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Who Benefits from Deflation?


Paul Jay: So if you’ve got more or less zero percent inflation and you’re getting 3 percent on your bond, you’re making 3 percent.  But if inflation’s 3 percent and you’re getting 3 percent on your bond, you’re down to zero.  Now, the Fed is saying that we can do this quantitative easing, increasing the money supply, in a way that isn’t inflationary, up to a point.  So why are bondholders so concerned, then?

Robert Pollin: Because they want to make sure.

Paul Jay: They don’t believe –.

Robert Pollin: It is going to be inflationary.  How much it’s going to inflationary is an issue.  But, you know, what these people are ignoring is that the greatest danger to the financial system, including themselves, is deflation, because deflation means, conversely with inflation, that the value of the dollars is going up.  So that means that it’s going to be more difficult for people, the debt holders, to pay off their debts.  In a deflation it’s more difficult to pay off your debts.  In an inflation, with cheaper dollars, it’s easier to pay off your debts.

Paul Jay: But if you own government bonds, aren’t you doing fine with deflation?  ‘Cause now your 3 percent is worth even more, and when you cash out your bond, your dollars buy even more.  So you might actually like deflation.

Robert Pollin: Again, that’s very short-term, narrow thinking, because if we think about the financial system as a whole, if we already have a very fragile financial system, if you have a deflation and on average it’s more difficult for everybody to pay off their debts, we will have more debt defaults.  The kind of things that happened, you know, a year and a half ago will certainly reemerge.  Ordinary people will start defaulting, foreclosing.  That will inevitably happen as a consequence of deflation.

Paul Jay: So if you’re really focused on your bonds and on your saving accounts, you may think you’re protecting them, but the whole economy is burning around you.

Robert Pollin: That’s right.

Paul Jay: In which case, in the end you might be dealing with such a collapse that what you had may not be worth much anyway.

Robert Pollin: Well, yeah, I mean, you can say: Great, deflation is good for me because I’m still going to get $30 on a $1,000 bond, and $30 will buy more because prices have fallen.

Paul Jay: Well, a part of the problem is that there are a lot of people sitting on a lot of cash right now.  And as you’ve pointed out in previous interviews, some of the big banks are sitting on almost $1 trillion of cash.  A lot of businesses are staying liquid, a lot of investors are staying liquid.  If you’re sitting on a lot of cash, then maybe austerity measures, no stimulus, and deflation is good for you, ’cause at some point you’re going to be able to buy back in at bargain prices.

Robert Pollin: Yes.  I mean –.

Paul Jay: Except a lot of people are going to lose their houses and homes and –.

Robert Pollin: It’s playing with fire.  You can say, yeah, when deflation hits, the value of my money goes up, I’m sitting on $1 trillion, and now I can buy more with $1 trillion dollars than I could last year.  But all that ignores is the fact that it’s also more difficult for each and every person that is a debtor in this economy, that it makes it more difficult for them to pay back their debts.  And when that happens, of course, you can have a massive debt devaluation because there’s all these defaults out there.  That’s what happened a year and a half ago.  And, by the way, we really haven’t had any experience with major deflation in this economy.  So we are moving into uncharted territories.  It’s extremely dangerous.  Bernanke himself and actually even Greenspan acknowledge this.  So the notion that deflation is a solution to everything is scary.

Paul Jay: The thing is that these really are class issues.  Like, if you’re on the side of sitting on a lot of dough and you want short-term gain, and then, you know, après moi, le déluge — if I make my short-term gain, then the hell with what comes next — you’re in this camp.  If you’re trying to think longer-term, you’re in this other camp.  But it seems like in this last vote there’s a heck of a lot of people who voted either for the short-term gain or out of the fear of inflation.

Robert Pollin: Who knows what they were voting for.  I mean, they’re voting for the fact that they don’t have jobs, that we’re at, as you said in the last interview, properly measured, nearly 20 percent unemployment.  People can’t pay off their mortgages.  They’re getting, you know, fear of being tossed out of their homes.  They think the government is arrogant.  We’ve borrowed all this money, there’s a big deficit, and there’s no jobs.  I mean, I don’t think that most people are thinking much beyond that.  If they are, they’re fairly sophisticated.  And, unfortunately, sophisticated people, it turns out, don’t really understand what’s going on either.

Paul Jay: Or just want to make a quick buck.

Robert Pollin: Well, they certainly want to make a quick buck.  Now, whether you can make a quick buck in a deflationary environment, again, I think it’s very, very tenuous.  I can certainly play out the logic, but I can play out the other logic.  When, you know, tens of millions of people can’t pay off their debts, they –.

Paul Jay: The unfortunate thing is the way to make a quick buck in this economy is take your dollars and go to Asia and Latin America and do your investments over there and let it burn here a little longer.

Robert Pollin: Okay.  Yeah.  That’s certainly the thought.

Robert Pollin is Professor of Economics and founding Co-Director of the Political Economy Research Institute (PERI) at the University of  Massachusetts, Amherst.  This video was released by The Real News on 19 November 2010.  The text above is an edited partial transcript of the interview.

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