Mish predicts no inflation Poom

[Adeptus]

In today's post..."Brink of Debt Disaster"

http://globaleconomicanalysis.blogsp...-disaster.html

Mish concludes:

Attempts to inflate out of this mess, cannot possibly work for three reasons.

1) The burden of consumer debt will only decrease under inflation if employment recovers, wages rapidly rise, and outsourcing of jobs to India and China stops. The odds of that happening are extremely slim.

2) Government cannot really "create" any jobs per se. It can raise taxes and shift private sector jobs creation to government jobs creation (typically a malinvestment), and it can bring production and consumption forward for those jobs that are genuinely needed (filling potholes), but once the potholes are filled, one has to ask the question, "What will we do for an encore?"

3) Even if by some miracle the economy rapidly picks up, interest rates will rise. Homeowners who now are seeing rates fall, will once again be put in jeopardy by rising rates. Furthermore, interest on the national debt will soar. The National Debt is $10.7 Trillion as of January 7, 2009. As interest on the national debt rises, so will taxes have to rise to cover it. In Fiscal Year 2008, the U. S. Government spent $412 Billion of your money on interest payments to the holders of the National Debt.

In short, there is no free lunch of inflating consumer debt away. Attempts to do so will only create bigger problems elsewhere.

(CONCLUSION)
Expect to see a long-term period of extremely slow growth with the economy slipping into and out of deflation and recessions for years, to come. This is the path of Japan, not the path of the Weimar Republic.

So basically no inflation POOM?

I would love to read itulip's counter arguements to the above 3 points.

Thanks,
Adeptus

[Spartacus]

Re: Mish predicts no inflation Poom

He's posted stuff he can point to later & claim he was right all along, regardless of the result.

One of his posts about a month ago said that there will be inflation "later ".

After changing his own story for years, and being called out on it by several commentators, he started accusing others of changing their story.

So basically no inflation POOM?
...
Adeptus

[sunskyfan]

Re: Mish predicts no inflation Poom

I am comming to the conclusion that we already have had the POOM. Asset and commodities ran out of control for a while indicating that POOM but there was no way to inflate wages with it so consumer debt was increased to match buying power with prices. That covered up what we normaly see as inflation. Obviously that only works for finite period of time evidently with a pretty abrupt end. With debt maxed out you must either write off the debt or inflate wages some how. It doesn't look like writing off the debt has worked. There might be no other way to do that except to dole money out. May I have my $80k welfare check since my union no longer exists? I doubt that will happen. Depression 2.0 here we come.

[FRED]

Re: Mish predicts no inflation Poom

See Anatomy of a credit crunch induced bankruptcy.

[GRG55]

Re: Mish predicts no inflation Poom

In today's post..."Brink of Debt Disaster"

http://globaleconomicanalysis.blogsp...-disaster.html

Mish concludes:



So basically no inflation POOM?

I would love to read itulip's counter arguements to the above 3 points.

Thanks,
Adeptus

This is the first thing that's wrong with his analysis:

The burden of consumer debt will only decrease under inflation if employment recovers, wages rapidly rise, and outsourcing of jobs to India and China stops. The odds of that happening are extremely slim.

1. Employment will recover. It always has. Even after the Great Depression. And Uncle Sam will make sure it does this time even if he has to hire every single living breathing American citizen by nationalizing the entire financial system, or [for those unfortunates who are not bankers] send them off to fight another foreign war, or build some "shovel-ready" infrastructure in influential Congressperson's Districts.
2. Creating wage inflation is one of the easiest things they can do. Increase the minimum wage. Increase the barriers to immigration some more. Give more legal power to the self-regulated professions to restrict entry and reduce mobility. Pander to the public sector unions. The list goes on. And sounds entirely plausible given pronouncements we've already heard from the new Administration
3. Exactly how are all those jobs in 1. above going to be outsourced? Does Mish really think there isn't going to be a heavy duty "buy America" component to trillions of stimulus?

Mish seems to think there is only one factor that will play out here - deflation. He ignores that the real world outcome will most likely be a combination of things working together that ends the debt deflation cycle, of which inflating the currency is just one element.

[bart]

Re: Mish predicts no inflation Poom

I'm answering mostly in Mish's dubious journalism mode, with an extra dollop of sarcasm.




Attempts to inflate out of this mess, cannot possibly work for three reasons.
Anything that starts out with a platitude like "cannot possibly work" is suspect at best and reminds me of "The four most dangerous words in investing are, 'It's different this time.'"
-- Sir John Templeton

1) The burden of consumer debt will only decrease under inflation if employment recovers, wages rapidly rise, and outsourcing of jobs to India and China stops. The odds of that happening are extremely slim.
Employment never recovers, wages never rise and trends never reverse.

2) Government cannot really "create" any jobs per se. It can raise taxes and shift private sector jobs creation to government jobs creation (typically a malinvestment), and it can bring production and consumption forward for those jobs that are genuinely needed (filling potholes), but once the potholes are filled, one has to ask the question, "What will we do for an encore?"
Of course government can never create jobs - that's why the WPA and many other similar programs didn't exist, and why government doesn't employ more people now than at any other time in history.
Inflation never works to restart an economy.
Malinvestments have only happened recently and have not been going on for decades.
Nothing is wrong with infrastructure or the US except potholes.


3) Even if by some miracle the economy rapidly picks up, interest rates will rise. Homeowners who now are seeing rates fall, will once again be put in jeopardy by rising rates. Furthermore, interest on the national debt will soar. The National Debt is $10.7 Trillion as of January 7, 2009. As interest on the national debt rises, so will taxes have to rise to cover it. In Fiscal Year 2008, the U. S. Government spent $412 Billion of your money on interest payments to the holders of the National Debt.

In short, there is no free lunch of inflating consumer debt away. Attempts to do so will only create bigger problems elsewhere.
Interest rates have never been higher than now.
Countries and economies never survive rising interest rates.
Monetary and fiscal policy excesses have never created bigger problems later.


(CONCLUSION)
Expect to see a long-term period of extremely slow growth with the economy slipping into and out of deflation and recessions for years, to come. This is the path of Japan, not the path of the Weimar Republic.
The economy has only been slipping in & out of recession for about 200 years - that's not a trend.
Deflation is by far what has been happening the huge majority of the time for the past 100+ years.
The Weimar path is the only alternative to Japan's path.
The US has not been taking on government debt and causing monetary base to go up at anywhere near at the rate which Japan did since 1990.
John Williams apples-to-apples adjustments to CPI don't exist and don't show any inflation - no prices are going up anywhere and never will.

[lrm21]

Re: Mish predicts no inflation Poom

This is the first thing that's wrong with his analysis:

The burden of consumer debt will only decrease under inflation if employment recovers, wages rapidly rise, and outsourcing of jobs to India and China stops. The odds of that happening are extremely slim.

1. Employment will recover. It always has. Even after the Great Depression. And Uncle Sam will make sure it does this time even if he has to hire every single living breathing American citizen by nationalizing the entire financial system, or [for those unfortunates who are not bankers] send them off to fight another foreign war, or build some "shovel-ready" infrastructure in influential Congressperson's Districts.
2. Creating wage inflation is one of the easiest things they can do. Increase the minimum wage. Increase the barriers to immigration some more. Give more legal power to the self-regulated professions to restrict entry and reduce mobility. Pander to the public sector unions. The list goes on. And sounds entirely plausible given pronouncements we've already heard from the new Administration
3. Exactly how are all those jobs in 1. above going to be outsourced? Does Mish really think there isn't going to be a heavy duty "buy America" component to trillions of stimulus?

Mish seems to think there is only one factor that will play out here - deflation. He ignores that the real world outcome will most likely be a combination of things working together that ends the debt deflation cycle, of which inflating the currency is just one element.

Actually Mish thinks the likelyhood of outcome is close to nil.

Regarding you point, it is not easy to create wage inflation, its actually pretty hard, because every studay has shown the forced wage inflation (a price control) leads to a corresponding drop in demand, you get higher unemployment.

You cannot have it both ways, low unemployment and High wages, thats called a free lunch. and it was tried in the 70's and led to stagflation.

The government can hire everyone as it did in the 30's for programs but that will prolong the cycle, as government taxes citizens to pay them back via government employment, crowding out private industry and crushing the economy. Central Planning is alway disastrous.

Also, what ends up happening is that basic commodities become harder to supply as, there is less labor at cost effecitive prices. This leads to government price controls, which leads to higher shortages.

Mish is wrong that this will be Japan..

Japan had extremely high savings to finance the government, over that 10 year period the government consumed its citizen savings in attempt to inflate the economy,.

In our case we have no savings, so our only options are to borrow from foreigners, increasing unlikely or to just print money the direction we are heading.

[grapejelly]

Re: Mish predicts no inflation Poom

I'm answering mostly in Mish's dubious journalism mode, with an extra dollop of sarcasm.

Okay, I'll play too!


Attempts to inflate out of this mess, cannot possibly work for three reasons.
Anything that starts out with a platitude like "cannot possibly work" is suspect at best and reminds me of "The four most dangerous words in investing are, 'It's different this time.'"
-- Sir John Templeton

1) The burden of consumer debt will only decrease under inflation if employment recovers, wages rapidly rise, and outsourcing of jobs to India and China stops. The odds of that happening are extremely slim.
Employment never recovers, wages never rise and trends never reverse.

He is right. Consumer debt will become less and less of an issue as inflation will depreciate the value of what needs to be paid back. Most of the buying power already borrowed will never get paid back.

2) Government cannot really "create" any jobs per se. It can raise taxes and shift private sector jobs creation to government jobs creation (typically a malinvestment), and it can bring production and consumption forward for those jobs that are genuinely needed (filling potholes), but once the potholes are filled, one has to ask the question, "What will we do for an encore?"
Of course government can never create jobs - that's why the WPA and many other similar programs didn't exist, and why government doesn't employ more people now than at any other time in history.
Inflation never works to restart an economy.
Malinvestments have only happened recently and have not been going on for decades.
Nothing is wrong with infrastructure or the US except potholes.

He is right here again. The government can hire people, of course. There is no question about that. But for every job the government "creates" there are two or three jobs they destroy.

That's why we have such economic stagnation. The larger the government becomes as as percentage of GDP, the poorer we all become.

There is always full employment...BUT people who have alternatives (being paid for unemployment, or underground income) won't work for the pay they deem "too low"...or the law doesn't allow employers to offer pay as low as it needs to be to employ the unemployed.

Now assume the government pays $15 per hour for its "jobs." A private employer has jobs that are worth $12 per hour. The $12 per hour employee doesn't work there anymore. So the private employer simply can't fill those positions because they aren't worth more than $12 per hour to her.

Similarly, if payroll taxes are raised, it costs more to employ someone and unemployment will rise.

And, if buying power is depreciated through stimulus-induced inflation, then the effective wages decrease, and that disincentivizes more people from working at their present job because their pay is lower now.

3) Even if by some miracle the economy rapidly picks up, interest rates will rise. Homeowners who now are seeing rates fall, will once again be put in jeopardy by rising rates. Furthermore, interest on the national debt will soar. The National Debt is $10.7 Trillion as of January 7, 2009. As interest on the national debt rises, so will taxes have to rise to cover it. In Fiscal Year 2008, the U. S. Government spent $412 Billion of your money on interest payments to the holders of the National Debt.

In short, there is no free lunch of inflating consumer debt away. Attempts to do so will only create bigger problems elsewhere.
Interest rates have never been higher than now.
Countries and economies never survive rising interest rates.
Monetary and fiscal policy excesses have never created bigger problems later.


(CONCLUSION)
Expect to see a long-term period of extremely slow growth with the economy slipping into and out of deflation and recessions for years, to come. This is the path of Japan, not the path of the Weimar Republic.
The economy has only been slipping in & out of recession for about 200 years - that's not a trend.
Deflation is by far what has been happening the huge majority of the time for the past 100+ years.
The Weimar path is the only alternative to Japan's path.
The US has not been taking on government debt and causing monetary base to go up at anywhere near at the rate which Japan did since 1990.
John Williams apples-to-apples adjustments to CPI don't exist and don't show any inflation - no prices are going up anywhere and never will.

[GRG55]

Re: Mish predicts no inflation Poom

Actually Mish thinks the likelyhood of outcome is close to nil.

Regarding you point, it is not easy to create wage inflation, its actually pretty hard, because every studay has shown the forced wage inflation (a price control) leads to a corresponding drop in demand, you get higher unemployment.

You cannot have it both ways, low unemployment and High wages, thats called a free lunch. and it was tried in the 70's and led to stagflation.

The government can hire everyone as it did in the 30's for programs but that will prolong the cycle, as government taxes citizens to pay them back via government employment, crowding out private industry and crushing the economy. Central Planning is alway disastrous.

Also, what ends up happening is that basic commodities become harder to supply as, there is less labor at cost effecitive prices. This leads to government price controls, which leads to higher shortages.

Mish is wrong that this will be Japan..

Japan had extremely high savings to finance the government, over that 10 year period the government consumed its citizen savings in attempt to inflate the economy,.

In our case we have no savings, so our only options are to borrow from foreigners, increasing unlikely or to just print money the direction we are heading.

Hmmm. Not sure I understand which way you are arguing this.

No savings. Unlikely to be able to borrow indefinitely from foreigners. Therefore likely to print money.

So how is this printed money supposed to enter the economy? More taxpayer funded bank reserves piling up at the Fed? The Administration can see this isn't working [and more of the same Paulson policy won't get them re-elected], even if Bernanke can't.

Will it not be through government stimulus and procurement demand? And why won't that result in the same inflationary outcomes we are all familiar with when we've seen this videotape in the past? Is it really different this time? I doubt it...

[Spartacus]

Re: Mish predicts no inflation Poom

a more accurate subject line:

Mish "argues", taking his conclusions from 5 years ago as axiomatic

he starts with his conclusions
Mish deduces
Mish induces
and Mish concludes that his conclusions from 5 years ago are written in stone
and Mish predicts that his conclusions from 5 years ago (with suitable "course adjustments", which resemble the iTulip thesis, which he's explained (sans credit to EJ) are what he meant all along) will happen soon.

he ends with his conclusions

[FRED]

Re: Mish predicts no inflation Poom

Mish confuses so many concepts it's hard to know where to begin. We can start his confusion over the role of credit in a general level price deflation. Since he does not distinguish between asset price and good price deflation, or between the separate but related FIRE and Production economies, he has no effective framework in which to analyze events.

Since no amount of careful argument gets through, we are thinking to buy him a plane ticket to Argentina where he can observe first hand a cash-only economy with double digit annual inflation rates, an extreme case that will convince him to at least ask the question, Can the money supply break free of the endogenous credit system? This will bring him a step closer to wisdom.

[The Outback Oracle]

Re: Mish predicts no inflation Poom

Why does everyone presume that when inflation hits again, debts will fall???
What you will get is a repeat of the last bout of inflation...people will borrow more...there will be even more debt!! All i want is someone to help me identify when that is a good idea! I'm going to load up with debt like the best of the leveraged ratios last time. And then help me identify again when it ceases to be a good idea...because the next time around will be worse
Again inflation is not a solution.

[The Outback Oracle]

Re: Mish predicts no inflation Poom

It's different in magnitude GRG. Everytime the magnitude is multiples of what it was the last time.

[LargoWinch]

Re: Mish predicts no inflation Poom

Lets say I am a typical CB:

"This morning I got up and before my second sip of coffee I enter the following under the "new money creation" field in my CB terminal:

+$1,000,000,000,000

...

I pause, look at my work and have my second sip of coffee."

Now Mr. Mish, please write me a nice article about deflation so that I can do it over and over...

[metalman]

Re: Mish predicts no inflation Poom

Why does everyone presume that when inflation hits again, debts will fall???
What you will get is a repeat of the last bout of inflation...people will borrow more...there will be even more debt!! All i want is someone to help me identify when that is a good idea! I'm going to load up with debt like the best of the leveraged ratios last time. And then help me identify again when it ceases to be a good idea...because the next time around will be worse
Again inflation is not a solution.

last time the trade was to load up on 30 yr usa treasury bonds at 19% and wait for the recessions to bring down inflation and the cows to come home. this time it won't be that way. ej's pointed out that the treasury smartened up. all treasury securities are now callable.