When deflation becomes a self-reinforcing deflationary loop, as in the 1930's in the US, it's horrible:
https://www.stlouisfed.org/-/media/project/frbstl/stlouisfed...
That's why Japan has been trying to fight deflation for decades.
https://www.stlouisfed.org/-/media/project/frbstl/stlouisfed...
That's why Japan has been trying to fight deflation for decades.
Inflation/deflation happens when there is a mismatch between the supply of money and the value of goods and services in the economy. This mismatch usually happens because the central bank prints deficit money.
Deflation in the 1930s happened because the Fed went the other way, refusing to create money. This continued until the late 30s when the Fed changed course, and (you guessed it) produced lots of inflation.
[1] "In Defense of Deflation": https://news.ycombinator.com/item?id=40206205
The treasury prints money. Remember when Janet Yelled said she is ready to mint a one trillion USD coin in case it is needed to avoid the debt ceiling.
What the Fed does is a duration transformation. Commercial banks can deposit US treasuries at the central bank and receive a claim on those treasures in the form of liquid central bank reserves. This is done because people keep holding more and more short term duration deposits in their checking accounts or at brokerage accounts. Buying a 10 year treasury with deposits that only have a 1 day duration is quite insane. This means that in practice whatever deposits you are keeping in your account are missing from the economy.
The US federal government can run a deficit and it can run it regardless of the financing conditions. It will merely pay an exorbitant interest rate if it chooses to do so.
Here is a loosely related paper:
https://www.elsevier.es/en-revista-investigacion-economica-1...
In an equilibrium economy, the expected net money supply is always zero, that is, every dollar in the money supply is offset by a dollar in debt. So called inside money.
If the neoclassical theory is true, then attempts at extracting seigniorage would immediately be spotted and no inflation could ever occur. The inverse is also true. If the government artificially restricted the money supply, people would find alternative means of providing themselves with the ability to exchange. So the expectation is that the government has zero power or ability to influence the economy with monetary policy. The only reason why it would have the ability to do so, is because it has made those alternatives illegal.
It's a euphemism for the modern way of simply issuing more debt, and more debt to cover existing debt.
Exactly: In periods like the 1930's, central must lend to banks at lower rates and buy fixed-income securities with newly created money as necessary, in order to prevent a deflationary loop. In the 1930's the Fed did the opposite, sending the economy into an even more painful deflationary spiral.
Now almost certain it's not great for humanity in a long term view (less investments in the future etc) but I'm not sure it has to be worse for the present generation.
People hear this and think "everyone was broke", but there literally was just no money. We hadn't fully figured out modern monetary policy at that point, and the old ideas of austerity reigned supreme for policymakers.
And yet, no. No one spoke of austerity. The government wasn't austere. Hoover's Treasury Sec., Andrew Mellon, wanted to "liquidate, liquidate, liquidate" in 1929, but that didn't happen. More government largesse than Roosevelt went with would not have resolved things, not all other things being equal.
The Fed was very hands off in the early 1930s:
> […] At the onset of the Great Depression in 1929–1930, the Fed maintained a “hands-off” approach, believing the economy simply needed to “wring out its excesses.” This is somewhat ironic in that Fed policy itself greatly contributed to the financial excesses of the 1920s. Nevertheless, the Fed failed to recognize the nature of the economy.
> When the Great Depression hit in 1929, the Fed’s instinct was to do little and let the economy and markets correct. But the Fed seemed to have no sense of how big the credit bubble from the 1920s was. Consequently, from 1929–1933, the Fed remained committed to a tight monetary policy. Under the gold standard then in force, when the gold balances held by the government contracted, the money supply did so as well. Faced with the increasing economic turmoil, US businesses and the public at large trusted gold more than paper currency. Overseas investors, fearing a potential devaluation of the dollar, preferred gold too. This created a gold drain. As the Fed’s gold stocks declined, the United States unwittingly reduced credit in the economy. Over the 1929–1933 period, the US money supply contracted sharply, declining by roughly one third between 1929 and 1933, and the country experienced its worst ever downturn, with unemployment soaring to roughly 25%.
* https://blogs.cfainstitute.org/investor/2015/09/17/the-ghost...
It was the interventionist policies of new New Deal and its various spending and jobs programs that helped the recovery begin. As well as getting off the gold standard:
* https://delong.typepad.com/delong_long_form/2013/10/the-grea...
If you think things are bad with government intervention and regulation, you may wish to examine history about things before it became a thing:
* https://en.wikipedia.org/wiki/Panic_of_1893
* https://en.wikipedia.org/wiki/Panic_of_1896
* https://en.wikipedia.org/wiki/Panic_of_1907
IMHO the (US) financial system has been much more stable with more of a government / Fed hands-on approach.
Certainly there were crashes (1987) and bubbles (1999), but that was more on the private sector side. At least one problem was due to not enough oversight:
The key thing was the Fed was (early on) complying with how the gold standard worked, which is a finite amount of cash being available, and only being able to be increased by having more of the shiny stuff.
> When the Great Depression hit in 1929, the Fed’s instinct was to do little and let the economy and markets correct. But the Fed seemed to have no sense of how big the credit bubble from the 1920s was. Consequently, from 1929–1933, the Fed remained committed to a tight monetary policy. Under the gold standard then in force, when the gold balances held by the government contracted, the money supply did so as well. Faced with the increasing economic turmoil, US businesses and the public at large trusted gold more than paper currency. Overseas investors, fearing a potential devaluation of the dollar, preferred gold too. This created a gold drain. As the Fed’s gold stocks declined, the United States unwittingly reduced credit in the economy. Over the 1929–1933 period, the US money supply contracted sharply, declining by roughly one third between 1929 and 1933, and the country experienced its worst ever downturn, with unemployment soaring to roughly 25%.
* https://blogs.cfainstitute.org/investor/2015/09/17/the-ghost...
This is one of the reason why the gold standard (or any "hard" currency) is a bad idea:
* https://www.moneyandbanking.com/commentary/2016/12/14/why-a-...
The sooner the US (and other countries) got off the gold standard, the sooner their economies started to recover:
> In the end, recovery from the Great Depression does not begin until countries give up on the combination of the Bagehot Rule and of commitment to sound gold-standard finance. Those countries that have central banks willing to print up enough money so that people are willing to spend it--it is when you adopt such policies that your economy begins to recover. If you don’t, you become France, which sticks to the gold standard all the way up to 1937, and never gets a recovery. When World War II begins, Nazi Germany’s production--equal to France's in 1933--had doubled between 1933 and 1939. French production had fallen by 15%.
* https://delong.typepad.com/delong_long_form/2013/10/the-grea...
There was a misstep in 1936 when there was pressure to raise rates and also to reduce spending due to deficits, and so rates were raised and austerity was enacted… and the economy tanked again.