Monday, December 1, 2008

Inflation, the Depression and Other Ruminations

There has been a lot of talk lately using the word "depression." I am in no way an expert on this event. But given the recent increase in the use of the word depression I think it would be a good idea to look at some of the economic items from that period.

Let's start with inflation. Here is a chart from the St. Louis Federal Reserve that shows the year over year percentage change in inflation.

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Let's start by assuming inflation measuring statistics were less developed in the 1920s than now. That being said, this is all we've got from that period. So -- let's see what this chart says.

First, notice there were two recessions during this period. According to the NBER these were May '23 - July '24 and October '26 - November '27. But also notice the lack of year over year growth for the last four years of the decade. A little inflation is a good thing -- it indicates there is either a strong demand to increase prices or a strong enough increase in costs to allow companies to increase prices. Either way, a little inflation is healthy. However -- there was no inflation for the last four years of the decade. That is not healthy at all.

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Above is the year over year percentage change in inflation from 1930 - 1939. Notice the price collapse in the first four years of the decade. From 1930 - 1934 year over year price movements s were negative. That's a heck of a lot of economic damage to recover from. Notice that year over year prices came back in 1935, but because this number was an increase from a huge drop I would argue it wasn't until 1936 at the earliest that prices got back to a healthy rate of increase. And then it would still take a few years to get back to 1930 levels.

So -- what have we learned? Deflation was an obvious issue in the 1930s. And deflation is not good.