'The consumer isn't overleveraged -- the middle class is'- merrill lynch

[Kadriana]

Re: 'The consumer isn't overleveraged -- the middle class is'- merrill lynch

This seems part of the apparent confusion. If one reads carefully it's pretty clear that EJ does not consider inflation to be "an event"...it's a process. He's said that in so many words. Everyone should relax. Your cost of living will be increasing plenty fast enough, plenty soon enough...

This is where I get a little confused. On one hand it's a process and slowly happens. On the other hand, it's strictly inflation and there is no stagflation or biflation or whatever you feel like calling it. There seems like a like of debate between inflationists and deflationists. Inflationists seem to point to increse in food and energy costs. Deflationists point to a decrease in spending. So is it a process but strictly all inflation?

[jk]

Re: 'The consumer isn't overleveraged -- the middle class is'- merrill lynch

. There seems like a like of debate between inflationists and deflationists. Inflationists seem to point to increse in food and energy costs. Deflationists point to a decrease in spending. So is it a process but strictly all inflation?

if energy and food are more expensive [inflation], then there is less income left over for discretionary spending [deflation?- no]. discretionary goods will have reduced volume [e.g. fewer sales of big flat screen tv's], and likely higher prices [smaller market, fewer economies of scale, fewer producers with less competition].

[cjppjc]

Re: 'The consumer isn't overleveraged -- the middle class is'- merrill lynch

got something new to say about "biflation"? fine. to me it looked like someone introducing this so-called concept as if it were an exciting new item to be analyzed. perhaps it was new to that person. so i suggested first reviewing what had already been written about it on this site, before going forward. is that a problem?

believe me, i am even more tired of the inflation/deflation discussion. it has been discussed in dozens, probably hundreds, of threads and certainly thousands of posts on this site, and heaven knows to even greater lengths adding in all the other places on the internet.

if someone has something new to say, great, by all means say it.

Something new to say? I doubt it. I did go back and search on the word biflation. The first use of the word on the free forum was back in April of this year. I saw your link to the paid section in reference to it. Looks like you were tired of it by then.

I enjoy the inflation/deflation arguement. Mostly because I can be convinced by the last post. The recent exchange between Bart and redress was educational. Today I learned annual change rate is not a good thing to look at if you believe a turning point has occured. Economics is not my strong suit. Patience and kindness is.;)

Always good hooking swords with you doctor.

[Kadriana]

Re: 'The consumer isn't overleveraged -- the middle class is'- merrill lynch

if energy and food are more expensive [inflation], then there is less income left over for discretionary spending [deflation?- no]. discretionary goods will have reduced volume [e.g. fewer sales of big flat screen tv's], and likely higher prices [smaller market, fewer economies of scale, fewer producers with less competition].

Don't we have to go through a period where a bunch of businesses go out of business so you have fewer competitors? Can TGIF's, Applebees, Chilli's. etc all make it if gas goes up to $5 a gallon. The same with stores. Doesn't K-mart have to kick the bucket before we see true inflation and we have full scale Poom? Is that part of the process EJ talks about and is it expected to be over in the next 3-6 months? If it is a process, then is biflation kind of thrown into the mix until inventories, including the amount of businesses that exist, decreasing part of the process. I'm guessing all these places aren't going out of business in the next 6 months. Biflation in a way is the beginning of the Poom?

[jk]

Re: 'The consumer isn't overleveraged -- the middle class is'- merrill lynch

here's something i wrote in an attempt to sort out my own thinking. according to my hard drive, it was last modified in jan '05 [before i discovered itulip] and thus refers to market conditions at that time.



Flation: causes and consequences

The financial markets are in turmoil, stuggling to predict the future of flation. Will we have de-flation? Or in-flation? I suggest that we have plain old flation viewed on a macro level, and dys-flation on a micro level.

Costs as measured by the cpi or ppi are essentially steady, although commodity indices are up. The lack of price movement across the economy in general I’m going to call plain old flation. One might think that such steadiness bespeaks tranquility in the economy but, looking more closely, that is not at all the case.

Instead we see areas of falling prices, especially in manufactured goods: cars, televisions, cell phones, computers, cameras, sneakers, clothes, anything that can be imported or competes with something imported from low wage but relatively high productivity countries, most notably China. Thus manufacturing jobs keep disappearing in the Unitied States. Overcapacity remaining from the ‘90’s tech build out exacerbates this problem. Also, jobs delivering services which can be delivered electronically by phone, fax, or modem – help desks, customer services for credit card companies, banks and airlines, etc – are also being exported, most commonly to the large, relatively well-educated, English speaking and low-paid population of India. These are the areas of American deflation.

Locally delivered services, on the other hand, cannot be imported. Housing, medical care, education and tuition, state and local government services, are all local products, and their prices are rising steadily. These are our sources of local inflation.

Think of water bubbling out of springs in some areas and being sucked down drains in others. This is the balancing act of the American economy.

Now price movements in general have never moved in lock-step, but I believe that the extremes that we are witnessing between the different areas of the economy represent a dangerous dysregulation of the economy and its price signalling function. This problem is only in part post-bubble stress disorder because of overinvestment in technology and mal-investment in financial services. Changes in world trade, globalization, would have pushed in this direction in any event, but the bubble made it worse. I suggest we call the current price situation dys-flation: widely disparate changes in the general price level in different sectors of the economy.

Where do we go from here? I’ve seen described essentially 3 prototypical scenarios – the Japanese, the Argentine, and a muddle through. The Japanese scenario predicts deflation – likely triggered by debt deflation as the rates of credit card and mortgage delinquincies continue to rise from current high levels, and major corporate bankruptcies continue to turn billions of dollars in corporate bonds into waste paper. The Argentine scenario focuses on Fed Governor Bernanke’s now (in)famous “printing press” speech, in which he took a blood oath to print any amount of money, and buy any number of assets, to prevent the Japanese scenario. Now the Fed is not about to start buying government long bonds to support the mortgage market, for example, without provocation. So the Argentine scenario I think presupposes that we swing close to the Japanese scenario, perhaps via a crisis (how about Fannie Mae as the next LTCM?) scaring the Fed to start buying bonds, futures, indicies, and so on to pump up the financial markets and pump bucks into the economy. These dollars will go somewhere, and in general liquidity chases the rising asset. It’s hard to predict what that might be in this scenario but one imagines safety being a prime consideration, leading to Treasuries and hard assets – real estate, perhaps, and gold. Thus we can have falling interest rates and rising gold prices. The muddle-through scenario says that the bubbling springs and sucking drains will remain in rough balance, allowing a gradual write down of redundant assets, a deleveraging from the enormous debt that has been accumulated by individuals and corporations (the U.S. government increases its debt levels again as the private sector reduces its debt), and adjustments in the composition of our economy to provide for different kinds of jobs for people who would formerly have worked producing now-imported goods and services.

What assets win in each of these scenarios? Japanese scenario: government bonds do well as the Fed keeps firing its few remaining bullets. Of course the dollar may drift down, but not too fast because a.) it’s the reserve currency and other central banks won’t let it go down too fast (witness recent Japanese intervention to hold down the value of the yen), b.) its competitors are so unattactive (except gold, perhaps). Argentine- gold, hard assets, currencies. Muddle through- not equities, at least not most U.S. equities because profits will remain under great pressure and p-e’s will contract as investors become progressively discouraged, one by one. Defense and security will continue to be growth industries. Foreign equities might have some interest in the longer run. In the muddle-through scenario bond prices must eventually stop going up, meaning that mortgage rates must eventually stop going down. Note that “According to FNMA, equity cash-outs from home values amounted to a staggering $130-140 billion. This amount equaled more than half of the increase in consumer spending in 2002.” This demand will have to be replaced by increased government spending, renewed corporate investment, and/or rising consumer incomes. My guess: government spending.