tag:blogger.com,1999:blog-944033466455044178.post280759974651684899..comments2024-01-16T08:08:13.239+11:00Comments on Gramp's Grumps: Dealing with Deflationrkshttp://www.blogger.com/profile/01183856757175002949noreply@blogger.comBlogger1125tag:blogger.com,1999:blog-944033466455044178.post-83368668900386617672008-11-04T20:19:00.000+11:002008-11-04T20:19:00.000+11:00This is stuff cut from another document. I'm just ...This is stuff cut from another document. I'm just putting it here because it has some stuff left out of the post, though it also repeats some:<BR/><BR/>Avoiding Deflation<BR/>Prices used in the CPI or in discussing housing prices are based on asking price, or on the prices of sales in circumstances where sales volume might have dropped a lot. To understand the true level of deflation one should perhaps also consider at what price the things for sale would actually sell (the clearing price). However it may not be necessary to assign numerical values to the amount of deflation and to the required rate of decline. It may be possible to figure out with economic models, how to print money at a steady rate, so that there is a small amount of inflation so that wages can fall steadily in real terms, but hold steady or rise slightly in nominal terms.<BR/><BR/>Currently money is mostly credit. With credit collapsing it might be necessary to print a very large amount of money to prevent deflation. Then when the recovery gets going it will be wise to take steps to prevent credit returning to the levels we have seen. Even so the government will need to stand ready to remove money from the economy once expansion starts to prevent serious inflation and to keep the size of the economy below the downward trend line dictated by declining energy availability.<BR/><BR/>When the deflation-fighting activity goes too far, and there is real inflation leading to higher nominal wages, then lenders need to be compensated for the losses they sustain in real terms (over and above the intentional small loss, needed to reduce all money holdings in line with the long term shrinking of the economy).<BR/><BR/>Letting politicians print money is a dangerous thing. It is important, but very difficult, that the money is introduced into the economy in ways that don't cause any unintended consequences. The intended consequences are to move productive activity away from optional personal expenditure and towards preparing for the future by changes to energy production, transport systems, energy efficiency, etc.<BR/><BR/>One simple technique is to buy durable commodities whose price is falling, thus supporting the price while moving money into the economy. Commodities would be purchased in proportion to their use in the Australian economy. Later these durable commodities can be sold to stop the price rising so quickly, simultaneously removing money from the economy. Things like this must be done completely transparently, even though that will inevitably lead to complaints by the people who would like the price to fall/rise respectively. Oil is an important commodity, and should be included in the scheme despite the cost of storing it.rkshttps://www.blogger.com/profile/01183856757175002949noreply@blogger.com