Given the information in the statement, I would call it a “Capital Loss” special. Nothing has been said about what happened to the general level of prices or about the purchasing power of the asset. Without such information, one can say nothing very interesting about the change in the price of one specific asset. It’s certainly possible that the price of an asset (call it shares of Lehman or Enron stock) can fall with or without inflation or deflation. I can’t tell what the purpose of the example is; hence, as Professor Gerard points out, Planet Money needs help.
They may need as much help as the US Senate who rejected Fed Board of Governor’s nominee Peter Diamond because he allegedly was not a macroeconomist.
Ah, those discerning folks who man our legislature.
Fill in the blank:
ADAM DAVIDSON: Ladies and gentlemen, I have an amazing investment opportunity for you. Give me $100 – just a hundred – and in one year, I promise it will be worth 93 bucks. We call it the _______ special.
Okay, what’s your answer?
If you said “inflation,” congratulations, you’ve mastered one of the simplest concepts about the value of a currency. As the general price level goes up, the purchasing power of the currency goes down. In this case, the $100 you lent is worth only $93 when you get it back. That’s why in times of inflation, people are reluctant to lend money.
If you said “deflation,” congratulations, you’re the co-host of NPR’s Planet Money. And that bit of Econ 120 fail is from a “patented Planet Money explainer.” Yikes. There was an entire story yesterday written around this bit of confusion.
Let me ask you a question — is that enough to knock that program off of your trusted sources list? They ostensibly write about economic issues, yet neither the founder/writer nor any editor/producer was able to catch such a colossal blunder. If they are that confused about the easy stuff, how much do you trust them to explain credit default swaps or the toxic assets program? (And, as regular readers know, we love the Toxie Cam).
Must be that solar eruption.
Don Boudreaux at Cafe Hayek argues persuasively that energy independence and comparative advantage are not likely to be compatible for the U.S. If we wish to specialize in energy production, it will be more expensive in terms of economic welfare than importation; thus, we must either accept a lower standard of living or import something else. What makes energy so special that we should not trade for it? Should we instead import more food, pharmaceuticals, or technology, for example. In short, the doctrine of comparative advantage suggests that we specialize in things that we are particularly adept at producing and trade for other goods and services.
In his classroom talk in April, Yoram Bauman posed two questions
1. Are you fearful that we will run out of energy (especially from carbon based sources)?
2. Are you fearful that we will not run out of energy from carbon-based sources?
Higher prices can ensure that the first won’t happen but not the second. Concerns raised by positive answers to the second question won’t be addressed until we have a price for carbon-based energy that is higher than for clean fuels. Certainly, energy independence (i.e., no importation of carbon-based fuels) will lead to higher prices, but it also would be a very expensive way to achieve the result as the domestic price would have to rise enough to clear the domestic market. It’s not clear, however, that this would be a price that internalizes the greenhouse gas effect.