Examining the Elemental Structure of Deflation
The Elements of Deflation
One of the advantages of travel is that it gives you time away from the tyranny of the computer to think. (Am I the only one who feels like I’m drinking information through a fire hose?) But getting the information is important too, as it gives you something to think about. And I've been thinking a lot lately about deflation.
I’m always asked whether I think we’ll see inflation or deflation. And I always answer, “Yes.” And I’m not trying to be funny. I think the primary forces in the developed world now are deflationary. When asked if I don’t think that the Fed monetizing debt of all kinds won’t eventually be inflationary, I answer, “We better hope so!”
Let’s quickly summarize some of the ideas from the last few months. Just as water is made up of two parts hydrogen to one part oxygen, so deflation has its own elemental structure.
The first element is Rising Unemployment. There’s never been a sustained inflationary period without wage inflation. Wages are basically flat and falling. With 9.8% unemployment, 7% underemployed (temporary), and another 3-4% off the radar screen -- because they’re so discouraged, they’re not even looking for jobs, and thus, aren’t counted as unemployed (who made up these rules?) -- it’s hard to see how wage inflation is in our near future.
Think about this: Only a few years ago, less than 1 in 16 Americans was unemployed or underemployed. Today it’s 1 in 5. That’s a staggering, overwhelming statistic. Mind-numbing, even.
Keynes said you should stimulate the economy in recessions in order to bring back consumer spending. That’s not going to happen this time. As my friends at GaveKal point out, this time we’ll have to have an Austrian (economic) recovery, or a business-spending recovery. When I’m with them in December at their conference, my argument will be: “Where are we going to get business-investment spending when banks aren’t lending and capacity utilization is at an all-time low?” This, of course, leads the Keynesians to jump in and say, “The government has to step up and jump-start consumption!” Which means more debt. Wash. Rinse. Repeat.
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I've read many of your friend's 'Daily Reckoning' e-mails, and I agree that he has a great talent for retrieving cultural and historical references, and turning some amusing phrases. But the message is always the same, and the glib tone gets tiresome. You have an interesting perspective on him however. I think optimism does change everything, and as you imply, the reasons for it are the inevitable gains in all forms of productivity, led by the U.S.
