With a real solution offered at the end of this article, I have been trying to get a handle on what deflation will look like with negative interest rates. Certainly, we are familiar with disinflation, a slowing of inflation. Yet disinflation is not deflation. Deflation is a different animal we have not experienced. Deflation could include a serious reduction of production, a serious slowing of credit, but must include a serious contraction of the money supply and a serious reduction in prices for consumer goods across the board.
Imagine a housing crash with all other prices falling at the very same time. That is deflation. Since commodities have crashed, it makes no sense for houses, made out of commodities, to remain priced as if they cannot be replaced by cheaper production of new houses. Housing in white hot areas could crash, unless there is simply no room for replacement. New modes of high speed transportation may eventually cause a decay in prices in those areas. That will be painful but is not imminent.
Deflation is the diminishing of demand, so much so that businesses have difficulty making money. My parents experienced deflation in the Great Depression. My adopted father had his wages cut, but could have become unemployed but for the importance of oil in his community. His payments stayed the same. The car was parked because they could not afford gasoline, which was dirt cheap, but they simply had no money to buy it. Good thing they lived in a small oil town. They walked.
Deflation is the absence of money, the massive contraction of the money supply. For my parents money was in great demand. A little went a long way, but few had much money. Deflation coupled with negative rates, as a means to increase the money supply will be a crushing tax on the average consumer.
Deflation reduces business revenues. In the Great Depression, as pointed out by Zero Hedge, farmers could not make a profit. You have to have food, so subsidies were issued for the farmers.
A spiral or cycle of deflation brings unemployment, lack of profits, and requests by business for subsidies. So, we are apparently headed toward a global deflation, which certainly has a lot to do with a contraction of the money supply and price declines everywhere.
When the Federal Reserve was created in 1913, it immediately created deflation. If the Fed created deflation in 1913, is the Fed creating deflation along with all the central banks around the world now? One reason the Fed would want to do this is to force wages down in the developed nations as was what happened in 2008. Or the second reason is that the Fed wants deflation in order to ban cash and save the banks at the expense of the real world! That is creepy if true. I can’t think of any other reasons why the central banks would do this.
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