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Why deflation and growth can't happen indefinitely

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Helsworth
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Post: #1
Why deflation and growth can't happen indefinitely

Ok, I'm writing this post in response to what this guy writes in this article, http://seekingalpha.com/article/225056-d...ng-economy

While indeed economic growth can happen with deflation (negative inflation), this state of affairs can't last. What drives production is sales. Increased sales pay for the expansion of production. Producers produce only if they are able to sell. The only way they can bear an expansion of production without a proportional growth in sales figures is by consuming their savings and or contracting loans. Leveraged and thus, without an increase in sales, the producers will inevitably fall short on their payments (bank, utility bills, wages etc). Therefore they go bankrupt. In short term, deflation and growth is alright, but mid to long term something has to give. Either prices increase, or economic growth turns negative.


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11.03.2013 14:03
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Lord Alexander
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Post: #2
RE: Why deflation and growth can't happen indefinitely

David Beckworth does not claim that it is possible to prolong infinitely the combination of economic growth and deflation. He is only saying that such combination has been present in the early 2000s, that it was wrong for Federal Reserve to maintain low interest rates in such situation, and that this mistake could have helped in the creation of bubble that later has triggered the economic crisis.

I do not know if he is right about this or not, but I do not find this issue to be very important because in my opinion the decades of deregulation of market economy under any circumstances would have led to economic crisis in the near future.

This post was last modified: 11.03.2013 16:21 by Lord Alexander.

11.03.2013 16:20
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Helsworth
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Post: #3
RE: Why deflation and growth can't happen indefinitely

That's austrian fallacious argumentation. "Low interest rates produce bubbles." That's false. Everyone saw the bubbles, but the institutions responsible for regulation and inquiry didn't do their job. The media practiced hagiography, the rating agencies gave tripe A ratings to beautiful packed toxic assets, predatory lending wasn't countered. It is known that a rise in asset prices is not a fundamental of economic growth. It's not the same as producing wealth. Low interest rates don't cause inflation; quite the opposite, since the coast of a loan raises the price of doing business and that price inevitably falls onto the consumer.
PS: I wasn't countering Beckworth. I was simply commenting on the issue of deflation and growth.


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This post was last modified: 11.03.2013 16:42 by Helsworth.

11.03.2013 16:40
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Lord Alexander
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Post: #4
RE: Why deflation and growth can't happen indefinitely

In a perfectly adjusted planned economy it theoretically should be possible to maintain zero inflation infinitely because in such system there will be no need to maintain the balance between the sales and the expenses on the expansion of production. Government can continue expanding the production without altering the prices as long as there is enough natural resources and sufficient workforce.

11.03.2013 17:11
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Helsworth
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Post: #5
RE: Why deflation and growth can't happen indefinitely

Lord Alexander Wrote:
In a perfectly adjusted planned economy it theoretically should be possible to maintain zero inflation infinitely because in such system there will be no need to maintain the balance between the sales and the expenses on the expansion of production. Government can continue expanding the production without altering the prices as long as there is enough natural resources and sufficient workforce.

It all depends on the deficit between a company's income and expenditures. A company, provided it has enough reserves, can expand its production quotas even without an increase in demand for their product. The time in which a company can do this depends on the level of production expansion (the deficit it runs). Corporations like households can go bankrupt.
Regarding a planed economy we are in accord. In a planned economy, the government runs everything. Thus, the government can run whatever deficit it wants. It's not a household. The only constrain to its deficit is physical resource limit, not a lack of money.


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This post was last modified: 11.03.2013 17:29 by Helsworth.

11.03.2013 17:21
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Lasfaro
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Post: #6
RE: Why deflation and growth can't happen indefinitely

Deflation with economic growth can happen long term , with government assistance in infrastructure , resource management and automation.

The greatest example of government assistance in infrastructure in causing deflation and economic growth was the building of the Panama canal. The challenge with trading with the USA was you had to circle all the way around South America before cotton or wheat could be shipped to Asia ,or resources from Asia going to USA that were fated for Europe. With the support of business leaders , Teddy Roosevelt constructed the canal. Thanks to the canal , a ship trip could take 6 weeks instead of 6 month , which lowered profit, and allowed more product to come in and go out . With the decrease in trip time , producers deflated their prices to compete with other international producers , but could still make a bigger profit.

But then again , the morals of the time have changed and big business will try to make the biggest profit on any excuse.

12.03.2013 00:35
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Helsworth
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Post: #7
RE: Why deflation and growth can't happen indefinitely

Well from your example, their basic material costs lowered dramatically, and thus they were in a position to lower the prices of their goods in order to enter foreign markets and compete with others. What matters for producers is to reach the sweet point between price and sales. They want to be able to make the optimum sales at the optimum price. This depends on many factors, but the primal factor, on the basis that the producer starts expanding production and hiring more workers, is sales. And the capacity to sell is strictly related to aggregate demand. Any producer trades his production for aggregate demand. If he doesn't find it domestically, he can find it outside in foreign markets. It just depends on the level of competition, if he can secure a deal or not, provided of course, there's demand for that particular good he's producing. As aggregate demand rises so do prices in time. If supply were to expand while aggregate demand were to diminish, we'd have a deflation of prices and economic contraction at the same time. Producers lower prices with the expectation of increasing sales. If they don't sell sooner or later, they'll go bankrupt. Highly leveraged companies will go bankrupt faster.


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This post was last modified: 12.03.2013 08:47 by Helsworth.

12.03.2013 08:46
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