Deflation Part Two

The idea that deflation is not a problem and is actually what we need was peddled by a CNBC commentator, Peter Schiff, and I addressed it in an earlier post, but I had no idea the problem was so closely at hand. The argument went that because there was an asset price bubble being pricked, asset prices needed to come down and therefore deflation was a good thing. However, and I’m sure the commentator in question knows this, deflation refers to a falling price level across the basket of consumer goods included in the consumer price index. Deflation in this sense is devastating for the economy and particularly for debtors who see the real value of their debt increasing (of course CNBC commentators are not typically on the side of the debtors, but on the side of the monied interests who loaned the money). The graph below (which is from a post at Angry Bear) shows the compounded six month CPI growth rate and shows a significant deflationary environment when energy prices are included (they are typically excluded from short term numbers because of their high month-to-month volatility, but the data in this chart are multi-month and the volatility should be smoothed, so it is appropriate to include them).

This also I think shows the foolhardiness of calling the multi-month deflation influenced by falling oil prices an “energy tax cut” as Larry Kudlow does so often. He sees falling energy prices as a good thing and therefore, in his ideological mindset, it must therefore be a “tax cut”.

Deflation? Bring it on!

Peter Schiff, a right wing money manager who’s on Kudlow’s show made an incredibly disingenuous conflation of two very different things today on “Call of the Wild”. He said “falling prices, we want falling prices. Asset values are too high” in response to Steve Liesman’s concern about deflation. His lie in the statement was to say that falling house (asset) prices is the same as a general fall in prices (e.g. the CPI). The former is a normal part of a popping of the bubble and is painful but necessary. The latter is deflation which makes downturns epically more painful by causing outstanding debts to grow in their real size which can push already overleveraged households and businesses over the edge and end up leading to a more severe recession or even depression. Another lie that Steve Liesman was only able to argue against briefly before the right-wing nuts Kudlow and Melissa Francis shouted him down & ended the segment.