“How can anybody support deflation? Is 350% of GDP in debt not enough for you?”

I thought it worth pulling out of your post and letting it just stand out. Wouldn’t it be wonderful if the rest of economy (outside banks) could write-down 40% if their total debts. Might make managing the debt situation more manageable. I am sure this would require a capital injection directly from the US Treasury to recapitalize over-indebted Americans who were encouraged or shall we say induced by the lenders to borrow to their hearts content.

Well, as a manager, a 4 day workweek would mean doing 5 days of work in 4 days…still the expectation…but I guess that would be OK. More time to volunteer or spend with the children.

Needless to say, no one’s buying big ticket items, no one’s looking to buy homes, no one’s spending a lot for Christmas, and everyone’s taking a bunker mentality. This isn’t definite yet, but everyone’s taking a “if it is, let’s prepare now” attitude.

If that means Joe SixPack has to eat less and take a bike to work, he might actually get a six-pack where it belongs..

What is supposed to be so scary is that deflation means that people’s debts increase while their incomes decrease…making it progressively harder to for them to pay the debts back, right?

Well, if that’s truly the primary fear, why the focus on the absolute value of the inflation rate (positive vs negative)? The fact is, debts have been increasing FASTER than incomes for many years, much faster than low, but positive, inflation. That’s how we even got to 350% in the first place!

Only now that the absolute value of the inflation rate is turning negative, and suddenly we’re scared stiff (even though we’re not actually adding to private debt much any longer)???

We’ve been focused on the wrong statistics all along. If we accumulated debt at a rate of 20% faster than income growth, and now we get wage deflation of -5%, say, but add no more debt (or even pay down 2%), seems to me we’re well past the peak of the problem we’re so frightened of. But this also means we’re already in the hole in terms of paying back our debts. A minor wage deflation won’t make much further difference.

What do you think, FairEconomist?

ignorantmike

I find the current situation terrifying. We have massive bankruptcies, a liquidity trap going on 2 months now and spreading up to higher and higher durations, and now anecdotal reports of wage deflation. That’s Fisher’s debt deflation cycle: more real debt causes more bankruptcies which shrinks the economy which causes deflation which increase the (real) debt burden which … Once it’s on it can continue forever based on historical results. All the countries in the Great Depression continued down without limit until they did a massive devaluation.

The problem is complicated by the fact that nobody knows what money is right now. M1 isn’t deflating, yet, although it’s close. M2 is still increasing. But all the evidence is that we are deflating, at least in the Fisherian sense, so it seems we don’t have a good measure. That’s really not a shock to anybody who’s been paying attention for the past 20 years – monetarist theory stopped working in the 80’s and changes in what “money” is are the standard explanation. But it’s still a problem.

His colleagues did not go for it, and he literally turned out the lights a few years later. Your ‘beggar thy neighbor’ thread today touches on the same impulse.