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PeakTrader said...

Good Deflation and Bad Deflation:

Good Deflation
A. Gary Shilling, 02.18.02

The bad deflation of insufficient demand, as in the 1930s and in Japan today. They note that in deflation buyers wait for lower prices, with the result that excess capacity and inventories force prices lower. This confirms buyer suspicions, leading to more purchase postponements and a downward price spiral.

The good deflation of excess supply driven by new tech. This was true in the late 1800s, when the Industrial Revolution and railroads created tremendous productivity and excess capacity. The economy grew an extraordinary 4% per year in real terms between 1870 and 1896, as wholesale prices fell 50%. Similarly, the Roaring Twenties were deflationary, as electricity and autos spread.

My comment:

The recession was a combination of "bad deflation" and "good deflation" of "insufficient demand" and "excess supply," and according to Warren Buffett, we're still in recession.

I stated before, a $5,000 tax cut for each worker in late '08 or early '09 (or $750 billion for the 150 million workers at the time) would've created a V-shaped recovery and strengthened the banking system.

Significant tax cuts worked under Kennedy in '61, Reagan in '81, and Bush in '01.