[ExI] Odd Market Moves

Dan TheBookMan danust2012 at gmail.com
Fri Mar 13 23:58:42 UTC 2020

This is defining deflation and inflation as some sort of price level or aggregate of prices. Another way of looking at this is to define deflation and inflation in terms of changes in the amount of money in a system. (Then, of course, one has to be careful to figure out what exactly ‘money’ means to make this definition work. While that introduces problems, I don’t think they’re any worse than those involved with price indices and the like.)

A problem with identifying deflation/inflation in terms of prices (or price aggregates) is selecting which prices or how to aggregate them. And this leads to what we see where the tool measure inflation changes to avoid uncomfortable inflation rates (usually because both inflation is seen as bad and because there are often policy triggers for what to do about it). I believe current measures used by the Fed tend to understate inflation and even overstate deflation.*

I believe it’s a little incoherent to say the price of, say, mobile phones has deflated while, say, healthcare costs have inflated.

(And the general reason why inflation is bad is because it distorts the structure of prices rather than raising them. Of course, rising prices also have other effects, like menu and shoe leather costs, but the big effect is how an increase in money supply flows through an economy — because some people get the increase in supply first via things like, in a central banking systems, credit and this tends to have path dependency. Were this not so, then the price structure wouldn’t be distorted.)


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* I don’t believe deflation is good either. It has distortion effects too, but these tend to be easier to self-correct. Most whinging about deflation in recent decades is really about slowing inflation usually by putting a halt on lowering central bank interest rates like the prime lending rate. In other words, it’s not really about deflation but about disinflation or even just slowing the inflation rate. And big investors tend to whine the most here because a higher interest rate lowers their access to credit. (Typically, the big investors benefit the most from central bank manipulators. This makes sense when you think that they’re the most politically connected, far more likely to access to central bankers, and also likely to have a bigger voice in the media — all to promote their projects.) 
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