Web Letters: Obama Faces Deflation Risk

If inflation hadn't been spiraling out of control since Nixon, arguments about the evil of deflation would make more sense. But the venerable economists that today's apologists invoke calculated with prices that hadn't changed much in their experience.

People like me who are concerned with an honest wage for an honest day's work would rather see price levels return to where needs can be met, reasonable desires can be satisfied and some money can be put aside for the twilight years.

Or wages can rise to where these goals can be achieved. Otherwise, damn your warnings about deflation.

Eric Jungkurth

Salem, OR

We need deflation. Without deflation wiping out over- inflated asset values, our economy will suffer stagnation à la Japan.

What the nation needs to create is wage inflation. This can be accomplished several ways:, a stimulus tax rebate, massive spending programs etc.

One way to create more jobs, and higher wages, is to lower the retirement age. The solutions to this crisis are counterintuitive.

Ramsay Mameesh
Green Retirement

San Francisco, CA

Indeed, "the chances of a major deflation are anything but remote. If history is any guide, curing a deflation will be a more difficult and chancy operation than correcting an inflation." And "but cheapening the dollar as a means of stopping deflation is not a path open to President Obama" is just not so.

What is happening is that money is being destroyed. Those that can pay debt down are doing so; many are defaulting on their debt altogether; hedge funds are being hit by redemptions so they need less debt; investment banks are reducing leverage (less debt); while newly minted debt is shrinking due both to credit tightening and bank hoarding. What does this shrinkage of debt mean ? Far less money in the system. For each dollar of net debt shrinkage, ten dollars is removed from the real economy--because every dollar in debt supports ten of debt. In short, our currency system is a Ponzi scheme that they call "fractional reserve banking".

Obama could just print, not borrow, money to refinance the system at no cost to taxpayers, as long as he balances the newly printed money with the destruction of net debt. In fact, this is how Lincoln paid for the Civil War. He didn't borrow any money at all. He just printed "greenbacks." The value of the dollar is based on the productivity of the country producing it less the consumption of the country. As long as the printed (not borrowed) money was in line with productivity, there would be no problem.

China and the rest of the world would, gladly I think. welcome the unfreezing of the credit markets (see Greider's "Bank Holiday") to get the world economy at least functioning. If that is the case, then as long as the Obama explains the plan, the case for printing money to replace the money being consumed by net debt destruction would be understood.

Michael McKinlay

Hercules, CA

This is a welcome article. Deflation is something to watch. You are incorrect on the point that "they" said real estate would not go down. I work with a Fortune 100 company in the financial services industry, and we've predicted real estate prices going down for six years. We're surprised it took this long.

gene nouhan

Cincinnati, OH