best deflation argument I've seen

[touchring]

Re: best deflation argument I've seen

Do you really think this situation is going to end as neatly as deflation, followed by inflation?

I'm thinking more along the lines of Germany 1923 replete with food riots, creditors repossessing the Saar (Alaska), rise of ultra-nationalist extremist groups, etc.

How will inflation solve California's shortfall? Eventually, someone must pay for the shortfall, and that will be in taxes or layoffs.

[c1ue]

Re: best deflation argument I've seen

How will inflation solve California's shortfall? Eventually, someone must pay for the shortfall, and that will be in taxes or layoffs.

If the federal government were to say make every $1 starting in 2010 equal to $100 along with language preventing the adjustment of existing contracts, the California budget problem would be fixed right quick: 100x the income and the previous outlays.

As for who will pay, surely you know that ultimately it is always the people who pay? The only question is how much, how long, and how painful it will be.

From my view the answer to each of these questions continues to grow.

[bart]

Re: best deflation argument I've seen

those are the two that everyone ignores... and ej brings up over and over and over. are you and i the only two who actually read the articles here?

There are others, and also other factors you didn't mention... but not as many are learning as what I would hope. *sigh*

At least the article covered some of the facts cleanly & clearly, and that's way above where we were a few years ago.

[occdude]

Re: best deflation argument I've seen

This may be, but one thing to consider: the US already is the largest economy in the world. By extension the US government has the greatest economic power of any single organization in the world.

But size doesn't always help. When you are the largest debtor and must borrow money, then being large is a bad thing.

The point about the balance of payments crisis is that there may not be enough money to fund US debt demands irregardless of the market's desires.

The 'bond vigilantes' or whatever thus may be irrelevant.

In contrast the US government as the largest economic power organization similarly holds unprecedented ability to inflate. That we haven't seen the inflation yet doesn't mean it cannot - think on this for a minute:

The $12.8T that was used to 'stabilize' the US markets and economy in 2008 is 23% of the entire world's GDP ($54.6T).

The net $12.8T assistance plus $14T in US GDP = 66% of the rest of the world's GDP($40.6T).

On top of this we're talking $2T deficit this year, $2T deficit next year, $5T deficit net throughout Obama's term.

Do you really think this situation is going to end as neatly as deflation, followed by inflation?

I'm thinking more along the lines of Germany 1923 replete with food riots, creditors repossessing the Saar (Alaska), rise of ultra-nationalist extremist groups, etc.

Anybody arguing for inflation now is making in my opinion the "efficient government action hypothesis". That is to say, your government, the same one that runs the post office, DMV, and other associated efficient entities, is more effcient than Mr. Market.

The Market drops 10T off in a quarter and the government adds 1t over five years. Who is winning? Not the government. except for this recent blip over energy prices in the CPI (with the energy prices now correcting) there aint no inflation YET!! The government will be the "Johnny come lately" to this party. As for social strife. It won't be inflation that brings them to the street first, it will be deflation via unemployment and decreasing asset values that are gonna make people feel a whole lot more poor. That will give people a lot of time for introspection which can only be a bad thing for an existentialist, superficial and spoiled populace.

I'll give you one wild card however, and that is the Fed. No body knows whats going on over there, but there is pressure to find out. This should put the kibosh on the Fed from its more egregious behavior. The unholy duo of treasury and Fed will get their act together however in the future, to craft a "Frankensteinian" economy that stands just long enough to fall.

[Kadriana]

Re: best deflation argument I've seen

The one thing I'm a little confused about is that I see people drastically cutting back around me. Now, my understanding is inflation will happen even if people slow down their spending because of our money printing and other countries loosing faith in our currency. So, are we just going to see massive unemployment. People around me are cutting back from 4 cars to 2 cars. They're making food from scratch instead of eating out. They're buying kid's clothes at garage sales or goodwill instead of Wal-mart. I know one person whose husband salary was cut back so much that she's having a hard time figuring out how to pay the bills never mind buying any extras. Since so much of our economy depends on consuming, what happens if a large percentage of Americans stop shopping, eating out, move back in with their parents, etc?

[snakela]

Re: best deflation argument I've seen

A lot of these arguments rest on CPI. Here is a question for the community: during a "POOM" phase will it be reflected in CPI, as that is adjusted/manipulated.

Reason I bring this up, the blogger that originally led me to iTulip (https://self-evident.org/) recently posted on inflation swaps which are based on CPI. Apparently traders don't think it will show up, in CPI at least.

[ASH]

Re: best deflation argument I've seen

A lot of these arguments rest on CPI. Here is a question for the community: during a "POOM" phase will it be reflected in CPI, as that is adjusted/manipulated.

Reason I bring this up, the blogger that originally led me to iTulip (https://self-evident.org/) recently posted on inflation swaps which are based on CPI. Apparently traders don't think it will show up, in CPI at least.

When someone like John Williams says that the methodology used to calculate CPI has been manipulated to understate price inflation, he is still talking about documented changes to procedure that are made from time to time, rather than continuous fabrication. It's not that the CPI is "made up" month to month for the sake of political convenience, it's that the rules used to calculate CPI change from year to year (and not every year) for the sake of political convenience. POOM is both big and abrupt, so I think it ought to show up in CPI. CPI may mismeasure the impact on prices -- and the methodology could very well be adjusted some more to minimize the apparent inflation -- but I cannot conceive of how a shock like POOM could fail to surface in CPI. After all, wasn't CPI inflation rising prior to the KA? We can argue about how fast it was rising, but the metric did respond to inflationary pressures which were much more mild than an actual POOM would be. Why, then, would POOM be masked? I think the manipulation of CPI has the effect of attenuating the measured inflation, but not of concealing it outright.

[snakela]

Re: best deflation argument I've seen

Maybe not masked but severly muffled. Looking at the history of CPI it appears that CPI is always a "sedated" version of PPI.

I guess the question then becomes what levels will cause riots in the streets / Gold to break back through 1K and keep climbing?

[ASH]

Re: best deflation argument I've seen

The one thing I'm a little confused about is that I see people drastically cutting back around me. Now, my understanding is inflation will happen even if people slow down their spending because of our money printing and other countries loosing faith in our currency. So, are we just going to see massive unemployment. People around me are cutting back from 4 cars to 2 cars. They're making food from scratch instead of eating out. They're buying kid's clothes at garage sales or goodwill instead of Wal-mart. I know one person whose husband salary was cut back so much that she's having a hard time figuring out how to pay the bills never mind buying any extras. Since so much of our economy depends on consuming, what happens if a large percentage of Americans stop shopping, eating out, move back in with their parents, etc?

I think we are going to see higher unemployment, combined with higher prices. That's what "inflationary depression" means to me.

I think the confusing thing about such a prediction is the idea that if people aren't consuming, then demand for what had been consumed should fall, and therefore so should prices. Likewise, if people aren't working, they likely aren't worthy of credit, and so won't be borrowing credit/money into existence. So, whence can come the "too many dollars chasing not enough stuff"?

One thing that has been pointed out on iTulip before is that the supply of stuff can change. Initially, during the deflationary "KA" phase, there is an oversupply relative to demand, and prices should indeed fall. Then suppliers and retailers go out of business, production is throttled back until supply better matches demand at a price for which production is profitable, and you end up with lower price competition among the surviving retailers.

I also look at the cost-push inflation associated with a POOM-type currency event as impacting supply. The relative strength of the dollar and America's access to foreign credit has allowed us to import energy and manufactured goods cheaply, as priced in our currency. If there is a currency-dislocating POOM, then the supply of imported goods -- or those with imported inputs -- that is available at the old dollar pricing will essentially collapse. The supply offered for sale in America will therefore contract until a new price level at which production (or importation) is profitable is once again reached. This will happen even if from an external perspective (outside the US), the physical supply of energy and goods may be the same.

Lastly, the inflationary expectation as regards employment, falling consumer demand, and ultimately the supply of money, is that the government will step in to support some of that demand in a political response to rising unemployment, and in doing so will cause inflation and will risk bringing about POOM. From a policy standpoint, the government cannot allow consumption (a.k.a. private sector demand) to fall to its natural level, given the circumstances -- that would close the deflationary feedback loop. So, once again, the inflation versus deflation debate boils down to (a) will the government attempt to avoid a deflationary spiral?, and (b) will it be successful?.

[flintlock]

Re: best deflation argument I've seen

Are we going to see an odd mix of inflation and deflation depending what segment of the economy we are talking about? Wages, Luxury items, Real Estate, all will continue to deflate? More essential stuff like energy and food will inflate? That's about all that I can figure out in this.

[grapejelly]

Re: best deflation argument I've seen

The one thing I'm a little confused about is that I see people drastically cutting back around me. Now, my understanding is inflation will happen even if people slow down their spending because of our money printing and other countries loosing faith in our currency. So, are we just going to see massive unemployment. People around me are cutting back from 4 cars to 2 cars. They're making food from scratch instead of eating out. They're buying kid's clothes at garage sales or goodwill instead of Wal-mart. I know one person whose husband salary was cut back so much that she's having a hard time figuring out how to pay the bills never mind buying any extras. Since so much of our economy depends on consuming, what happens if a large percentage of Americans stop shopping, eating out, move back in with their parents, etc?

Inflations cause prices to rise, so living standards decline and people buy used stuff or fish around in garbage cans for food and old clothes.

We are about to have terrible inflation, but it may be delayed a year from now as there is a 2 year lag quite often between big expansion in fiat, and the results being seen in the "real" economy.

But meanwhile, people will continue cutting back.

[flow5]

Re: best deflation argument I've seen

If the FOMC wanted the insured member banks to lend they would lower the renumeration rate on excess reserves. The current rate is higher than the actual FFR has been trading.

Excess reserves represent idle unused lending capacity. They are sterile. The FED has offsetted changes in the FED's balance sheet expansion with excess reserves.

Contrary to the pundits, the "monetary base" is not a base for the expansion of money (legal reserves are).

Income velocity is a contrived figure. The transactions velocity of bank deposits represents the turnover of money:

The transactions concept of money velocity (Vt) has its roots in Irving Fischer’s equation of exchange (PT = MV), where (1) M equals the volume of means-of-payment money; (2) V, the rate of turnover of this money; (3) T, the volume of transactions units. The “econometric” people don’t like the equation because it is impossible to calculate P and T. Presumably therefore the equation lacks validity. Actually the equation is a truism – to sell 100 bushels of wheat (T) at $4 a bushel (P) requires the exchange of $400 (M) once (V), or $200 twice, etc.

The real impact of monetary demand on the prices of goods and serves requires the analysis of “monetary flows”, and the only valid velocity figure in calculating monetary flows is Vt. Income velocity (Vi) is a contrived figure (Vi = Nominal GDP/M). The product of MVI is obviously nominal GDP. So where does that leave us? In an economic sea without a rudder or an anchor. A rise in nominal GDP can be the result of (1) an increased rate of monetary flows (MVt) (which by definition the Keynesians have excluded from their analysis), (2) an increase in real GDP, (3) an increasing number of housewives selling their labor in the marketplace, etc. The income velocity approach obviously provides no tool by which we can dissect and explain the inflation process.

To the Keynesians, aggregate demand is nominal GDP, the demand for serves (human) and final goods. This concept excludes the common sense conclusion that the inflation process begins at the beginning (with raw material prices and processing costs at all stages of production) and continues through to the end.

Admittedly the data for Vt are flowed. So are nearly all economic statistics, but that does not preclude us from using them. An educated estimate is better than no estimate at all. For example, we know that the international balance of payments balances – debits equal credits, payments equal receipts, etc. The Department of Commerce statistics do not prove this, so in order to make their statistics balance, they put in an “errors and omission “balance figure. The triumph of good theory over inadequate facts.


...Obviously funds used for short selling do not contribute to a rise in prices. But we do know that to ignore the aggregate effect of money flows on prices is to ignore the inflation process. And to dismiss the concept of Vt by saying it is meaningless (that people can only spend their income once) is to ignore the fact that Vt is a function of three factors: (1) the number of transactions; (2) the prices of goods and services; (3) the volume of M. Inflation analysis cannot be limited to the volume of wages and salaries spent. To do so is to overlook the principal "engine" of inflation - which is of course, the volume of credit (new money) created by the Reserve and the commercial banks, plus the expenditure rate (velocity) of these funds. Also overlooked is the effect of the expenditure of the savings of the non-bank public on prices. The (MVt) figure encompasses the total effect of all these money flows.

Some people prefer the devil theory of inflation: “It’s (Peak Oil’s, or Peak Debt's) fault. This approach ignores the fact that the evidence of inflation is represented by "actual" prices in the marketplace. The “administered” prices would not be the “actual” market prices were they not “validated” by (MVt)

[ASH]

Re: best deflation argument I've seen

Are we going to see an odd mix of inflation and deflation depending what segment of the economy we are talking about? Wages, Luxury items, Real Estate, all will continue to deflate? More essential stuff like energy and food will inflate? That's about all that I can figure out in this.

I'm thinking that the wages of those who have jobs will inflate, too, once the price of essentials starts to rise. Labor doesn't have as much pricing power as it used to, but it's not zero. However, I think wages will lag prices, and fail to keep pace. So, in terms of real purchasing power, wages will "deflate"; in relative dollar terms, I think they will rise. After all, some wage inflation has to occur in order for consumers to pay off their debts in devalued dollars.

I'm not sure about the luxury market. (But hell -- I'm not sure about anything... just sharing my thoughts.) My guess is that the "aspirational" demand for luxury goods will collapse, and that the remaining demand for luxury goods from the truly wealthy will be supplied by a smaller group of surviving retailers, such that luxury goods too will eventually inflate. Initially one might see some good deals on luxury items while there's oversupply and retailers are going out of business, but in the long run, prices rise thanks to adjustment of supply and reduced competition -- the dynamic discussed by iTulip heading into Q1.

Seems like real asset prices linked to FIRE should continue to deflate in this scenario until they reach their non-credit-supercharged valuation, whatever that is. However, I don't discount the value of land in a highly inflationary environment, so there's got to be a floor at some point. I'll trust to wiser heads to identify that point.

So, in my opinion, the mixture of inflation and deflation is to be expected earlier, during the transition period; later, I think it's mostly going to be inflation. I even expect that asset prices linked to FIRE will bottom in nominal terms fairly soon after inflation surfaces.

[ASH]

Re: best deflation argument I've seen

Do you really think this situation is going to end as neatly as deflation, followed by inflation?

That, I think, is the big picture -- and the big picture is the important aspect of this crisis.

Your good offices serve to remind us to believe our eyes, and not to discount the life-changing implications of what is transpiring.

[Kadriana]

Re: best deflation argument I've seen

Inflations cause prices to rise, so living standards decline and people buy used stuff or fish around in garbage cans for food and old clothes.

We are about to have terrible inflation, but it may be delayed a year from now as there is a 2 year lag quite often between big expansion in fiat, and the results being seen in the "real" economy.

But meanwhile, people will continue cutting back.

I can see in two years, or even a year there being inflation but it's hard for me to imagine it happening before the end of the year except for a couple essentials like food and energy. Maybe people are mainly referring to the essentials when they talk about inflation so soon and not things like houses, cars, clothing, etc. Well, whatever happens during the next couple years, it's not going to be fun. I figure the best thing to do is prepare for inflation now since it's a given that it will come eventually.