Why Deflation Doesnt Happen During a Recession

Why Deflation Doesn't Happen During a Recession When there is economic expansion, demand seems to outpace supply, particularly for goods and services that take time and major capital to increase supply. As a result, prices generally rise (or there is at least price pressure), particularly for goods and services that cannot rapidly meet the increased demand, such as housing in urban centers (relatively fixed supply), and advanced education (takes time to expand/build new schools). This doesnt apply to cars because automotive plants can gear up pretty quickly. Conversely, when there is an economic contraction (i.e. recession), supply initially outpaces demand. This would suggest that there would be downward pressure on prices, but prices for most goods and services dont go down and neither do wages.  Why do prices and wages appear to be sticky in a downward direction? For wages, corporate/human culture offer up a simple explanation: people do not like to give pay cuts... managers tend to lay off before they give pay cuts (though there exist some exceptions). That said, this doesnt explain why prices dont go down for most goods and services. In  Why Does Money Have Value, we saw that changes in the level of prices (inflation) were due to a combination of the following four factors: The supply of money goes up.The supply of goods goes down.Demand for money goes down.Demand for goods goes up. In a boom, we would expect that the demand for goods to rise faster than the supply. All else being equal, we would expect factor 4 to outweigh factor 2 and the level of prices to rise. Since deflation is the opposite of inflation, deflation is due to a combination of the following four factors: The supply of money goes down.The supply of goods goes up.Demand for money goes up.Demand for goods goes down. We would expect the demand for goods to decline faster than the supply, so factor 4 should outweigh factor 2, so all else being equal we should expect the level of prices to fall. In  A Beginners Guide to Economic Indicators we saw that measures of inflation such as the Implicit Price Deflator for GDP are pro-cyclical coincident economic indicators, so the inflation rate is high during booms and low during recessions. The information above shows that the inflation rate should be higher in booms than in bursts, but why is the inflation rate still positive in recessions? Different Situations, Different Results The answer is that all else is not equal. The money supply is constantly expanding, so the economy has a consistent inflationary pressure given by factor 1. The Federal Reserve has a table listing the M1, M2, and M3 money supply. From Recession? Depression? we saw that during the worst recession America has experienced since World War II, from November 1973 to March 1975, real GDP fell by 4.9 percent. This would have caused deflation, except that the money supply rose rapidly during this period, with the seasonally adjusted M2 rising 16.5% and the seasonally adjusted M3 rising 24.4%. Data from Economagic shows that the Consumer Price Index rose 14.68% during this severe recession. A recessionary period with a high inflation rate is known as stagflation, a concept made famous by Milton Friedman. While inflation rates are generally lower during recessions, we can still experience high levels of inflation through the growth of the money supply. So the key point here is that while the inflation rate rises during a boom and falls during a recession, it generally does not go below zero due to a consistently increasing money supply.   In addition, there may be consumer psychology-related factors that prevent prices from decreasing during a recession- more specifically, firms may be reluctant to decrease prices if they feel like customers will get upset when they increase prices back to their original levels at a later point in time.

The History Behind the Presidents Resolute Desk

The History Behind the Presidents Resolute Desk The Resolute desk is a massive oak desk closely associated with presidents of the United States due to its prominent placement in the Oval Office. The desk arrived at the White House in November 1880, as a gift from Britains Queen Victoria. It became one of the most recognizable pieces of American furniture during the administration of President John F. Kennedy, after his wife realized its historic significance and had it  placed in the Oval Office. Photographs of President Kennedy seated at the imposing desk, as his young son John played beneath it, peeking out from a door panel, captivated the nation. The story of the desk is steeped in naval lore, as it was crafted from oak timbers of a British research vessel, HMS Resolute. The Resolutes fate became wrapped up in the exploration of the Arctic, one of the great quests of the mid-1800s. The Resolute had to be abandoned by its crew in the Arctic in 1854 after becoming locked in ice. But, a year later, it was found drifting by an American whaling ship. After a meticulous refitting at the Brooklyn Navy Yard, the Resolute was then sailed by an American naval crew to England. The ship, with great fanfare, was presented by the American government to Queen Victoria in December 1856. The return of the ship was celebrated in Britain, and the incident became a symbol of friendship between the two nations. The story of the Resolute faded into history. Yet at least one person, Queen Victoria, remembered. Decades later, when the Resolute was taken out of service, the British monarch had oak timbers from it saved and crafted into a desk for American presidents. The gift arrived, as a surprise, at the White House during the administration of President Rutherford B. Hayes. The Story  of H.M.S. Resolute The bark H.M.S. Resolute was built to withstand the brutal conditions of the Arctic, and the heavy oak timbers used in its construction made the ship uncommonly strong. In the spring of 1852 it was dispatched, as part of a small fleet, to the waters north of Canada, on a mission to search for any possible survivors of the lost  Franklin Expedition. The ships of the expedition became locked in ice and had to be abandoned in August 1854. The crews of the Resolute and four other ships set out on a dangerous journey over ice to meet up with other ships that could return them to England. Before abandoning the vessels, the sailors had secured hatches and left things in good order, though it was assumed the ships would be crushed by encroaching ice. The crew of the Resolute, and the other crews, made it safely back to England. And it was assumed the ship would never be  seen again. Yet, a year later, an American whaler, the George Henry, saw a vessel drifting on the open ocean. It was the Resolute. Thanks to its astoundingly sturdy construction, the bark had withstood the crushing ice. After breaking free during a summer thaw, it somehow drifted a thousand miles from where it had been abandoned. The crew of the whaling ship managed, with great difficulty, to sail the Resolute back to harbor in New London, Connecticut, arriving in December 1855. The New York Herald published an extensive front-page story describing the Resolutes arrival at New London  on December 27, 1855. The British government was informed of the find, and accepted that the ship was now, according to maritime law, the property of the whaling crew who had found her on the open ocean. Members of Congress became involved, and a bill was passed authorizing the federal government to purchase the Resolute from the private citizens who were its new owners. On August 28, 1856, the Congress authorized $40,000 to purchase the ship, refit it, and sail it back to England to present to Queen Victoria. The ship was quickly towed to the Brooklyn Navy Yard, and crews began restoring it to seaworthy condition. While the ship was still quite sturdy, it needed new rigging and sails. The Resolute sailed from the Brooklyn Navy Yard on November 13, 1856, bound for England. The New York Times published an article the following day which described the extreme care the U.S. Navy had taken in repairing the ship: With such completeness and attention to detail has this work been performed, that not only has everything found on board been preserved, even to the books in the captains library, the pictures in his cabin, and a musical-box and organ belonging to other officers, but new British flags have been manufactured in the Navy Yard to take the place of those which had rotted during the long time she was without a living soul on board.From stem to stern she has been repainted; her sails and much of her rigging are entirely new, the muskets, swords, telescopes, nautical instruments, etc., which she contained have been cleaned and put in perfect order. Nothing has been overlooked or neglected that was necessary to her most complete and thorough renovation. Several thousand pounds of powder which were found on board will be taken back to England, somewhat deteriorated in quality, but still good enough for ordinary purposes, such as firing salutes. The Resolute had been built to withstand the Arctic, but was not very fast on the open ocean. It took nearly a month to reach England, and the American crew found itself in peril from an intense storm just as it neared Portsmouth harbor. But conditions suddenly changed and the Resolute arrived safely and was greeted with celebrations. The British extended a welcome to the officers and crew who had sailed the Resolute to England. And even Queen Victoria and her husband, Prince Albert, came to visit the ship.   Queen Victorias Gift In the 1870s the Resolute was taken out of service and was going to be broken up. Queen Victoria, who apparently harbored fond memories of the ship and its return to England, directed that oak timbers from the Resolute be salvaged and made into a gift for the American president. The enormous desk with elaborate carvings was crafted and shipped to the United States. It arrived in a huge crate at the White House on November 23, 1880. The New York Times described it on the front page the following day: A large box was received and unpacked at the White House today, and was found to contain a massive desk or writing table, a present from Queen Victoria to the President of the United States. It is made of live oak, weighs 1,300 pounds, is elaborately carved, and altogether is a magnificent specimen of workmanship. The Resolute Desk and the Presidency The massive oak desk remained in the White House through many administrations, though it was often used in upstairs rooms, out of  public view. After the White House was gutted and restored during the Truman administration, the desk was placed in a ground floor room known as the broadcast room. The enormous desk had fallen out of fashion, and was essentially forgotten until 1961. After moving into the White House, First Lady Jacqueline Kennedy began exploring the mansion, becoming familiar with the furniture and other fittings. She discovered the Resolute desk in the broadcast room, obscured under a protective cloth covering. The desk had been used as a table to hold a motion picture projector. Mrs. Kennedy read the plaque on the desk, realized its significance in naval history, and directed that it be placed in the Oval Office. A few weeks after President Kennedys inauguration, the New York Times published a story about the desk on the front page, under the headline Mrs. Kennedy Finds a Historical Desk for President.   During the administration of Franklin Roosevelt, a front panel, with a carving of the Great Seal of the United States, was installed on the desk. The panel had been requested by President Roosevelt to hide his leg braces. The desks front panel opened on hinges, and photographers would snap the Kennedy children playing under the desk and looking out through its unusual door. Photographs of President Kennedy working at the desk as his young son playing under it became iconic images of the Kennedy era. After President Kennedys assassination the Resolute desk was removed from the Oval Office, as President Johnson preferred a simpler and more modern desk. The Resolute desk, for a time, was on display in the Smithsonians American Museum of American History, as part of an exhibit on the presidency. In January 1977, incoming President Jimmy Carter requested that the desk be brought back to the Oval Office. All the presidents since have used the gift from Queen Victoria crafted of oak from H.M.S. Resolute.