Mish: (Price) Deflation Has Gone Global

[gasull]

Mike Shedlock's article:

Japan wholesale prices log fastest drop since 2002

(...)

German wholesale prices see record decline in 22 years

(...)

Chinese CPI, PPI Negative

(...)

US CPI In First Year-Over-Year Decline Since 1955

(...)

US Produce Price Index (PPI) Biggest Drop In 59 Years

(...)

This expansion of money to bailout banks is not going to cause hyperinflation or even strong inflation

So disinflation (Ka) has turned into deflation. This wasn't going to happen according to Ka-Poom theory, but anyway it doesn't matter that much as far has the high inflation (Poom) phase actually happens in the future.

Mish's article Fiat World Mathematical Model:

Assume for a moment you invent a magical printing press. Your machine can print hundred dollar bills so good that the US Treasury cannot distinguish them them from the real thing. The bills are perfect in every way. Now assume you print $5 trillion worth of those bills and bury them in your back yard. Is this inflation? Surely not. Would it be inflation if $5 trillion in bills were spent and entered the economy? You bet. The key then is not how much the Fed prints, the key is how much of that money makes its way into the economy.

Please consider this audio with Austrian Economist Frank Shostak on Mises on September 30, 2008 discussing recent actions by the Fed.

Will this printing create [price] inflation? This is dependent very much on what money will do next. If banks will not lend and banks sit on that cash forever and ever like the great depression because the risk is too high and the banks do not know if the lending will end up in good assets or bad assets, and because banks are in so many bad assets now they probably will not lend at all.

That is the observation that Murray Rothbard made, that during the Great Depression that banks have chosen not to lend because the risk of accumulating bad assets was far to high. So they were sitting on massive reserves. That is what is developing right now.

This seems right to me. I don't see how all the trillions are going to cause high inflation (Poom) at any time. If banks don't lend it won't happen. I'm even unsure about the possibility of biflation.

Maybe I just don't completely get Ka-Poom theory. Am I missing anything? Thanks.

[jtabeb]

Re: Mish: (Price) Deflation Has Gone Global

Mike Shedlock's article: So disinflation (Ka) has turned into deflation. This wasn't going to happen according to Ka-Poom theory, but anyway it doesn't matter that much as far has the high inflation (Poom) phase actually happens in the future.

Mish's article Fiat World Mathematical Model: This seems right to me. I don't see how all the trillions are going to cause high inflation (Poom) at any time. If banks don't lend it won't happen. I'm even unsure about the possibility of biflation.

Maybe I just don't completely get Ka-Poom theory. Am I missing anything? Thanks.

If supply of goods (say commodities, for instance) crashes FASTER than money supply shrinks you can easily end up with biflation.

Think house prices vs food prices for example. House prices could continue their crash as less money or credit is available for purchase because housing in not really a consumed asset. Food on the otherhand, is consumed so the price could rise even as house prices fall by say another 30%.

It's not just price and money supply, it's also goods supply (stock or repelenishment rate, if stocks are being depleted).

Make sense?

[rjwjr]

Re: Mish: (Price) Deflation Has Gone Global

Mike Shedlock's article: So disinflation (Ka) has turned into deflation. This wasn't going to happen according to Ka-Poom theory, but anyway it doesn't matter that much as far has the high inflation (Poom) phase actually happens in the future.

Mish's article Fiat World Mathematical Model: This seems right to me. I don't see how all the trillions are going to cause high inflation (Poom) at any time. If banks don't lend it won't happen. I'm even unsure about the possibility of biflation.

Maybe I just don't completely get Ka-Poom theory. Am I missing anything? Thanks.

Here's a basic graphical depiction of my opinion...

Ka...Poom

Ka...Ka...Poom

Ka...Ka...Ka...Poom

Ka...Ka...Ka...Ka...Ka...Poom

The longer the disinflation/deflation, the more comfortable, complacement, and confident the Fed becomes, the greater the inflation once it hits.

[BadJuju]

Re: Mish: (Price) Deflation Has Gone Global

Here's a basic graphical depiction of my opinion...

Ka...Poom

Ka...Ka...Poom

Ka...Ka...Ka...Poom

Ka...Ka...Ka...Ka...Ka...Poom

You do not sound convinced. :p

[gasull]

Re: Mish: (Price) Deflation Has Gone Global

If supply of goods (say commodities, for instance) crashes FASTER than money supply shrinks you can easily end up with biflation.

Think house prices vs food prices for example. House prices could continue their crash as less money or credit is available for purchase because housing in not really a consumed asset. Food on the otherhand, is consumed so the price could rise even as house prices fall by say another 30%.

It's not just price and money supply, it's also goods supply (stock or repelenishment rate, if stocks are being depleted).

Make sense?

I don't see how the supply of commodities and raw materials could crash. The only supply that I see going down in the future is oil.

[rjwjr]

Re: Mish: (Price) Deflation Has Gone Global

Here are some exerpts from EJ's Hyperinflation Part II post. He stops short of saying a hyperinflation is inevitable, but he paints a very convincing argument for its strong likelihood of occurence...

"In the dozens of cases of hyperinflation we’ve studied, the antecedents and pre-conditions boil down to ten, ranked below in order of significance in contribution to conditions ripe for hyperinflation, with current applicability to the US marked Yes or No.

Ranked hyperinflation antecedents and pre-conditions as they apply to the US

Viewed this way, it is clear why the US has not experienced a major inflation already."


"Here is an uphappy forecast that is leading us to reconsider our long standing aversion to the hyperinflation scenario.




Assume that the current administration keeps its promise to increase outlays as much every year as it has already this year.

• Assume that since the administration is determined not take the necessary steps to allow the banking system to clear, so that the spending does little to halt the depression.
• Assume a three year depression 2009, 2010, and 2011.
• Assume a much more mild depression than The Great Depression, with receipts declining only 24% decline versus 49% as in happened between 1930 to 1933.
• Assume GDP declines only 12% versus 25% as between 1930 and 1933, pushing GDP only back to the 2003 level. Truly a "Depression Lite" to use Bill Gross's term.

Here's what happens to the US fiscal deficit/GDP ratio.

Regardless of the advantages of owing our foreign debt in our own currency, of a history of political stability, and of monetary stability -- with a few notable exceptions -- if GDP declines at a 4% annual rate while receipts fall only 8% per year while outlays rise annually by as much as Congress just approved, we are not going to get very far into this depression before China's worries prove well founded, and Jim Sinclair and John Williams are proved correct. In fact, if receipts and real GDP indeed decline at these rates, the fiscal deficit/GDP ratio may exceed 10% in 2009 and 15% in 2010. At that point we'd better hope our reputation for political stability holds up; it may be all that stands between high inflation and a lot worse."

Not a very rosey picture especially since we need political discipline to keep us out of the abyss. My money, sadly, is on the abyss.

[ricket]

Re: Mish: (Price) Deflation Has Gone Global

Maybe I just don't completely get Ka-Poom theory. Am I missing anything? Thanks.

Yes, you are actually.

What makes you think the banks will not loan that money out (and thus allow the money to enter into the economy), *especially* if they know that if the bets go bad the Government will just bail them out, *and* the same individuals who made the mistakes are not punished and are allowed to stay in positions of power and are continued to rake in millions in bonuses, commissions, and other fees for making said bets?

[gasull]

Re: Mish: (Price) Deflation Has Gone Global

"In the dozens of cases of hyperinflation we’ve studied, the antecedents and pre-conditions boil down to ten, ranked below in order of significance in contribution to conditions ripe for hyperinflation, with current applicability to the US marked Yes or No.

Ranked hyperinflation antecedents and pre-conditions as they apply to the US

Viewed this way, it is clear why the US has not experienced a major inflation already."

So if I'm getting it right, EJ says that inflationary pressure will come from foreign investors and central banks, rather than from the trillions thrown at the FIRE economy.

I still don't see it. If foreign investors dump dollars then they will get something in exchange. Probably commodities and raw materials. That would mean biflation. I don't see how higher prices for commodities and raw materials can make stuff more expensive when there is so much stuff in stock:

Dodge SUVs sit parked in the Atlantic Marine Terminal at the port of Baltimore February 18, 2009 in Baltimore, Maryland. As the worldwide economic downturn persists and automobile sales continue to slow, more than 57,000 new automobiles sit idle in the port of Maryland. The state of Maryland recently paid $5.26 million for almost 15 acres of additional car storage space near the port, freeing space for more cargo.

[gasull]

Re: Mish: (Price) Deflation Has Gone Global

What makes you think the banks will not loan that money out (and thus allow the money to enter into the economy), *especially* if they know that if the bets go bad the Government will just bail them out, *and* the same individuals who made the mistakes are not punished and are allowed to stay in positions of power and are continued to rake in millions in bonuses, commissions, and other fees for making said bets?

I think I got it now

So the basic difference between EJ and Mish is that EJ thinks banks will lend money, and Mish thinks they won't. Those are their bets.

Maybe consumers' habits are changing. Who will borrow that money ready to be lent?

I can't take any of both bets right now. I would need to know more :confused:

Thank you for your explanation.

[gwynedd1]

Re: Mish: (Price) Deflation Has Gone Global

Hyperinflation of course becomes a dysfunctional currency and is devastating but is localized. Just stay away from assets it is denominated in. Depressions always seem to go global.
There is no catchers mit for bank loans like real estate. Where will the loans come from? It would need to be something on the scale of Fannie and Freddie like massive loan guarantees for a new bubble like green energy. In other words, some new scheme of heads they win, tails tax payers lose.

[gwynedd1]

Re: Mish: (Price) Deflation Has Gone Global

Yes, you are actually.

What makes you think the banks will not loan that money out (and thus allow the money to enter into the economy), *especially* if they know that if the bets go bad the Government will just bail them out, *and* the same individuals who made the mistakes are not punished and are allowed to stay in positions of power and are continued to rake in millions in bonuses, commissions, and other fees for making said bets?

Hi ricket,

That is what must happen. I am looking for government loan guarantees. Without them forget about poom. If it does happen we may get poom.

[cjppjc]

Re: Mish: (Price) Deflation Has Gone Global

It's about time for Metalman to make an apperance.

Btw: Biflation it is.

[SJ]

Re: Mish: (Price) Deflation Has Gone Global

I don't think its about whether banks lend to private borrowers (though that would certainly accelerate the POOM). Its about the Fed lending to the US Govt (monetization of debt) once the Chinese and Arabs back off.

[idianov]

Re: Mish: (Price) Deflation Has Gone Global

Assume that the current administration keeps its promise to increase outlays as much every year as it has already this year.

• Assume that since the administration is determined not take the necessary steps to allow the banking system to clear, so that the spending does little to halt the depression.
• Assume a three year depression 2009, 2010, and 2011.
• Assume a much more mild depression than The Great Depression, with receipts declining only 24% decline versus 49% as in happened between 1930 to 1933.
• Assume GDP declines only 12% versus 25% as between 1930 and 1933, pushing GDP only back to the 2003 level. Truly a "Depression Lite" to use Bill Gross's term.

Here's what happens to the US fiscal deficit/GDP ratio.

Regardless of the advantages of owing our foreign debt in our own currency, of a history of political stability, and of monetary stability -- with a few notable exceptions -- if GDP declines at a 4% annual rate while receipts fall only 8% per year while outlays rise annually by as much as Congress just approved, we are not going to get very far into this depression before China's worries prove well founded, and Jim Sinclair and John Williams are proved correct. In fact, if receipts and real GDP indeed decline at these rates, the fiscal deficit/GDP ratio may exceed 10% in 2009 and 15% in 2010. At that point we'd better hope our reputation for political stability holds up; it may be all that stands between high inflation and a lot worse."

I have been watching Federal and State Tax receipts and Federal Outlays since EJ published that article. EJ's mild Depression scenario is too optimistic:

As of April 2009

Budget deficit triples to $957 billion for year

March deficit hits $192 billion has receipts drop 28%, outlays rise 41%

The U.S. federal budget deficit rose to a record $956.8 billion in the first six months of the fiscal year ... the Treasury Department reported Friday.
...
In March, the deficit widened to $192.3 billion from $48.2 billion in March 2008. Outlays rose 41% to $321.2 billion from $227 billion, while receipts dropped 28% to $129 billion from $178.8 billion.

Sales-Tax Revenue Falls at Fastest Pace in Years

State and local sales taxes, among the largest sources of revenue for municipalities, fell 6.1% in the fourth quarter of last year, as consumers bought fewer clothes, ate out less and canceled vacations. Revenue from personal income taxes was down 1.1% in the fourth quarter; corporate income taxes dropped 15.5%, reflecting weaker profits.

The declines have continued through the beginning of this year. In the first two months of 2009, the 41 states that have reported tax revenue saw total receipts decline 12.8%, versus the same period a year ago.

[metalman]

Re: Mish: (Price) Deflation Has Gone Global

I think I got it now

So the basic difference between EJ and Mish is that EJ thinks banks will lend money, and Mish thinks they won't. Those are their bets.

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