Friday, September 24, 2010

Deflating Demand

Read Karl Denninger commenting on a Robert Reich confession that printing more money isn't really going to turn things around.

Probably the majority of consumers are unable to spend more money to revitalize small business where most job growth is attained. People who have a little spare cash are hoarding it for fear that they might lose their jobs. Businesses, instead of hiring people they don't need to provides goods or services no one will purchase, are using their capital to finance mergers and acquisitions and to buy back stock to speculatively run up their share prices.

We are not seeing rapid increases in consumer prices because DEMAND has fallen off the cliff. As Denninger points out, gasoline should be perhaps $1.25 based on decreased demand, but it is holding at around double that. Some of that is decreased supply after the BP Deepwater Horizon spill -- possibly. I haven't been following the oil market. But some of it may be the leading edge of inflation.

Food prices certainly aren't dropping, and coffee seems to be getting more expensive. I wish I had a crystal ball that worked.


  1. Without job creating and wage increases, I'm not sure how we can create inflation.

    With respect to food prices, I suspect that has something to do with population growth increasing faster than food suppoy.

    The funny thing is that debt origination by the federal government is the only thing supporting demand right now.

    Since massive soverign debt origination is "working", the Fed/Treasury will probably continue doing that until something bad happens in soverign debt land.

  2. You can hyperinflation if the population loses faith in the fiat currency. This is of a different nature than the traditional wage/price inflation caused by an oversupply of money chasing fewer goods.

    Unemployment is definitely depressing demand which is holding the line against inflation. There is little demand for increased commercial or consumer debt, which has decreased the velocity of money. Unemployment is like a dam on the river.