The Keynesian Deflation Humbug-----A Reality Check


Hip, hip, hooray! The CPI is up more than expected, led by a huge 1.1% month-over-month surge in medical care supplies.

Medical care services jumped 0.9%, and shelter jumped 0.3%.

This will not help the economy. And it will subtract from consumer spending other than Obamacare and rent, but economists are cheering.

CPI-U All Urban Consumers


Real World Happiness

  • Food at home -1.9%
  • Energy -9.2%
  • Gasoline -17.3%
  • Fuel Oil -12.8%
  • Electricity -.07%
  • Used cars -4.0%

Unreal World Happiness

  • Food Away From Home +2.8%
  • Medical Care Commodities +4.5%
  • Shelter +3.4%
  • Transportation Services +3.1%
  • Medical Care Services +5.1%

Keynesian Theory vs. Practice

Keynesian theory says consumers will delay purchases if prices are falling. In practice, all things being equal, it’s precisely the opposite.

If consumers think prices are too high, they will wait for bargains. It happens every year at Christmas and all year long on discretionary items not in immediate need.

Reality Check Questions

  1. If price of food drops will people stop eating?
  2. If the price of gasoline drops will people stop driving?
  3. If price of airline tickets drop will people stop flying?
  4. If the handle on your frying pan falls off or your blow-dryer breaks, will you delay making another purchase because you can get it cheaper next month?
  5. If computers, printers, TVs, and other electronic devices will be cheaper next year, then cheaper again the following year, will people delay purchasing electronic devices as long as prices decline?
  6. If your coat is worn out, are you inclined to wait another year if there are discounts now, but you expect even bigger discounts a year from now?
  7. Will people delay medical procedures in expectation of falling prices?
  8. If deflation theory is accurate, why are there huge lines at stores when prices drop the most?

Bonus Question

If falling prices stop people from buying things, how are any computers, flat screen TVs, monitors, etc., ever sold, in light of the fact that quality improves and prices decline every year?

Crazy Thinking

Anyone who thinks soaring Obamacare and rent is a good thing and will help the economy is crazy.

By the way, pay particular attention to the price of new and used cars. I expect a price plunge in those categories as people will have less discretionary spending thanks to a rise in Obamacare premiums and rent.

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Won’t that be fun?

By the way, Keynes thought a recession and inflation at the same time could not happen. Somehow Keynesian idiocy managed to survive anyway.

Mike “Mish” Shedlock


David Stockman's Contra Corner is the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.

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