy stuff because they need it. It seems borderline absurd to suggest that consumers are going to reconsider buying something because in a year it will be a few % cheaper in price.
However, I do agree that a persistent deflationary economy (and the corresponding expectations that it will continue) will have... interesting effects on interest rates, debt, and corporate spending. But I still am not sold on the idea that it's a de facto negative thing. I think saying "deflation = bad" oversimplifies the lessons to be learned from the Great Depression but unfortunately that's the lesson we're taught.
Of course it won't change consumer behavior for everyone all the time. At some point I'm just gonna have to buy that dishwasher. But it will change consumer behavior at the margin and what happens at the margin is what economic thinking is all about.
Also, it's not just about consumer behavior but also investor behavior. Why should I take the risk of investing my money in a new product or company if I can earn a profit by hiding my money under my mattress?
On your former point I actually agree, but that's not the way the 'deflation = bad' argument is usually presented. It's usually presented that "people will defer purchases", full stop, and that would be terrible but it's hard to believe. I agree it will happen on the margins, but that might not be a huge deal.
Investment wise, it always comes down to risk and inflation adjusted returns. Hiding your money under your mattress results in a risk free positive real return in a deflationary environment, but this just the same as buying a short term treasury bond.
It's self evident that just because you can get a risk free positive return, it doesn't mean capital won't take on risk for a higher one. If that were the case, nobody would invest in anything other than government bonds.
Deflation shifts the returns, making holding cash more attractive, so it reduces investment. Reduced investment likely results in lower long term growth as less new businesses and ideas can be funded.
Deflation effectively increases the risk free real rate. So the same effect of seeing the rate on the 10yr rise will be seen with disinflation. The difference being that you get some yield for "free" by just holding the cash and not buying bonds, but this is just incidental. The effect on risk-taking should be the same. So the point is I don't understand why it's treated as a deathblow for investment when we accept interest rate rises all the time without widespread panic about investment coming to a halt.
There is a huge difference between interest rate changes, which are set in large part by the Fed, versus deflation, which is not set by the Fed.
The return on a 10yr (govt bond I assume?) is set by the market - this is not just picked or changed arbitrarily, although returns there are likely influenced by Fed rates.
People control the interest yield for many products through the Fed, so we can avoid a deflationary spiral just by having the Fed change the interbank loan rate (among other things they can do).
Deflation (caused by many types of things from demand shocks to economic fears to war) is often not easily dialed back, and can lead to a deflationary spiral, which cannot be simply tuned by the Fed.
This is the reason the Fed targets slight inflation instead of zero inflation; the controls are not magic and the inflation/deflation tends to hover around where the Fed targets, and by staying away from zero we avoid possibly triggering a deflationary spiral we cannot control.
In short, we have good tools for dealing with inflation. We do not have equivalently good tools for dealing with deflation.
Deflation is not just a problem for "debtors". It's a basic and simple problem with the economy as a whole. The very basic problem is, if the 100 dollars I have in my wallet right now will be worth 110 dollars next year, I would naturally be disinclined to spend my money today?
Now, one can debate whether economic growth model as understood today (where Growth == higher number of transactions) is the most desirable model of economic goodness or not. But so many other metrics of a happy economy (jobs, govt spending on public services, societal optimism etc.) are so tied up to a growing economy in the current model, that the only practical way this could be changed is via a huge political revolution... which has it's own problems. Given all that, it'll be hard for a reasonable thinker to welcome a permanent state of deflation.
And fwiw, IMHO, it's no more than a thought exercise. We're nowhere near an actual permanent state of deflation.
It's arguably been going on ( with interruptions ) since 1992. There are only like two years with CPI greater than 5% in the U.S. since then.
Of course, it's unevenly distributed - medical care, education and housing have all gone up.
I don't think we want nor should we celebrate deflation. It makes a culture hidebound, makes (some) things harder on the poor and can destabilize governments.
Income inequality and political polarization both have a basis in deflation, in my view.
There are nations - like Australia - that do not have deflation. It's not inevitable.
Australia hasn't had deflation because for the last 20 years we've basically hitched our wagon to China in the form of mining exports. During that time (and particularly the last 5-8 years) the rest of our heavy and manufacturing industry has stagnated or died (our last locally made car manufactures are finishing up production in the next few years). Now that China's boom is slowing, and we have basically no other heavy industry left to fill the gap, deflation is a real possibility.
I am basing what I said on Sumner's writing on the subject ( how's that for an appeal to authority? :) ) He seems to hold that Oz uses something closer to NGDP level targeting in monetary policy.
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[ 3.2 ms ] story [ 37.5 ms ] threadConventional wisdom seems frequently wrong in economics. If deflation is now the expectation, inflation might be around the corner.
This is only true in a trivial sense. As it should be clear by now (although to be fair it also should have been clear 30 years ago), more effective extraction methods are developed at a steady pace.
[EDIT: since this has been confused multiple times, let me clarify that "trivial" and "absolute" are not antonyms.]
It is already affecting our economic situation in a very real sense and it has done so catastrophically on several occasions in the past.
Imagine a world where oil costs $500 / barrel and you're looking at a totally different world than the one we live in today. That would completely alter the balance of power.
"It's raining soup, and all we have is forks"
And energy prices for say electricity could be going down while energy prices for petroleum could be going through the roof. Utility pricing for energy is historically coupled to the oil price but that won't be sustainable as an ever larger chunk of the energy consumed electrically is generated by renewables or nuclear.
The big wildcards are:
- ITER
- further dramatic reduction in solar panel pricing
- mass transportation using electricity
- battery technology
- the first successful long range electrical airplane
Today, that world would look almost identical, since oil has never been expensive enough to justify using such a hypothetical technology. But it would never look like the naiive "oil is a finite resource and must therefore always increase in price" world foretold by peak oil doomsayers.
Since supply is absolutely finite and EROEI declines over time (easy reserves are used first), fossil fuel extraction as a general economic phenomenon is basically a bubble. Bubbles have a way of going higher and further than anyone expects. As they do so, everyone gets their turn to look like a fool. Initially the bubble skeptics look like idiots and the believers are repeatedly proven right as the bubble builds and builds. Then the bubble pops and the situation inverts. When bubbles do pop they often do so rapidly and destructively.
To the extent that our civilization is dependent upon fossil fuels, complex technological civilization is therefore also a bubble.
I'm really surprised this doesn't scare the crap out of more people. It's really simple math and physics, and most of the people here have lived through two economic mega-bubbles so you all know what a bubble looks like. You've all seen how "it's different this time" until it isn't, and then crash.
If we're still 80+% dependent upon fossil fuels and a real crash comes, this could be an extinction level event. It would likely trigger a global thermonuclear or biological war, since game theoretically the rational course of action would be to attempt to exterminate the rest of humanity as quickly as possible so you have some chance of survival in the face of a rapidly collapsing resource base. A likely scenario would be a brutal Darwinian war of all against all played out in a matter of years, and given our capacity for destruction it's possible that nobody would win.
Slower but equally catastrophic scenarios are possible too. An oil crash could lead to immense expansion of the use of coal and coal-to-liquids technology, which would cause exponential increases in CO2 emissions per unit energy generated. As EROEI crashes, we just dig up exponentially increasing quantities of carbon since the net energy profit per unit is declining. If we think we have a carbon problem now, imagine the emission curve going hockey stick. This ends with planetary desertification, an anoxic event, or some kind of chaotic flip to a new ice age.
This IMHO is the existential threat faced by humanity in the 21st century. Given the likelihood that similar deposits of easy energy are found elsewhere in the universe, I personally think this is a good candidate for one of the "great filters."
https://en.wikipedia.org/wiki/Great_Filter
(I've speculated that the first great filter is warfare, the second is ecology, and the third is a non-expansionary planetary utopia -- leading to gradual disengagement, birth rate collapse, and fade to black. A pleasant extinction event if you will.)
Most explanations of 'peak' hydrocarbons make two errors - the first is that they don't understand what reserves are, and the second is that they don't factor in technological innovation as a cost reducing force. People like to throw around 'moores law' as applying to solar and that it will cause it to overtake other energy - but what they forget is that moores-law changes also apply to extraction technology, mind that EROEI continues to favour hydrocarbon based technology, and will do so for a long, long time.
1 bucket, 2, 4, 8, 16, 32, 64, ...
[1]http://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/20... [2]http://www.nature.com/nature/journal/v517/n7533/full/nature1... [3]http://cleantechnica.com/2014/04/24/us-solar-energy-capacity... [4]http://cleantechnica.com/2014/02/06/technological-advancemen... [5]http://www.energypost.eu/historic-moment-saudi-arabia-sees-e...
Occupational hazard, I think.
Consider: computers have been getting cheaper for a generation and its been one of the greatest economic boons in history.
I'm aware of the standard economic criticisms of deflation, I just don't agree with them. The massive deflation shock of the Great Depression was due to the preceding leverage boom, and should not be used for a general analysis of deflation without considering that boom.
Deflation is usually good. Things we want cost less of our labor. The benefits are widely distributed with no early receiver advantages as there is with inflation. This is a good thing.
edit: I should clarify that I don't completely disagree, just that debt is the real problem. No one wants to endure the short term pain so we keep "kicking the can down the road" as they say.
Regardless, I think its important to point out that a slow and steady deflation is actually an ideal or at least a reasonable state for an economy.
The ideal state for an economy is one where the rate of inflation/deflation is determined by the market. This would happen if central banks were disbanded and the production/circulation of currency was left to a (regulated) private sector with a healthy number of competing companies innovating to have the best currency on the market.
What we are seeing now is a natural adjustment to years of accumulating debt under an artificial, inflation-targeting central banking system. Central banks have tried their best to prevent deflation in order to support the debt-driven "fractional-reserve" system that has created an unsustainable network of debt that is no longer tied to the productivity of real assets. A system of competing private currencies would remove artificial signals manufactured by central bank monetary policy and gov. fiscal policy.
In real life ceteris is never paribus, of course.
2. Yes, but would you use Honest Achmed's Used Cars and Dollars?
3. (Private) Ratings Agencies would rate currencies and maybe each other. The market picks the winner based on trust, convenience, or whatever else it cares about.
In practice, I'd expect an 80/20 rule. Two currencies would make up 80% of all transactions in a given region, with a rather large tail (gold/silver/basket of commodities backing, fixed exchange rates, etc). Multiple currencies is nearly unworkable with paper money, but quite trivial with digital paper money.
Hayek also wrote a great paper on the subject in 1990. In it he quite presciently predicts the current conundrum of the euro zone and makes the case for competing physical currencies. He realized that this would never happen in his lifetime but went through the the intellectual steps nonetheless. Virtual currency could make his thesis possible.
Check it out if you're interested: http://mises.org/library/denationalisation-money-argument-re...
It is possible that the previous evils of deflation no longer apply ( because technology) , but I'd rather not find out through experiment.
Consider how much doesn't get invested by the poor and middle class into education, paying down debts, or retirement savings accounts. It feels rather absurd to suggest that they would somehow benefit from continually raising the price of something they need to buy.
Pippa Malmgren - correctly, I think - describes this inflating away the value of the currency (and by extension, all outstanding debts) as just another form of default, and one that has been used many times in history. It's just more stealthy than saying "we can't pay, so we won't pay" or something similar[0].
[0] https://www.youtube.com/watch?v=KBU59sY2erA
I am rather shocked that anyone can't tell the difference between the effects of mild inflation on debt and default.
Debt is not a blood oath - it's just a tool. We're better off if we can use this tool and use it properly. With deflation, that's harder.
http://www.federalreserve.gov/faqs/economy_14400.htm
The markets, however, figure that out, and price that in. Which is why countries with weak currencies don't have an option to borrow in their native currencies.
Wages would fall with the deflating currency. Goods would not cost less of your labor. They would cost the same.
The benefits are distributed only to those who already have money. Those who are in debt are harmed.
Not to mention, those standard economic criticisms that you don't agree with. Even the working rich with a respectable bank account are harmed in a deflationary spiral.
The deflation has to be severe enough to cause people to substantially change their behavior. Suggesting that deflation always leads to a deflationary spiral (which you implicitly did) doesn't hold.
Remember, wages are sticky so people aren't necessarily going to be making less money, just that stuff will be cheaper.
As things get cheaper, it's possible that sales volumes will go up (econ 101). That could then offset any reduction is gross profit, if there is any. There may well not be, because the reduction in the output price might simply be from the reduction in the material input price.
Massive deflationary shocks cause a lot of problems. But how do you get deflationary shocks? By trying desperately to pretend deflation isn't happening for many years, and then eventually the market stops believing you (you being the central banker) and prices adjust to a more realistic level.
Perhaps the folks who are trying like mad to prevent a mild deflation are in fact the cause of the deflationary spiral that's a problem. Perhaps in their absence we'd just have mild deflation that doesn't cause the whole world to blow up all at once.
I think part of the problem is that endless credit growth is what constitutes economic growth, instead of increasing productivity as it should be. So by preening and saying we cannot accept lower prices, we ignore the obvious long term benefits of stable and falling prices.
There are winners and losers in deflation, just as there are winners and losers in inflation. It's better to take a neutral view of the distribution of benefits because someone wins or loses either way, and it helps to think more clearly when you realise everyone has a bias based on which camp they are in. What should matter for the sake of the debate is whether everyone would be better off overall.
Computers haven't become cheaper in terms of their price-tag, but more affordable thanks to your increased nominal income (inflation!) and because they have become cheaper relative to other other goods whose prices have increased more.
Of course computers do a lot more today than 30 years ago, but I'm sure that more suitable examples can be found (digital watches anyone?). And think of the debt the computer manufacturers could pay more easily thanks to all that inflation!
The price of an apple 2 computer, with no monitor, was $1300. You can get a 21 inch imac for $1100 today. 18% nominal deflation! Apple must be absolutely broke!
Look, I know. I went to the same "inflation is necessary" schools you did, and listened to Cal Econ professors patiently explain to me how without it we'd all be rooting around in the dirt, eating grubs. At some point I just stopped believing that.
There is, however, evidence of periods in the Roman Empire where price stability lasted for spans of several emperors (the ones that didn't debase the currency). But when emperors decided to debase the currency, those long periods of price stability were destroyed in the blink of an eye.
Many economists tie themselves in knots trying to explain how inflation has complex causes, but it is 'always and everywhere a monetary phenomonen'
There is a hard limit in price set by a few things such as the cost of raw materials that go into any piece of tech, but other than that, you may consider that we have "computers" (well, devices actually) priced around $13 at par with or surpassing many capabilities of Apple II.
For example, every time we cut the price of a 3D printer in half we bootstrap thousands of new creative into a position where they can have much stronger pricing power by doing something very, very, different.
Inflation vs. deflation matters because of the incentives they provide for asset balances, not because consumer goods are more or less expensive.
Inflation incentivizes storing value in investments, which makes capital available for innovation. Deflation incentivizes storing value in currency, which does not. Which is better for long-term economic growth?
edit: grammar
The G7 between them have been deflationary exactly twice in the last 100 or so years that we've been keeping good records on this. That's twice, for less than a decade each, in 700 country-years of economic experience.
That includes time on the gold standard, time on fiat currency, pre-euro, post-euro, WWI, WWII and the cold war. Early industrial to post industrial, pre-computing and high frequency trading. Only a couple times through all those crazy situations was deflation a thing.
So an extremely rare and divergent situation is the 'natural' state of affairs? Are we talking in the eating nuts and berries sense of natural here, or what?
So out of 700 country-years across the G7, we've got Japan deflationary for 20 with a mediocre-to-lousy economy, and the US deflationary for maybe 5 if we round up, during the great depression.
From those datapoints, I'm supposed to conclude that deflationary at 25/700 is the 'natural' state of things, rather than exceptional, and additionally that it's a good place to be?
I'm not sure what you're supposed to conclude. It appears, from my rough estimation, that as economies develop (as Japan's did, as the rest of the first world is currently) they'll reach an economic equilibrium which appears to be deflationary in nature. If you continue to become more and more productive, and there are only so many consumers and so much to consume in they physical world, prices should go down.
[1]You can use a different basket of countries if you want but changing political situations tend to overshadow the economics everywhere else.
Now why do you limit your vision to 100 years ? Because you know this has been a period when inflation dominated more than ever ? For the bigger picture : http://upload.wikimedia.org/wikipedia/commons/thumb/2/20/US_...
Is inflation the norm, or is the period 1950-2000 an historical aberration ?
A man gathering berries by hand makes for expensive berries. A man harvesting berries with basket and stick technology will make the price for them fall. What's true for this primitive example becomes even more powerful as you move up the production and technology chain: a woodworker with proper power tools can make chairs far more affordable to other people than someone working with simple hand tools can.
So, yes, everything else being equal, the advance of technology will cause prices to decline over time and this is a natural and good thing. It's a measure of the level of corruption in economic discourse that this strikes intelligent people as a novel or insane concept.
http://en.wikipedia.org/wiki/The_Great_Deflation
You could argue that the economic conditions today - a technological revolution, widespread social reorganization, whole industries replaced, and increasing automation - have much more in common with the late 19th century than with all of the 20th century.
Inflation is a tax. Politicians don't like raising taxes, because it's unpopular. The government still needs money though, so they inflate the currency which redistributes the money from the citizens to the government. Government redistributes the wealth back to citizens through services which usually provide more to the less wealthy members of society.
I think wealth distribution is a good thing and I'm not opposed to it being done in this manner.
Our global deflation problem is caused by too much debt. Debt can't increase faster than the economy indefinitely because it becomes impossible to pay back. But it had been increasing in that fashion for quite some time before the financial crisis. We're now living in a world where debt isn't growing at those fast rates, and central banks have been trying to keep the economy going without it.
Central banks have kept the economy going by buying low-risk assets with new money, which makes the value of assets in general go up. They've also set interest rates to zero, which makes it attractive to borrow money. Asset holders feel richer and spend more money than they would otherwise. Investment opportunities become more attractive because it's cheaper to borrow money to take advantage of those opportunities. We get economic growth. These were reasonable actions for our central banks to take.
But eventually, the actions of our central banks will need to be reversed. Low interest rates and quantitative easing in perpetuity will eventually cause inflation when the economy gets healthier, or asset prices will get too high for people to continue to expect future gains. This is why the Fed is planning on raising interest rates this year. The problem is that raising interest rates will cause people to stop expecting higher asset prices as well, and they will sell.
Deflation in the long run is something to worry about, but it's strange for me to hear long term worries when we have more serious short term worries. How do you stop our extraordinary monetary policies without dramatically popping the asset bubble and causing the problems that our policies have been avoiding for six years?
I would argue exactly the opposite -- deflation in the short term is something we should absolutely worry about. We know very well how to put a lid on inflation once it starts, but for now we have exactly the opposite problem.
The cost of healthcare, tuition, a house, oil, gold, corn, electricity, etc - all have increased dramatically since 2000.
If asset prices drop precipitously, we might be back in 2008 (or worse).
Every day more and more cash pours into the Bay Area because it's one of the best risk-adjusted investments. Be it tech, real estate, or biotech, everything is booming. Without an alternative things will continue along this path. There's just more money here now than there otherwise would be. Some call it a bubble, some don't—it doesn't really matter.
From a certain perceptive, it's a good thing. If things stay like this perhaps the giant pool of money will continue to pool around things that are relatively riskier than the traditional financial instruments.
This seems strange to us, but maybe this is actually a better allocation of capital. Maybe we are just moving into a world where a relatively higher portion of the world's capital flows into biotech instead of treasury bills.
However, there are two big factors that argue against long term deflation:
1) Employee wages: Built into the compensation system is a review process that rewards workers for their work. To date, this process includes a wage increase in the form of a "raise". In an era of full employment, periodic raises push costs up, which leads to increases in prices, which leads to inflation. To change this, the compensation system would need to be changed or employment severely reduced.
2) Central Banks: Most central bankers will use all their tools (in the form of monetary fiscal policy) to prevent long-term deflation. So, there will likely be a major counter-acting force from large governments over time.
Not inherently, I don't think. If every employee started on $10 and got a $1 raise every year until they retired, and there was a 1:1 ratio of joiners to retirers, there's no overall inflation. Individuals' wages might rise over time, but the average wage doesn't have to.
> Most central bankers will use all their tools (in the form of monetary fiscal policy) to prevent long-term deflation.
Empirically, central bankers respond to a bursting asset bubble by blowing a bigger asset bubble. Dotcom bubble crashes, blow a housing bubble. Housing bubble crashes, blow an everything bubble.
That's very wrong.
http://i.imgur.com/LG2LTTT.jpg
Meanwhile annual energy use per household has not increased in two decades.
You are right though, it does make the claim that "energy prices are going relentlessly hard" odd without further context; presumably he was talking about a more apples-to-apples comparison of how each type of energy is dropping in price (oil prices dropping, renewables getting cheaper), but that the mix is shifting towards types of energy that are more expensive (and have less externalities) so _residential_ energy prices reflect more of the cost.
[1] http://www.latimes.com/nation/la-na-power-prices-20140426-st...
But what I see is the cost of these things skyrocketing: education, housing, and health care. That is -- the things that real people actually need! I don't care about the cost of cell phones and TVs and so forth. Or even gas (for me). Those are a drop in the bucket.
Education: I graduated in 2001 from an Ivy League university. It cost $32K a year as far as I remember. The same thing costs $50K or so now? That's a pretty astounding increase in such a short time.
Housing: Obviously situations are different throughout the country, but in the wealthier areas like NYC and the Bay Area housing prices seems out of control. I feel like housing prices aren't falling in the US in general besides economically distressed places like Detroit, but I could be wrong.
Health care: Costs also seem to be rising quickly, but admittedly that is probably because health care is generally much better than it was 50 years ago and people will pay anything to survive, and they are surviving in greater rates (e.g. compare Iraq veterans to veterans of previous wars.)
Sure all of these are just anecdotes. But I think there is something to the experience that education, housing, and health care are increasing in cost. Probably the main reason is that they are NOT as affected by globalization. And they are essential to life.
Lumping everything together under "inflation" or "deflation" seems misleading. There are many different parts of the economy and they have different properties.
What is interesting is that, while the model of education has not changed, higher education costs had increased by 8-10% above inflation over the past 20 years.
The money was not spent on research/learning. It went to build up spa-like amenities (gyms, swimming pools, etc), but primarily to administration personnel. Loads and loads of senior vice presidents and chancellors. But wait, the best paid profession in education? University sports coaches: http://deadspin.com/infographic-is-your-states-highest-paid-...
I hope online courses can provide some deflationary effect, and force re-focusing on research and learning which should be all that education is about.
http://www.huffingtonpost.com/2014/12/03/health-care-spendin...
http://www.modernhealthcare.com/article/20141223/NEWS/312239...
Also on housing: http://www.bloomberg.com/bw/articles/2014-07-01/the-re-explo...
The Bay Area (and probably New York) are alternate housing realities that have nothing to do with the larger picture of the economy.
And housing costs in the Bay Area can mostly be explained by a bizarre alliance between left progressives and wealthy homeowners who both somehow think of the view from their bedroom windows as a basic human right.
I believe the core CPI figures leave out food and energy, since their prices are sometimes more volatile. So, the CPI does include healthcare and education, but I suppose those price increases must be outweighed by price decreases in other sectors.
[edit] In addition, there are "weights" for goods in different categories. Ex. in the document I found from 2013[1], the weights add up to 100, with housing-related items having a total weight of ~41.4. Healthcare is 7.5 and education 7.0.
So, the actual CPI numbers are somewhat manufactured. The weights correspond to what the BLS predicts the average family spends, proportionally, on those different goods. If your expenditures don't match those proportions, you will "feel" inflation at a different level in your own purchasing.
[1] http://www.bls.gov/cpi/cpiri_2013.pdf
Education: There is an artificial restriction on the number of "good" universities. As demand for Ivy League schools increases, supply does not, so people are willing to pay more and more for it. It takes many years to build up a school's reputation. Also, the US Government guarantees student loans, so while the financial system would normally correct this by appropriately incorporating risk when issuing loans to students attending sub-par schools, they do not in this case. But some pull-back is happening; specifically with law schools.
Housing: This is a relatively recent issue, but essentially it's the same thing as education: there are only so many "desirable" places to live, but an increasing demand for them. The supply of housing in popular areas can't increase as quickly as demand; it can take a decade or more just to acquire the land to build a dense multi-family structure on top of a block of row homes. The bay area also has a lot of problems in that it tries to protect existing communities by making it pretty difficult to build anything, which ultimately just drives up the price of housing. NYC has other issues because globally, wealthy people see it as a status symbol to have an apartment in Manhattan and London. They buy it as an investment and often don't use it, but this prices out people who live in the area.
Health Care: This is a whole other subject; pricing in health care is largely NOT driven by supply and demand. It's closer to extortion; if I tell you that you're going to die or be disabled unless you pay me $50,000; you're going to pay me. Congress has shown little appetite to actually fix the problem: there are too many middlemen with opaque pricing, and consumers will pay whatever they have to when it comes to their health. Prices will continue to rise until people start to demand action.
In my country in addition to the headline CPI number there is another basket with items consumed by the poor and also a calculator on the website which helps you figure out your personal inflation by having you specify on what you spend your money on. You could try the BBC version for the UK: http://www.bbc.com/news/business-22523612
Here's the issue I see: the rich cities have decoupled from the rest of the American economy. Rich cities are experiencing very high inflation, while poorer parts of the country experience no inflation, or even deflation.
The Fed only has one lever. It cannot make money expensive in SF while making it cheap in Detroit.
When I visit family in Idaho, I'm sort of shocked how rich I am. But in Seattle I'm squarely middle class. The divide seems to be growing very quickly.
This is mostly an issue of cities restricting housing supply, especially through height limits and parking minimums: http://www.amazon.com/Rent-Too-Damn-High-Matters-ebook/dp/B0....
See also https://marginalrevolution.com/marginalrevolution/2015/03/ho...:
Last year authorities in the Houston metropolitan area, with a population of 6.2m, issued permits to build 64,000 homes. The entire state of California, with a population of 39m, issued just 83,000.
Want to be rich? Get out of Seattle, California, and New York.
It's hilarious that you mention parking minimums; a friend of mine moved his industrial business to Idaho because, hey, cheap real estate. Then found out the building he bought wasn't going to work unless he spent some ridiculous 6 figure sum building more parking spaces, the number of which is determined by building square footage and not the actual number of people. It's definitely not a California-only thing.
"Helicopter" Ben Bernanke was roundly mocked for his comment that the Fed should just throw money out of helicopters, but that would probably be both more equitable and yield faster, more easily controlled effects on the economy.
Yes: See Tyler Cowen's books The Great Stagnation and Average is Over.
Interestingly, someone else asked this question about a year ago, and I'll give the same answer I did then: https://news.ycombinator.com/item?id=7315908:
Take a look at Matt Yglesias's The Rent Is Too Damn High (http://www.amazon.com/dp/B0078XGJXO); many "fun" municipalities like Seattle have restricted development to the point that housing is extremely expensive. If you move from Seattle to, say, Houston or Dallas, you'll probably see your effective rent shrink by 35 – 50%.
Secondly: see Tyler Cowen's books The Great Stagnation and Average is Over. Those books are too sophisticated and deep (though they're quite readable) to summarize here, but the shortish version is that Western economies are undergoing a lot of profound shifts driven by a combination of technology and Baumol's cost disease.
in the last couple years have been rent, medical, and dental in that order
Alex Tabarrok's Launching the Innovation Renaissance is also good: regarding medicine and dentistry, part of the issue is Baumol's Cost Disease and part of it is the powerful lobbies that restrict entry into those fields through licensing regimes and other means.
Finally, a general note: be wary of any answers in this thread that don't cite any sources and ideally those sources should be books. The issue is too complex for simple answers, and the simple answers that one tends to hear also tend to be wrong or missing a lot of important information.
An increase of 56% in 14 years is only 3.2% per year. Sure, that's more than the 2.0% average inflation rate, but I wouldn't say that it's an astounding increase.
You have to be careful about that, because in those areas there are confounding factors. I went to Georgia Tech in the early 2000's, and paid about $60k for my degree. Today it'd cost well over $100k. But it's also a totally different product. More services, fancier buildings, smaller classes, etc. Also, these institutions aren't growing as more and more people go to college. Instead, they're lowering admissions rates and becoming more elite products. The admissions rate at many top universities is half of what it was when we went to college.
Same thing with healthcare and housing. People are using more and better healthcare than before, and living in bigger houses. I grew up in an 1,100 square foot three-bedroom built in the 1960's. Such a common floor plan at the time that my wife grew up in an almost identical house on the other side of the country. That's about the size of your typical two-bedroom apartment in this area now. And the neighborhood is also a different product. What was a sleepy D.C. suburb 20 years ago is now at the heart of urbanization in the area. Rents in places like New York and San Francisco and DC are skyrocketing, but again they're much more desirable products today. When I was growing up in the 1990's, middle class people didn't go to D.C. except to work or see the museums. They wouldn't dare live there.
You can get housing much easier than a generation ago, although there is a trend to be bigger. If you want to be in the best area[1], there are only so many spots and they are not being produced anywhere near enough.
If you want 1960s health care today, it's dirt cheap. But most people want the latest and greatest in health care, personally delivered by doctors. Labor is expensive.
[1] however you define that
http://inflationdata.com/Inflation/images/charts/Oil/Inflati...
But getting the economy to 5% inflation? That brings a lot of dynamism back!
https://www.kickstarter.com/projects/hypercapital/hypercapit...
More at: http://hypercapital.info
The Fed has a target of 2% inflation. Krugman makes good arguments that the target should be 4%.
Meanwhile the Fed is talking about raising interest rates later this year (which is deflationary).
There are two clearly different views forming and it will be interesting to see how it plays out.
Canada has a target 'between 1 and 3%' and our core is currently sitting at 2.1%. We just had a interest rate decrease.
Some recent comments from Krugman about why we didn't see deflation during the recent recession:
http://krugman.blogs.nytimes.com/2015/03/31/missing-deflatio...
It's predictable that financial operators will, at some point during a cycle, begin to wonder if current conditions will persist forever. What's fascinating to me is that smart people have to relearn the lessons from not too far back, as if it's all new material. "The new normal" ended a long time ago for many asset classes.
As a credit to Wilson, he's not cheerleading for the ideas in his post. Nonetheless, the questions he raises mirror the idea that the dollar was dead (Protect your wealth with Bitcoin!) or the earlier idea that real estate prices will only go up. Or that the New Economy wasn't bound by the old rules. The peak oil idea was popular in 2006, and celebrities wanted to get paid in Euros during the crisis.
The global economy is dynamic. Times change. Stuff repeats. This time is not different.
We're riding some major trends in increased productivity that may go exponential, so if that's the case then yes, this time it is very different and the downward pressure on rates from this might put us into a secular deflationary period of a pretty long time. Nobody is saying we'll never see a period of rapid inflation or high interest rates, but merely saying that we may be in a secular period that lasts long enough for that not to matter for anyone alive today.
Of course, that's right before a crash. Just a thought...
When everyone expects prices to fall in the future, everyone becomes less willing to spend today. Sitting on cash becomes an investment with a positive yield. The less everyone wants to spend on goods and services, the less businesses sell of everything, and the more they have to compete by lowering prices further, making everyone less willing to spend... a vicious circle of economic contraction.
Businesses normally find it very, very difficult to cut employee compensation in line with declining prices, so they end up cutting costs by firing people instead, making everyone less willing to spend, so businesses sell less of everything, forcing them to cut costs futher... contributing to the vicious circle of economic contraction.
A deflationary economy is a negative-sum game in which everyone loses.
I find that contradictory. If something becomes cheaper, I will be more likely to buy it. It's the entire reason to have discounts and sales.
Slippery slope fallacy?
The iPhone 6 just had record sales so empirically there are other factors for consumer purchases that are stronger than the "waiting for items to be cheaper" factor.
It is true that major investments like new factories might conceivably become cheaper but this also ignores opportunity cost - in the same way, with inflation, new factories are more likely to become more expensive, so it's logical to think that in inflationary times, the countryside will be dotted with idle factories built as a hedge. This doesn't happen because of a variety of factors, not the least of which is that people make investments because they expect to see a big margin difference between keeping the cash and having that investment make cash for them. You don't built a new factory because you think you'll make 3% more than bank interest, you do it because you think you'll make 20-50% return on the cash.
The deflationary spiral postponed purchases explanation is a bit like the efficient market hypotheses - plausible sounding but ultimately and empirically not true in practice.
However, I do agree that a persistent deflationary economy (and the corresponding expectations that it will continue) will have... interesting effects on interest rates, debt, and corporate spending. But I still am not sold on the idea that it's a de facto negative thing. I think saying "deflation = bad" oversimplifies the lessons to be learned from the Great Depression but unfortunately that's the lesson we're taught.
Also, it's not just about consumer behavior but also investor behavior. Why should I take the risk of investing my money in a new product or company if I can earn a profit by hiding my money under my mattress?
Investment wise, it always comes down to risk and inflation adjusted returns. Hiding your money under your mattress results in a risk free positive real return in a deflationary environment, but this just the same as buying a short term treasury bond.
It's self evident that just because you can get a risk free positive return, it doesn't mean capital won't take on risk for a higher one. If that were the case, nobody would invest in anything other than government bonds.
The return on a 10yr (govt bond I assume?) is set by the market - this is not just picked or changed arbitrarily, although returns there are likely influenced by Fed rates.
People control the interest yield for many products through the Fed, so we can avoid a deflationary spiral just by having the Fed change the interbank loan rate (among other things they can do).
Deflation (caused by many types of things from demand shocks to economic fears to war) is often not easily dialed back, and can lead to a deflationary spiral, which cannot be simply tuned by the Fed.
This is the reason the Fed targets slight inflation instead of zero inflation; the controls are not magic and the inflation/deflation tends to hover around where the Fed targets, and by staying away from zero we avoid possibly triggering a deflationary spiral we cannot control.
In short, we have good tools for dealing with inflation. We do not have equivalently good tools for dealing with deflation.
Now, one can debate whether economic growth model as understood today (where Growth == higher number of transactions) is the most desirable model of economic goodness or not. But so many other metrics of a happy economy (jobs, govt spending on public services, societal optimism etc.) are so tied up to a growing economy in the current model, that the only practical way this could be changed is via a huge political revolution... which has it's own problems. Given all that, it'll be hard for a reasonable thinker to welcome a permanent state of deflation.
And fwiw, IMHO, it's no more than a thought exercise. We're nowhere near an actual permanent state of deflation.
Of course, it's unevenly distributed - medical care, education and housing have all gone up.
I don't think we want nor should we celebrate deflation. It makes a culture hidebound, makes (some) things harder on the poor and can destabilize governments.
Income inequality and political polarization both have a basis in deflation, in my view.
There are nations - like Australia - that do not have deflation. It's not inevitable.
I am basing what I said on Sumner's writing on the subject ( how's that for an appeal to authority? :) ) He seems to hold that Oz uses something closer to NGDP level targeting in monetary policy.
http://www.themoneyillusion.com/?p=12985
I am probably missing something.
http://wfhummel.cnchost.com/
If it were a book, it would be a very thin book and you owe it to yourself to read it.