Why Not Let Prices and Wages Fall?

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#1 Sun, Jun 19, 2011 - 10:53am
Joined: Jun 14, 2011

Why Not Let Prices and Wages Fall?

Good piece from reason mag that helped me get a slightly better grasp of what the Bernanke is up to, or more accurately, how to describe what he is up to for those who aren't in the know. I haven't plowed through the attached .pdf file yet, but plan ot do so later today. Posted for the good of the order and whatever comments this can get started.

happy reading!


Edited by: mezzrow on Nov 8, 2014 - 5:07am
Sun, Jun 19, 2011 - 12:29pm
Joined: Jun 18, 2011

You know...

The economy is so screwed up because of these moronic central planners. Now there seems to be this never ending push to "maintain" and throw out fears about deflation.

Things need to crash or they will not get better for probably 10 years unless the $ is done before then. We could get back on track in a few years along with rejecting the massive amount of debt we owe to the criminal banks.

The central planners should lay off the money supply and let the interest rates rise. Close(sell?) the 900 bases we have in over 130 countries (there are 195 countries total!). Bring the troops home from the middle east. Lower the income tax to 1% across the board, lower tariffs, lower the corporate tax rate. Use the income/sales tax to pay our entitlements and cut back all non-essential government programs including the departments of agriculture, commerce, education, energy, homeland security and also the EPA and the FDA - I'm sure there are more but this is a good start.

Individual states/counties would go back to supplying their own energy and there would be a massive influx in hiring, business creation and most likely a different means of payment for labor as these smaller states start to manage themselves.

The bottom line is things need to change. "America" was a great idea. We live in the United States now. I guess I am little annoyed by the whole thing, through all of this crap no one ever thinks the people should be able to keep more of their own earnings instead of giving more to a wasteful inept government. Bleh.

Sun, Jun 19, 2011 - 12:39pm (Reply to #2)
Joined: Jun 16, 2011

deflation is scary because

1) More home owners underwater leads to more foreclosures

2) Lower home prices reduces property taxes (BIGGIE)

3) Deflation is good for the working poor, bad for the rich

Sun, Jun 19, 2011 - 1:17pm (Reply to #3)
Doc Scurlock
Joined: Jun 14, 2011

reason deflation can't be allowed

The banking industry cannot allow deflation to happen. The housing bubble was a financing bubble for the banks as much as the housing consumer. As home owners fall underwater on their house, the banks feel the pain also. As house prices (collateral) decrease, banks will have to increase capital to remain solvent. That is why the mark-to-market rules were suspended in March '09. 

The Fed knows that the banking sector is extremely undercapitalized as house prices have contracted. The more prices fall, the worse the capital problem gets. That is why inflation must happen. The Fed is trying desperately to blow air into a deflating housing bubble. The inflation is manifesting itself in other asset classes, but the housing sector is still falling, albeit more slowly than it otherwise would in a free market.

The scarier part of this story, is the derivative market exposure. The losses for the banking industry will be magnified by multiples as the housing prices fall. Essentially, the banking industry is entirely insolvent, and will be exposed if debt is to be cleared and asset prices fall.

Deflation is bad for borrowers, especially overextended irresponsible borrowers. It is good for savers, and those people who act responsibly. Unfortunately, those with power today represent the debtor class and not the saver class.