Tuesday, March 17, 2009

Just sayin' Part II: Inflation vs. Deflation

Remember how all those "Tea Party" protestors were complaining that Obama's stimulus plan would lead to out-of-control inflation? Yeah, so far, it's not happening. Last month, wholesale prices increased a whopping .1 percent. That's a fourth less than economists predicted. And down from an .8% increase in January. Compared to a year ago, wholesale prices are still down 1.3% from a year ago.

Say it with me: the recession we are dealing with is deflationary, not inflationary. That's exactly why government spending that puts pressure to keep prices from dropping out-of-control is a GOOD thing.

Inflation is safely in check, and we're seeing the bottoming out of deflation. The housing market and even some financial companies are starting to show signs of strength. The Dow gained 10% in last week, and has shown continued growth this week. It's what we'd call a sustained rally. While conservatives have been screaming to blame the roughly 1,500 points the Dow has lost this year on Obama, the market is showing a rebound. There's still the roughly 5,000 points that the market lost during the Bush Administration to make up that almost nobody points out in comparison.

Now that the Obama Administration, particularly Treasury Secretary Geithner, are finally cracking down on short sellers, we can expect a continued rally in the market, especially once uncertainty about the fate of trouble banks is resolved.

I'm actually getting rather upbeat about the economy. Maybe it's the extra coin in my pocket and signs of an economic rally. But I bet the Republicans who went all-in on betting Obama to fail are beginning to feel a little queasy right now. Because if you bet your party's remaining political fortunes that the economy wouldn't rebound in time for the 2010 elections, you better be right. Otherwise, well, it's going to be a long hard political winter for the Republicans if they're wrong (again.)


Jeff Lehner said...

Inflation is a longer-term phenomenon about which well-reasoned assumptions based on interpretation of any given one-month interval cannot be made on that basis alone. We're printing dollars and borrowing at a rate that everyone agrees is not sustainable. This, at a time when payrolls are shrinking and the economy continues to worsen.

So what happens to the value of all those extra dollars when things turn around (as they inevitably will)? And oil- and natural gas prices spike and production and transportation costs are passed on to consumers?

Modern Esquire said...

What happens any time inflation starts to threaten the economy, the Fed Reserve will raise rates (now at zero) on the Prime Rate to keep inflation in check. Again, we're dealing with a deflationary economy in recession right now.

The stimulus, by design, is designed to stop the deflationary cycle. There are obvious sighs that is occurring beyond the new data that came out yesterday.

The stimulus is a large, but temporary infusion of government spending designed to break a cycle of people refraining from spending due to expectation of lower prices over time and economic concerns.

How I look forward to the day when our economic activity is so heated we're worried about inflation again! Regardless, the Fed has shown that it can keep inflation in check, and to date, the fears about inflation are proving to be unfounded.

Jeff Lehner said...

Of course, you're right. But your point presupposes that supposedly independent central bankers will have the political will to raise rates when the recovery begins. Recent history suggests otherwise, aside from this, we both seem to acknowledge that 'stimulus' - via inflation, huge rate hikes or massive future tax hikes (or probably some awkward mix of the three) - comes at a heavy price that is likely to hamper future growth one way or another. Bottom line: Bills get paid.

Congrats on re-launch. It seems you're part of a rare breed - a blogger up for a good debate. Good on you, too much inanity in the blogosphere, in my view. I'll be a regular.

Jeff Lehner said...

Debt, debt, debt. Print, print, print. Ironic that this should happen on the day we discuss inflation.

Hooray for central bankers...???

Modern Esquire said...

I actually agree with the Fed's assessment. It says in a much elevated tone what I clumbisly tried to say in this post.