USA deflationary spiral?

[Baylor3217]

http://nypost.com/2014/02/08/thanks-to-aging-population-its-all-downhill-from-here-for-usa/

Thoughts?

[marty998]

Author cites Japan as an example but Japan doesn't really have immigration to compensate for the very low birth rate.

Of course no one has an answer to "what happens when the immigrants get old?" This is where I think the Japanese may come out of it all in better shape. They will get over their population problem in a generation when the boomer generation dies, and there will in future be fewer old people to support in proportion to their reduced population.

The rest of us who are engaging in a version of a ponzi scheme by bringing in more and more immigration to compensate for more and more old people will have a much bigger catastrophe to deal with when shit hits the fan.

In Australia, the projection is for 25% of the population to be over 65, and the ratio of taxpayers to pensioners to reduce to something like 5:2.

I am heavily in favour of stable populations, tilting slightly towards a reduction over time. Certainly not in a "lets cull people" mentality, but certainly zero growth. The correlation between overpopulation and lack of resources, war & civil unrest, health outcomes and general quality of life is too strong. This is before we talk about pollution and impacts on the environment.

I've gone off topic haven't I? Doubt very much deflation will be allowed to happen, because that will really screw the economy x 10 to the max. Guarantee enough money will be printed to keep the wheels turning.

[soccerluvof4]

long EWJ

[DollarBill]

I think we are headed for a deflation period not because of the aging population. I think people are getting smarter and don't want to buy the crap they're selling. I have to laugh at most commercials now because you can see thru the BS in the first 2 seconds. They brought it on themselves but we will all share the pain.

Sometimes I wonder who's smarter: the people who save their money all their life or the people who create Ponzi loans then file for bankruptcy and hit the reset button.

[AndrewJackson]

Why is deflation a bad thing? Personally, I prefer to live in a world where goods become cheaper over time due to increased productivity and efficiency. It happens every day in technology and I love it. My cell phone has gotten 10X better in the last 5 years and is vastly cheaper per month. What is not to like?

[wing117]

I'm going to focus on the population aspect only, so apologies if this is a little off topic from the financial aspect of it:

Just so we have accurate population numbers to consider against this article, here's the Population Pyramid for the United States:

http://www.wolframalpha.com/input/?i=United+States+Population+by+age

Looking at the population data, I don't actually see an issue with our population decreasing like in Japan.

The two population pyramids are incredibly different. From this data, I believe his fundamental grounds for his debate is false. I don't see a deflation issue on hand. If one does occur, I'd expect it to be minor.

I have no data to back this, so it's just a theory:

To AndrewJackson's example of efficiency and productivity, lets apply Moore's Law to the productivity of human civilization - That every x months a single human becomes x-times more efficient/productive. We are seeing an increase in worker productivity (largely due to technological advancements under the same law) and thus require fewer workers to perform tasks. As this productivity and efficiency increases I think it would make sense that a population would decrease and/or level off as the demand for able-bodies does as well. eg. "I don't need 10 children to run my farm anymore, I have two machines that do the work of 20 people with a single worker. Thus, I don't have 10 children, only 2."

Ultimately, population is also linked to infant mortality rates. The lower the infant mortality rate, the less children people have, and the population can start leveling off (once we also get away from the Duggars). Combining the two thoughts: "I don't need 10 children to run my farm anymore, only 2, and the two children I do have will probably live. So instead of having 4-5 children (where 2-3 may die in the first year of life), I'll only plan to have 2." This stabilizes the population. One could say that no children are necessary to 'help around the farm' anymore and they may only have one child just to pass on their genes/bloodline/surname - this would be a net decrease.

I have no doubt we will get to the point in the future where people decide to have children because "I need to do my part to sustain my countries population" as one reason.

I don't think this will mean a drastic decrease in the world population (though that would be okay because we are taxing our biosphere significantly - and a natural population decrease due to birthrates is probably the best way (rather than war, disease, famine, murder and forced methods like eugenics)), but it should help stabilize the exponential growth we've been seeing.

[Luck better Skill]

  Deflation could happen in the USA.  Many people just have less money and credit to spend.  Over supply pushes prices down.  Business are forced to liquidate inventory to pay suppliers, employees, rent, taxes, etc.  An increase credit crunch could be the catalyst.  It is a possibility even if low % chance.

[matchewed]

My thoughts are that yes the boomer generation moving out of the workforce will impact the future, but I don't think it is so easy to say it will be identical to Japan. That takes a leap of faith (logic?) I cannot fully agree with.

https://pressroom.vanguard.com/nonindexed/10.28.2013_Baby_Boomers_and_equity_returns.pdf

Here is a Vanguard paper discussing future equity returns and the impact the boomer generation may have.

And just because I have to express my own bias... the NY Post... really? Not exactly the paragon of journalistic ability. Thankfully they can review books written by business consultants and financial prognosticators, which as we all know are so excellent at their crystal ball gazing.

[tooqk4u22]

Yes there was a population boom witht he Boomers but there was also an equal or larger population boom with the boomers kids - the millenials.  The issue is that the boomers have been spending all their money on the millenials and most boomers can't afford to stop working, but once they do the it will be an economic tide when the millenials start growing their careers and incomes.  That will then lead to them having children, its just happening later.

We basically have a log jam. 

The US is currently growing at an acceptable rate to maintain growth (aided by immigration).  Japan's population is slightly declining.

The sustainability of the US leveraged society is a far greater risk to deflation than population.

[Luck better Skill]

The sustainability of the US leveraged society is a far greater risk to deflation than population.

Agreed.

[foobar]

Would you buy anything in that environment? Would you spend 400k on a house if you thought it would be worth 300k in 3 years or 50k in 30? Would you buy that 50 million dollar machinery to create 20 jobs would you procrastinate  a couple of year? Would you buy a stock a 50 if the price was dropping 5% every year? And how would you like those higher taxes? After all the national debt isn't dropping but instead of paying it off with cheap future dollars (inflation) your paying it off with expensive ones.

You don't want excessive inflation or deflation.

Why is deflation a bad thing? Personally, I prefer to live in a world where goods become cheaper over time due to increased productivity and efficiency. It happens every day in technology and I love it. My cell phone has gotten 10X better in the last 5 years and is vastly cheaper per month. What is not to like?

[Luck better Skill]

Would you buy anything in that environment? Would you spend 400k on a house if you thought it would be worth 300k in 3 years or 50k in 30? Would you buy that 50 million dollar machinery to create 20 jobs would you procrastinate  a couple of year? Would you buy a stock a 50 if the price was dropping 5% every year? And how would you like those higher taxes? After all the national debt isn't dropping but instead of paying it off with cheap future dollars (inflation) your paying it off with expensive ones.

You don't want excessive inflation or deflation.

Why is deflation a bad thing? Personally, I prefer to live in a world where goods become cheaper over time due to increased productivity and efficiency. It happens every day in technology and I love it. My cell phone has gotten 10X better in the last 5 years and is vastly cheaper per month. What is not to like?

  There is a difference between cheaper goods as a result of better technology, manufacturing, or innovation versus deflation in value. 

[tooqk4u22]

Would you buy anything in that environment? Would you spend 400k on a house if you thought it would be worth 300k in 3 years or 50k in 30? Would you buy that 50 million dollar machinery to create 20 jobs would you procrastinate  a couple of year? Would you buy a stock a 50 if the price was dropping 5% every year? And how would you like those higher taxes? After all the national debt isn't dropping but instead of paying it off with cheap future dollars (inflation) your paying it off with expensive ones.

You don't want excessive inflation or deflation.

Why is deflation a bad thing? Personally, I prefer to live in a world where goods become cheaper over time due to increased productivity and efficiency. It happens every day in technology and I love it. My cell phone has gotten 10X better in the last 5 years and is vastly cheaper per month. What is not to like?

  There is a difference between cheaper goods as a result of better technology, manufacturing, or innovation versus deflation in value.

Yes but I think part of foobar's point is that in order to have innovation there needs to be a return thesis and investment to make that happen.  All the things you mentioned were not created with out cost.  Your phone is 10x better and cheaper per month but that is largely because the infrastructure has already been created, possibly paid for, and is now being leveraged. Things are not getting cheaper because of deflation.

Same goes with manufacturing anything, which requires significant upfront investment to get (1) efficiencies and (2) scalability. #2 is more important. 

[dragoncar]

Would you buy anything in that environment? Would you spend 400k on a house if you thought it would be worth 300k in 3 years or 50k in 30? Would you buy that 50 million dollar machinery to create 20 jobs would you procrastinate  a couple of year? Would you buy a stock a 50 if the price was dropping 5% every year? And how would you like those higher taxes? After all the national debt isn't dropping but instead of paying it off with cheap future dollars (inflation) your paying it off with expensive ones.

You don't want excessive inflation or deflation.

Why is deflation a bad thing? Personally, I prefer to live in a world where goods become cheaper over time due to increased productivity and efficiency. It happens every day in technology and I love it. My cell phone has gotten 10X better in the last 5 years and is vastly cheaper per month. What is not to like?

  There is a difference between cheaper goods as a result of better technology, manufacturing, or innovation versus deflation in value.

Right, afaik the former is not referred to as "deflation"

[LalsConstant]

Others see deflation.  I see earlier FI.

[Clever Name]

How can you write an article predicting deflation without once mentioning the Fed?  There's only so much they can do to curb inflation, but (as the OP mentioned) they can more or less immediately halt deflation just by printing more money.  Demographic issues notwithstanding, the US is not headed for a deflationary spiral.

[Johnny Aloha]

Remember a couple years ago when the US was going to have uncontrollable inflation because of all the government intervention in financial markets?

I personally think we'll be just fine - markets will have some hickups but we'll chug along nicely, similar to the past 40 years.

Edit: after reading the article and seeing that Harry Dent is the author/forecaster, my concerns faded away rapidly.

[dragoncar]

How can you write an article predicting deflation without once mentioning the Fed?  There's only so much they can do to curb inflation, but (as the OP mentioned) they can more or less immediately halt deflation just by printing more money.  Demographic issues notwithstanding, the US is not headed for a deflationary spiral.

Didn't Japan try that?  Serious question.

[AccidentalMiser]

Others see deflation.  I see earlier FI.

This.

I save money like crazy.  So do most of you.  If I have a boatload of money and prices sink, my money goes farther.  If I buy my retirement home for 100k and its value goes to 50k, it doesn't matter to me since I'm not selling it.  Cars get cheaper, gas gets cheaper, wages contract, but my cash just grows by comparison.

Deflation doesn't scare me.  Inflation scares me more that Freddy Krueger.

[matchewed]

How can you write an article predicting deflation without once mentioning the Fed?  There's only so much they can do to curb inflation, but (as the OP mentioned) they can more or less immediately halt deflation just by printing more money.  Demographic issues notwithstanding, the US is not headed for a deflationary spiral.

Didn't Japan try that?  Serious question.

Eh, on and off. Most economic critics who support qualitative easing as a method to curb deflation agree that Japan never went all in on that as a solution. - http://en.wikipedia.org/wiki/Deflation#In_Japan

As for those who think that deflation is a path to earlier FI, don't forget that if you have debt (mortgage) that you're spending a larger % in debt. Debt is really bad for deflation periods.

[Jack]

How can you write an article predicting deflation without once mentioning the Fed?  There's only so much they can do to curb inflation, but (as the OP mentioned) they can more or less immediately halt deflation just by printing more money.  Demographic issues notwithstanding, the US is not headed for a deflationary spiral.

Then why can't the Japanese fix their deflation by printing more yen?

[matchewed]

How can you write an article predicting deflation without once mentioning the Fed?  There's only so much they can do to curb inflation, but (as the OP mentioned) they can more or less immediately halt deflation just by printing more money.  Demographic issues notwithstanding, the US is not headed for a deflationary spiral.

Then why can't the Japanese fix their deflation by printing more yen?

Mostly because they've stopped qualitative easing whenever they had a positive inflation number. Leaving them most years at 0 or negative where they'd react and bring it back up to 0. See my link above.

[dragoncar]

Others see deflation.  I see earlier FI.

This.

I save money like crazy.  So do most of you.  If I have a boatload of money and prices sink, my money goes farther.  If I buy my retirement home for 100k and its value goes to 50k, it doesn't matter to me since I'm not selling it.  Cars get cheaper, gas gets cheaper, wages contract, but my cash just grows by comparison.

Deflation doesn't scare me.  Inflation scares me more that Freddy Krueger.

But my money is invested in assets.  Which have decreasing value in deflation.  I don't keep my money under the mattress.  You?

[AccidentalMiser]

Well, some, but I also don't sell my assets. 

If the price of corn goes down at approximately the same rate as my ConAgra dividend, I'm still where I started. 

Deflation is something I've not experienced in my lifetime.  It's possible that there will be an extended period of deflation but I don't consider it as a major planning factor (yet.)  If I begin to see evidence, then I'll adjust my investment strategy.

As I learned in the bull/bear combo of 1999-2003, being right early is just as costly as being wrong.

[dragoncar]

Well, some, but I also don't sell my assets. 

If the price of corn goes down at approximately the same rate as my ConAgra dividend, I'm still where I started. 

Deflation is something I've not experienced in my lifetime.  It's possible that there will be an extended period of deflation but I don't consider it as a major planning factor (yet.)  If I begin to see evidence, then I'll adjust my investment strategy.

As I learned in the bull/bear combo of 1999-2003, being right early is just as costly as being wrong.

I agree that I think it's unlikely given the current Fed outlook.  But it's always possible that future leadership is unwilling to act to prevent deflation.

Similar to people who want to "balance the budget" (not to open a can of worms).

[LalsConstant]

Others see deflation.  I see earlier FI.

This.

I save money like crazy.  So do most of you.  If I have a boatload of money and prices sink, my money goes farther.  If I buy my retirement home for 100k and its value goes to 50k, it doesn't matter to me since I'm not selling it.  Cars get cheaper, gas gets cheaper, wages contract, but my cash just grows by comparison.

Deflation doesn't scare me.  Inflation scares me more that Freddy Krueger.

But my money is invested in assets.  Which have decreasing value in deflation.  I don't keep my money under the mattress.  You?

Well I was being slightly facetious, but I'll be serious now.  It's true that if this happens, some assets will tank.  Stocks come to mind.

But that's why I keep my positions diversified.  Will every single economy in the world deflate at once?  Will cash and bonds respond to deflationary pressure the same way?

The poster who mentioned debt is a real problem in deflation was absolutely correct, but I live without debt.  I have a meaningful portion of my savings in things like treasuries and I bonds for such an occassion as deflation, so any such spiral is just a buying opportunity.  My lifestyle would be so cheap to maintain if I already owned a house for example, I could flip burgers for a living and not notice a difference in luxury.

I've also generally started to get used to the idea I don't need so much crap.

Don't get me wrong, I favor fantasyland where everything appreciates constantly at a nice smooth rate because that'd be best for everyone, but we have seen it doesn't work that way.

[Luck better Skill]

  We don't know what we don't know.  The people reading this blog tend to be aware of consumerism, save, are financially flexible, very likely to adapt to any problems that arise.  Economist have always been caught flatfooted by economic changes/adjustments that did not exist before.  Mercantilism, the industrial revolution, new trade, etc.
  In USA's great depression the deflationary spiral was caused by the efforts of the government's reaction to stock market crash, tariff wars, etc.  The global economy is currently trying to correct itself.  That could be a minor or major correction. 
  There is a small chance it will be a major correction.  The reactions of governments will likely create real problems.  There is the possibility of events never before conceived of.  Such as the deflation of salaries, high unemployment, with high inflation in price of goods/food. 
  Humanity will survive.  The race has weathered worse events.  The question is will you rise with the cream to the top, hold your own, or tank?