21 of 25 people found the following review helpful:
3.0 out of 5 stars
Looking at Two Kinds of Deflation with Errors, August 12, 2004
This review is from: Deflation: What Happens When Prices Fall (Hardcover)
Looking at Two Kinds of Deflation with Errors
Deflation is a subject that most of us have not thought much about. The primary reason for that is because deflation hasn't been a force in the United States for over 60 years. Instead, varying rates of inflation have been a problem and a concern.
In Deflation, Mr. Farrell points out that there are two primary sources of deflation. The first is an active growth in productivity such as that which occurs in the semiconductor industry. Under such circumstances, prices fall but businesses can make a decent profit while still providing better value for customers. Such deflation was fairly common in the days of the gold standard and often occurred during times of robust economic growth. The second source of deflation is a radical drop in demand for goods and services of the sort that occurred in the 1930's depression. Here, the dropping prices feed on themselves to reduce demand further as people wait for lower prices. Real interest rates rise which further cuts demand.
Mr. Farrell argues that the threat of deflation that Chairman Greenspan was concerned about in May 2003 was of the healthy variety, and suggests a number of possible measures for offsetting that risk.
Naturally, we now know that the risk of inflation is in fact greater than the risk of deflation due to soaring commodity prices around the world driven by the global expansion, the weakening dollar (due to the trade and budget deficits), and the various bubbles that are developing around the world. So this book won't seem of such relevance as it might have a year
ago.
I was dismayed to find that the book's arguments and details contained little information beyond what a well-done business magazine article would have contained. So the book doesn't present a very good value.
In addition, I was even more dismayed to find that the book had not been proofread or fact-checked very carefully so there were an unusual number of errors and questionable observations in it. For example, an early reference by Chairman Greenspan to what appears to be disinflation (slowing of inflation) is referred to by the author on page 2 as a euphemism for deflation. I don't think so. The Thai currency is called the "bath" rather than the "baht" on page 21. On page 36, the author says that television was available to Wyatt Earp in Los Angeles in 1929. On page 42, the author says that the events of 9/11 further dampened economic activity, yet we know that the recession ended right after 9/11. On page 45, it says that Meg Whitman started the 1990s at eBay. She joined the company late in the decade. On page 61, it says that economic growth does not cause inflation. Our current experience with oil and steel prices and ocean freight rates would suggest otherwise. On page 64, economic growth is described as only coming from creativity and innovation. Yet most economists would argue that over 60 percent of economic growth comes from population growth and investments in capital assets. I stopped counting what appeared to be errors at this point.
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9 of 10 people found the following review helpful:
5.0 out of 5 stars
Brilliant exposition of an alternative view of our economy, June 16, 2004
This review is from: Deflation: What Happens When Prices Fall (Hardcover)
Is the United States currently in a deflationary period? If not then are we headed for one? Why have such major economic figures as Alan Greenspan started hinting that deflation is a possibility? Is deflation always a negative event bringing on recession is its wake? Author and financial columnist Chris Farrell answers all these questions and more in his fascinating book "Deflation: What Happens When Prices Fall". Mr. Farrell makes a strong case for deflationary pressures coming about from globalization of many industries as well as the strong pressure from retailers forcing suppliers to continually lower their prices. While deflation is a normal part of the economic cycle most of the 20th century has seen pronounced inflation. What does it all mean now that there are legitimate concerns about deflation? Mr. Farrell makes a convincing case that deflation does not necessarily equate with depression. In fact deflation can co-exist with a strong economy! This is definitely not the economics that I learned in college but is a well presented argument for a different view of where we are headed. Brilliantly done, "Deflation: What Happens When Prices Fall" is highly recommended for anyone interested in economic theory and may represent a more accurate view of deflation than the popular Keynesian theory of economics.
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9 of 10 people found the following review helpful:
5.0 out of 5 stars
The "risks" of deflation presented accurately and in context, May 31, 2004
This review is from: Deflation: What Happens When Prices Fall (Hardcover)
I follow the financial news fairly regularly, reading the news headlines and many of the columns on the Internet at least three times daily. A few months ago, the main topic of some of the economic stories was one that I had never seen in a contemporary financial column, the possibility of the U. S. economy entering into a deflationary state. A deflationary condition is when prices start to fall, and people begin to delay non-essential purchases in the belief that they will continue to fall, which can lead to an economic collapse. In general, it was considered a significant threat, and apparently the high officers of the Federal Reserve (the Fed) were preparing contingency plans if it were to happen. The possibility, consequences and potential benefits of a deflationary phase in the U. S. economy are the primary topics of this book.
Outside of major wars and their consequences, there were two major economic cataclysms in the U. S. economy in the twentieth century. The first was the Great Depression of the thirties, which was a major deflationary period. The second was the uncontrolled inflation of the seventies, where price increases were relentless, a major success was proclaimed when the inflation rate dropped to ten percent or less. These two long-term economic problems form the major historical basis for the basic premise that monetary policy is the preeminent driver of major economic trends. Milton Friedman, long the primary champion of monetary policy, is mentioned many times. Farrell finds many historical justifications to blame the severity of the two events on the Fed. While it cannot be refuted that the Fed made many major mistakes in both situations, the political leadership also must bear a great deal of responsibility. That point is made, but not quite as forcibly as it should have been.
The primary event that is driving the current concern over the potential for deflation is the performance of the Japanese economy in the last decade. It has been in a recurring deflationary condition throughout that time, performing sluggishly and with no end in sight. However, Farrell uses this as a point of demonstration as to how monetary policy can be used in a counterproductive manner. He argues that the Fed is smart enough to avoid those mistakes and will act quickly and forcibly to prevent a dangerous deflationary trend in the U. S.
Another major point is whether deflation is in fact a trend to be feared or welcomed. As Farrell so excellently points out, there have been many deflationary periods in the American economy, and while we remain focused on the 1930's, the others were often periods of economic expansion and growth. They were due to the development of new technologies, which led to previously unheard of improvements in efficiency. Dramatic improvements such as the telegraph, telephone, railroad and medical advancements all changed society and dramatically lowered the costs of gods and the efficiency of living. His point is that if the costs of the goods are declining due to increased efficiency, then it is a very good thing. Companies being forced to reduce their production costs in order to compete is always a boon to the overall economy.
The last chapter contains a series of recommended policy changes. The first is that global free trade should be expanded to include all nations. Farrell argues that since the poorer nations largely rely on agriculture, the U. S. should stop subsidizing agriculture, which would allow the products from the poorer nations to compete in the global markets. A valid point, but of course politically impossible. One point that I found of particular interest was the cost benefits of sophisticated medical care. He argues that nearly every successful medical treatment returns more than it costs. The exact figures are that from 1960 to 1997 it cost approximately $13,000 in medical spending and pharmaceutical research to gain one year of additional life and that the economic return on this additional year of life was $150,000. If true, it would be the most powerful argument for universal health care that could be made. An additional argument made in this section is that the current system of employer-managed health care programs is inefficient and should be refined into a single program.
Several pages are devoted to significant human capital investment, which means enormous investments in education and training. Farrell argues very forcefully that this is essential and historically justified. As Americans began moving from a rural, agrarian society to an urban, industrial one, the massive investments made in education were necessary for the transformation to be complete. He argues that sufficient investment capitol would be available if the agricultural subsidies were eliminated.
Farrell makes powerful arguments in favor of his basic premise that deflation is an expected consequence of dramatic increases in economic efficiencies due to the opening of global trade and technological advancements. While I sometimes had minor disagreements with his points of emphasis and understand that his proposals for solution are largely politically impossible, I found the book a sound analysis of what is now being raised as a potential economic danger.
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