Thank you, Kathleen. Good afternoon, everybody walking back to our special deflation edition of midday. I'm Gary. I can join this hour by Minnesota Public Radio senior business and economics editor Chris Farrell Arthur rolnick is also Alice Smith rolnick is senior vice president and director of research for the 9th Federal Reserve Bank in Minneapolis. We also course invite you to join our conversation looking back at the big special over the noon hour about deflation what it means for us for years. We've worried about prices going up now, we're told we're supposed to worry about prices going down. What does it all mean for us the businesses we patronize for the jobs. We hold get us a call with your questions and comments Twin City area number is 227-6002 276 thousand if you're calling from outside the Twin Cities, you can reach us toll-free. That number is 1 800 to +422-828-227-6000 or one 800-242-2828 and we should know it by the way Ray Suarez will be along.Was Talk of the Nation as scheduled at 2 this afternoon and matter fact that he's going to be talking about how to buy a house so he can Onyx seminar continues here on Minnesota public radio right now on this extended edition of midday. We're talking about the unfamiliar concept of deflation steady or falling prices again, if you'd like to join our conversation put City area number is 227-6802 for 22828 gentleman. Thanks for coming in pretty sanguine about this whole deal the nascence. What's the worry prices are holding steady. They're going down. Why worry, is there anything to worry about while you're at your right on The Optimist on the program where I was I think the FED it if you recall in the early eighties set its goal to bring double-digit inflation down and do it gradually, but the to bring it down.Studies show over and over again the countries that have low inflation environments basically stable prices usually have very strong financial Industries strong financial industry as usual mean a strong economy. So they're fed argue back then that it was a good idea to aim for Price stability. That's what we could do to contribute to economic growth and I would argue that's how it's worked out. So we we more or less are achieving our objective of bringing and we brought inflation down as you know, we're below 2% of the rate of inflation year-over-year. This economy is very strong. It's exactly what we thought would happen to a my mind low inflation or stable prices or even a little bit of deflation is nothing to really worry about it's a sign I would say of a very healthy and, I see your colleagues on Washington are talking about the inflation is eerily calm. Does that mean that what does that mean that we still we're still wants to know? What the heck I didn't use those words. I think Washington attends toWorried that the inflation is right around the corner. Sometimes that's not my personal forecast. My personal forecast is that we're probably masilo inflation for for at least out to the near the near-term, Maybe you're too this economy is strong partly because we're seeing some very strong half the increases in productivity, which means individual workers are producing more than they did before. They're more productive. You have more Goods same amount of roughly the same amount of money in the economy. That means prices are going to fall. I think that's going to continue for a while. I think that best explains what happened last year that productivity was stronger than we thought and I looks like it's it's continuing to strengthen so that I see this low inflation environment and that I wouldn't describe it is you really optimistic Lilo and again reflects my optimism on this economy. Well leave it to the media Chris Farrell, you know, I mean just I just when we can sit around and enjoying know when I'm beingJoyce and Joyce Table prices and so on you go find the dark side of this thing woke up and said he's been talking about inflation year after year, and now he gets a speech about deflation if we can avoid one of those catastrophic deal. So, you know the Great Depression the Panic of the lady. Is there anything bad about this and in your mind? Well, I can do a couple thing. It's a different world. When is it may just give an example of how to think about it. A lot of people say in a worker worker wages aren't Rising, you know, where is really aren't getting pay increases and then they were Economist who will look at this world and would look at a world in mile deflation to say no workers are getting real pay increases the Top Line. They're getting a to a three maybe 4% wage increase. It doesn't sound like much it isn't much but they're getting a bigger wage increase in that number because if you have mild deflation your dollar can go farther, but that's a it's a change in your mindset the other things and talking to a lot of businesses and what art was talking about. This Rising productivity people aren't doing this because they want to it's an intensely harshly competitive environment and one of the fascinating aspects of our economy is where the corporate recruiters going. Where are they hiring mundane businesses are going to Silicon Valley. I say we want to hire you because you have a set of skills instead of knowledge of how to thrive in a deflationary world and we're getting killed because we don't know how to do we need your skill. So for a business in an environment where you can't raise prices unless you come up with some Innovation some twist that nobody else has you can charge a higher price for that. It's a very tough environment. If you do make a mistake is incredibly harsh Stephen Smith noted in his report on the depression that what really seemed to touch that off of course was debating a big the stock market crash stock market has been going gangbusters for the last several years here what happens if the market does crash now stock market crashes now, it's a bad thing some changes in corporate earnings going to affect cost of capital you make it layoffs. But what is the link between the stock market going down and what we call the real economy and economy of goods and services. If you look what's happening in Asia that shift the age of there yet stock market crashes in your having depressions. They were heavily indebted economies. You go to the US economy the Great Depression way to stock market crashed. We also had a heavily indebted economy today. The US balance sheet is pretty healthy. It wouldn't be a nice thing at the stock market went down. It would probably be a very good indicator that we're going to go into recession, but I don't think we'd end up with a depression because our balance sheets are debt levels are reasonably under control and the problem with that forecast is that we never really actually know that until we've gone through the bad times, but with the knowledge that we had today, I think we can say that the debt levels in the United States are a reasonable stock market crash 1987 that in real terms rival the stock market crash of 1929. We had a banking crisis in the 1980s and their I'm talking about the S&L crisis and thousand of our banks are commercial banks failed that banking crisis in many ways rival the banking crisis in the early 1930s and yet this economy continue to grow and do very well in the Market stock market bounce back quite a bit. I think it's a different economy than the 1920s and 30s for a number of reasons 20 of those are we have some safety nets out there that prevent the financial collapse occurred in the thirties. We have Deposit Insurance, for example, that protects the small saver so they don't have to run their Banks and Banks aren't subject to this sort of instability. That's that's a big difference. We have a central bank which in the early thirties when we were on the gold standard back then so the central bank was limited into how much money they could introduce him to the economy. Today. We are no longer on the gold standard. We get off the gold standard international in 71 the FED has control over the money supply and we won't let the money sit. By the client is it did in the 1930? So we have certain I would argue policies in place today that I won't say. It's impossible to have them in another great depression, but I make it very very unlikely. Even if we did get another 1987 Type R 1929 stock market crash and I do think when we get the next recession, it could be unusually brutal and it's a question that I raised during the reports. It's probably find it very difficult to raise prices in the in the jargon terms companies don't have pricing power that used to be all your brand name companies could say we're going to raise their prices by three 4% when we have went industries were less competitive. There's less foreign competition less entrepreneurship. Now, you can't do that unless you are able to innovate. Well, if we're in a recession and demand shrinks and what's going to happen to prices we could get real price declines and we haven't dealt with that for a long. Of time. We're not really exactly sure what would be the implications of it. I think it would be a very different type of Maybe perhaps more like the type of recessions we got in the 19th century than some of the post-world War II and director at the 9th Federal Reserve Bank in Minneapolis have joined us this our continuing our coverage of deflation. The Spectre of falling prices across America think of it lots of callers on the line with questions and comments and they let me give you the number don't call right now though because you'll just get a busy signal on you get frustrated. But the number to call give us a couple of minutes to get through some callers get some of the lines clear to 276 thousand in the Twin City area to 276 thousand outside the Twin Cities one 802-422-8280. Hi, I work for a heating appliance repair company and deflation over the last few years is really created a concern for us. Cuz it seems like any work that's being done is is reading what's called it like a D minus performance and then you just do enough to get by and that's all the further anybody's worried about and Manufacturing on some brands of furnaces out there. We will go out then we'll see many new updates within a year or two of them being put out there a certain appliances. We're seeing your major parts changes in about 2 or 3 years and they just keep going until now. They finally decide not to make any parts for this after 7 and 1/2 years. And I'm just wondering what deflation is going to keep doing to the air quality standard of what we're buying. I think in a deflationary environment or an intensely price competitive environment you end up with more products of different quality. And if if you're not a lot of competition you come out with one one product one or two products and you sell them and you can pretty much dictate your price when you're in a deflationary environment. You going to come up with some products that are not particularly good and you going to sell those at a very low price in order to deserve one party or markets, you might have more of a middle of a product of the middle price and it will be a reasonable quality and excessive part of it is breaking up your Market in the different niches, but overall the quality of goods and services in the United States is rising and I think that's the real important point about a disinflationary price stability mile deflationary environment that the overall quality goes up because of these productivity improvements that are happening the price comes down and the quality improved because you have to figure out a way to manufacture that good. Faster and quicker, but the consumer is pretty smart and the consumer has a lot of choice. So it's not a reasonable quality for the price that consumers going to go to somebody else Jean. Go ahead, please thank you. My concern is in terms of real estate. The residential real estate in the Twin Cities is increased in value considerably in the last year ended up. Of deflation. I wonder what that affect be in general and residential real estate. We talked about deflation. We're talking about the overall price level doesn't mean that some prices can't go up on other prices are coming down. In fact, that's what you're seeing and real estate some significant price increases not just in the Twin Cities, you're seeing this I think cross the country. I know California is having a major increase in in some of their homes in some of their areas housing start numbers just came out today. They were Very strong on last month. I think this is a booming market right now. I think the demographic partly are driving. It was also driving it is that this economy is producing a lot of wealth over the last last 15 or 20 years in people can demand more and bigger homes and they're doing that. So they at what the deflationary or stable price environment means is these homes would have while their prices are going up. They would have gone up a lot more in an inflationary environment. So even though we're seeing some price increases their relative price increases, they're not the type of inflationary price increases that we saw in the 70s. What happens is it more risky or less grip less risky or environment to I take out one of these home equity loans going to use your house has a revolving line of credit generally speaking. If you're a bar where you want to be an inflationary environment cuz you going to be paying it back in in in cheaper dollars if you will now course at the lender building inflation premium it's not clear that you're going to be that much better off interest rates eventually do reflect inflation, but generally speaking it's less risky to be a buyer or than to be a lender in an inflationary environment sport of your question, please what do you think Farmland values some do in the next 5 years due to the inflationary. Funland prices will Farmland prices. I don't know if I find lamb prices food prices have been declining in real terms. So it since the early 1900s and to a large extent that's reflected productivity increases and you said simply are able to to produce a lot more Farm Goods with using less labor and a lot more capital and a lot of knowledge. So the long-term Trend and I think the long-term trend for farm products is very good mayonnaise is going to come back and Asia is a big buyer of a lot of of our exports. So as a longer-term statement, I would say that farming is a good business. It's a great business seems that Farmland would be a pretty good. But if we went through some sort of a deflationary real deflationary episode Farmland would be vulnerable but I think basically farming is a good business follow your next glad he has to do with some statements that were in the piece that was just on and I talked about the downsizing and more efficient businesses. And the fact we have the lowest unemployment rates now, but also the companies are doing massive layoffs, and I don't understand why that's happening. It seems to me if there's massive layoffs. There would be high unemployment. So I need to find out how that's all related. In a sense of low unemployment and massive layoffs are two sides of the same coin. They're reflecting this intensely competitive environment. Where in there was what was it? Say two years ago. A lot of the baby bells announced enormous layoffs in in the telecommuting their businesses and you added it up among the baby bells in AT&T and they laid off of 80,000 people. That was that was the announcer but employment that year in the industry grew by 120000 Will what happened they were laying off in one side of their business and they were hiring in the wireless side of their business in an intensely competitive environment like this. We are profit margins gets shrunk businesses will get rid of people very quickly, but then they move other people sometimes the same people as soon as they go outside into their faster growing businesses and put the resources into that business. So when we're talking about low unemployment in massive layoffs in a sense, it's the same phenomena counts for both. It's part of this created. Russian it's part of the worker insecurity. But it's also why we can have the innate your long economic expansion long term though as you as companies more and more Reliant technology to increase their productivity. Don't you get to a point that Jeremy Rifkin is raised this issue. I don't you get to a point where I essentially most of us won't have a job because there won't be a job for us to have that arguments been made for over a hundred years and the history suggests that arguments dead wrong. Then what happened to this new technology is new technologies create new types of jobs pick up software developers. Obviously, they didn't exist the 30-40 years ago. So there is a booming economy when the new productivity new technology comes along and demand a new type of worker may be different skills, but doesn't eliminate jobs. It's just create new type of jobs. New type of service jobs new type of a high-tech jobs Etc. Market economy a dynamic economy needs to change needs to find new workers. You'll find that we've had a churning in terms of the number of jobs a type of jobs layoffs occur throughout this economy. It's actually a sign of a healthy economy that's course not easy on the individual's went to switch jobs was laid off for a while. But if you try to protect the old jobs as the former countries that were part of the Soviet Union did you get stagnation? So it is at the actual sign of a healthy economy. It's it's not easy for the individual workers. But is we should be telling our children expect as you enter the labor force that you're not going to stick with one career. It'll probably be three four five different careers to your lifetime be prepared to know how to learn and to change into adapt to the new environment because that's the real world of a of a market-driven economy. It means alot to grow that means a lot of well, it means a high per capita income on average, but it also means that you're going to have to Face layoffs and job change throughout your career. We're talking the shower about the phenomenon of deflation. And if you'd like to join our conversation, give us a call to 276 thousand is our Twin City area number to 276 thousand. I'll try the Twin Cities. You can reach his toll free at one eight hundred to +422-828-227-6802 for 22828 a special Expanded Edition of midday today so we can talk a little bit more about deflation Chris Ferrell is with us. He is our senior business and economics editor at Minnesota Public Radio on Arthur roll-neck has joined us. He is the research director at the 9th Federal Reserve Bank in Minneapolis. Next caller is from stanchfield Jim question Place more of a comment. It seems to me that most of the deflation Airy pressure is released many of them is kind of run their course the guns and butter Vietnam and then the Reagan budget deficits have have Translate come to an end and we've got the technology payoff coming through worker productivity. So that's keeping wages down but most importantly at least as it seems to me is that the shoot shock of the oil price who are most fundamental commodity the one that runs through everything from the production of fertilizer and far and I was working the fields with diesel to be moving all the good. They shoot shock that went through the economy in the 70s and 80s from the tremendous rise and oil prices. Now, we've seen the Fallen oil prices. So, you know the inflationary prickling percolating through the inflationary tenancy percolating through the economy in the 70s from the rise and oil price seems to me to have been reversed now is oil prices at least in real terms as noted in a reporter at historic lows that's percolated through the system and now prices have fallen to compensate but looking forward that Corrections been made as has the budget. What seems to be that we're actually in pretty good shape for the future Asian situation raises some haunting questioning. Why are we having the largest International bailout has ever been engineered and it at the moment looks contained but we don't know whether is contained in the reason why we're trying to contain it is we don't want some of deflationary effects of Asia to really become to turn into a worldwide effect in a world of price stability. I think we more have to think about the prospect not just of inflation which is what wall Street's been obsessed about four years now and you're still hearing the commentary more workers in basic training Wall Street unemployment slow wages are rising inflation has to be around the corner, which I'm skeptical about because I still have a promising have more people working is inflationary, but that that do no believe that aside but At the same time you have to worry about shocks on the downside and that is a different world than what we really been living with for the past 40 years and explain again. What you mean by shocks on the down side by the shocking the downside is that not that price is rice lightly or the real real estate prices rise a lot and there for the FedEx to stem that inflationary ride, but that you actually get a negative CPI number and negative a drop in the Consumer Price Index. And why would that be bad? It would be bad essentially because it will it it it hurts borrowers and we have a lot of bars in our economy. It puts enormous pressure on company profit margins in order found how do companies make their money and they you know, we'll probably lay off more work or so. It's in it. It's an environment that you don't want to have and it also has an environment where business can pull back on its investment. I'm in the classic risk of deflation is bars are exposed business tops investing because they're Unser. About how much demand is going to be out there and consumers so to sit back and say I'm not going to buy right now cuz I wait for something to be be cheap and it is something that haunts Central Bankers. This is not a situation that they want Lamar Mo price declines. That's fine. But just a central Bankers don't want virulent inflation. They really don't want deflation but I think in the world of price stability. For a central bank that has worried about rightfully about inflation for the past few 20-30 years. It has been now incorporate the prospect of deflation when it's making its analysis Arthur olenick. What happens to wages? Can we expect the time soon when wages will actually drop when when you go in to see your boss there and you want to raise and we're going to cut you buy Viagra and this year I wouldn't worry about it. I mean, it could happen that we could get a major deflation for some unknown reason. I suspect though. That's very unlikely. Price level changes long-term sustainable inflation or deflation are going to be driven by the amount of money in the system Federal Reserve Bank controls that in this economy. The Federal Reserve is committed to a stable price policy which means allowing the money supply to increase enough to keep the economy growing but not enough to reignite inflation or not too little to cause of deflation. So I think one of the reasons I'm optimistic that has the caller was is if you look out in the future that the FED is committed to this low inflation pound stable price policy and the other are some shocks is Chris mentioned that could temporarily move us off price stability, but long-term, I think though we're in for low inflation. I should point out that if you look at interest rates in the inflation expectations that get built into an interest rate. They tend to be reflecting on expectation of about 1 to 2% inflation right now. So the market is betting not on deflation, but I'm very low price. Crazy, so I doubt that you're going to see actually at the Klein and wages. I think right now the wage picture is looking pretty good is Chris mentioned earlier? You've got a fairly low inflation, maybe a little bit of deflation and wages are going up 34% That's a pretty good real increase and wages are going up because productivity is going up. So we're starting to reap the benefits. I would argue of the new technology that's come on. It's made our workers more productive of this very competitive environment where and we are markets are really world markets. Today. We have to compete in the world. We have to be competitive that is driving this higher productivity using this new technology and it's producing. I think more wealth in this economy in particular hire a real wages were talking a shower about deflation Arthur Raonic from the Federal Reserve is with us crisp are all our senior economics and business editors with us. It will take some more phone calls in just a moment we have here for the first time in the history of Western. The idea that childbearing does not equal motherhood. New questions about surrogate motherhood. I'm Steven Smith. Listen for the fertility race tomorrow at 7:20 on Morning Edition, Minnesota Public Radio know FM 91.1 in the Twin Cities. By the way, I want to mention again if you missed a Chris Farrell, so special report that we broadcast over the noon hour today kind of setting out the dimensions of the discussion on deflation will be rebroadcast in that program after 9 tonight. You're on Minnesota Public Radio lots of callers on the line with questions about this issue of falling or stable prices and what it means for all of us Danny. Your question place optimists are wrong and we have met all the requirements for deflation and we're sliding toward perhaps a depression. Where would be the best place to have your savings to maintain purchasing power and I'll hang up and listen, you're not going to answer but it would be us treasury bills and you know, the fact of the matter Blue Chip corporations the stock of Lucha Corporation now stock Abuja corporations will go down but assuming that they don't go bankrupt in the other fairly large in that kind of environment large companies have a lot of Natural Resources. They're still earning money. They're still employing people. They typically are the survivors and so you want to put some of your money with the survivors and some of your money with the full faith and credit of the federal government and they can't go bankrupt people are pouring huge sums of money into their retirement plans. If this were, you know, if they pan out as pleasantly as we'd like to thank our people at risk of losing all that money, so I doubt they're at risk of losing all that money, but is Chris said if you're concerned about such an invite Transpiring such an economy that that that would actually Decline and have some deflation you want to be in safer more liquid assets cassia in that environment is actually a good investment because she's going to buy you more in future years and stocks and bonds at these companies are going broke are probably more risky Investments to know I wouldn't say people in 401k and those plants are necessarily Tris. Most of them are fairly. Well Diversified and good percentage of them. I'm sure are investing in some sort of government securities and cash. So if you're more concerned than others about this area that I think he want to shift more into the government and the liquid stuff in the other things. You don't want to be a borrower mean you want to be a lender and went a lot of people create some people can't make their payments, but you don't want to be in debt because you mentioned earlier your dad gets more and more expensive to pay back. So you don't you could get out of debt if you were afraid of this and the other thing is you would avoid every gold-bug silverbugs Platinum bug. Magnesium bug and whatever else is out there who's going to sell you? The one thing that will do well in an inflationary Ordo Scooby deflationary environment steer clear of all that cuz they're going to come out of the woodwork back to the old Chris Farrell manttra cash is good. It's always good Mike question place. Yes, I have a question regarding and what might be contributing to the to the source of downward inflation. I bought long had a theory that we should have more open trade in a seam turn down the fences regarding International Trade may have caused. I'm working her dependency between the Country Sports interaction of economies and that lower price personal material available in other markets would thereby cause downward pressure on prices? And he responds to that. I think that's a very good explanation. I think in fact, it's one of the leading explanations of why we've not seen the type of inflation. We typically see when labor markets good as tight as they've been I would also add to that then if you look around the world at most of the other central banks they too are aiming for low inflation. They too have kept their money supply numbers in line. And so you have a if you will a world agreements hear that low inflation is best for the international economy. And so that tends to keep our prices low as well. If open borders global trading as good as a way to control inflation are closed borders and in a closed economy a good way to fight off the bad effects of deflation. No, no, no one does not necessarily follow. It just depends on what these other countries are doing suppose. You're a small country in you're basically tied to the US dollar how many small countries do that? If we Start inflating their currency is inflate. If we start deflating their currency goes down if you close it up. It just simply depends on your own country's policies and how they run their monetary policy generally speaking. If you close your borders down your economy is going to suffer trade is sort of the Keystone to economic growth. And so I would never recommend closing down borders to trade always keep those borders open. You may want to rethink how you manage your money supply depending on whether you want it take it to a dollar. What do you want at the float? In fact, that's a debate that's going on now among some of the Asian countries as to whether they should let their currencies float or Pega $2 or quantity gasket, but those get into some fairly esoteric topics, but the general rule I would say that we've learned from history is an open borders to trade are the path to economic growth. Just want to raise I think one of the concerns about the environment that were in it's just that Central Bankers have been fighting the battle against inflation since the 1970s and most of central Bankers Industrial Nations have been fairly successful. So the generals are all marching the same direction and they're all still battling the same fight. Now most of the evidence is if you look at our Consumer Price Index is overstated somewhere between half a percent to a percent. So we're really running about 1% and you go around the world Frances inflation's running at 5/10 / Cent. And the question is are the central Bankers running tight such tight policies at this point that in Asia or some sort of shock like this does turn into a greater deflation than we expect because they're all marching the same direction. The generals are fighting the last war not the current work and I think that is a legitimate concern that's out there. Will your next Grandpa's? Yes, thank you for taking my call. I have a question which needs to be prefaced by a comment made in the previous hour during deflation. The electronic Finance Services may continue to do well namely the buying and selling of Futures options swaps in foreign currency derivatives electronically where there is 60 times more money invested and following that in stocks and bonds. Now, I know why foreign currency value market makers such as George Soros and Robert Rubin Where is possibly 40 billion each and rolling in their wealth are doing so well. Those are there being in foreign currency derivatives, but why is not deflation affecting Bill Gates or is he secretly also in foreign currency derivatives and lastly Wildey super billionaires become even wealthier when they can buy deflated value Industries on the cheap and thank you for taking my question. I'm afraid the only part of the question. I understood was the last part was Bill Gates in a deflationary world. He is driving a deflationary world. It's he's creating Microsoft creates wonderful products and they charge a cheaper price for it and they grow their sales and out of The Growler sales in the US, but they grow their sales worldwide and it's a driving force in our economy. I can't I think it's a wonderful thing. Yeah, I it's interesting people have raised this question who tends to benefit in an inflationary environment and who tends to benefit in a deflation in their environment used to be the common wisdom that somehow Banks were the ones that were favor of lots of inflation that they somehow their interest rates that they paid on their deposits were relatively fixed and therefore they did very well during inflationary environment. In fact, it's turned out that as we've brought inflation down as we moved into this new environment banks are doing great in a low inflation and every low inflation every environment now the wisdom, of course it was the other way if you get some deflation, I think stable prices to the extent that we can get the prices as stable as with the overall price level. I think it levels the playing field. It reduces uncertainty out there for all investors. I think that's one of the reasons central banks including the feds aiming for that way. It doesn't favor one over the other you want the market signals the price signals to be independent of What's Central bank's are doing inflation General you want them to reflect underlying Market fundamentals. Then it sort of fair for everybody. If you will and a sharper one's the one who study the markets the most of the ones that I know you better than you don't want his beer is rapid inflation or rapid deflation. Both of them are incredibly destructive and only a few people having be made in the right place at the right time benefit in that kind of environment in the mass of people suffer. One of the things you pointed out. I came up during your program Chris was that I think was Mike Riedel red Supervalu was essentially saying the the marginal operator is is being hammered right now and the strong Will Survive the week will probably fall by the wayside. Is it true that just flabby poorly run businesses will fall by the wayside or with a lot of good ones go down to well. Unfortunately, probably a lot of good ones go down to never quite works out that way lie. It's not that that's fair that only the the flabby are destroyed by a lot of good companies are destroyed a man don't think it's a coincidence that we are in an environment where prices have been coming down and mergers and Acquisitions are at record levels companies can't raise prices so I can I grow up. Will you go out with me by somebody else and then you hope that you can get some efficiencies in your company and grow your sales that way Jeff your question. Go ahead, please where does money come from the workbook people do and other sources of value get turned into new money. Arthur roll-neck, you're the banker. That's a terrific question. Let me explain the mechanics of how the FED introduces money into the economy is actually quite simple if if you were to look at our balance sheet what we own we own government securities and our liabilities are Federal Reserve notes the currency that did that you use in hand-to-hand purchases to introduce money into the economy. We buy government securities from the public. So when we buy government securities from the public that those government securities going to our portfolio and we issue Federal Reserve notes. So you have more currency that's how currency gets into the system. We try to keep enough currency in this system again to meet the needs of the economy, but not too much too so that we don't reignite inflation. So it's a very simple either by to buy government securities to increase the money supply sell to decrease those decisions are made by the Federal Reserve System in total and the operations themselves. Actually take place at the New York Federal Reserve Bank in something called The Open Market desk and everyday they're buying and selling trying to keep that money supply on an even Keel. If you will to meet the objectives that we have low inflation Wayne. I have a question because of computer. I'm using the one at the campus Because the prices are going down so much. So equation can actually slow consumer demand cuz they're waiting for the next product and I have a question will happen. If we get a real sizable Surplus in the federal government and actually starts paying off the national debt. How will that affect the money supply before we get to the Surplus and and how that affects things are there? A lot of people like Wayne who are going to be that seem to be in the in the in the show seem to be one of the great fear that people would just start waiting waiting waiting. Nobody buys then the companies are are stuck and the spiral starts. Are there a lot of people like Wayne or the most people just go buy it anyway, but then what happens is you cut the price far enough and people just throw in the towel and say, okay, I'll buy it and you also open up to New Market. So personal computers have been stuck around the $2,000 level for quite a while. Now, there are a thousand and going below part of that is and you want to open up the new markets you want to get other people to start buying so there is some what Bill cat and call the hesitation Blues can affect the individual consumer. But so far what we've seen is you cut the price for enough and people come out of the woodwork now the budget surplus the possible or actual actual a federal budget surplus. How is that going to affect this discussion about the Federal Reserve and US Treasury, we are independent of the US Treasury, the Federal Reserve does not get its orders from the US Treasury. We are told that we have to buy so many bonds or help to you know to take care of a deficit etcetera. We make that decision based on how much money we think the economy needs to the way to think of a federal Surplus or deficit if we're running a deficit. It means future taxpayers are going to have to have higher taxes to pay off the principal and the interest now that we're running a surplus that means future taxpayers will have to pay their taxes can be lower. So what changes your future tax liabilities and as we raised shirt as we were on surpluses, that means we can pay off some of this deck that's out there. We have trillions of dollars of government that out there we can start paying that off yet means that we won't have to pay as high taxes in the future as we would have if we would have continued running deficits if we continue running down the interest and principal on that that would have continued to mount and it would have meant hi future tax liabilities. That was a big concern of Congress one of the reasons. We wanted a balanced budget in stock. Running surpluses physical so we can avoid putting that burden on future generations, and we're starting to do that. So, I think you should think of surplus is now as our attempt to lure the total amount of debt out there and lower the tax burden on future Generations. This is a special edition of midday coming to you today here on Minnesota Public Radio. We're talking about deflation Chris Ferrell is with us Minnesota Public Radio senior business and economics editor at Rolling Acres here. He is the director of research at the Federal Reserve in Minneapolis, and if you'd like to join our conversation, if it got a question or comment about deflation what it is how it's going to affect us. Give us a call 227-6020 area number to 276 thousand. I'll try the Twin Cities one 802-4228 to a reminder that Ray Suarez will be along with the Talk of the Nation program at 2 this afternoon and that he's going to be talking about how to buy a house. So we'll get to that at 2. Afternoon, Marshall your question, please the idea of starting an airline. So my question is the airlines from the business point of view of the Airlines and also from the passengers who buy the tickets are ticket prices going to go down soon. Will couple years ago 1993 or so a 1994 bowling came out and said we have to change the way we manufacture airplanes. It's simply too expensive and we cannot continue to as our customers to pay the price increases that we are putting on and the fact is they that the customers were walking. So if you're starting up an airline, but I would imagine you're buying used aircraft is supposed to new aircraft, but it's an industry where you would assume at least the manufacturers will have increase efficiencies and you'll get out again. It's a high-tech good air quality for a cheaper price, but cheaper prices is a relative thing if he see can be $1,000 a couple airplanes that's getting into a big bucks Tom your question. In the considering inflation in the past. I've always wondered what we're measuring. Are we measuring the value of goods going up or the value of the dollar or the currency going down now seems to me that the stock market and real estate market are both continuing to inflate very sharply. And if that means that the value of the currency is going down then it seems that the steady-state of consumer prices really means that we're having farm or deflation there then we might realize if that's the case that what risk would that pose when he kind of has talked about inflation or deflation or measuring the overall price level and not just Economist with the way we measure in Washington. We take a a market basket of goods typical Market Basket that a consumer would buy and we ask what's the price of that Market Basket today compared to say 10 years ago. And that's how we measure inflation inflation is think of it as a cost-of-living. How much is it increased the cost of living increase or decrease a from 10 years ago. So we're thinking of a market basket of goods and services are not talking about asset prices were not talking about stocks and bonds. So when you talk about the inflation the inverse of that is is the value of Inflation is going up with means the value of money is going down. It's one in the same. So that's just the definition. That's what we mean by inflation. What are the risks of inflation or deflation the rest of what I would describe them as if you allow an economy to have high inflation or high deflation you are messing up Market signals. You're making it much more difficult to figure out what to buy how to invest because you don't know whether your prices are going up because you're a good producer or simply because central banks are printing too much money and you got a lot of inflation as a result you get a misallocation of resources much more difficult to invest I would argue in an inflationary environment a lot of companies that shouldn't make a do make it because the signals arm are mixed up and therefore the wrists are are there's a lot of investment risk. There's a lot of risk in starting a business in in these unstable price environments Sheeran. Median income consumer wants to sell an existing smaller home and buy a better home will interest rates remain low and how does deflation affect the price of a home? Thank you was doing that. We're talking about the mild deflation, which I think is it is it is realistic a man. That seems to be a realistic Prospect then what I be, you know, that's a good environment because interest rates will be down and then the question is are there alot of jobs in your area are people moving into your area because there are a lot of jobs and you can take a look at housing markets and say it there a lot of jobs and people moving in houses tend to be strong. So so the price will probably go up in price will probably go up. Jack your next. Yeah, I I I was thinking about the yellow brick road story that was advised previously and I've always thought the money was speculated on or manipulated as Buckminster Fuller and suggested that we use the kilowatt of electricity is a standard any thoughts of a new standard in our exchange system. Well, there's a there's always talked of going back to the gold standard. I would argue that since we've been off the gold standard. We've seen the economies like ours around the world do very well. I'm not sure gold standard or a kilowatt standard or whatever cuz I'm sorry come out of the standard buys you very much having the flexibility having central banks have the flexibility to respond to a crisis. I think it's very important. It gives a lot of confidence to financial markets and I think it's one of the reasons why since we've been off the gold standard this economy has done extremely. Well. I kind of love to study what if we didn't have central banks and we just relied on Travelers cheques incorporation could issue their own money in Banks could issue their own money and said she have private money would this be a better world but that's you know, that becomes a world abstraction is kind of interesting and give you insights to what how many May behave and people behave but no one seriously is considering it. It is a dismal science after all. A question concerning with the depletion taking its toll on businesses and their bottom lines and Prophets being observed. How do you see the companies handling the economy with part-time and temporary workers not making as much in that receiving his benefits of the should and how is that going to play in the economy of the future for the bottom line increasing? I need to shift to temporary work as a permanent change is part of the world that what that were in companies will depending on their what's happening in their business will continue to rely on part-time workers will continue to rely on temporary workers with their shifts in what benefits are offered to those workers with a through company policy or government policy. I could see some changes there but the ability to add part-time workers when business is going great and the ability to shed them when when your business slows down companies are going to get it up. I might disagree with the callers fax little bit businesses have done extremely well over the last couple years business profits or way up. So here we have an environment in which we brought inflation down stable prices may be a little deflation and we're seeing a boom in business is a Boomin the stock market. So I would argue that this environment is a very healthy environment for businesses on average very competitive doesn't mean there are going to be some losers but on average this is the type of environment businesses should want and they've done very well for we run out of time or let me shift gears quickly when we've had these big deflation Arie. In the past. We have had major political and social disruption in this country. Would we Face the same thing again? It depends on what what causes it if you really have a break down as we did in the Great Depression in the financial Industries in in markets, just essentially closing down and World Trade closing down and all sorts of trade barriers being raised. Yeah, I would think it would cause serious political serious political response. I just think it very unlikely. That's why we would get a name that we would even get something like that. Again. There's an expectation that we may get a serious political response in the coming year or so. If it turns out that Asia's troubles continued to spill over and we got a tidal wave of imports coming into this country and it starts showing up in lower profit margins and more layoffs and you can cut a move toward protectionism. The Federal Reserve will come under a lot of criticism for not running a loser policy or more anticipating this event. So I could see if we end up with a more negative downturn and prices that the political corruption could be fairly loud. Can I play Tutions in general cope with a new Global Marketplace or is the nation-state As We Know It basically a dead horse. Well, I think we have we need more treaties. I mean, we need more cooperation among governments and central banks and we're getting more of that. I had mentioned that most central banks are any for low inflation in a way. They're coordinating the European Community is trying to engineer an economic Union. So with more trade comes the need to develop more international trade agreements, but I do have it all to the positive. It means that our political borders, which are never good economic borders will come down and we'll get more jobs out of this more grow more well for people who are wringing their hands right now and something new to worry about how can they protect themselves in this new environment Chris you protect yourself the same way you did over the past couple years, which is boy unless it's your home or most of us can't afford to buy a car. Sounds of a car something that that's a real asset I would just your cleared that are at the Roanoke. Oh, I would suggest getting as much schooling or vocational Tech skills as you can this economy is going to have a huge demand for skilled workers. Those are the ones that have done very well over the last five or ten years and my guess is they're going to continue to do well over the next five or ten years is an old story. But the more educated you are the more the more skills that you have other better you're going to perform. Thanks so much for coming in today help thank set discussion extended edition of midday today talking about deflation falling prices are guess this our Arthur rolnick director research at the Federal Reserve Bank in Minneapolis and Minnesota Public Radio senior business and economics editor Chris Farrell and thanks to all of you been listening a through the hours specially those of you who called in or tried to call him with your questions and comments like to remind you that business and economic reporting is supported by the law firm of Larkin Hoffman Daley Lindgren providing solo. Sims 4 today's legal problems shandwick providing strategic public relations Council and Pantera Diversified company building shareholder value through focused industrial growth going to catch up on some news headlines. 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