An excellent item in the comments thread on this piece in the UK Telegraph about the impending printing of dollars to combat deflation. It states that we have already had deflation for the last decade, a period when you could buy a T-shirt for less than 30 years ago, or a Chinese DVD player for less than a Hollywood DVD:
“Why do people not understand we have had deflation for the last 11 years, it was on the imported goods from China. This is what caused us to get into a mess as we decided for an arbitrary reason that inflation had to be 2% and so we kept rates low and had an inflation boom in services and assets.
Now it is reversing as the deflation from China has run its course and becomes inflation, hence the assets and services must deflate.
Letting rip with money supply and govt spending will end with significant inflation and not the “old equilibrium” that they seem to be looking for. it will erase the debt but will not give people jobs…..”
[It will give people jobs – but perhaps, not long term jobs, if this is money spend purely to bootstrap, it does matter what the long term investment benefits are. Spending on weapons or patching up existing infrastructure won’t be good in the long term.]Prices over the last decade depend on which frame of reference you use. The convenient view in places like America and Britain was that asset prices like houses were rising rapidly relative to goods. People borrowed against these assets and banks leveraged the borrowing further.
If, as is entirely reasonable, you look at this from another frame of reference, then house prices stayed the same, and wages dropped as China started to replace our manufacturing base, producing cheaper goods. Only one thing did rise – oil.
So what is happening now? A switching of the frame of reference.