Tuesday, January 21, 2014

Peter Schiff: The Wall Street Journal and the Government Seem to be Perfectly Aligned.

The Deflation Menace
 By Peter Schiff

Dedicated readers of The Wall Street Journal have recently been offered many dire warnings about a clear and present danger that is stalking the global economy. They are not referring to a possible looming stock or real estate bubble (which you can find more on in my latest newsletter). Nor are they talking about other usual suspects such as global warming, peak oil, the Arab Spring, sovereign defaults, the breakup of the euro, Miley Cyrus, a nuclear Iran, or Obamacare. Instead they are warning about the horror that could result from falling prices, otherwise known as deflation. Get the kids into the basement Mom....they just marked down Cheerios!


In order to justify our current monetary and fiscal policies, in which governments refuse to reign in runaway deficits while central banks furiously expand the money supply, economists must convince us that inflation, which results in rising prices, is vital for economic growth.

Simultaneously they make the case that falling prices are bad. This is a difficult proposition to make because most people have long suspected that inflation is a sign of economic distress and that high prices qualify as a problem not a solution. But the absurdity of the position has not stopped our top economists, and their acolytes in the media, from making the case.

A January 5th article in The Wall Street Journal described the economic situation in Europe by saying "Anxieties are rising in the euro zone that deflation-the phenomenon of persistent falling prices across the economy that blighted the lives of millions in the 1930s-may be starting to take root as it did in Japan in the mid-1990s." Really, blighted the lives of millions? When was the last time you were "blighted" by a store's mark down? If you own a business, are you "blighted" when your suppliers drop their prices? Read more about Europe's economy in my latest newsletter.   

The Journal is advancing a classic "wet sidewalks cause rain" argument, confusing and inverting cause and effect. It suggests that falling prices caused the Great Depression and in turn the widespread consumer suffering that went along with it. But this puts the cart way in front of the horse.  The Great Depression was triggered by the bursting of a speculative bubble (resulted from too much easy money in the latter half of the 1920s). The resulting economic contraction, prolonged unnecessarily by the anti-market policies of Hoover and Roosevelt, was part of a necessary re-balancing. A bad economy encourages people to reduce current consumption and save for the future. The resulting drop in demand brings down prices. 

But lower prices function as a counterweight to a contracting economy by cushioning the blow of the downturn. I would argue that those who lived through the Great Depression were grateful that they were able to buy more with what little money they had. Imagine how much worse it would have been if they had to contend with rising consumer prices as well. Consumers always want to buy, but sometimes they forego or defer purchases because they can't afford a desired good or service. Higher prices will only compound the problem. It may surprise many Nobel Prize-winning economists, but discounts often motivate consumers to buy -- try the experiment yourself the next time you walk past the sale rack.

Economists will argue that expectations for future prices are a much bigger motivation than current prices themselves. But those economists concerned with deflation expect there to be, at most, a one or two percent decrease in prices. Can consumers be expected not to buy something today because they expect it to be one percent cheaper in a year? Bear in mind that something that a consumer can buy and use today is more valuable to the purchaser than the same item that is not bought until next year. The costs of going without a desired purchase are overlooked by those warning about the danger of deflation

In another article two days later, the Journal hit readers with the same message: "Annual euro-zone inflation weakened further below the European Central Bank's target in December, rekindling fears that too little inflation or outright consumer-price declines may threaten the currency area's fragile economy." In this case, the paper adds "too little inflation" to the list of woes that needs to be avoided. Apparently, if prices don't rise briskly enough, the wheels of an economy stop turning

Neither article mentions some very important historical context. For the first 120 years of the existence of the United States (before the establishment of the Federal Reserve), general prices trended downward. According to the Department of Commerce's Statistical Abstract of the United States, the "General Price Index" declined by 19% from 1801 to 1900. This stands in contrast to the 2,280% increase of the CPI between 1913 and 2013

While the 19th century had plenty of well-documented ups and downs, people tend to forget that the country experienced tremendous economic growth during that time. Living standards for the average American at the end of the century were leaps and bounds higher than they were at the beginning. The 19th Century turned a formerly inconsequential agricultural nation into the richest, most productive, and economically dynamic nation on Earth. Immigrants could not come here fast enough. But all this happened against a backdrop of consistently falling prices.

Thomas Edison once said that his goal was to make electricity so cheap that only the rich would burn candles. He was fortunate to have no Nobel economists on his marketing team.They certainly would have advised him to raise prices to increase sales. But Edison's strategy of driving sales volume through lower prices is clearly visible today in industries all over the world. By lowering prices, companies not only grow their customer base, but they tend to increase profits as well. Most visibly, consumer electronics has seen chronic deflation for years without crimping demand or hurting profits. According to the Wall Street Journal, this should be impossible.

The truth is the media is merely helping the government to spread propaganda. It is highly indebted governments that need inflation, not consumers. But before government can lead a self-serving crusade to create inflation, they must first convince the public that higher prices is a goal worth pursuing. Since inflation also helps sustain asset bubbles and prop up banks, in this instance The Wall Street Journal and the Government seem to be perfectly aligned.


Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.

11 comments:

  1. Excellent article and post. The Wall Street Journal is just that, a journal for Wall Street only, and government officials. It's not named the Main Street Journal. And its a dying dinosaur. Thank God for the Internet that has spawned thousands of better alternatives, like this site as one. When I was a young professional in the 70's and 80's, there was no information other than what I could buy at the newsstand, like the WSJ, NYT, Time, and Newsweek, and three TV network channels. When CNN came along it was mind boggling. I used to read the Wall Street Journal cover to cover and that was ALL I knew. Finally in about 2002, I made the big leap of cancelling my subscription to the WSJ and never looked back. And the entire world of possibilities opened up for me. The WSJ is now only for the New York and DC Wall Street/government commuter train drones and their masters. Their narrow little world that unfortunately still rules the world like as from Mordor.

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    1. Taranto is worth an occasional peek but that's only because its free via the inter-webs.
      .
      Wouldn't pay one Bernanke penny for the other state drivel.

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  2. Excellent article and analysis. It's funny how things change over 40 years. Back in 1974 Gerald Ford was declaring "whip inflation now!" Now that's becoming "we need inflation now!" It is amazing to me that people could even buy the ridiculous "inflation is good for you" argument.

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  3. Nixon imposed wage and price controls in the early 70s when consumer prices were in the 4-5% range. If we calculated the CPI today as we did 40 years ago, it would probably be north of 7%, yet the Fed is frustrated that they can't generate enough "inflation." Amazing.

    Leave it to the government and the Fed to screw it up every single time.

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    1. 7% inflation? Hope you are trolling.

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    2. No, you moron. Look at real inflation stats, not the bullshit your beloved government publishes.

      Quit sucking government cock and wake up you troll!

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  4. You had plenty of deflation last year. Gold fell 28% and according to Ron Paul gold provides the proper measure of inflation/deflation.

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    1. What is your citation for such a Ron Paul statement? I've never heard him say anything like that. Ron Paul is strict Austrian Econ 101: Monetary inflation does not affect all prices uniformly and at once and can also be manifest by a price staying the same when it otherwise would have fallen, or falling less than it otherwise would have. For all we know, without last year's massive inflation, the gold price would be down even more, or such inflation will manifest itself in the gold price some time in the future.

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  5. Clover wrote, "Gold fell 28% and according to Ron Paul gold provides the proper measure of inflation/deflation."

    Which is exactly why the gold price was manipulated downward. Mafia guys do the same thing the world over. I.e. tip the scales in their favor. Use mislabeled weights, etc...

    Anyway, the key to look at is the long term trend, not a short term manipulated change. Gold fell 28% recently, but it's still Up compared to when it was $200 - $400 per ounce. What's that average out to?

    - PanarchistamericanHelot

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    1. Also, whoa, I didn't know the Germans 'only' wanted 1/5th of their gold back. I thought it was the whole she-bang they wanted. 1/5th kind of puts a whole new twisted light on things.
      Talk about manipulating supply.

      http://www.shtfplan.com/headline-news/feds-dirty-little-secret-the-gold-isnt-there-exists-as-paper-ious_01212014#comment-2917370

      - PanarchistamericanHelot

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