Turning on a Dime: The New Frugality
By Mike Mish Shedlock Jan 15, 2009 10:00 am
Changed social mood will define the future.
Baby Boomers Unprepared for Tomorrow
Boomers have known only inflationary or reflationary conditions for most, if not all of their conscious lives. Here's the pattern: Want, work, borrow, spend, enjoy, and worry about bills tomorrow because tomorrow never comes.
But tomorrow is dawning. The bills are due, and boomers are now entering their golden years with a need to consume what they perceived would be a treasure chest of accumulated wealth - wealth that would allow them to sustain their inflationary lifestyles to life's end.
However, their assets have now vanished in a giant deflationary two-step of collapsing home prices and a failing stock market. Note that these are symptoms of deflation, not proof of it.
However, 15 out of 15 things one might expect to see happen during deflation are happening now, as Humpty Dumpty on Inflation details.
Living standards and associated expectations among the lower working class and poor in the western nations have been raised to levels that won't likely be maintained during a secular deflationary crisis, let alone permit the lifestyles of the upper working class, professional middle class, and wealthy to remain intact.
Is Deflation a Government Choice?
Most still believe in the Fed's ability to inflate another bubble. They're mistaken. Instead, I offer a Crash Course for Ben Bernanke.
Alan Greenspan had the wind of consumers' willingness and ability to go deeper in debt at his back. Bernanke has the wind of boomers fearing retirement -- in the midst of falling home prices and impaired bank-balance sheets -- blowing stiffly in his face. There's no cure for what ails us other than time and price. And with the aforementioned attitude changes, the biggest, most reckless, global credit-expansion experiment the world has ever seen is coming to an end. Central banks are powerless to do anything about it.
I know that, in theory, a determined government can always produce hyperinflation if it wants. But if it was as simple in practice, yields wouldn't be at 0%. Right now, the important thing to note is that even with the massive "stimulus," thus far, it's been dwarfed by the implosion of credit and the trillions of dollars worth of writedowns and bankruptcies that are coming. Japan tried for years to combat deflation and failed.
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Reply
2009-01-15 10:37:00
In agreement...
...with everything you have outlined, as I have followed you for quite some time, both through MV and other avenues. Good job.
Had already seen Hendry's video, and found it equally informative and entertaining. Finished moving everything into Treasuries/bonds last July, with just a bit of dry powder for occasional forays into SDS.
Know that some of us boomers actually listened to our depression-era parents and lived beneath our means throughout the unsustainable economic expansion of the last few decades. Though modest, everything here is PD/4.
Still, the future has never been more ominous, and I doubt that even the most paid-up little savers like myself are immune. For the moment, though, I must say that having stumbled upon MV has been the single most important discovery (for my personal well-being) that I have ever made.
Waiting for the other side....and I suspect it will be quite a while.
Had already seen Hendry's video, and found it equally informative and entertaining. Finished moving everything into Treasuries/bonds last July, with just a bit of dry powder for occasional forays into SDS.
Know that some of us boomers actually listened to our depression-era parents and lived beneath our means throughout the unsustainable economic expansion of the last few decades. Though modest, everything here is PD/4.
Still, the future has never been more ominous, and I doubt that even the most paid-up little savers like myself are immune. For the moment, though, I must say that having stumbled upon MV has been the single most important discovery (for my personal well-being) that I have ever made.
Waiting for the other side....and I suspect it will be quite a while.
2009-01-15 10:42:26
some believe
While I am not an eloquent speaker, I have one success story.
I use an older escrow agent for my real estate transactions and he LISTENED to me last summer and got out of the stock market entirely with his 401k and retirement plans.
I didn't know this until recently when he fessed up to me.
He calculates saving around $200,000 because of it.
I am humbled and grateful that even a few listen.
I use an older escrow agent for my real estate transactions and he LISTENED to me last summer and got out of the stock market entirely with his 401k and retirement plans.
I didn't know this until recently when he fessed up to me.
He calculates saving around $200,000 because of it.
I am humbled and grateful that even a few listen.
2009-01-15 11:41:29
Time horizon?
So it's been stated that the next 2 years are going to be rough, but we're almost guaranteed inflation in the long-run. So for those of us with a long-term horizon, would it be worth dollar cost averaging into something like TBT over the next 2-3 years instead of trying to time the bottom, so that when inflation does come back, we're well situated? I know that the risks of a Japanese style deflation decade are there, but with the US Gov't owing such a huge percentage of debt to other countries/entities, it seems like inflation should come back far faster than Japan, who owed it all to itself...
2009-01-15 13:32:08
Japan or Depression
When talking of deflation, exactly what do you have in mind.
People talk of Japans lost decade (or 2) but a look a the numbers (if I remember correctly) shows just a few years here and there with the CPI never going down more than 2% a year.
The US depression was different, several years of price declines exceeding 5%, one year close to 10%.
Is any one out there suggesting that when the teachers in my school district get a new 3yr contract the yearly changes will be -3%, -5%, -2%. or even one year of 0% ?
As a boomer on the leading edge (edge of the boom) who has payed off the mortgage, saved, invested, and then bailed out in 04-05 I would like nothing more than a real good deflation where the value of money really does go up, and not just a deflation in a few asset classes. I have had a number of 0% raises over the years and took pay cuts because of job changes, but it just seems that some folks have very sticky incomes that will just not come down much, and until they do I will not believe this deflation talk.
Where will my money be spent going forward? Well, I started late so I have kids to put through school, will that become cheaper going forward? (and a lot of boomers on the tail edge have this same expense now). Real estate taxes are probably my largest single expense (NY). Will they go down? My wife has aging parents, will the cost (medical, nursing) to help them out go down?
Do you think I will spend less $ in 10 years to heat my house, will my electric bill go down?
I was vested in a small pension when I left a job (not indexed to inflation) 15 yrs ago, but I have to wait 7 years until I can start collecting. Does anybody think that in those 7 years deflation will come close to fixing the damage that inflation has done to my pensions purchasing power? In 7 years I think my pension will not even pay the taxes on the house I live in. (taxes would take 58% of it now)
People talk of Japans lost decade (or 2) but a look a the numbers (if I remember correctly) shows just a few years here and there with the CPI never going down more than 2% a year.
The US depression was different, several years of price declines exceeding 5%, one year close to 10%.
Is any one out there suggesting that when the teachers in my school district get a new 3yr contract the yearly changes will be -3%, -5%, -2%. or even one year of 0% ?
As a boomer on the leading edge (edge of the boom) who has payed off the mortgage, saved, invested, and then bailed out in 04-05 I would like nothing more than a real good deflation where the value of money really does go up, and not just a deflation in a few asset classes. I have had a number of 0% raises over the years and took pay cuts because of job changes, but it just seems that some folks have very sticky incomes that will just not come down much, and until they do I will not believe this deflation talk.
Where will my money be spent going forward? Well, I started late so I have kids to put through school, will that become cheaper going forward? (and a lot of boomers on the tail edge have this same expense now). Real estate taxes are probably my largest single expense (NY). Will they go down? My wife has aging parents, will the cost (medical, nursing) to help them out go down?
Do you think I will spend less $ in 10 years to heat my house, will my electric bill go down?
I was vested in a small pension when I left a job (not indexed to inflation) 15 yrs ago, but I have to wait 7 years until I can start collecting. Does anybody think that in those 7 years deflation will come close to fixing the damage that inflation has done to my pensions purchasing power? In 7 years I think my pension will not even pay the taxes on the house I live in. (taxes would take 58% of it now)
2009-01-15 13:58:32
3rd Historical Scenario
Increasingly, we're connecting our current situation to 1930s US and 1990s Japan. Why have we not fleshed out 1920s Germany situation?
1930s US creditor/saver deflation
1990s Japan creditor/saver deflation
1920s Germany debtor/spender hyperinflation
Seems to me current US macro context more toward 1920s Germany. I need to do more work here to be sure, but the mechanism that caused Germany situation to head in the other direction seems to merit closer scrutiny.
1930s US creditor/saver deflation
1990s Japan creditor/saver deflation
1920s Germany debtor/spender hyperinflation
Seems to me current US macro context more toward 1920s Germany. I need to do more work here to be sure, but the mechanism that caused Germany situation to head in the other direction seems to merit closer scrutiny.
2009-01-15 14:21:54
Definition of a bubble
Mish:
"When it comes to Treasuries, it's not the next 30 years that matters; rather, it's the next 30 months."
Is this not what people said about home prices? 'Who cares if these prices are unsustainable for 30 years? I'll sell in 5 years to a greater fool and make a killing.'
Going long during a bubble works well until suddenly the strategy stops working.
Moral of the story: Don't buy any investment that you wouldn't be willing to hold 10 years if you had to. Isn't this one lesson we should have learned after the real estate crash?
"When it comes to Treasuries, it's not the next 30 years that matters; rather, it's the next 30 months."
Is this not what people said about home prices? 'Who cares if these prices are unsustainable for 30 years? I'll sell in 5 years to a greater fool and make a killing.'
Going long during a bubble works well until suddenly the strategy stops working.
Moral of the story: Don't buy any investment that you wouldn't be willing to hold 10 years if you had to. Isn't this one lesson we should have learned after the real estate crash?
2009-01-15 17:24:30
Currency?
Currency in your wallet for the last year has appreciated in terms of equities, bonds, tv's, cars and a host of other things. I'd say cash is worth about 20% more than it was a year ago. Untaxed too. It is possible we will experience declines in medical care, food and such. I'll bet you can make a better deal with your plastic surgeon right now. So, in my view, deflation is here now. Maybe it will accelerate, maybe it will slow but become more pervasive, and maybe the government will scare us out of money and we will be off to the races. It makes some sense to keep an eye out for all possibilities. But grinding deflation is the scenario least expected. Poor baby boomers. This may be their time of trial - their golden years!
2009-01-15 18:26:26
Deflation vs. Devalued
I think this was covered in the many useful comments, but I want to sum up:
The money available in the system is valued based upon how much there is vs. how much stuff people want vs. whether or not they can get it (jobs).
If people are losing jobs and can't get paid, they won't take on more debt. Prices drop accordingly. The real issue is whether prices drop more (money increases in value) or the government supplies too much money (money decreases in value).
If there are enough resources to keep people working and paying taxes, there might be some moderation of the value of the money because the people would pay taxes (money comes out of the market while being put in by government), but if the jobs aren't there, hyperdevaluation of the money is the result.
Inflation or deflation are really related to prices of goods. As long as there are tons of goods available, the prices moderate themselves. If there is more money available, but no more food, then people start throwing wheelbarrows full of money at the plate glass windows and taking everything they want.
Predicting what WILL happen is as easy as asking, "Will the government do anything that implies we are getting paid too much for jobs that we don't need done?"
Since that answer is no, then the government will continue to dump money into the system to maintain the illusion that every job is useful and perpetual growth is possible.
The money available in the system is valued based upon how much there is vs. how much stuff people want vs. whether or not they can get it (jobs).
If people are losing jobs and can't get paid, they won't take on more debt. Prices drop accordingly. The real issue is whether prices drop more (money increases in value) or the government supplies too much money (money decreases in value).
If there are enough resources to keep people working and paying taxes, there might be some moderation of the value of the money because the people would pay taxes (money comes out of the market while being put in by government), but if the jobs aren't there, hyperdevaluation of the money is the result.
Inflation or deflation are really related to prices of goods. As long as there are tons of goods available, the prices moderate themselves. If there is more money available, but no more food, then people start throwing wheelbarrows full of money at the plate glass windows and taking everything they want.
Predicting what WILL happen is as easy as asking, "Will the government do anything that implies we are getting paid too much for jobs that we don't need done?"
Since that answer is no, then the government will continue to dump money into the system to maintain the illusion that every job is useful and perpetual growth is possible.
2009-01-15 19:00:39
3rd Historical Scenario
fascinating thoughts. the potential for this economic situation to be used by the powers that be are tremendous.
how many wars must we fight to fight our way out of this one???
2009-01-15 20:15:15
3rd Historical Scenario
Matt -
I'd be interested in reading an article on what you've come up with. I like making sure my personal theories pass the sniff test.
Here's why I think that the Weirmar republic is not a good comparison:
Germany at the end of WWI was a conquered country. Not only was Germany asked to rebuild her own country, but the world demanded reparations for the war in their own currencies.
What they had is a now small economy (remember that the war decimated the young men who create economies) with a tremendous real (rebuilding) and artificial (reparations/debt) burden.
The easy and most logical path in that situation is to print money. At least you can get rid of the external debts quickly.
The way I was taught it, WWII was considered to be in direct result of how the winners handled Germany after WWI. Part of the idea that the US was pumping money directly into all of Europe and Japan through the Marshall was in part to prevent the conditions of the WWI. Obviously, the cold war was in full swing then and the Marshall plan was also politically motivated, but I digress :)
In contrast, there are several parallels to this time with the Great Depression and Japan. Our parallels with Japan includes a large,important currency (how does hyperinflation happen with a reserve currency??) and the timing of an aging working age population.
The roaring 20's in the US was a time of great credit expansion and technology explosion (in less than a decade most household had or had access to: radios, record players, small electric devices, and most notably cars.) The Internet revolution represents the same type of productivity jump - and certainly no one can argue the credit expansion.
My theory (mostly from the Ville here) is that deflation will be with us for a while. Unless the government directly hands people money, it will have little luck in creating inflation, perhaps for another decade or so.
I'd be interested in reading an article on what you've come up with. I like making sure my personal theories pass the sniff test.
Here's why I think that the Weirmar republic is not a good comparison:
Germany at the end of WWI was a conquered country. Not only was Germany asked to rebuild her own country, but the world demanded reparations for the war in their own currencies.
What they had is a now small economy (remember that the war decimated the young men who create economies) with a tremendous real (rebuilding) and artificial (reparations/debt) burden.
The easy and most logical path in that situation is to print money. At least you can get rid of the external debts quickly.
The way I was taught it, WWII was considered to be in direct result of how the winners handled Germany after WWI. Part of the idea that the US was pumping money directly into all of Europe and Japan through the Marshall was in part to prevent the conditions of the WWI. Obviously, the cold war was in full swing then and the Marshall plan was also politically motivated, but I digress :)
In contrast, there are several parallels to this time with the Great Depression and Japan. Our parallels with Japan includes a large,important currency (how does hyperinflation happen with a reserve currency??) and the timing of an aging working age population.
The roaring 20's in the US was a time of great credit expansion and technology explosion (in less than a decade most household had or had access to: radios, record players, small electric devices, and most notably cars.) The Internet revolution represents the same type of productivity jump - and certainly no one can argue the credit expansion.
My theory (mostly from the Ville here) is that deflation will be with us for a while. Unless the government directly hands people money, it will have little luck in creating inflation, perhaps for another decade or so.
2009-01-15 20:41:24
Japan now, Germany then
so how is Japan 90-present different than germany, 20's?
the savings rate as well as a higher degree of monetary restraint?
--
at what point canl the government 'open the floodgates' and overwhelm even the bank's unwillingness to lend?
when they open the us postal bank?
--
todd-o keeps obliquely referring to the wishbone world, jumping the shark, a sudden monetary shift as well as geopololitical turmoil.
seems that there is something in the aethers.... a disturbance in the force?
2009-01-15 21:28:39
Turning on a Dime...
Thanks Mish, have been holding both EDV (Long, UST's, and TBT (Ultra-short UST's) due my continuing problem with ADD, (as well as so much conflicting ("BUBBLE"?/"DEFLATION"?)!!!
Think you have got the right idea...30 months or 30 years...and DEflation IS most likely for much of that first period...worry/prepare for the remainder a couple years from now.
Think you have got the right idea...30 months or 30 years...and DEflation IS most likely for much of that first period...worry/prepare for the remainder a couple years from now.
2009-01-15 22:24:21
3rd Historical Scenario
I think this comes back to the "Public" versus "Private" confidence , that Martin Armstrong wrote about.
We have demand destruction and excess private debt (being shifted to public). This is the flight to safety (Public confidence) and leads to deflation. Inflation occurs when there is no flight to safety, and there is growth. This allows the government to get away with monetization. Here it would be a case of Private confidence.
Read, ItsJustTimeMartinArmstrong.pdf (on the web)
The economic analysis is excellent. The cycle theories are much harder to prove (one problem with any theory is that there are many con men who start with solid analysis, and then deviate wildly. So in this case I read the economic theory and found it quite good- and skimmed over the rest. Maybe someone can prove the timing theories)
We have demand destruction and excess private debt (being shifted to public). This is the flight to safety (Public confidence) and leads to deflation. Inflation occurs when there is no flight to safety, and there is growth. This allows the government to get away with monetization. Here it would be a case of Private confidence.
Read, ItsJustTimeMartinArmstrong.pdf (on the web)
The economic analysis is excellent. The cycle theories are much harder to prove (one problem with any theory is that there are many con men who start with solid analysis, and then deviate wildly. So in this case I read the economic theory and found it quite good- and skimmed over the rest. Maybe someone can prove the timing theories)
2009-01-15 22:42:54
3rd Historical Scenario
Hi Amy.
Truth be told, I've been leaning 'deflation' for yrs. But the sheer size of this unprecedented globally coordinated stimulus and our debtor status has me wondering.
I'm early in investigating the Weimar situation, but one thing I 'think' I see is that Germany post WWI initially relied on the world buying German country bonds to make boost their economy and make reparations. When creditors shut off the spigot, then things got ugly.
More to come, but the more I read, I'm surprised by the parallels I can draw.
If you didn't catch Minyan Peter's Buzz post from yesterday, his comment largely captures the gist of what I'm beginning to wonder:
http://www.minyanville.com/buzz/bookmark.php?id=99547&s=m&context=search&chars=1
matty
Truth be told, I've been leaning 'deflation' for yrs. But the sheer size of this unprecedented globally coordinated stimulus and our debtor status has me wondering.
I'm early in investigating the Weimar situation, but one thing I 'think' I see is that Germany post WWI initially relied on the world buying German country bonds to make boost their economy and make reparations. When creditors shut off the spigot, then things got ugly.
More to come, but the more I read, I'm surprised by the parallels I can draw.
If you didn't catch Minyan Peter's Buzz post from yesterday, his comment largely captures the gist of what I'm beginning to wonder:
http://www.minyanville.com/buzz/bookmark.php?id=99547&s=m&context=search&chars=1
matty
2009-01-16 09:40:11
this is what jumps out at me
"Debt of all forms went from a generational low of 110% of GDP in 1974 to 360% of GDP recently. We've supersized everything. In 25 years it will be back at 110% of GDP. That has profound implications on valuations and asset classes. It puts a downward damper on everything."
looks like that equals a 250%GDP decrease in spending over the next 25 years...
wow!
looks like that equals a 250%GDP decrease in spending over the next 25 years...
wow!
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