More thoughts on deflation/inflation

To put this in the proper context... it is a response to this post:

http://stefanmikarlsson.blogspot.com/2009/03/return-of-inflation.html

I am still a deflationist (the open market policies are definitely inflation though)... but, of course, political incentives would promote inflationary policies. For example, the Japanese were savers, thus the electorate would be reluctant to see that value of their savings eroded by inflationary monetary policies. Hopefully, Bernanke would simply give up reflationary policies eventually and accept some of the economic and social benefits of deflation. Of course, deflation does cause significant harm for many people, and, hopefully, some government redistributive policies (if competently enacted) would ameliorate some of the pain. Of course, I do want people to feel some pain because it would have a positive deterrent effect on future generations though. Those last statements, of course, reflect my normative desires (which reflect negative utilitarianism), and not my empirical perspective.

I still believe in deflation (and reject the hyperinflationist view point) unless I see wage nominal inflation (even this did not happen when Greenspan enacted his inflationary policies in the early 2000s) and the price of consumer goods (such as cars) go up dramatically. I have thus given the evidence that could falsify my (actually mostly plagiarized from Mish Shedlock, and to a lesser extent Edward Harrison) deflationary thesis in a Popperian fashion. I do not see any macroeconomic trend that would pressure wage growth unless Bernanke literally drops money out of a helicopter, not merely use QE in open market operations as that money would not reach many people.

Also, you did mention the CPI. Of course, most Austrians do not regard that as a reliable measure of inflation (as they are compelling cases for the perspectives it understates or overstates increases or decreases the increase or decrease in the price level) because changes in price level are not inflation, but merely its effects. Even if we do disregard food and energy, I am sure that the some goods in the basket of CPI goods are imported. This could cause a rise in the CPI in a deflationary environment if the imported goods are from a country that does not have a currency pegged to the US dollar (like the renminbi and gulf coast currencies) and if the trade-weighted US dollar index drops which would cause the dollar to drop relative to other floating currencies.

Regarding the recent price increases, it does not falsify deflation as it merely reflects an increase in the velocity of capital after the FOMC announcement. The increase happened because people who had short equity, commodity, bond, and currency positions (relative to the US dollar) had to cover their positions, people entered long positions because of their expectations of Bernanke's reflationary policy and were spooked, and people who were early would anticipate these reactions by other market participants.