From Bloomberg:
There is an important distinction between good deflation caused by excess supply and bad deflation created by deficient demand.
Good deflation is the result of new technologies that power productivity and output as the economy grows rapidly and as supply outpaces demand. The bad kind stems from financial crises and deep recessions, which increase unemployment and depress demand below the level of supply.
The Industrial Revolution began in the late 1700s. But in the U.S. it didn’t achieve sufficient scope to drive the economy until after the Civil War. Value added in manufacturing and mining leaped. As bottle machines replaced glass blowers, the price of a dozen goblets dropped to just 40 cents in 1888, from $3.50 in 1864.
At the same time, railroads connected the nation, enhancing productivity and supply. Real gross national product grew 4.5 percent each year from 1870 to 1898, an unrivaled rate for a period that long, and consumption per consumer jumped 2.3 percent a year. Good deflation reigned, with wholesale prices dropping 34 percent, a 1.7 percent annual rate of decline, and consumer prices falling 47 percent, or 2.5 percent annually.
New TechnologiesJust a small heads-up on one of his prognostications. From April 2012:
Good deflation also prevailed in the 1920s, when the new technologies were electrification of factories and homes and mass-produced automobiles. Electrification contributed to the development of other goods, such as household appliances and radio. Industrial production almost doubled in the 1920s, but prices fell as supply outran robust demand.
By contrast, bad deflation ruled in the 1930s as the Great Depression pushed demand well below supply. The money supply, prices, banks and real goods and services all shrank. As prices collapsed, the jobless rate rose to 25 percent. That depression was truly global, affecting almost every developed country. Industrial production dropped 45 percent in the U.S., 34 percent in Austria, 41 percent in Germany, 12 percent in the U.K. and 23 percent in Italy.
Japan has endured bad deflation over the last two decades after the housing and stock-market bubbles of the 1980s. But the lack of demand wasn’t caused by a dearth of employment and income, as in the U.S. in the early 1930s. Instead, it was a result of the government’s delay in cleaning up financial institutions, while consumers, and later businesses, refused to spend their incomes.
I have been forecasting chronic good deflation of excess supply because of today’s convergence of many significant productivity-enhanced technologies, such as semiconductors, computers, the Internet, telecommunications, robotics and biotechnology, that should continue to increase output. As a result of rapid productivity growth, fewer man-hours are needed to produce goods and services....MORE
"GARY SHILLING: THE S&P 500 WILL DROP -43% THIS YEAR"
Back in the day he was A. Gary Schilling. His friends called him A.
[you've lost your mind -ed]
