Economic Deflation and How to Prevent It

Economic Deflation and How to Prevent It Is the problem that there is more to printing money than printing money? Is, in fact, the way printed money gets into circulation, that the Fed buys bonds, and thus gets money into the economy? What is the logical rabbit trail that leads to inflation from printing money? Would solving deflation this way work with todays low-interest rates? Why or why not? Deflation has been a hot topic since about 2001 and the fear of deflation does not look like it will subside anytime soon. What Is Deflation? This article on why money has value explains that inflation occurs when money becomes relatively less valuable than goods. Then deflation is simply the opposite, that over time money is becoming relatively more valuable than the other goods in the economy. Following the logic of that article, deflation can occur because of a combination of four factors: The supply of money goes down.The supply of other goods goes up.Demand for money goes up.Demand for other goods goes down. Before we decide that the Fed should increase the money supply, we have to determine how much of a problem deflation really is and how the Fed can influence the money supply. First, well look at the problems caused by deflation. Most economists agree that deflation is both a disease and a symptom of other problems in the economy. In Deflation: The Good, The Bad and the Ugly, Don Luskin at Capitalism Magazine examines James Paulsens differentiation of good deflation and bad deflation. Paulsens definitions are clearly looking at deflation as a symptom of other changes in the economy. He describes good deflation as occurring when businesses are able to constantly produce goods at lower and lower prices due to cost-cutting initiatives and efficiency gains. This is simply factor 2 The supply of other goods goes up on our list of the four factors which cause deflation. Paulsen refers to this as good deflation since it allows GDP growth to remain strong, profit growth to surge and unemployment to fall without inflationary consequence. Bad deflation is a more difficult concept to define. Paulsen simply states that bad deflation has emerged because even though selling price inflation is still trending lower, corporations can no longer keep up with cost reductions and/or efficiency gains. Both Luskin and I have difficulty with that answer, as it seems like half an explanation. Luskin concludes that bad deflation is actually caused by the revaluation of a countrys monetary unit of account by that countrys central bank. In essence, this is really factor 1 The supply of money goes down from our list. So bad deflation is caused by a relative decline in the money supply and good deflation is caused by a relative increase in the supply of goods. These definitions are inherently flawed because deflation is caused by relative changes. If the supply of goods in a year increases by 10% and the supply of money in that year increases by 3% causing deflation, is this good deflation or bad deflation? Since the supply of goods has increased, we have good deflation, but since the central bank hasnt increased the money supply fast enough we should also have bad deflation. Asking whether goods or money caused deflation is like asking When you clap your hands, is the left hand or the right hand responsible for the sound?. Saying that goods grew too fast or money grew too slowly is inherently saying the same thing since were comparing goods to money, so good deflation and bad deflation are terms that probably should be retired. Looking at deflation as a disease tends to get more agreement among economists. Luskin says that the true problem with deflation is that it causes problems in business relationships: If you are a borrower, you are contractually committed to making loan payments that represent more and more purchasing power - while at the same time the asset you bought with the loan to begin with is declining in nominal price. If you are a lender, chances are that your borrower will default on your loan to him under such conditions. Colin Asher, an economist at Nomura Securities, told Radio Free Europe that the problem with deflation is that in deflation [theres] a declining spiral. Businesses make less profits so they cut back [on] employment. People feel less like spending money. Businesses then dont make any profits and everything works itself into a declining spiral. Deflation also has a psychological element as it becomes rooted in peoples psychologies and becomes self-perpetuating. Consumers are discouraged from buying expensive items like automobiles or homes because they know those things will be cheaper in the future. Mark Gongloff at CNN Money agrees with these opinions. Gongloff explains that when prices fall simply because people have no desire to buy - leading to a vicious cycle of consumers postponing spending because they believe prices will fall further - then businesses cant make a profit or pay off their debts, leading them to cut production and workers, leading to lower demand for goods, which leads to even lower prices. While I havent polled every economist who has written an article on deflation this should give you a good idea of what the general consensus on the subject. A psychological factor that has been overlooked is how many workers look at their wages in nominal terms. The problem with deflation is that the forces causing prices in general to drop should cause wages to drop as well. Wages, however, tend to be rather sticky in the downward direction. If prices rise 3% and you give your employees a 3% raise, theyre roughly as well off as they were before. This is equivalent to the situation where prices drop 2% and you cut the pay of your employees by 2%. However, if employees are looking at their wages in nominal terms, theyll be much happier with a 3% raise than a 2% pay cut. A low level of inflation makes it easier to adjust wages in an industry whereas deflation causes rigidities in the labor market. These rigidities lead to an inefficient level of labor usage and slower economic growth. Now weve seen some of the reasons why deflation is undesirable, we must ask ourselves: What can be done about deflation? Of the four factors listed, the easiest one to control is number 1 The supply of money. By increasing the money supply, we can cause the inflation rate to rise, so we can avoid deflation. In order to understand how this works, we first need a definition of the money supply. The money supply is more than just the dollar bills in your wallet and the coins in your pocket. Economist Anna J. Schwartz defines the money supply as follows: The U.S. money supply comprises currency - dollar bills and coins issues by the Federal Reserve System and the Treasury - and various kinds of deposits held by the public at commercial banks and other depository institutions such as savings and loans and credit unions. There are three broad measures economists use when looking at the money supply: M1, a narrow measure of moneys function as a medium of exchange; M2, a broader measure that also reflects moneys function as a store of value; and M3, a still broader measure that covers items that many regard as close substitutes of money. How the Money Rupple Is Influenced The Federal Reserve has several options at its disposal in order to influence the money supply and thereby raise or lower the inflation rate. The most common way the Federal Reserve changes the inflation rate is by changing the interest rate. The Fed influences interest rates causes the supply of money to change. Suppose the Fed wishes to lower the interest rate. It can do this by buying government securities in exchange for money. By buying up securities on the market, the supply of those securities goes down. This causes the price of those securities to go up and the interest rate to decline. The relationship between the price of a security and interest rates is explained on the third page of my article The Dividend Tax Cut and Interest Rates. When the Fed wants to lower interest rates, it buys a security, and by doing so it injects money into the system because it gives the holder of the bond money in exchange for that security. So the Federal Reserve can increase the money supply by lowering interest rates through buying securities and decrease the money supply by raising the interest rates by selling securities. Influencing interest rates is a commonly used method of reducing inflation or avoiding deflation. Gongloff at CNN Money cites a Federal Reserve study that says Japans deflation could have been dodged, for example, if the Bank of Japan (BOJ) had only cut interest rates by 2 more percentage points between 1991 and 1995. Colin Asher points out that sometimes that if interest rates are too low, this method of controlling deflation is no longer an option, as currently in Japan where interest rates are practically zero. Changing interest rates in some circumstances is an effective way of controlling deflation through controlling the money supply. We finally get to the original question: Is the problem that there is more to printing money than printing money? Is, in fact, the way printed money gets into circulation, that the Fed buys bonds, and thus gets money into the economy?. Thats precisely what happens. The money the Fed gets to buy government securities has to come from somewhere. Generally, it is just created in order for the Fed to carry out its open market operations. So in most instances, when economists talk about printing more money and the Fed lowering interest rates theyre talking about the same thing. If interest rates are already zero, as in Japan, there is little room to lower them further, so using this policy to fight deflation will not work well. Fortunately, interest rates in the U.S. have not yet reached the lows of those in Japan. Next week well look at seldom used ways of influencing the money supply that the United States may want to consider in order to fight deflation. If youd like to ask a question about deflation or comment on this story, please use the feedback form.

Understanding Customers and Competitors Essay Example | Topics and Well Written Essays - 5000 words

Understanding Customers and Competitors - Essay Example Understanding Customers and Competitors At the same time every company has its customers with limited budgets. They are free to choose to purchase from a company or other then that company who offer the same goods and services and at the same time competitor of the first company. Customers also free purchase totally different substitute goods and services by means of their limited funds. Companies those offer similar goods and services are the direct competitors of each other. Thus it is most important to understanding the Customers and Competitors A company's marketing environment consists of the actors and forces outside marketing management's ability to develop and maintain successful transactions with its target customers. The marketing environment offers both opportunities and threats. Successful companies know the vital importance of constantly watching and adapting to the changing environment. Treacy, M. & Wiersema, F. (1993) mentioned that marketers take the major responsibility for identifying significant changes in the environment. More than any other group in the company, marketers must be the trend trackers and opportunity seekers. Although every manager in an organisation needs to observe the outside environment marketing it, marketers have two special aptitudes. They have disciplined methods-marketing intelligence and marketing research- for collecting information about the marketing environment. They also spend time in the customer and competitor environment. By conducting systematic environmental scanning, marketers are able to revise and adapt marketing strategies to meet new challenges and opportunities in the marketplace. Evans, J. R., & Berman, B. (1990) has stated the marketing environment is made up of a microenvironment and a microenvironments. The microenvironment consists of the forces close to the company that affect its ability to serve its customers- the company, suppliers, marketing channel firms, customer markets, competitors, and publics. The macroenvironvent consists of the larger societal forces that affect the microenvironment- demographic, economic, natural, technological, political, and cultural forces. Kotler, P., Armstrong, G. (2006) argued that marketing environment is made up of five microenvironmental and six macroenvironmental components. The microenvironment consists of other actors close to the company that combine to form the company's value delivery system or which affect its ability to serve its customers. The first microenmental component is the company's internal environment- its several departments and management levels- as it influences marketing decision making. The second component

Will GM's Strategic Plan Lead to Future Success Case Study

Will GM's Strategic Plan Lead to Future Success - Case Study Example The third strategy that GM has implemented is the premium pricing strategy that has led to higher margins and prices thus ultimately leading to higher profits per unit sales. GM has cut the incentives for the dealers in order to attain higher margins. The fourth strategy linking the executive compensation to company performance through ensuring the executive bonuses are dependent on the margins posted by the company. The company has also carried out staff rationalization in order to reduce the boated wage bill. Based on the case study, GM’s vision is to become the most profitable automaker in the world. The company is not interested in expanding its market share, but its strategies aim at reducing the operating costs and increasing the unit margins in order to improve the profitability of the company (Daft 183). The vision is realistic since it managed to regain from Toyota as the largest automaker in term of sales figures and has increased its profit margins. The company has also controlled costs. In this case, higher margins and sales volumes will make GM the most profitable automaker if the measures implemented in controlling costs are successful. The first SMART goal is to raise profit margins by 10 percent. This goal is specific and measureable since the current profit margin is 6 percent and this could go up to 10 percent after restructuring the company and improving operational efficiency. The reduction in engineering and manufacturing costs through downsizing the auto platforms will significantly reduce the manufacturing costs. Use of standardized plants and assembling will also improve efficiency of operations and lower costs. Other companies that have few auto platforms have managed to attain a return of 10 percent of sales and this goal is realistic and time-bound since GM will have only 14 auto ‘platforms’ by 2018. The second SMART goal of GM is to make more than $ 10

Do We Really Listen To Young Children An Investigation into The Essay

Do We Really Listen To Young Children An Investigation into The Importance of Listening to Young Children In Early Years Sittin - Essay Example The question whether do we really listen to young children brings about a few thoughts to a person’s mind. Questions such as how much importance is provided to listening to children and how they have been they treated by the adult world needs to be unearthed. It is significant to note that children are least noticed or listened to at the earlier stages. In many circumstances the early intervention into the life of the children would lead to solving many issues related to their life. Moreover, the careful examination on the unique individualities of children will help others find out the mysteries that surround children, their feelings, thoughts and creativity during the early years of life. The characteristic attributes are attained at an early stage. So it can be said that the life of each children is highly valued and so the educators at the early years sitting should clearly listen to the activities of the children who are entrusted to their care. It is important to recogni se that a number of factors has influenced the growing interest in listening to children. ... Background: In many countries children are treated as having not much of importance. Much negligence was reported on children all over the world. This prompted various organisations and persons to look into the matter very seriously. In 1904 the Prevention of Cruelty to Children Act was established in England and hence forward many laws came into force on the rights of children in the country. The UN assembly too shared its concern for the rights of children all over the world. 1979 was considered as the International year of children and the Assembly decided to pass a convention on the rights of children. It was adopted in the year 1989 and Britain ratified this law in 1991. The country stresses much importance on the well being of the children. Children under five are placed in babysitting and the government makes ample measures for the overall development of children at this stage. Many strategies are implemented for the total development of children in the country. All these nece ssitate the importance of children’s rights as subjects of the state. In the recent years, the government agendas in England have focused on the need to involve children in policy and service design. There has been a strong feeling that the provision and evaluation of services used by children, or which affect them, should be given priority. Whereas consultation with older children is given importance in the recent years, the case for younger children is much different and they are not given due respect for their opinions. Significantly, listening to children has been regarded as an integral part of understanding their needs and feelings from their early experiences. Linda Kinney maintains, â€Å"there were two key outcomes from our work on consultation with

FUNDAMENTALS OF FINANCE Assignment Example | Topics and Well Written Essays - 1000 words

FUNDAMENTALS OF FINANCE - Assignment Example From the Table in 4(a), it is evident that the higher the portfolio’s expected returns, the higher the standard deviation. This also means that the higher the returns the higher the risk, hence the above discussed risk-return relationship holds for shares property and bonds. This relationship is also observed in the chart in 4(b), since, for example, the shares are moving more radically and their returns are the highest; and this trend holds even for property and bonds. The radical plunge in prices in the last quarter of 2008 is majorly attributable to the effect of the global financial crisis that occurred during that time. This decline in prices was a major indicator of the crisis, which was accompanied by a significant reduction in demand in the financial markets, as many people observed their retirement accounts water down (Bartram and Gordon, 2009; Dwyer and Paula, 2009 ). It is important that the investments are spread over a variety of assets like the fixed income, equities and cash. This is because each asset class perfoms differently from the others as a result of its unique balance of risks and rewards. Diversification calls for the need to know the security an investor needs. Therefore, diversification is where there is a need to spread each asset investment over different types of securities. Most importantly, an investors needs to know their risk profile so they decide how to allocate their assets, on the basis of risk-return relationship. From example, from 4(a), one can combine growth fund which is very risky, with conservative fund which is less risky – so that one can continue enjoying substantial returns and even in the event of a crisis one does not lose significantly (Kapur and Orszag, 1999). b. If your group had $50,000 to invest in a managed fund, which specific portfolio would you choose from those offered in Question 4? Justify your choice by including a reference to the characteristics of financial

Activity-Based Costing (ABC) in Service Industries Case Study

Activity-Based Costing (ABC) in Service Industries - Case Study Example Most of the companies always have the door to door service after purchasing a product from their organization. This is always a relief of the transportation issue as some commodities are always bulky and difficult to transport. The online shopping is always time convenient and a customer can get a good or service at any time he or she orders as the organizations always operate in 24 hours (Anderson & Young, 2001). Another important factor that consumers always like in the e-commerce organizations or rather the online shopping is due to the fact that there are always a variety of commodities and services at different prices thus every customer will always get an opportunity of selecting what he or she desires at a price affordable to the consumer. The BlueFly incorporation is one of the top online businesses in the United States of America. It is known for its great sales of designer shoes and accessories for both men and women within the United State and internationally (Innes & Mitchell, 2010). It is widely known for its best services thus it always sells greatly across all nations. The Company experiences high sales since it offers its customers with a perfect and superior shopping experience by providing value and a high level of customer service that creates loyalty in the customers. The BlueFly incorporation is always using one of the modern technologies available thus it has developed electronic commerce innovations such as personalization of shopping services and the browse and search features are easy to use making even the illiterate customers able to use. Doing shopping at the BlueFly incorporation is always absolutely fast and safe as there are systems of simple procedures, the credit transactions are very secure plus a convenient communication of customers through their e-mail addresses and the shipping of bulky goods is also done directly without any inconveniences

Parenting Capacity and Substance Misuse Essay Example | Topics and Well Written Essays - 8000 words

Parenting Capacity and Substance Misuse - Essay Example Because these effects within the children have a strong potential to be carried into the next generation as well as to impact the public health, it is necessary for the social worker to learn how to recognize these signs and develop means of providing the children with the needed elements they are missing within the home. While this seems a nearly impossible task without the investment of vast resources and time into each family unit, there are some tools and practices that may help. It is the purpose of this study to examine the prevalence of these issues within society and to illustrate the importance of understanding on the part of the social worker in bringing about positive effective change within the home. It seems to be almost common knowledge that substance abuse/misuse can have serious detrimental effects on the care and raising of children within the home where one or both parents are involved in substance abuse activity. The tendency of this thinking holds that all children living within homes in which substances are used or abused are the victims of domestic violence. However, children living in these types of situations may not have any experience at all with the concept of violence within the home, yet may have numerous other issues to deal with as a result of neglect or other forms of abuse. Parents engaging in substance abuse may not have enough time or attention to provide their children with the necessary skills and attention they require to thrive while the parents may also be spending much-needed time and money away from the home as a means of supporting their habit. Children living in this sort of environment may find themselves needing to survive without adequate cloth ing, food or housing while also being required to essentially raise themselves without the benefit of parental guidance or support. This situation can have serious public implications as teenagers, having grown up in this sort of environment, tend to have