How does this decline compare to previous recessionary ones?

[Montecfo]

The period 1873-1896 had deflation, averaging roughly 2% annually. At the same time, real GDP grew over 4% annually. We should be so lucky as to have that "scourge". It became the beginning of the 2nd industrial revolution. Real wages in this period grew at faster rate than the prior period of inflation (1866-1879).



Remember, it is REAL wage growth, REAL GDP growth, REAL returns that matter.



But then we couldn't have people happy that they are getting a 4-5% nominal return on a treasury while inflation rages at 8+.

So you view deflation as a positive? Perhaps you can flesh that out a bit.

Deflation crushes economies because it creates incentive to delay spending since prices are in decline. Every delay is rewarded by lower prices. Which then bloats inventories leading to even lower prices. Leading to production cuts, layoffs and even lower prices.

It is easy to see how damaging this is and why central bankers worldwide labor to avoid it.

 

[copyright1997reloaded]

So you view deflation as a positive? Perhaps you can flesh that out a bit.

Deflation crushes economies because it creates incentive to delay spending since prices are in decline. Every delay is rewarded by lower prices. Which then bloats inventories leading to even lower prices. Leading to production cuts, layoffs and even lower prices.

It is easy to see how damaging this is and why central bankers worldwide labor to avoid it.

Deflation as a result of productivity improvements is a positive. Did computer makers have a disincentive to delay spending over the last four decades? Deflation as a result of demand declines is a negative.

Our entire economic policy has become "tarnished" as a result of the great depression to think that an economy must have inflation to be prosperous. All one has to do is look at the buying power of a dollar since 1940 to now to see the damage that has done.

In the long run, we only can live better (in terms of higher standards of living ) by becoming more productive. Yes, investment delay because a potential factory builder thinking that prices are going down (due to demand destruction) is a bad thing. But if demand is robust, prices going down because you are able to produce more per $ of inputs (and thus can reduce price while increasing profit) is a good thing and would not delay investment.

 

[MichaelB]

Deflation indicates a contraction in aggregate demand, and that is usually undesirable.

When economic output grows faster than internal demand it means there is an economic imbalance, there is a surplus of goods and services produced, and they can only be disposed of by lowering price or export.

It may be a temporary condition deliberately caused by policy measures to reduce inflation. If it becomes chronic, as is the case in Japan today or the US great depression, it can become a self sustaining spiral downward and lead to economic catastrophe. The Fed fears sustained deflation for good reason, and deliberately causing deflation is dangerous.

 

[Gumby]

....All one has to do is look at the buying power of a dollar since 1940 to now to see the damage that has done....

I'm pretty sure no one has kept a dollar bill since 1940 in order to spend it today. They spent it then or invested it in a manner that has probably kept up with or exceeded inflation since.

 

[Koolau]

Here are the top 2 articles on Yahoo Finance right now

Oppenheimer Says the S&P 500 Could Surge 15% in 2023 — Here Are 2 Stocks to Bet on It

Wall Street’s Top Bear Sees Another Big Down Year for S&P 500

I'm gonna split the difference and keep on doin' what I'm doin'. Stay the course. Follow the plan. Turn off the financial porn channels. No expert, so YMMV.

 

[Montecfo]

Deflation as a result of productivity improvements is a positive. Did computer makers have a disincentive to delay spending over the last four decades? Deflation as a result of demand declines is a negative.



Our entire economic policy has become "tarnished" as a result of the great depression to think that an economy must have inflation to be prosperous. All one has to do is look at the buying power of a dollar since 1940 to now to see the damage that has done.



In the long run, we only can live better (in terms of higher standards of living ) by becoming more productive. Yes, investment delay because a potential factory builder thinking that prices are going down (due to demand destruction) is a bad thing. But if demand is robust, prices going down because you are able to produce more per $ of inputs (and thus can reduce price while increasing profit) is a good thing and would not delay investment.

Agree that productivity improvements are a net positive and highly desirable. Your computer example is hard for me to follow, but I would caution against equating productivity improvement with "deflation".

Just as rising prices for one or two goods is not "inflation", price declines in one or two areas do not equate to "deflation".

Both refer to widespread, systemic conditions affecting the economy overall.

So productivity = good
Deflation = bad

 

[copyright1997reloaded]

Deflation indicates a contraction in aggregate demand, and that is usually undesirable.

Deflation is not the same as contraction in aggregate demand, rather they are orthogonal.

Deflation simply means that the amount of money to purchase a representative basket of goods goes down over time. Inflation is the opposite. Deflation can occur when aggregate demand is falling, and that is bad. Inflation can occur when aggregate demand is falling, and that is bad.

We are going in circles here. I pointed out a period in US history where price levels, expressed in US currency was falling yet economic activity was rising. And I produced a logical argument as to why this should be so, that is productivity improvements should result in less per unit costs (in labor and/or capital). If the supply of money is fixed (or more realistically fixed per capita), we should see lower prices on goods as we become more productive in creating them.

 

[copyright1997reloaded]

I'm pretty sure no one has kept a dollar bill since 1940 in order to spend it today. They spent it then or invested it in a manner that has probably kept up with or exceeded inflation since.

The purchasing value of the dollar has decreased dramatically over time due to inflation. You actually make my point, they *spent it* because people know its purchasing power deflates due to inflation. Or they *invested it* because they know they have to risk it or defer using (riskless investment) in order to try to keep its purchasing power.

"probably keep up" is pretty bad given all investments have risk(s) vs. immediate use.

 

[Gumby]

The purchasing value of the dollar has decreased dramatically over time due to inflation. You actually make my point, they *spent it* because people know its purchasing power deflates due to inflation. Or they *invested it* because they know they have to risk it or defer using (riskless investment) in order to try to keep its purchasing power.

"probably keep up" is pretty bad given all investments have risk(s) vs. immediate use.

My point is that is it far easier to get that dollar bill today than it was in 1940. You cannot look solely at prices. Wages have also gone up substantially since 1940. Productivity has improved. I'm too lazy to go find a source, but it is also my recollection that people spend a far smaller percentage of their income on food and clothing today than they needed to spend in 1940.

If it took me one hour of work to buy a pair of pants in 1940 and it takes me 45 minutes of work to buy a pair of pants today, how have I been harmed?

 

[Lsbcal]

Nobody seems to have a good inflation model. And if I did it probably wouldn’t tell me how to invest in equities. I don’t trouble myself with much economic modeling but it is good for cocktail talk I guess ?.

I do closely watch the unemployment rate . Stay tuned for tomorrow’s report ?

 

[MichaelB]

The loss of value of the $$ over the past century is something that seems like it must be meaningful in some way, but in reality it isn’t.

In this same period of time, or even in the period 1940’s to present referenced earlier in this thread , the US has seen the greatest improvement in standard of living for the largest number of people ever recorded in human history.

There is absolutely no doubt at all that if the money supply and price level had held constant over that same period, we would collectively be much poorer and have a lower standard of living.

When a dollar is used to engage in economic activity it holds its value in real terms or even grows. When a dollar is stuck under the mattress, it loses value over time. The problem is not inflation or money supply, it is the passive use of the currency.

 

[yhoomajor]

There is absolutely no doubt at all that if the money supply and price level had held constant over that same period, we would collectively be much poorer and have a lower standard of living..

I would have to disagree with this absolute assumption that we are better off because of inflation.

Greatest innovation (industrial age) and uplift in living standards occurred in 1800s and early 1900s. That allowed us to move from dark-ages to industrial age. I am not sure how much inflation existed during that period. I just don't know.

Sure we now have tinder, snapchat, and such.. but most of this is fluff. Foundation of most of this technology occurred during industrial age.

 

[yhoomajor]

And only argument that I hear from folks who support inflation... is that "oh but deflation is bad".

But this is not a binary choice. We don't have to have deflation just because inflation is 0%.

 

[Lsbcal]

I think the inflation/deflation discussion is interesting and deserves another thread rather then continuing on in this one. Anyone here want to start that thread?

My intention for this thread is to focus on how closely or not this decline compares to previous really bad ones and are we really headed towards a bad outcome recessionary decline? Maybe that is too ambitious? Well at least I get to show it graphically developing against a backdrop of previous bad recessionary declines.

My bias right now is a really negative 2023 until a bottom develops. Another negative unknown is likely to appear. That's what my fortune cookie says. I don't know, maybe it's China having huge supply problems because their Covid zero plan got dumped for no plan. Maybe the market starts really believing what the Fed keeps saying?

 

[audreyh1]

There are already a couple of active threads discussing current inflation issues that would be appropriate locations for additional discussion:

Here: https://www.early-retirement.org/forums/f44/latest-inflation-numbers-and-discussion-114292.html

or even here: https://www.early-retirement.org/forums/f28/inflation-prediction-for-2023-year-end-116468.html

 

[matjung]

Given your choice of 7 recessions, did you count how many people believe, this, that or those - and why they believe so.
Are you planing to Blog about the results of your query.

 

[Koolau]

Nobody seems to have a good inflation model. And if I did it probably wouldn’t tell me how to invest in equities. I don’t trouble myself with much economic modeling but it is good for cocktail talk I guess ?.

I do closely watch the unemployment rate . Stay tuned for tomorrow’s report ?

Speaking of the jobs report, our local Macys on Windward Oahu (been there for over 40 years) is shutting down in the spring. We still have other Macys stores on Island, but that was a big store that used to have lots of business - especially back in the day. I can't say whether this is the canary in the coal mine, but I don't think it bodes well - certainly not in the Islands. YMMV

 

[Koolau]

I think the inflation/deflation discussion is interesting and deserves another thread rather then continuing on in this one. Anyone here want to start that thread?

My intention for this thread is to focus on how closely or not this decline compares to previous really bad ones and are we really headed towards a bad outcome recessionary decline? Maybe that is too ambitious? Well at least I get to show it graphically developing against a backdrop of previous bad recessionary declines.

My bias right now is a really negative 2023 until a bottom develops. Another negative unknown is likely to appear. That's what my fortune cookie says. I don't know, maybe it's China having huge supply problems because their Covid zero plan got dumped for no plan. Maybe the market starts really believing what the Fed keeps saying?

I just mentioned Macys deleting an old-stand-by store in a busy shopping area. THAT kind of data seems most relevant to me regarding the health of the economy. Certainly inflation is more than a distraction as it leads to eventual contraction (as a way to solve the "problem.") I realize one big store closing does not a recession make, but it may be the leading edge of something bad - so I'm watching it closely. So far, no one from Macys has said much about the reasons - just that they are doing it. YMMV

 

[Markola]

The most active discussion jumped to the second link that Audrey posted above.

 

[Markola]

OMG... math is so hard.

It never gets to zero... certainly not anything like a simple 100%/2% = 50 years or 100%/4% = 25 years... it just doesn't work that way. Plus, since a key component of interest and return rates is expected inflation, 0% inflation would mean much lower interest rates.

50 years of inflation at 2%: 1*(1-2%)^50= .364
25 years of inflation at 4%: 1*(1-4%)^25= .360

Having promptly ignored your delivery tone, I’m curious what you think are some real world implications of your impressive formula? I agree that 0% inflation would mean much lower interest rates, for example.

 

[Montecfo]

And only argument that I hear from folks who support inflation... is that "oh but deflation is bad".

But this is not a binary choice. We don't have to have deflation just because inflation is 0%.

Well, if you notice, it is not that easy to manage pricing to an exact figure. Surely this is very clear in our current inflationary environment when we shoot for 2% and get 8%. And above all you have to consider human behavior when we shoot for zero percent and pricing actually declines 5%.

There is no positive case for deflation. Low inflation is needed for overall price stability.

Increased productivity helps keep wage inflation low. We need improved productivity right now to prevent more rate hikes by the Fed.

 

[ERD50]

Originally Posted by pb4uski View Post
OMG... math is so hard.

It never gets to zero... certainly not anything like a simple 100%/2% = 50 years or 100%/4% = 25 years... it just doesn't work that way. Plus, since a key component of interest and return rates is expected inflation, 0% inflation would mean much lower interest rates.

50 years of inflation at 2%: 1*(1-2%)^50= .364
25 years of inflation at 4%: 1*(1-4%)^25= .360

Having promptly ignored your delivery tone, I’m curious what you think are some real world implications of your impressive formula? I agree that 0% inflation would mean much lower interest rates, for example.

Before you can have a useful discussion about the 'real world implications', you have to have some agreement on the terms being used.

Objectively, factually, your math is wrong, and pb4uski's math is correct.

Start there.

-ERD50

 

[Lsbcal]

there are already a couple of active threads discussing current inflation issues that would be appropriate locations for additional discussion:

Here: https://www.early-retirement.org/forums/f44/latest-inflation-numbers-and-discussion-114292.html

or even here: https://www.early-retirement.org/forums/f28/inflation-prediction-for-2023-year-end-116468.html

Please see these threads Audrey posted for more on topic inflation discussions

 

[Koolau]

Well, if you notice, it is not that easy to manage pricing to an exact figure. Surely this is very clear in our current inflationary environment when we shoot for 2% and get 8%. And above all you have to consider human behavior when we shoot for zero percent and pricing actually declines 5%.

There is no positive case for deflation. Low inflation is needed for overall price stability.

Increased productivity helps keep wage inflation low. We need improved productivity right now to prevent more rate hikes by the Fed.

Actually, the "positive case" for deflation is if you are already rich. Especially if you keep your money in dollar denominated instruments backed by gummint (or just cash under the mattress.) Some folks in the GD made out very well indeed. Not many, of course, but those with cash were (almost literally) King.

Heh, heh, I don't recommend it and the folks I knew who actually went through the depression were NOT folks who had money (both mom and dad had horror stories that haunted them throughout the remainder of their lives.) YMMV

 

[intent]

Here are the top 2 articles on Yahoo Finance right now

Oppenheimer Says the S&P 500 Could Surge 15% in 2023 — Here Are 2 Stocks to Bet on It

Wall Street’s Top Bear Sees Another Big Down Year for S&P 500

I read that second article today and particularly enjoyed how the Morgan Stanley guy says the market is going to tank in the first half of the year, then further down in the article the Stifel guy says it's going to surge in the first half of the year and tank in the second half.

I suppose someone will be right ... though both of these might be wrong. If a site doesn't already exist, it would sure be interesting for someone to put together a site that tracks all of the predictions by these various prognosticators and how they've measured up against reality.

I suspect the results would be, erm, entertaining.