The last time this happened, voters didn’t credit Bill Clinton. That may be a bad omen, or a good one.
If the stock market chose presidents, Joe Biden would be a shoo-in for reelection in 2024. The market rallied this month amid growing optimism about the economy, with the S&P 500 zooming 1.9 percent Tuesday on news that the consumer price index rose only 3.2 percent in October (compared to 3.7 percent in September). Stocks rallied again Wednesday on news that the producer price index fell 0.5 percent. Commentators are no longer debating whether the economy will experience a “soft landing” (i.e., a reduction in inflation without recession). The only question now is when it will arrive. The S&P 500 seems to have decided it’s already here.
But the stock market doesn’t choose presidents. Voters do, and polls continue to show they think the economy is in terrible shape. A Financial Times–Michigan Ross Nationwide Survey conducted November 2–7 is absolutely brutal on this point.
Any economic downturn will involve the risk of deflation because lack of demand will cause prices to go down, but that is merely a symptom, not the cause of the great depression. While you talk about the logical choice of waiting for purchases, this doesn’t work out the same way in real life because people generally just buy when they want something. A key example is technology. Technology is inherently deflationary because it’s designed to be cheap to manufacture, so initial high prices are mainly to recoup R&D costs plus profits and it should only get cheaper from there, plus technological advances mean that you get a better product than before. However, people and businesses don’t just wait around forever to purchase computers, TVs, phones, etc. Technology is the largest sector of the S&P 500.
As for debt, if deflation is expected then it’ll be factored into the interest rate. What’s the difference between a 4% loan at 2% inflation and a 0% interest rate at 2% deflation? The 2% inflation rate target is completely arbitrary, so why not target a 2% deflation rate? Consistency is key.
You pointed it out yourself, deflation is a symptom of bad economic downturns. How would you propose causing deflation without an economic downturn or some kind of intrusive economy wide price controls and rationing? A deflationary environment is deflationary because no one can afford to buy anything so prices are dropping to try and compensate. And once deflation is established it’s very hard to break out again (see how long the great depression lasted). It’s a terrible situation.
If they kept driving interest rates even higher until they got deflation, the reason would be because they got interest rates so high the entire economy has gone into a giant recession. You can’t just “set a 2% deflation target.” When the fed is talking about an inflation target, it’s adjusting the interest rate to get there. I mean you could set that target, but you’d be waiting until the interest rate got so high the entire economy had crashed before you got there. You’d be shooting yourself in the head to fix a headache.
You’re also ignoring all the many existing debts with fixed interest rates, a deflationary environment would be devastating for student loans. The corona virus period inflation has actually helped them and devalued any debt from prior to this period, making it easier to pay off in the future.
You can cause deflation through tighter controls on the monetary supply. The fed is so scared of deflation that they had been lending out money to banks very cheaply and this has caused the crazy asset bubbles we’re grappling with now. You’ll get spiraling deflation because of crazy heights of inflation. A more controlled process would temper risky behaviors and smooth things out instead of having to deal with stark boom and bust cycles. Cheap money is actually how the great depression happened. Banks would lend money willy nilly and people would throw it at the stock market or other frivolous purchases. These risky “investments” set up the deflation spiral as things had to come back to reality. Deflation was the medicine and you’re pointing at it as if it was the cause. Yes, the transition will be painful, but putting it off will only make it more painful when the piper comes to collect.
Inflation only helps you pay down debts if you make more money to match that inflation. Instead, people are paying 50-100% more for groceries, housing, and vehicles, among many other things. Meanwhile their paychecks are not necessarily matching inflation.
Yeah, they decrease the money supply by rasing interest rates, that’s what they’re doing. And if they go too far they’ll cause a recession. It would be the recession that causes deflation. But now you have a recession. And 50-100% inflation is just simply untrue. And it’s also untrue paychecks aren’t matching inflation right now. Wages have been growing faster than inflation since January.
Comparing my grocery bills to a couple years ago, 50-100% inflation over that period is absolutely true. From what I’ve seen in the housing and vehicle markets, the same holds true. The bulk of the inflation happened in 2022, which is why they changed the inflation calculation from comparing two years back to comparing just one year back. Inflation is apparently slowing down, but it’s still higher than target and wages have quite a bit of catching up to do to reach the total amount of inflation since covid.