Deflation Has Arrived

Safehaven ^ | 01.28.04 | Robert Prechter

[Toddsterpatriot]

Deflation is sitting just below the surface and has been. It has only been kept at bay by the FED's and government's ability to massively expand debt. There are limits and I think that we are getting close to them. Without debt expansion, the deflatinary monster is going to eat us and everything in sight. More helicopter money from the government coming soon. After that, turn off the lights cause the party is over.

Deflation,the opposite of inflation, is easily cured. Just do what causes inflation, print money. The Fed prints it and buys Treasury Bonds from the banks with it. The banks have to loan it out, it does them no good to leave it in the vault. They lower rates, consumers borrow and spend.

Problem solved.

[Beck_isright]

Stocks are not going up on solid earnings. They are going up on lower expectations. Please justify a 105 P/E for Cisco. I'd love to hear it.

[Nick Danger]

I think it's too early to ring the bell on this. There are relatively liquid financial assets out there that do not get counted in M3. If money that had been parked in a bank savings account ventures back out into the stock market, that's going to look like a decline in M3.

We do see that happening. Stock prices bottomed out last Spring, and by Fall even the doubters were starting to get antsy that they were missing out on a good thing my keeping their money "safe" in a low-yield savings account.

With a stock market turnaround, it's reasonable to expect some months of this kind of flow, from the "safety" of bank accounts toward a stock market that looks like it's going to go up for a while.

There is another phenomenon at work here that also fuzzes things up. The "money supply" isn't just a function of the quantity of money, it is also a function of its velocity, i.e. how often it is changing hands. That is something that will rise as an economy leaves a slow period and heads into an expansion, which it is doing now. There can therefore be some amount of contraction in the quantity of money during such a period without causing deflation.

If this is still happening after the "scared money" is done leaving the banks for the newly-revived stock market, then there is certainly cause for concern. I think it's too early to say that, though.

By the way, if a year from now we can definitely say that deflation is dead and that this guy was wrong, all the people who are constantly telling us how bad Alan Greenspan is, have to bow down and genuflect to the man for the second time in five years. This author is absolutely right to be worrying about deflation, and to suspect that we may have already drifted inside the event horizon and that it's too late to get out. Sane people should be worrying about that. But we don't know for sure yet that we haven't escaped. If we did, it was close. And if we did, Alan gets another trophy.

I know people don't like the guy, but he's damned good at what he does.

[Beck_isright]

Here's all that freshly printed money....going....going....

[NormsRevenge]

My wife has been hoarding gold and gems for years. ;-]

[Beck_isright]

I hate to break this to you, but here are your historical velocity charts....

[Toddsterpatriot]

Wow, that brings us back to what, the July 03 money supply?
From 6150 down to 6050 is about 1.6%. That's the proof of deflation?

[Tauzero]

A bump to your cogent comments, sir.

[Beck_isright]

I guess trends and historical data are beyond your scope. If this were a true "recovery" the chart would continue upwards. Also the stat about consumer and corporate debt would decline, not increase. Please, keep investing. I need a sucker fellow investor to take the other side of my trades. I love people who hate shorts.

[dpwiener]

The FED can issue any kind of hints that it wants. No one is even taking there constant bullhorning seriously anymore.

It seems to me that the Fed has been very cautious and consistent in indicating the type of monetary policy it is following. When it hints that it will soon cut or raise interest rates, it then does so.

Greenspan is extremely cognizant of the fact that markets like predictability and don't like surprises. So he tries to say little and move slowly. As a result, the markets believe the hints that emerge, and are able to digest them in manageable bites.

Yesterday's hint, in which the Fed stopped saying that it would keep interest rates low "for a considerable period", was properly interpreted by the markets as meaning that the Fed would slowly boost rates within several months. I fully expect the Fed to follow through on that. It is the traditional response to the rapid economic growth we are starting to experience.

[arete]

" There were great expectations of a quick business revival in the spring of 1930. Credit was ample and available at low rates. Bank rates had been cut sharply by the Federal Reserve Bank and all the major European national banks. Private interest rates had been cut even faster and sharper as people with money found it increasingly difficult to profitably employ it. Not only were business risks rising, the profit inducement to borrow was clearly declining, making the availability of money at sharply declining interest rates increasingly irrelevant."

DESCENT INTO THE DEPTHS (1930)

Richard W.

[Beck_isright]

FYI Nick, my charts were not a slam against your comments, just to emphasize your points. The velocity is in a historical decline. My larger concern is the black hole which Sir Alan refuses to close. I think the statistic which hit me yesterday was that of the debtload vs. GDP on a historically adjusted basis. I've never seen anything like this. Thus my 2005 predictions.

[FITZ]

They should just put the mints in China.

[Nick Danger]

If the government didn't inflate the money supply in the first place, deflation would be a normal and highly desirable economic condition.

Let's debate this. You have your position there, and I will take the position that chronic deflation is an absolutely horrible idea that would produce tremendous human misery in the form of continuously low economic growth leading to chronic high unemployment; a rigid caste system with very little upward social mobility; and a bass-ackwards allocation of resources away from the generation that is raising the society's children, toward the generation that is nearest to leaving for its heavenly reward.... basically the social and economic conditions we would associate with a feudal society of 400 years ago.

You can go first. Tell us why, and by what mechanism, "deflation would be a normal and highly desirable economic condition."

[arete]

I fully expect the Fed to follow through on that. It is the traditional response to the rapid economic growth we are starting to experience.

That little change in wording was for the benefit of Japan and Germany who are both making noise about no longer supporting our ponzi scheme. No way No how do we get an interest rate increase this year. The economic recovery is debt induced smoke and mirrors for political purposes.

Richard W.

[Southack]

Ask yourself, why does the government try to guess that the speed of money changing hands can be derived by dividing GDP by M2? M2 is money in checking accounts and savings accounts and such. GDP is the size of our economy.

What do either of those things have to do with how much faster I can spend money online with a credit card today than I could twenty years ago by going to a dpeartment store with cash or mail ordering something from Sears before Fed Ex flew its first flight?

The velocity of money is a critical economic measurement, but no one really knows how to do it very well yet.

How do we tell how much faster money is going from consumer to supplier to employee and back again in today's fast-paced techno-world?

It's not a trivial question.

[Toddsterpatriot]

I guess trends and historical data are beyond your scope.

Yeah, when it comes to trends, Prechter has me beat. What wave are we on now?

[Beck_isright]

"They should just put the mints in China."

I'm sure some of the vendors have a tie or two to the Chicoms, sigh.

[AdamSelene235]

Ask yourself, why does the government try to guess that the speed of money changing hands can be derived by dividing GDP by M2?

Good Evening, Southack.

What do you propose as an alternative?

The velocity of money is a critical economic measurement, but no one really knows how to do it very well yet.It's not a trivial question.

Sir Prints-a-lot has already admitted difficulty in measuring and defining *money* itself. I scarely expect he will be able to measure the speed of something he can not define.

[Beck_isright]

I have a larger, more historical question that can not be answered here, IMHO....

As of 2003, the total corporate and consumer debt was 360% of GDP. On a statistical basis this is 95% higher than 1931. During the Great Depression we were a creditor nation. Anyone care to take a stab at the implications of our current wage deflation environment against that backdrop?