How to fix the Economy?
People say that the economy is in bad shape because things are deflating ... house prices went down, so people defaulted on their home loans, this caused mortgage securities to go down in value causing investment companies and banks to go under, so loans have become difficult causing companies to go bankrupt and stock prices to deflate.
Deflation is not necessarily a bad thing ... it is an opportunity for those who can act on it. People generally think that their investment is doing well if its monetary value is higher. That is a wrong assumption. If everything deflates, average person should see an increase in value of the money he / she has. The 10,000$ in the bank should be worth more than before. We are seeing the effects immediately in oil prices and other commodities. After all, don't you wait for discounts to appear at stores before buying stuff? Why don't you apply the same logic for stocks or home prices.
Govt should get out of the way and stop bailing out companies. If they are in trouble, they should be allowed to gracefully go bankrupt. It is good for the remaining companies since it frees up resources for them to use and they can survive. They shouldn't bail out home-owners as well. The common argument is that people will be homeless. Has anyone checked how many homes purchased in 2003-2006 are really occupied by their owners?
Many people do have money and are waiting on that buying opportunity. They are just waiting for stock prices to bottom out or home prices to stop falling. The only way to get those people to invest would be make the prices go down even further and quickly.
If there is no govt help, prices will fall further and it will create an environment where people with money can feel that they have a great discount. This will push money back into the economy and prices will go up again.
The only risk is: people may think that investing in developing countries is better than in US and that would create a very bad situation. That will bring stagflation as everything deflates in US but since developing countries progress, there is demand for commodities and they actually increase in price. This means: a recession in the US with inflation. Add to it the risk that US govt has too much debt and that people would lose faith in the dollar causing worse inflation. I see why the US govt wouldn't want the economy to get a deflationary experience and are working so hard against it. In the long term it is always bad ... a recession avoided today by monetary policy will bring a depression tomorrow.
Deflation is not necessarily a bad thing ... it is an opportunity for those who can act on it. People generally think that their investment is doing well if its monetary value is higher. That is a wrong assumption. If everything deflates, average person should see an increase in value of the money he / she has. The 10,000$ in the bank should be worth more than before. We are seeing the effects immediately in oil prices and other commodities. After all, don't you wait for discounts to appear at stores before buying stuff? Why don't you apply the same logic for stocks or home prices.
Govt should get out of the way and stop bailing out companies. If they are in trouble, they should be allowed to gracefully go bankrupt. It is good for the remaining companies since it frees up resources for them to use and they can survive. They shouldn't bail out home-owners as well. The common argument is that people will be homeless. Has anyone checked how many homes purchased in 2003-2006 are really occupied by their owners?
Many people do have money and are waiting on that buying opportunity. They are just waiting for stock prices to bottom out or home prices to stop falling. The only way to get those people to invest would be make the prices go down even further and quickly.
If there is no govt help, prices will fall further and it will create an environment where people with money can feel that they have a great discount. This will push money back into the economy and prices will go up again.
The only risk is: people may think that investing in developing countries is better than in US and that would create a very bad situation. That will bring stagflation as everything deflates in US but since developing countries progress, there is demand for commodities and they actually increase in price. This means: a recession in the US with inflation. Add to it the risk that US govt has too much debt and that people would lose faith in the dollar causing worse inflation. I see why the US govt wouldn't want the economy to get a deflationary experience and are working so hard against it. In the long term it is always bad ... a recession avoided today by monetary policy will bring a depression tomorrow.
posted by Nitin M. Shetti at
9:39 AM
2 Comments:
Sigh ! If only they could follow how Louis Gerstner saved IBM in 1993. More here: http://fail92fail.wordpress.com/2008/11/21/on-louis-gerstner-and-ibm/
By
Abhishek, at 4:39 PM
Your analysis leaves out the expectations deflation creates. If people expect prices to keep going down, they tend to postpone their purchases. In general, people spend less, making it harder for companies to sell their products, causing layoffs, which in turn leads to less disposable income and more cash hoarding: A 'vicious cycle', like what happened in Japan or during the great depression. Tends to lead to protracted recessions, and high un-employment. Basically the worst case scenario, short of bankruptcy or hyperinflation.
By
Justin, at 1:53 PM
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