Economics: The question I've been asking myself, and the answer I come up with

[ThomWV]

Here is the question I keep asking myself: How can we pump a trillion dollars into the economy and not see inflation?

Now that's quite a question. Inflation is generally considered to be cause by too many dollars chasing too few goods so you'd expect the injection of many dollars into the economy with a more or less fixed amount of goods would lead to inflation. So where are the great increases in the cost of goods? Interestingly enough just this morning (C-span interview on Washington Journal) Paul Krugman once again suggested that the greatest danger we face right now is deflation. Of course the funds being poured into banks isn't finding its way into the economy, but when it does will we then see inflation run rampant?

Well, an answer occurs to me for the lack of inflation so far. The answer seems to be that our future tax dollars, the ones that are being given birth today in the accounts of the nations half a dozen largest banks, are only replacing dollars that were booked but never really existed the first place, the overstated earnings and profits of the banks from 'better times'. They never earned the money in the first place and now we are taxed with replacing it, illusionary dollar of the past with very real hard earned dollars of the future. And that is why we aren't seeing inflation now, we aren't adding dollars to the economy just replacing these old phantom dollars with future earnings.

And that brings up the specter of deflation. What if the phantom dollars are not replaced? I know enough about economics to understand the horror of a downward spiral of prices. What would cause deflation? Classically it would be too few dollars chasing available goods. Well, what happens if we underfund the bailout? Would that not inevidibly lead to deflation?

[JVS]

1. Because when put against the losses, the net change is minimal

[BlooInBloo]

2. If a trillion dollars has exited the system. Durr.

[CJCRANE]

6. That makes sense

(as per JVS above too) and is somewhat reassuring because it means the stimulus package should fill the gap (at least for this year).

[Jackpine Radical]

3. Our production capacity is largely shut down.

My prediction is that increased availability of money will result in opening up production. There are no fundamental scarcities. Inflation shouldn't get out of hand unless we hit the ceiling of production capabilities. Sadly, most of those production facitities have of course been moved overseas, but my point remains.

[ThomWV]

4. Somewhere recently I saw a number for our industrial utilizaiton, 14% I think it was

Sorry, don't recall the source. It does seem to confirm what you say though.

[Greyhound]

7. There is an article posted over in the economics forum stating that the global shipping

rate hit zero last month. Nothing is moving, warehouses are full, ships are sitting idle, and nothing beyond bare necessities is being sold. We have an economic gridlock.

This is what has Krugman and most economists so freaked out. This does cause a deflationary spiral as companies keep lowering prices to get rid of inventory, while closing down production, which leads to fewer people having any money to purchase goods which keeps inventories high, which...

There is a $2.9T gap this year and $750B will not bridge it, even if all of it were to come in at the bottom, which of course, it is not.

[ThomWV]

13. So, do you think the spiral has already begun?

Seems that's sort of where things seem to be pointed.

[Greyhound]

16. Yes it has. More than a "stimulus bill" we need wages to be higher.

Perhaps subsidies to facilitate this in conjunction with the stimulus focused on small business are in order. It is hard to make business raise wages when they are not making money, so this might be one component. Additionally, the people in the top positions have to accept less, if they suck up all the money themselves, none of this will work.

There is no "silver bullet" solution, this will take a concerted, sustained, effort on the part of us all, and that is going to take unity, that is what Obama can do most effectively. We have to get people to understand that they are not in this alone and that we have each others backs.

It's a huge task that lays ahead and if we fail to accomplish it, the world is screwed.

ETA; I think we really need to quit focusing so much on big business and put much more emphasis on small businesses and new start-ups, that is paramount.

[Still Sensible]

5. Forever we had been taught that deficit spending was THE

cause of inflation. They taught us in school, reiterated it in college. That was the dogma for a long long time. And then Reagan ran up the biggest deficits in history (up to that time) and, gee whiz--we didn't see anything like the inflation of the 70's when deficits were lower.

I think it had been drummed into us from junior high school forward (all the textbooks had a graphic showing the "inflationary spiral" and the evil deficit spending fueling it) that even the reality of the relatively low inflation rate of today in the face of a trillion dollar deficit seems counter-intuitive because of the conventional wisdom we were taught.

[kentuck]

8. I think that at first we have deflation...

because no one is spending any money. Prices are coming down. Once the economy recovers or once this huge influx of dollars starts moving thru the system, then we may have inflation? Of course, who is going to have "too many dollars" chasing the goods? Twenty five years plus of restricting the economy makes it difficult to imagine inflation at all. Of course, at this time, no dollars are flowing thru our system - they are being hoarded by the Big Banks. Maybe that is their plan all along?

[Greyhound]

9. Short answer; Less than a trillion dollars pumped in does not cover the $3T shortfall. n/t

[Life Long Dem]

10. I'd say that pumping dollars into the economy causes disinflation.

This could slow a decrease in prices. Otherwise if demand isn't met, deflation will happen and prices will continue downward.

And the spiral continues downward without supply and demand.

[quaker bill]

11. Ecomonics are contextual

In a full employment economy, deficit spending can be inflationary. When there are plenty of dollars chasing goods, an action that brings more dollars into the economic mix can be problematic.

Each of the policy actions (fiscal or monetary) has to be looked at in context. Under certain circumstances, a tax cut is the right choice, under other circumstances a tax cut would cause problems and could even be inflationary. In some cases, deficit spending is the right choice, such as the current circumstance where aggregate demand is falling.

The mistake of the right wing is that they only ever had one policy preference (tax cuts) and tried their level best to argue that it was the cure all for any occasion. It is not that tax cuts are inherently wrong on any occasion, it is that they have long ago lost all utility. Once the marginal tax rate is dropped below a threshold, taxes cease to be a driving force in business decisions. At this point, diminishing returns are met and taxes become a tool with no utility in economic regulation. Reagan took us there and well beyond in one stroke. Taxes have not been a useful tool in economic regulation since.

[dkofos]

12. We could reinstate the Nixon price controls.

[ThomWV]

14. They were accompanied by wage controls. Would you have that too?

Curious.

[dkofos]

15. Sure, I'm not working anyway.