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Old 09-28-2010, 11:55 AM
 
Location: San Diego California
6,797 posts, read 6,643,799 times
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For almost 3 decades we substituted debt for wage increases among the working class. The debt itself was perpetrated on artificial asset values in the equity and real estate markets. Meanwhile the wealthy are the only ones whose income was truly increasing. At some point this ponsie scheme does not work any more, the economy collapses because people cannot service their debts. The result is high unemployment that exasperates the situation. The problem cannot be solved without increasing wages for the working class, which is nearly impossible in an environment of high unemployment. Or the second solution would be for massive deflation to bring down prices to what the people can afford.
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Old 09-28-2010, 03:09 PM
 
Location: Portland, Oregon
7,090 posts, read 11,190,215 times
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I kind of wonder how one would increase wages and cause deflation at the same time, especially as a solution to debt.

If you are paid $100 a week and increased the value of the money, the company would start losing more money as the company could not sell the item for as much. If you had wages stay the same you would need to either eat the increasing labor costs of the product into your bottom line, fire the worker and rehire at the deflated wage rate, or increase the relative price of the product. If people started getting paid less and you raise the price of the product, you lose even more sales. Raising the workers wages forcefully would double that effect, and the business would fail. It's Econ 101.

Debt would be even worse. If you have $100,000 in debt and the value of money is increasing, that debt is increasing in value as well. Where in real terms with 1% inflation you would be paying it off in a year with a relative value of ~$99,000...where with deflation the real value of the debt would increase to ~$101,000 (outside of interest). Add in interest, and it compounds that affect as your payment increases in real value every year ($100 to $101 to $102.01...). Anyone in debt would be made even poorer every year on top of the interest already being charged. Everyone with debt would be hemorrhaging money, anyone with no debt would be doing okay, and people with cash would be doing better every year (with little incentive for the risk of investing or loaning it out).

All you would be doing is making the poor even poorer every year, especially as populations increase relative to the supply of money. Deflation and increasing population further increases that effect, with more people chasing after fewer dollars. Mandating wages high would just force the companies into bankruptcy, worsening the unemployment situation.

Your solution would just make things even worse for those you want to help, which is pretty dang funny.

Last edited by subsound; 09-28-2010 at 03:37 PM..
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Old 09-28-2010, 09:41 PM
 
Location: Sputnik Planitia
6,946 posts, read 9,727,357 times
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while a lot of people think there is going to be inflation, deflation is actually the biggest risk now...

Pimco's Hodge: Global Deflation Now Bigger Risk Than Inflation - WSJ.com (http://online.wsj.com/article/BT-CO-20100927-714694.html - broken link)

Think about it, wages.. do you really think companies are going to INCREASE wages? Without increasing wages who is going to buy stuff.. in the past this shortfall was made up with credit but now credit is being aggressively slashed and there isn't any, where is the demand for goods going to come from? If there is no demand for goods can the price level remain the same? Of course not..it has to fall which is exactly the DEFINITION of deflation.

If the price level falls it feeds a deflationary cycle. If the government prints stacks of bills, unless they actually distribute it to people it means nothing. Just because the government prints money and makes it available as loans does not mean the people are going to see it or salaries are going to go up. And if the demand is not there then companies do not want to borrow this cash anyway!
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Old 09-28-2010, 10:03 PM
 
48,508 posts, read 88,682,201 times
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Actually deflation come when too dollwrs are chasing to much, It means less jobs and less growth which means more services need from a government that has less revenues. its what we are experiencing now basically.Governam,nt can not contimue to borrow because they runout fo thsoe willing to lend.
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Old 09-28-2010, 10:29 PM
 
Location: Massapequa Park
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Quote:
Originally Posted by subsound View Post
I kind of wonder how one would increase wages and cause deflation at the same time, especially as a solution to debt.
I think the idea being floated around is keeping or increasing tax cuts for the middle-class while letting them expire on the rich.

Kind of a no-brainer there.
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Old 09-29-2010, 03:28 AM
 
4,570 posts, read 3,231,214 times
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Inflation mitigates debt, not deflation. Deflation increases the real level of debt. If your money buys more, your debt is worth more.
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Old 09-29-2010, 06:50 AM
 
Location: Londonderry, NH
41,478 posts, read 54,309,015 times
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I would probably do well in a deflationary situation because my future income is a pension with a set amount. I do not have much debt and do not intend to get any more. If deflation resulted in $1.50 a gallon gasoline and cheaper cars the entire middle and lower class would benefit.
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Old 09-29-2010, 08:29 AM
 
Location: Portland, Oregon
7,090 posts, read 11,190,215 times
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Quote:
Originally Posted by Pequaman View Post
I think the idea being floated around is keeping or increasing tax cuts for the middle-class while letting them expire on the rich.

Kind of a no-brainer there.
Tax cuts for the middle class, even though the OP says increasing wages for the working class?
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Old 09-29-2010, 08:43 AM
 
13,689 posts, read 23,938,846 times
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Some products may be coming down in price due to lack of demand but the stuff that matters - bread, wheat, flour, sugar, eggs, milk, gasoline, etc., are all increasing. Inflation is at work.\

After WWI, Germany was in a large amount of debt and simply printed money to pay it off. The money became worth more as heat than actual money.

Here is a famous picture:

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Old 09-29-2010, 09:35 AM
 
Location: Massapequa Park
3,172 posts, read 6,152,977 times
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Quote:
Originally Posted by subsound View Post
Tax cuts for the middle class, even though the OP says increasing wages for the working class?
I think OP worded it incorrectly. The gov't should not be mandating higher wages. But they can effectively increase working/middle class wages by cutting taxes for lower income earners. By letting them expire on the upper earners, you balance out and keep inflation in check. If they let all of them expire or if they keep all the tax cuts, it does nothing for the working class. By keeping tax cuts for the upper earners, the extra inflation this causes voids any gains the lower earners will see through their meager tax cuts.

eg- (1 Million dollar/yr earner will save $50,000 or so, while a $100k earner will save $2500). That $50,000 loss to treasury just results in higher inflation/higher SS taxes for middle class, reducing the lower earners buying power. Whoever made these cuts realized this and the ultra-rich (top 3%) are laughing at how ignorant we really are. I wonder if people realize that the only tax cuts that mattered the last 9 years were the top 3%'s cuts - the increase in inflation negated all middle class tax cuts. Under 200K earners benefited by ZERO from the cuts and they may have actually lost purchasing power greater than their tax cuts

- Middle class tax cuts are going to higher gasoline $1 to $3 from 2000-2010, higher food costs, higher SS taxes, etc.. If I were ultra rich I would be keeping this on the down low as well and laughing all the way to the bank. Warren Buffett may be the only one to point out how nonsensical the cuts are.

Last edited by Pequaman; 09-29-2010 at 09:50 AM..
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