Five Things: Deflationary Forces Continue to Dominate
By Kevin Depew Mar 12, 2009 4:15 pm
The magnitude of the deflationary forces at work continues to be underestimated by pundits and policymakers.
1) Deflationary Forces Continue to Dominate
Ominous news today from the National Inflation Association:
"The United States today is in a short-term deflationary phase caused by forced liquidations, de-leveraging, going out of business sales, and other temporary factors."
You might be surprised to learn that I completely agree with the National Inflation Association... except for the parts about this deflationary phase being "short-term" and "temporary." But other than that, we're on the same side, in total agreement.
Having come of age in the post-World War II era of inflationary excess, a deflationary debt unwind seems so utterly foreign as to be practically unimaginable. After all, in my lifetime, there has never been this kind of sustained period of forced de-leveraging, forced asset liquidation, voluntary debt payment, rising savings and economic contraction - all occurring simultaneously, and creating a negative feedback loop which reinforces the collapse in aggregate demand.
Consequently, the magnitude of the deflationary forces at work continues to be underestimated by pundits and policymakers. Take a look at two charts below updated from the Federal Reserve's Flow of Funds report. These charts show, one, the rate of destruction of household net worth we are seeing and, two, the annualized rate of destruction in real estate owners' equity.
Household Net Worth Year-over-Year Percentage Change
Click to enlarge
Real Estate Owners' Equity Annualized Percentage Change
Click to enlarge
No wonder most of us don't much feel like "getting out there" to the shopping malls and "doing our patriotic duty." These declines in household net worth are staggering. Household "wealth" fell by $5.1 trillion in the fourth quarter alone.
To put that amount and its economic impact into perspective, let's look at it alongside President Barack Obama's $787 billion stimulus package that was signed into law last month. If you consider the magnitude of the loss on an individual basis, it's the equivalent of losing $5,100 at the racetrack one day, vowing to give up gambling forever, but finding $787 in your glove box and rushing back to get it all down on the next race.
The reality is there's nothing short-term or temporary about this "deflationary phase."
2) U.S.(Zimbabw)A.?
The National Inflation Association's ominous report continued:
"It is our belief that the monetary policies of the Federal Reserve and United States Treasury will soon put an end to this deflationary phase, and we will see massive inflation in the U.S. that could ultimately lead to Zimbabwe-style Hyperinflation."
Going back to 1934, whenever the Federal Reserve has made credit available the world has accepted it. While it is true the Fed and global central banks are making record amounts of credit available, as those anticipating hyperinflation argue, that is only one side of the credit equation.
The assumption is that this record-breaking credit expansion means risk assets (stocks, commodities, etc.) will all skyrocket and the U.S. dollar will get destroyed. But what hyperinflationists fail to realize is that for an inflation (of either the tame or hyper variety) to take place, one must have both the means (credit from the fed and banks) and the motive (the desire to take on more debt) for credit expansion. For over a year now we have had record amounts of the former, but none of the latter.
Additionally, in order for hyperinflation to even be a remote possibility here there would have to be at least one economy that is both stronger than the U.S. during a global economic downturn, and larger in size than the state of Ohio's or even California's economy.
Ironically, while smaller emerging markets could potentially find themselves facing a Zimbabwe-esque hyperinflation, that would only make the U.S. dollar and U.S. debt more attractive and secure. Emerging markets are at this point the only place where it seems a possibility that credit could find a willing home and debt an eager taker, but even that is not a certainty. It is more likely that the creeping protectionism that is developing, as countries begin to wake up to the fact that the global system is too big to save, results in a more severe credit contraction globally.
Make no mistake, this is not to say that we won't again experience inflation. We most assuredly will. But there are two critical errors being made by those currently warning of either aggressive inflation or hyperinflation; one, a failure to recognize the severity of the deflationary forces at work and, two, a failure to appreciate the duration of this deflationary debt unwind.
3) When Doing Things Right Turns Out Wrong
Kevin -
Here's what I really don't understand. I just can't get my head around this: if there are those people who did the right thing, still have their jobs and are still making the same amount of money, why does it seem everyone is so strapped for cash these days?
Good question. Going back to today's number 1), the primary reason everyone feels strapped is that a broad array of assets have declined in price; homes, apartments, stocks, investments.
Many people spent anticipating these things would only go up in value. but now that they have declined in value, even people who "did the right thing" have seen their debt relative to their assets increase. In short, people feel more strapped because they are more strapped.
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2009-03-12 16:23:59
The Reverse Wealth Effect
Glad to hear that the Reverse Wealth Effect is not curbing your Pho intake. How is your drink budget faring?
2009-03-12 16:33:45
245,674,213
Congratulations! Out of 6,250,000,000 people on earth, you are in the top 4% of humankind!
Barack Obama will soon raise your taxes, you rich son-of-a-day-trader!
Barack Obama will soon raise your taxes, you rich son-of-a-day-trader!
2009-03-12 16:53:24
Deflation/Inflation
I understand and agree with the issue of risk preferences being deflationary, but isn't this already and likely to remain a global phenomena? If that is the case, then the major funding countries for our massive deficits/debt will be looking inward rather than outward. Their trade surpluses are already dropping rapidly with demand crumbling in the US/Europe/Japan.
So if I read your argument correctly, you are basically assuming that the US dollar will remain as the currency/store of value for most of the world, as almost everyone goes through this shift in risk preferences. At the same time, you argue that gold is set to go down due to this same deflationary trend.
While I agree with your assessment of the underlying force (shifting risk preferences), I don't share your confidence that the US dollar will maintain its status at the top of the monetary totem pole.
I would venture that the real determination between inflation and deflation will be the global perception of the US dollar as a store of value. Because so much of our debt is owned by foreigners and our deficits are exploding, we are in a tremendously vulnerable situation should that perception shift.
So in summary, I think that your argument is correct but that the certainty of your conclusion is far too high. If a shift in risk preferences is all that it took to cause deflation, then history wouldn't be littered with inflationary depressions.
So if I read your argument correctly, you are basically assuming that the US dollar will remain as the currency/store of value for most of the world, as almost everyone goes through this shift in risk preferences. At the same time, you argue that gold is set to go down due to this same deflationary trend.
While I agree with your assessment of the underlying force (shifting risk preferences), I don't share your confidence that the US dollar will maintain its status at the top of the monetary totem pole.
I would venture that the real determination between inflation and deflation will be the global perception of the US dollar as a store of value. Because so much of our debt is owned by foreigners and our deficits are exploding, we are in a tremendously vulnerable situation should that perception shift.
So in summary, I think that your argument is correct but that the certainty of your conclusion is far too high. If a shift in risk preferences is all that it took to cause deflation, then history wouldn't be littered with inflationary depressions.
2009-03-12 17:17:45
Will somebody please pick up my tab?
Sorry, but someone has to pick on this couple.
Borrow fifty grand and put thirty into a lake cottage. Pocket twenty grand.
With two good jobs and pay, manage to spend everything and save nothing for five or six years. Pick rotten investments in a Bull market that completly evaporate.
And for the bad news, your home goes UP from three hundred to four hundred thousand.
Your cottage stays at one twenty.
Is this is my brother in law?
2009-03-12 17:30:32
Depew Deflation
I've given this economic cycle a Title "Depew Deflation". Or how about a little chaos theory thrown in - "The Racetrack Effect".
Only a couple of thinks Kevin.
1. Inflation can and does occur in a deflationary environment. When excess starts disappearing the basics (core inflation) go up in price, especially if you add social unrest to the mix.
2. The resulting inflation form Credit extension is different then Monetary Created (base) inflation.
Only a couple of thinks Kevin.
1. Inflation can and does occur in a deflationary environment. When excess starts disappearing the basics (core inflation) go up in price, especially if you add social unrest to the mix.
2. The resulting inflation form Credit extension is different then Monetary Created (base) inflation.
2009-03-12 17:59:37
Hyperinflation
Isn't there more to hyperinflation than just an out of control increase in the money supply or credit? I'm looking at the symptom, increasing prices. What if instead of an increase in money chasing goods and services we instead have a destruction of the means of supply? Exacly what is happening in Zimbabwe? or happened in Germany? Just a simple matter of more money?
2009-03-12 18:15:33
Consider the effect of these two things
1.
Kevin, you said "Additionally, in order for hyperinflation to even be a remote possibility here there would have to be at least one economy that is both stronger than the U.S. during a global economic downturn, and larger in size than the state of Ohio's or even California's economy." What about CHINA? China has been the fastest-growing major nation for the past quarter of a century with an average annual GDP growth rate above 10%. (Wikipedia). Yes, they have serious issues, but they also have lots of Savings and much our our National Debt.
What does that do to inflation?
2.
Looking around, I see hints of massive drought this year in CA and here in NC. If I am right, won't that cause commodity (food) prices to spike higher? Inflation through scarcity?
Looking forward to someone who can give some insight. I'm still on the inflate/deflate fence.
Ray McGill
Oxford, NC
Kevin, you said "Additionally, in order for hyperinflation to even be a remote possibility here there would have to be at least one economy that is both stronger than the U.S. during a global economic downturn, and larger in size than the state of Ohio's or even California's economy." What about CHINA? China has been the fastest-growing major nation for the past quarter of a century with an average annual GDP growth rate above 10%. (Wikipedia). Yes, they have serious issues, but they also have lots of Savings and much our our National Debt.
What does that do to inflation?
2.
Looking around, I see hints of massive drought this year in CA and here in NC. If I am right, won't that cause commodity (food) prices to spike higher? Inflation through scarcity?
Looking forward to someone who can give some insight. I'm still on the inflate/deflate fence.
Ray McGill
Oxford, NC
2009-03-12 18:18:11
Depew Deflation
Pep:
Building on Adam's comment, isn't the 'persistent deflation' thesis built on an assumption that the credit system is broken and will not be repaired anytime soon (i.e., reluctance of borrowers to borrow and lenders to lend)?
While I tend to agree with that assumption, why would policymakers, once they grasp that the credit system is indeed broken, 'give up' and walk away from the problem at that point? I would think that desperate bureaucrats would merely bypass the dysfunctional credit system and resort to pure money printing and helicopter drops. Tax rebates, gift cards, stimulus checks, etc--early forms of which we're seeing now.
While some of this will be hoarded by recipients (saving, debt paydown, etc), I suspect that the more of this funny money that is issued, the more time preferences will change to favor behavior geared towards preserving purchasing power.
The boldness of bureaucratic response to date leads me to believe that radical money printing measures are more likely than I previously imagined.
Humbly,
Matty
Building on Adam's comment, isn't the 'persistent deflation' thesis built on an assumption that the credit system is broken and will not be repaired anytime soon (i.e., reluctance of borrowers to borrow and lenders to lend)?
While I tend to agree with that assumption, why would policymakers, once they grasp that the credit system is indeed broken, 'give up' and walk away from the problem at that point? I would think that desperate bureaucrats would merely bypass the dysfunctional credit system and resort to pure money printing and helicopter drops. Tax rebates, gift cards, stimulus checks, etc--early forms of which we're seeing now.
While some of this will be hoarded by recipients (saving, debt paydown, etc), I suspect that the more of this funny money that is issued, the more time preferences will change to favor behavior geared towards preserving purchasing power.
The boldness of bureaucratic response to date leads me to believe that radical money printing measures are more likely than I previously imagined.
Humbly,
Matty
2009-03-12 18:53:46
Dont guess at your standing
....you can know your position in the world:
http://www.globalrichlist.com/
Enter your annual income...you will be surprised
http://www.globalrichlist.com/
Enter your annual income...you will be surprised
2009-03-12 19:56:13
Time For An Independent Global Rating Agency?
Pepe,
I think one of the ways this whole global bubble could have been prevented is with a global rating agency.
Not a global regulatory agency, but a rating agency.
If something like this could be set-up and funded by multiple countries, then it might, and I emphasize might, be possible to prevent future financial turmoil.
The basic idea is, if credit instruments could be rated properly, or at least a little more critically, then it would be harder to form a bubble. It would also allow for better global investment.
Of course, it would take quite a treaty to set this up, but the up-side could be huge in terms of trust anf global investment.
Just an opinion
I think one of the ways this whole global bubble could have been prevented is with a global rating agency.
Not a global regulatory agency, but a rating agency.
If something like this could be set-up and funded by multiple countries, then it might, and I emphasize might, be possible to prevent future financial turmoil.
The basic idea is, if credit instruments could be rated properly, or at least a little more critically, then it would be harder to form a bubble. It would also allow for better global investment.
Of course, it would take quite a treaty to set this up, but the up-side could be huge in terms of trust anf global investment.
Just an opinion
2009-03-12 20:04:00
Couple Explains Phase Two of the Banking Crisis
This morning an odd piece of economic news hit the wires. Over 74,000 homes were foreclosed upon in February. Why odd? Because most of the big home lenders enacted foreclosure moratoriums since January.
I think this surprise number is partially explained by Kevin's example. Say one of the spouses lost their job in the past three months. Remember, over 1.7 million jobs have been eliminated since November. Where do they begin cutting expenses? How about that mountain cabin that they have only used three times in the past year. They have no equity left in it anyway so they just send the bank the keys.
The bank, of course, is stunned. They made a good loan - 20% down, 30 year mortgage to a couple with plenty of income and probably a 750 credit score. Yet now they have the keys to a home with no equity. By the time they sell it, they will probably have taken a $30,000 - $40,000 hit on the foreclosed property. And voila - the banking crisis continues.
Like Kevin said, no one in this scenario has done anything particularly wrong. Sure, the couple should not have overpaid for a cabin but real estate had been rising for over 15 years straight and prices were accelerating higher, not going down. Unless you were a Minyanville subscriber or understood the nature of economic cycles the couple made rational choices. The bank, likewise, did nothing wrong. They made a good loan backed by both the real estate value, a big down payment and the incomes of two people.
This problem came about because of loose monetary policy that gave people a false sense of long-term stability. By not allowing a full recessions to occur, especially in 2001 - 2002, prices never had a chance to adjust downward. Now that the boom turned into a bust far worse than anyone could have imagined, everyone is surprised by their predicament - even the central bankers that should have known better from the start.
I think this surprise number is partially explained by Kevin's example. Say one of the spouses lost their job in the past three months. Remember, over 1.7 million jobs have been eliminated since November. Where do they begin cutting expenses? How about that mountain cabin that they have only used three times in the past year. They have no equity left in it anyway so they just send the bank the keys.
The bank, of course, is stunned. They made a good loan - 20% down, 30 year mortgage to a couple with plenty of income and probably a 750 credit score. Yet now they have the keys to a home with no equity. By the time they sell it, they will probably have taken a $30,000 - $40,000 hit on the foreclosed property. And voila - the banking crisis continues.
Like Kevin said, no one in this scenario has done anything particularly wrong. Sure, the couple should not have overpaid for a cabin but real estate had been rising for over 15 years straight and prices were accelerating higher, not going down. Unless you were a Minyanville subscriber or understood the nature of economic cycles the couple made rational choices. The bank, likewise, did nothing wrong. They made a good loan backed by both the real estate value, a big down payment and the incomes of two people.
This problem came about because of loose monetary policy that gave people a false sense of long-term stability. By not allowing a full recessions to occur, especially in 2001 - 2002, prices never had a chance to adjust downward. Now that the boom turned into a bust far worse than anyone could have imagined, everyone is surprised by their predicament - even the central bankers that should have known better from the start.
2009-03-12 20:10:44
inflation vs. deflation
by the traditional - and correct - definition of inflation we currently have lots of it. inflation has nothing to do with 'rising prices' - those are only one of the possible effects of inflation. inflation is an increase in the supply of money. currently, the supply of money is increasing by leaps and bounds. every single money supply measure is growing at accelerating rates of change. one of the narrowest, the TMS measure used by Austrian economists, shows year-over-year growth of 10%. so no matter how one slices it, there is now at least 10% MORE money in the US economy than there was one year ago. this is INflation. we will not just 'someday' have it again, we're having it NOW.
having said that, there is a large demand for money as debt is being paid down or worthless assets on financial institutions books require that liabilities are funded anew. as a result, much of the liquidity in the system is 'trapped' - much of it on the Fed's own balance sheet as it were.
now, how might we actually get 'rising prices' then? it depends on one thing only - the political decision to 'inflate even more'. Zimbabwe is actually a very instructive example. Zimbabwe has no banking system anymore - not in the traditional sense. its banks have stopped lending years ago. and yet, its inflation is in the sextillion annualized percentage range at last count. very simply, the central bank has 'monetized' an ever growing pile of government debt denominanted in Zim dollars, by simply printing up the physical banknotes.
at a later stage, once people realized what was afoot, the value of the currency started to decline even faster than the central bank could print up new notes. instead, checks with ludicrous numbers on them were circulating as a 'secondary' money supply.
the Federal Reserve can do the same thing anytime it wants.
so the real question is not 'how much phantom wealth is being lost and how much more is that than the proposed stimulus', the real question is: 'will the Fed decide to inflate for real'. if it so decides, then there will be hyperinflation, even if the economy and all lending and borrowing come to a complete standstill.
having said that, there is a large demand for money as debt is being paid down or worthless assets on financial institutions books require that liabilities are funded anew. as a result, much of the liquidity in the system is 'trapped' - much of it on the Fed's own balance sheet as it were.
now, how might we actually get 'rising prices' then? it depends on one thing only - the political decision to 'inflate even more'. Zimbabwe is actually a very instructive example. Zimbabwe has no banking system anymore - not in the traditional sense. its banks have stopped lending years ago. and yet, its inflation is in the sextillion annualized percentage range at last count. very simply, the central bank has 'monetized' an ever growing pile of government debt denominanted in Zim dollars, by simply printing up the physical banknotes.
at a later stage, once people realized what was afoot, the value of the currency started to decline even faster than the central bank could print up new notes. instead, checks with ludicrous numbers on them were circulating as a 'secondary' money supply.
the Federal Reserve can do the same thing anytime it wants.
so the real question is not 'how much phantom wealth is being lost and how much more is that than the proposed stimulus', the real question is: 'will the Fed decide to inflate for real'. if it so decides, then there will be hyperinflation, even if the economy and all lending and borrowing come to a complete standstill.
2009-03-12 20:32:29
Pep
What factors would you look for to signal the probable end to the deflationary unwind?
2009-03-12 20:33:23
Time For An Independent Global Rating Agency?
The Global Rating Agency would become as corrupt and political as the current National rating agencies, probably within a week of its formation.
2009-03-12 23:37:53
VIX below 200 dma, what does TD analysis say?
Prof. K, Now that VIX has broken down below its lesser triangle (43.0 - today at 10:20, retest and rejected by 11am), below its 200 dma and its Great Triangle (retest rejected 12:30) and has assumed a well-defined channel downward (hourly chart, sorry I have no way to post the chart here at MV), shouldn't we look to see it drop a nice fat 10 points (25%, height of the Triangle here) before a rise to retest the TD demand line (the lower line of the Great Triangle) and the 200 dma? If we get an open lower than 41.16 (today's close) and it trades lower, is that a "qualified breakdown" that confirms the next-lower TD Demand line (~24.2 here but rising) as area of attraction?
If so, doesn't that suggest we still have another 10-20% upside in the market before reality (adjusted mark-to-market will not save the world) and fear begins to reassert itself?
If so, doesn't that suggest we still have another 10-20% upside in the market before reality (adjusted mark-to-market will not save the world) and fear begins to reassert itself?
2009-03-12 23:53:49
No way I'm richer than dogbettors
Dude, I put in my income and it said I was #190,434,783. That puts me ahead of Herr Professor K! Heck, that puts me ahead of MOM!
I think that's a "We're here to PUMP YOU UP" site :)
I think that's a "We're here to PUMP YOU UP" site :)
2009-03-13 00:08:51
Definitely not outstripping dogbetting
That site wants my money! "You're so rich" they said, and asked me for money!! Grrr. #190 million and change my rear patootie!
Oh, that was my GROSS income. I put in the net income (you know, after income tax, Social Security Tax, Medicare Tax, deductions for mandatory "retirement" fund = Ponzi scheme a la Social Madoff Security, etcetera Etcetera ETCETERA as said the great Yul Brinner, King of Siam) and....
drumroll,,,
I'm #471,781,610. Shoot, I'm poorer than this whole country. Please make a donation.
Oh, that was my GROSS income. I put in the net income (you know, after income tax, Social Security Tax, Medicare Tax, deductions for mandatory "retirement" fund = Ponzi scheme a la Social Madoff Security, etcetera Etcetera ETCETERA as said the great Yul Brinner, King of Siam) and....
drumroll,,,
I'm #471,781,610. Shoot, I'm poorer than this whole country. Please make a donation.
2009-03-13 07:29:50
rankings and rantings
re: "...because they were misled by monetary policy makers as to the true underlying demand for assets...."
were?
;-)
ps - my relative financial ranking # is below a quantifiable threshold at this time - more a wave than particle, so to speak ;-)
were?
;-)
ps - my relative financial ranking # is below a quantifiable threshold at this time - more a wave than particle, so to speak ;-)
2009-03-13 09:38:47
inflation vs. deflation
Can we please end the Zimbabwe comparisons? The US economy vs. Zimbabwe, c'mon get real.
Inflation is NOT the increaae of money supply, it has to move into the economy, why do you think they measure velocity?
The money is buried in the vaults of banks, it isn't moving anywhere. UNLESS, you want to borrow, and can qualify, and those criteria have gone back to sanity.
How about credit cards? Max limits have come way down, ask your friends, and rates have gone up. No velocity there.
Think of it this way,what if they gave a " let's create even more debt to re-inflate the bubble dance, but nobody came?"
Inflation is NOT the increaae of money supply, it has to move into the economy, why do you think they measure velocity?
The money is buried in the vaults of banks, it isn't moving anywhere. UNLESS, you want to borrow, and can qualify, and those criteria have gone back to sanity.
How about credit cards? Max limits have come way down, ask your friends, and rates have gone up. No velocity there.
Think of it this way,what if they gave a " let's create even more debt to re-inflate the bubble dance, but nobody came?"
2009-03-13 09:47:15
Consider the effect of these two things
Ray, China is way way behind the US as is everyone. Not to belittle out national debt crisis, which has to be addressed, but a little perspective:
- 2007 GDP world-wide was $54T, US was $14T or 26%
- Japan was second at $4.4T
- US bigger then next four combined ( Japan; Germany; China ; UK ). They all have their own problems.
- yes, we have lost SOME of our industrial base; however, we are stil the largest in world, more then 2x Japan in second, and still larger than Japan and China combined.
The dollar isn't the worlds currency on some whim.
- 2007 GDP world-wide was $54T, US was $14T or 26%
- Japan was second at $4.4T
- US bigger then next four combined ( Japan; Germany; China ; UK ). They all have their own problems.
- yes, we have lost SOME of our industrial base; however, we are stil the largest in world, more then 2x Japan in second, and still larger than Japan and China combined.
The dollar isn't the worlds currency on some whim.
2009-03-13 10:30:14
Why should we put in our income. Isn't our net worth a better measurement of wealth
2009-03-13 10:31:57
Dang
Kevin,
Dang! I was 245,674,213th until I paid off my credit card, refied my home to a 15 year fixed from that 30 year fixed, and dropped my home phone service.
I should probably stop this deflationary spiral by taking out a HELOC, paying for that premium cable package, and going on a bender to VEGAS BABY!
The new street cred is being in debt! I going to max out that credit card, quit paying my mortgage, and buy a Hummer. If I were a woman I'd do the OctaMom to increase Gob'ment cheese. Before long I'd be getting my mortgage paid for and have the politicians and philanthropists fighting to make me their poster child.
If only I had planned ahead!
I really need that hyperinflation to kick in to make this work; when will that happen?
Dang! I was 245,674,213th until I paid off my credit card, refied my home to a 15 year fixed from that 30 year fixed, and dropped my home phone service.
I should probably stop this deflationary spiral by taking out a HELOC, paying for that premium cable package, and going on a bender to VEGAS BABY!
The new street cred is being in debt! I going to max out that credit card, quit paying my mortgage, and buy a Hummer. If I were a woman I'd do the OctaMom to increase Gob'ment cheese. Before long I'd be getting my mortgage paid for and have the politicians and philanthropists fighting to make me their poster child.
If only I had planned ahead!
I really need that hyperinflation to kick in to make this work; when will that happen?
2009-03-13 10:32:26
inflation vs. deflation
Bravo!!!
No matter which side of the debate you're on -- STOP using Zimbabwe as a comparison no matter on what level...
It is just absurd!
Sadly, there are more than just contributors that have used Zimbabwe in their commentaries--- This really would just become just another radical web blog-- and there are way too many out there as it is!
Unfortunately, I sense that some who critisize traditonal media (CNBC) feel the urge to do the mirror image of their rhetoric-- Both are extremes-- This is Minyanville-- let's rise to that occasion.
No matter which side of the debate you're on -- STOP using Zimbabwe as a comparison no matter on what level...
It is just absurd!
Sadly, there are more than just contributors that have used Zimbabwe in their commentaries--- This really would just become just another radical web blog-- and there are way too many out there as it is!
Unfortunately, I sense that some who critisize traditonal media (CNBC) feel the urge to do the mirror image of their rhetoric-- Both are extremes-- This is Minyanville-- let's rise to that occasion.
2009-03-13 11:00:49
inflation vs. deflation
Yes, we need to drop Zimbawbwe and use the Weimar Republic of Germany in the 20's.
Rather than war reparations, the U.S. has FED bond obligations to China and Social Security obligations.
Where's that whellbarrow?
2009-03-13 11:10:29
inflation vs. deflation
Zimbabwe and 1920's germany are completely different--- I specifically mention Z. In fact they should not even be on the same page, let alone the same sentence!
I'll be the first to stand up and look for the unthinkable to happen (never say it can't happen again)... but any comparison to Zimbabwe is ridiculous, intellectually and academically.
I'll be the first to stand up and look for the unthinkable to happen (never say it can't happen again)... but any comparison to Zimbabwe is ridiculous, intellectually and academically.
2009-03-13 11:26:23
Consider the effect of these two things
The China discussion certainly has two sides.... While I believe there is phenomenal growth yet to be seen in China-- They are not geared to be a consumption society-- Not yet. With over 1 billion people, having just a quarter of the population in the middle class (arguably) and woefully inadequate natural resources (namely water), still requires decades, not mere years to resolve.
For this reason China must depend on the west to mitigate the pressures of the transition.
On this front I agree with Depew... On the other hand, inflation can rear its ugly head just by population growth which was not much of an issue way back when. Then again there are amazing technological breakthroughs that can alleviate this.
The other major sticky point is political confrontation, read war--- Where, when, and the magnitude is a whole other debate.
As for the US almost forcefully encouraging consumption in not possible at this time. Can an old dog be taught new trick? Maybe.. but more importantly the youth of this country can be, and they already are much more frugal than the rest of us--
There's a lot to be said of 1-21 year olds in this country.
For this reason China must depend on the west to mitigate the pressures of the transition.
On this front I agree with Depew... On the other hand, inflation can rear its ugly head just by population growth which was not much of an issue way back when. Then again there are amazing technological breakthroughs that can alleviate this.
The other major sticky point is political confrontation, read war--- Where, when, and the magnitude is a whole other debate.
As for the US almost forcefully encouraging consumption in not possible at this time. Can an old dog be taught new trick? Maybe.. but more importantly the youth of this country can be, and they already are much more frugal than the rest of us--
There's a lot to be said of 1-21 year olds in this country.
2009-03-13 14:21:39
inflation vs. deflation
money velocity is a lagged effect of previous either tight or loose monetary policy. it has absolutely no meaning beyond that. Federal reserve policy was tight from 2004 to 2007 (this can be shown by the growth rate of TMS sharply declining during this period), so now velocity has fallen as a lagged effect of this policy tightness. the same goes for prices by the way. current policy is extremely loose and inflation of the money supply is in full swing. the effects will arrive once again with a lag. this is why so few people are able to make the connection between prices and inflation - the time lag. it takes time for inflation to percolate through the economy, and as i mentioned, rising prices (and by extension, rising velocity), are only ONE of the many possible effects. the worst effect of monetary inflation is actually that it leads to malinvestment of capital and intertemporal discoordination in the economy's production structure.
2009-03-13 14:22:05
Time For An Independent Global Rating Agency?
Bubbles are produced by delusional, manic societies. They will express their manias come hell or high water, and will sweep aside anything that stands in their way, using logical reasons, the way a crack addict can justify selling her baby. Manic impulses swept away Glass Steagal, the uptick rule, and all sorts of lessons "learned" during the Depression (the last one ,that is), just as all the regulations put into place, and the International Regulator you propose, will be swept away as "unnecessary due to modern Brain-Chip Implantation (BPI) technology" during your great great grand childrens Mars exploration Bubble.
Financial Markets are not mechanistic- they are ruled by Human folly.
The same protectionist measures which we "would never repeat" because they "caused the great depression" are already being proposed, and logically justified, by politicians and the masses.
If anyone needs proof that we never learn, and that we are no more sophisticated than humans were in 1929, 1800, or 5000 BC, just look to the slaughterhouses of the Wars we keep fighting. The blood soaked earth tires of us.
Financial Markets are not mechanistic- they are ruled by Human folly.
The same protectionist measures which we "would never repeat" because they "caused the great depression" are already being proposed, and logically justified, by politicians and the masses.
If anyone needs proof that we never learn, and that we are no more sophisticated than humans were in 1929, 1800, or 5000 BC, just look to the slaughterhouses of the Wars we keep fighting. The blood soaked earth tires of us.
2009-03-13 14:26:53
inflation vs. deflation
on the contrary, Zimbabwe is very pertinent, because it shows that a hyperinflation is possible even when the banking system is completely paralyzed. the deflationary argument largely rests on the banking system's inability to extend new credit and the unwillingness of borrowers to add to their outstanding credit balances.
the point is NOT that Zimbabwe and the US are the same or even on the same path, the point is merely to show that inflation in a fiat money system is a POLITICAL DECISION and has nothing whatsoever to do with how well or poorly the economy does, or whether your banks are insolvent etc. - it only depends on the willingness of the central bank to print enough money.
the point is NOT that Zimbabwe and the US are the same or even on the same path, the point is merely to show that inflation in a fiat money system is a POLITICAL DECISION and has nothing whatsoever to do with how well or poorly the economy does, or whether your banks are insolvent etc. - it only depends on the willingness of the central bank to print enough money.
2009-03-13 14:37:28
Time For An Independent Global Rating Agency?
it can't be denied that the psychology of market participants is a strong contributor to the forming of bubbles, but bubbles always initially spring forth from a too loose monetary policy. the solution to this problem is to take the control and production of money out of the hands of governments and return it to a full free market setting.
then the seed of bubbles could never be sown, because interest rates would be a pure expression of time preferences plus risk premia. before a 'bubble' could get our of hand, rising rates would put a stop to it.
this can not happen while a central bank controls interest rates and creates money from thin air. the public and politicians are always clamoring for an inflationary policy, because intially, it 'feels good' , even though it invariably destroys wealth.
the deflation of the recent bubble is really only a return to reality - what has been destroyed by the correction in asset prices was really 'phantom wealth'.
however, the credit and money inflation that was the impetus for the bubble did of course damage the pool of real wealth enormously.
we have consumed capital for decades. the only thing that can be done is to allow the market free reign so that it can rearrange the structure of capital as quickly as possible. unfortunately, governments all over the world have decided on massive intervention, bail-outs, etc., instead.
this will condemn us to a long lasting depression (Japan is contemporary empirical proof for the utter failure of this type of policy, but it can of course also be shown by rigorous theoretical analysis that government intervention in recessions makes them worse).
then the seed of bubbles could never be sown, because interest rates would be a pure expression of time preferences plus risk premia. before a 'bubble' could get our of hand, rising rates would put a stop to it.
this can not happen while a central bank controls interest rates and creates money from thin air. the public and politicians are always clamoring for an inflationary policy, because intially, it 'feels good' , even though it invariably destroys wealth.
the deflation of the recent bubble is really only a return to reality - what has been destroyed by the correction in asset prices was really 'phantom wealth'.
however, the credit and money inflation that was the impetus for the bubble did of course damage the pool of real wealth enormously.
we have consumed capital for decades. the only thing that can be done is to allow the market free reign so that it can rearrange the structure of capital as quickly as possible. unfortunately, governments all over the world have decided on massive intervention, bail-outs, etc., instead.
this will condemn us to a long lasting depression (Japan is contemporary empirical proof for the utter failure of this type of policy, but it can of course also be shown by rigorous theoretical analysis that government intervention in recessions makes them worse).
2009-03-13 14:38:09
clearer terminology
kevin, for the sake of clarity, and to avoid riling up the engineer types, calling the awful self re-enforcing events "ADVERSE feed-back loops" is preferable to using "negative feedback loops" which do NOT self- sustain. "Calling them "positive feed-back loops" would technically be correct, but will get you angry letters from people who think you are in favor of World-Wide collapse. And we know you are not, even if that might move you up the Forbes list.
2009-03-13 14:50:37
Time For An Independent Global Rating Agency?
I agree with most of what you say, but the Monetary authorities you mention are ALSO market participants, as are the regulators and everyone else who essentially share the samr rising and falling social mood. In laboratory experiments, with no central bank, market simulations consistently give rise to the creations of bubbles. Remember, bubbles are really just overblown expressions of the same optimism which makes us such a high achieving (for good and ill) species. The mechanism for the bubble will always appear, be it excess money, excess debt (which was what the so called "liquidity" of the past ten years really was),
or just excess trust in a scammer like John Law, Bernie Madoff, or Social Security. Was there a central bank during Hollands Tulip bubble? If so, I withdraw that question.
or just excess trust in a scammer like John Law, Bernie Madoff, or Social Security. Was there a central bank during Hollands Tulip bubble? If so, I withdraw that question.
2009-03-13 15:08:03
inflation vs. deflation
Inflation is not just the increase in money supply- -- the Austian model also includes the increase in credit and debt. The combination of the sharp decrease in the velocity of money and the vaporization of trillions in debt and credit- both vountary (people cutting up their charge cards) and involuntary (Chase cancelling HELOCS, bankruptcies), is, right now, creating the , admittedly very rare, Deflation. Another point that Mr. Robert Prechter points out is that hyper-inflations end with a deflationary collapse.
The real tragedy of all this is to those who will be starving and homeless, whichever scenario plays out. I hope we are all wrong.
The real tragedy of all this is to those who will be starving and homeless, whichever scenario plays out. I hope we are all wrong.
2009-03-13 15:20:52
inflation vs. deflation
So I guess Japan will experience inflation once the time lag is accounted for. I further guess two decades isn't sufficient. And one further guess, you still prefer to look to Zimbabwe for clues rather than the world's second largest economy, Japan.
2009-03-13 16:47:31
Inflation/Deflation Fence
Kevin's comment about having one nation strong enough to become a factor in the inflation scenario of today, led to your point about China being strong enough to be that very nation. China has a vested interest in the status-quo as they are expanding their economy, under Communism, without an act of war, and arre moving rapidly into the modern era, albeit on bicycles with i-Pods. Neither the Dollar or the Yuan are on the gold standard, and so they can keep parity with each other if they wish, through central bank or central Party intervention. China has already decided to keep the Yuan weak to promote exports via the Hong Kong model. They have the wealth to cause turbulence, but even for idealogical reasons, they are not employing it. I believe they value the gains made in world trade too much to jeopardize them. We overprint, they overprint, the European Central Bank overprints, and so on. To the issue of drought-induced inflation. That is the wording of a textbook, that defined price changes in the first chapter and will always call an increase in price, inflation, and a decrease as, deflation or deflationary. Milton Friedman expressed that, "Inflation is always and everywhere a monetary effect." If you consider: Two dollars put in circulation where there should only be one. Price increases would occur in every single item of purchase, from thumbtacks to thermonuclear weapons, candy bars to Rovers on Mars, typing paper, toilet paper, newspaper, wallpaper, and all paper. You could not find anything to buy that HAD NOT gone up. Price rise or decline might be useful terms to get away from the tyranny of the textbook, so that real Inflation/Deflation might stand out.
2009-03-13 17:17:55
inflation vs. deflation
Pater, are you saying that an increase in the money supply always results in an increase in velocity? My understanding is that velocity refers to the turnover rate of whatever supply of money there is, and in both the fundamental event that has occured- a credit collapse, and in the growing negative phsychology of a Depression, that prospensity to spend has vastly diminished, and again, combined with the destruction of trillions in credit and debt, is resulting in a rare instance of Deflation.
Do you agree with Bernanke's belief that with fiat money we can never experience Delation? And, to ask less sarcastically than another poster, what about Japan? They printed trillions of Yen and offered free money (which admittedly did fuel bubbles elsewhere), but has had flat to negative inflation for 20 years. I personally believe Gold will go over $5,000 dollars within next 2-15 years, and don't doubt that the FED will manage to create hyper-inflation at some point, but I believe we are in the early rounds of a Deflationary Depression right now.
Do you agree with Bernanke's belief that with fiat money we can never experience Delation? And, to ask less sarcastically than another poster, what about Japan? They printed trillions of Yen and offered free money (which admittedly did fuel bubbles elsewhere), but has had flat to negative inflation for 20 years. I personally believe Gold will go over $5,000 dollars within next 2-15 years, and don't doubt that the FED will manage to create hyper-inflation at some point, but I believe we are in the early rounds of a Deflationary Depression right now.
2009-03-13 17:25:29
Time For An Independent Global Rating Agency?
In actual fact, recent historical research shows that there was an inflation in money preceding the tulipomania. Holland debased its currency. you can read all about it here:
http://mises.org/story/2564
http://mises.org/story/2564
2009-03-13 17:33:56
Depew Deflation
Matt, preserving purchasing power is valued only at the individual level, whereas Congress just has to write a different dollar amount on the Bill they are drafting. Tell the rest of us how to preserve purchasing power of the dollar, when the overprinting of currency is out of our individual control because of the U.S. fiat money system. Putting money under the mattress allows it to lose value because of real inflation. Tell me to buy gold and I reply, "Get rid of my money to preserve the buying power of my money. Did I hear that correctly?" ( I really do understand moving to a stable asset, then coming back when the calamity has run its course.) Hoarding of money is hard for me to understand. Only a very wealthy person can accept a large amount of cash and sequester it from the economy around them. Even the banks of the Cayman Islands make loans with the funds that are deposited there, and that re-introduction of currency into the marketplace is what happens to nearly every dollar Bernanke drops on us. The poor/indebted spend fastest, with the velocity of the money being only slightly slower as you move up the financial food-chain. Given that there are only two schools of thought competing for implementation as solutions for the present crisis, consider how long a "tax-cuts-only" approach would take to get us out of the mire. My Republican friends are too wealthy for their own good. They assume that a tax cut will leave more discretionary income whith which to make house payments, but they ignore the need for basic employment, on which the tax is levied. My long affiliation with the Republican party is in hiatus. They are out of touch. They altered rules that now make it hard just to put repairs in place. Home prices rose, following the ballistic arc of Bernanke's now-invisible M-3, and we sit here and speak of "phantom-valuations" in housing, and how to readjust prices downward to a new "reality" and not just to some arbitrary level which would punish the folks that behaved well through all of this bubble time frame. You wrote of the "persistent deflation" of no-lend, no-borrow. When we define how money is created in our economy, we do it through creation of debt. Borrow for a car and the loan "creates" the money for the dealerhip, on the strength of your pledge to repay. No-loan, No-money.
So. How do you restart a stalled economy. (I think I hear the whup-whup-whup of the rotor blades in the distance, and... yep, it's Ben B. overhead in the Check-Chopper.) I hate the notion of debt on top of debt, but there is no eraser on this pencil, so we keep writing. Walt.
So. How do you restart a stalled economy. (I think I hear the whup-whup-whup of the rotor blades in the distance, and... yep, it's Ben B. overhead in the Check-Chopper.) I hate the notion of debt on top of debt, but there is no eraser on this pencil, so we keep writing. Walt.
2009-03-13 17:38:00
inflation vs. deflation
one must consider the following: every cent of money that has been created thus far STILL EXISTS. the only way this money can be destoyed is by paying back debt, or by letting depository institutions fail in such a manner that deposits are actually wiped out. defaults destroy the claims of creditors, but they do not destroy the fiat money that was created when the debt first came into existence.
this explains why the supply of money is highly unlikely to shrink, and is in fact not shrinking at the moment either (as an aside, it has been noted today by Mr. Seddacca that the US total credit market debt to GDP ratio is at a new all time high of 370%) - on the contrary, as i mentioned, the supply of money is increasing very fast at the moment.
now, an argument could well be made that the danger of a future deflation has increased - by a combination of people and corporations paying back debt and banks unwilling to create new debt/deposits.
not if the governments of the world have anything to say about it though. to wit, Mr. Obama's recent budget, the biggest expansion in government debt in peace time ever. to wit, the Bank of England deciding that it will engage in quantitative easing, i.e. monetization of existing debt.
the rational bet is to expect governments to more than make up for any reduction in outstanding private sector debt. the Federal Reserve has increased its balance sheet by well over 100% in a mere three months. there is nothing that keeps it from continuing to increase it. Mr. Bernanke has told us so himself - he will do ANYTHING to avert deflation. if we are to take him by his word, then we must conclude that that is exactly what he is going to do. so far, he is succeeding (contrary to 1931, which would otherwise be broadly comparable to 2009 so far, the money supply is not shrinking, but growing. not even commercial bank lending is shrinking as of yet - it is only growing at a slower pace than previously. the data are all in the public realm).
this explains why the supply of money is highly unlikely to shrink, and is in fact not shrinking at the moment either (as an aside, it has been noted today by Mr. Seddacca that the US total credit market debt to GDP ratio is at a new all time high of 370%) - on the contrary, as i mentioned, the supply of money is increasing very fast at the moment.
now, an argument could well be made that the danger of a future deflation has increased - by a combination of people and corporations paying back debt and banks unwilling to create new debt/deposits.
not if the governments of the world have anything to say about it though. to wit, Mr. Obama's recent budget, the biggest expansion in government debt in peace time ever. to wit, the Bank of England deciding that it will engage in quantitative easing, i.e. monetization of existing debt.
the rational bet is to expect governments to more than make up for any reduction in outstanding private sector debt. the Federal Reserve has increased its balance sheet by well over 100% in a mere three months. there is nothing that keeps it from continuing to increase it. Mr. Bernanke has told us so himself - he will do ANYTHING to avert deflation. if we are to take him by his word, then we must conclude that that is exactly what he is going to do. so far, he is succeeding (contrary to 1931, which would otherwise be broadly comparable to 2009 so far, the money supply is not shrinking, but growing. not even commercial bank lending is shrinking as of yet - it is only growing at a slower pace than previously. the data are all in the public realm).
2009-03-13 18:05:59
Time For An Independent Global Rating Agency?
Thank you, I will check that site for that.
My thinking comes from the socionomic perspective, which would imply that the same shared social mood that causes bubbles causes lax regulation,loose money, a willingness of lenders to lend to bad credits, and a belief by those optimistic borrowers that they will be able to pay off those loans through increased income, ever increasing home values, job promotions etc. Socionomics would enable one to predict the coming regulations, protectionism, increasing societal polarity and other negative expressions of shared social mood by the Herd, which when these events occur, will be described by mainstream economists and the media as the CAUSE of a declining stock market, and extrapolated in linear fashion into a never ending downward spiral, when in fact these negative manifestations will suddenly turn when social mood has turned.
My thinking comes from the socionomic perspective, which would imply that the same shared social mood that causes bubbles causes lax regulation,loose money, a willingness of lenders to lend to bad credits, and a belief by those optimistic borrowers that they will be able to pay off those loans through increased income, ever increasing home values, job promotions etc. Socionomics would enable one to predict the coming regulations, protectionism, increasing societal polarity and other negative expressions of shared social mood by the Herd, which when these events occur, will be described by mainstream economists and the media as the CAUSE of a declining stock market, and extrapolated in linear fashion into a never ending downward spiral, when in fact these negative manifestations will suddenly turn when social mood has turned.
2009-03-13 18:22:29
inflation vs. deflation
there is not only the supply of money to consider, but also the demand for it. since many people and organizations find themselves with higher leverage than they counted on as a result of the asset price bust, there is currently a strong demand for money. however, we all increase our cash balances only up to a point - namely the point at which we deem to have accounted for all the uncertainties regarding our future money needs. now, while this increase in the demand for cash balances - which is also a lagged effect of the previous tight Fed policy, which after all was the trigger for the bust - without a doubt slows down velocity, it is still the case that the money supply increases concurrently. once everybody's cash balances have reached their comfort level, concerns will switch toward the increase in money supply that has happened in the meantime.
as to the velocity question - the quantity equation M*V=P*T makes no sense. all money that exists in the economy is held by someone, always. the velocity of circulation of money merely reflects the velocity of circulation of goods on the other side - after all, money is exchanged for goods. in what way is this transactional velocity supposed to influence prices? V is not an independent variable. whether for instance the same house is bought and sold two times a year or ten times a year should not change its price , per se.
it is true that when the value of money is expected to decrease (because of an inflationary policy being recognized by the public), people will try to get rid of their cash balances, and yet, someone will always end up holding the money. the point is: velocity is an EFFECT, not a CAUSE. it can not 'cause' prices to rise or fall. it is a side effect of the individual expectations holders of money have regarding the future value of money, respecitvely their need to hold cash balances.
furthermore, as regards the exchange of money for goods, it is quite clear that velocity can not for example increase without limit if it is the case that everybody tries to get rid of their cash balances and exchange them for goods. the production of goods would have to also be speeded up concurrently for this to work. one major source of rising and falling velocity are securities markets such as the stock exchange. the turnover of shares is almost constantly rising, but as we see on the stock exchange, the velocity of turnover has NOTHING to with whether prices are rising or falling. they can fall just as well on increasing velocity as they can rise.
in short, we can watch velocity as a possible symptom of people's value decisions regarding money (whether they value goods over money or vice versa), since often when they offer more money for goods upon recognition of the falling value of money velocity will increase concurrently. it is an effect, and not a cause - and relative to monetary policy it is an effect that always arrives with a large and variable time lag.
as to the velocity question - the quantity equation M*V=P*T makes no sense. all money that exists in the economy is held by someone, always. the velocity of circulation of money merely reflects the velocity of circulation of goods on the other side - after all, money is exchanged for goods. in what way is this transactional velocity supposed to influence prices? V is not an independent variable. whether for instance the same house is bought and sold two times a year or ten times a year should not change its price , per se.
it is true that when the value of money is expected to decrease (because of an inflationary policy being recognized by the public), people will try to get rid of their cash balances, and yet, someone will always end up holding the money. the point is: velocity is an EFFECT, not a CAUSE. it can not 'cause' prices to rise or fall. it is a side effect of the individual expectations holders of money have regarding the future value of money, respecitvely their need to hold cash balances.
furthermore, as regards the exchange of money for goods, it is quite clear that velocity can not for example increase without limit if it is the case that everybody tries to get rid of their cash balances and exchange them for goods. the production of goods would have to also be speeded up concurrently for this to work. one major source of rising and falling velocity are securities markets such as the stock exchange. the turnover of shares is almost constantly rising, but as we see on the stock exchange, the velocity of turnover has NOTHING to with whether prices are rising or falling. they can fall just as well on increasing velocity as they can rise.
in short, we can watch velocity as a possible symptom of people's value decisions regarding money (whether they value goods over money or vice versa), since often when they offer more money for goods upon recognition of the falling value of money velocity will increase concurrently. it is an effect, and not a cause - and relative to monetary policy it is an effect that always arrives with a large and variable time lag.
2009-03-13 19:30:39
inflation vs. deflation
broad supply money growth in Japan has been minuscule. a temporary large increase in the monetary base failed to translate into broader money growth, and has been taken back in the meatime (base money was decreased by 25% in 2006). this is not the case in the US now - every money supply measure, from the narrowest to the broadest is growing in double digits (Japan's m2 growth was at around 2,5% most of the time over the past two decades).
Also, Bernanke's determination to inflate may be greater than that of the BoJ was. I'm not a mind reader of course - he may decide that the value of the dollar should not be jeopardized too much - but i go by what he has said and written and done THUS FAR.
Also, Bernanke's determination to inflate may be greater than that of the BoJ was. I'm not a mind reader of course - he may decide that the value of the dollar should not be jeopardized too much - but i go by what he has said and written and done THUS FAR.
2009-03-13 19:37:32
Time For An Independent Global Rating Agency?
I'm actually partial to the socionomic perspective. Indeed, the bearish social mood will influence all the institutions, politcians , etc. just as it influences the population at large. in a way this social mood creates its own fundamentals. nevertheless, one can not just ignore the facts behind the bubble and its inevitable bursting. the huge inflation in money and credit that has enabled the bubble would not have been possible in a free market without a central bank. this is not to say that there would not have been cyclical ups and downs, but they would likely have been more frequent and have had far less amplitude. as an example, consider that the stock market has been rising in real terms for well over 100 years prior to the creation of the Fed (this is to say, in terms of gold), while currently, it is in real terms back to where it was 90 years ago. there was progress in the stock market in real terms before fiat money credit bubbles were enabled, but none since.
2009-03-13 20:25:18
Depew Deflation
Appreciate the thoughts, Walt. My sense is that if the credit system is broken (which is necessary for deflation in our present day system), then bureaucrats will eventually try to circumvent it and put money directly in people's hands. Were that to occur, then the result would be a confetti-fest of inflation.
Matt
Matt
2009-03-13 20:35:03
inflation vs. deflation
Velocity is an effect, not a cause. Agreed. Why then is velocity so low? The cause is that on a relative scale to a year prior and before, no one either doesn't want to borrow more, or cannot qualify . It is that simple. Businesses are cotracting, not borrowing to expand into a declining market. Consumers are tapped out: wealth destroyed, cash flow ( under and unemployment ) reduced, and the oft-mentioned seachange in attitude towards consumption.
It appears to me your primary argument is that Bernanke says he wants to avoid deflation at all costs. I surmise you believe he actually has the power to do that.
Irving Fisher and a host of noted economists disagree. They have stated monetry policy has little influence during a debt unwind period such as we are in.
As large as the bailouts and stimulus packages seem, they are trifling to the degree of the debt that has to be unwound.
They need to just get out of the way and let it occur.
It appears to me your primary argument is that Bernanke says he wants to avoid deflation at all costs. I surmise you believe he actually has the power to do that.
Irving Fisher and a host of noted economists disagree. They have stated monetry policy has little influence during a debt unwind period such as we are in.
As large as the bailouts and stimulus packages seem, they are trifling to the degree of the debt that has to be unwound.
They need to just get out of the way and let it occur.
2009-03-14 15:11:24
When Doing Things Right Turns Out Wrong
The loss in home equity should not matter much to those who were "doing things right." As long as they can make their payments, they should be fine. If anything, these payments should be lower than before because of the interest rate drops.
A mitigating factor is whether one or both of them lose their jobs. However, if they did not establish a fund for this before buying a second house, then I would argue that they weren't doing things right. Anyone who decides to buy a second house should still have enough to live on for a year without a job, even with the market's plunge.
A mitigating factor is whether one or both of them lose their jobs. However, if they did not establish a fund for this before buying a second house, then I would argue that they weren't doing things right. Anyone who decides to buy a second house should still have enough to live on for a year without a job, even with the market's plunge.
2009-03-14 23:11:22
inflation vs. deflation
Hey Pat,
I believe if you look at the reality of ONE business, in a particular field, say construction for arguments sake, and then multiply it out many thousands of time, you get ONE piece of the puzzle.
Commercial construction is almost always financed, and the banks do it because the economy is growing. Ditto, home construction. Home remodels, are often paid out of equity one way or another.
ALL OF THAT IS GONE for ONE business (that relies on this), (x) times (how many) ?.
A "good" economist will understand that number is important, plus all the other affected businesses, multiplied out to reflect the actual reality.
I can tell you, from experience, from an historically recession-proof area, it aint pretty.
I believe if you look at the reality of ONE business, in a particular field, say construction for arguments sake, and then multiply it out many thousands of time, you get ONE piece of the puzzle.
Commercial construction is almost always financed, and the banks do it because the economy is growing. Ditto, home construction. Home remodels, are often paid out of equity one way or another.
ALL OF THAT IS GONE for ONE business (that relies on this), (x) times (how many) ?.
A "good" economist will understand that number is important, plus all the other affected businesses, multiplied out to reflect the actual reality.
I can tell you, from experience, from an historically recession-proof area, it aint pretty.
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