Readers Question: I do not understand something mentioned by an economist in his speech He said it was because of global overcapacity that deflation is a cause for concern.I can’t seem to make the connection. Can you please help out?
- Global overcapacity means that industries are producing more than global demand. Or it may mean that firms are operating at 50% capacity, leaving factories idle for periods of the time.
- Deflation occurs when there is a fall in the general price level.
This is a basic economic idea that if supply is greater than demand, prices tend to fall.
In this diagram demand is falling due to recession causing lower prices. Also, if supply was increasing, prices would fall even more.
Suppose a car factory has produced a 1,000 cars that it can’t sell at the current market price of £10,000. Now, in a recession, the firm is short of money and the unsold cars are no use to the firm. So there is an incentive for firm to cut price and sell some of its unsold goods. Therefore, they may offer cars for £9,000
On a global scale, if industries have a surplus of goods, then global prices will tend to fall which is deflation
2 comments ↓
The theory is the correct analysis. The issue is how well does it translate into deflation. That bring us to the issue of usable capacity. Years of experience tell me we have two types of excess capacity that which can easily and efficiently brought back on line and excess capacity that will never be back on line.
Since you used the auto industry in your example I would expect some of the auto industry’s excess capacity never will never be brought back ob line because it would be inefficient to bring the capacity back on line.
As a result the amount of excess capacity is the key issue in discussing deflation.
The Science of Debt Dependent Saturation Macroeconomics
Terminal Quantum Fractal Progressions – Identifying the Wilshire’s 11 October 2007 Secondary High
The exact high for the Wilshire on October 11 2007 was prospectively predicted by the science of saturation macroeconomics. The science of saturation macroeconomics as defined by quantum fractal growth and decay of macroeconomic system’s countervailing debt, on the one hand, and commodity and equity, on the other ‘investment’ instruments has now retrospectively indicated the final secondary high for the Wilshire.
Speculative money rotating from equity and commodity speculative instrument that flowed into global debt instruments driving the US ten year note, as way of a sovereign debt proxy, to its 150 year low at 2.04 percent on 18 December 2008 well matched the Wilshire’s initial nodal low at 7400 on 21 December 2008. With the 150 year low long term interest, speculative money began flowing back into equities which had lateral growth and thereafter downward growth until 6 March 2009, completing a 7/16 week x/2-2.5x fractal sequence.
With the US central bank’s counterfeiting 350 billion dollars in the short term treasury market to incrementally absorb short term US roll over debt that had insufficient real economy buyers, the US equity market and the entire global equity markets achieved growth valuations beyond that which would have occurred if competing short term debt instruments were placed on the existing capital market table.
Since 6 March 2009 the Wilshire completed a fractal sequence formed by the earlier 7/16 week first and second fractal series. A 7/16/19 week fractal series completed the first of two final fractal growth periods.
The 19 weeks of the 7/16/19 first fractal series were composed of a daily fractal series of 17/38/35 days :: x/2-2.5x/2x with a nonlinear drop seen on the minute unit charts on the 38th day of the second fractal.
The second fractal series is composed currently of 6/12/7 weeks :: x/2x/1x or 27/55/33 days. The 27th day of the third fractal is nested in a cup 5 days from the likely secondary Wilshire high on 4 December and the secondary high on 16 December 2009.
Since 9 December 2009 the Wilshire has followed a 15/32/15 hour :: x/2-2.5x/x fractal growth series ending on Friday 18 December 2009 with the characteristic nonlinear drop on the 31st hour of the second fractal. The final 15 hour is composed of a 3/8/6 hour fractal x/2.5x/2x or a 12/24/20 :: x/2x/1.6x 15 minute fractal.
On Friday 18 December the Wilshire reached its second and (relatively) final lower high of a 27/55/27 day x/2x/x fractal followed by a 15/32/15 hour : x/2x/x
fractal. Incipient nonlinearity of a major degree is expected on Monday 21 December 2009.
Possible fractal decay progressions using the 6/12/7 week fractal sequence (decay is confluent with and begins in terminal apical growth) are: 6/12/12 weeks or 6/12/12/9 weeks with the third fractal (of the latter fractal series) 12th a final third much lower high.
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