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Watch Out for Falling Prices; I Did
Townhall. com ^ | August 13, 2011 | Mike Shedlock

Posted on 08/13/2011 8:50:57 AM PDT by Kaslin

Hyperinflationits have now blown it twice. First, they insisted hyperinflation would happen before deflation. They were wrong. Then, during the QE2 inspired equities and commodities ramp, they said the same thing. They were wrong again.

Prior to the Great Financial Crisis I had a bet with "Heli-Ben", a staunch hyperinflationist who insisted we would hyperinflation before deflation. I won the bet but have not yet received my prize, a "crying towel" from "Heli-Ben".

By any rational measure, and certainly by my definition, the US went into a period of deflation lasting at least a year. Deflation ended in March of 2009.

In the wake of QE II hyperinflationists again started preaching about hyperinflationary crashes. Once again, and with increasing intensity, we heard things like ...

I could assign names to the above list, but I won't.

Two well-known hyperinflationists confidently predicted hyperinflation would start this year. A third said 2011 or 2012 giving himself extra time to be proven wrong.

My position all along was that the US would go in and out of deflation over a period of years, just like Japan.

I am claiming my "crying towel" prize for the second time. The US is now undeniably back in deflation. If "Heli-Ben" does not submit a "crying towel" his word is as good as his economic theories, which is to say worthless.

Definition of Terms

Before discussing terms one must define them. I have on numerous occasions defined mine, and my definition was the basis for the bet.


Inflation is a net increase in money supply and credit, with credit marked-to-market.


Deflation is a net decrease in money supply and credit, with credit marked-to-market.


Complete loss of faith in currency.

The first two definitions have nothing to do with prices per se, the third does (by implication of currency becoming worthless).

Price Myopia

Many if not most economists, especially Keynesians, think of inflation in terms of prices.

In contrast, Austrian-minded economists generally have definitions similar to mine except most of them fail to properly include credit in their analysis. Austrians in general look at money supply alone, and that is a huge mistake.

Role of Credit in Inflation

Failure to include credit in the definition of inflation and the analysis of economic activity causes many problems. Credit influences consumer prices, jobs creation, and asset prices. The mark-to-market value of credit influences the ability and willingness of banks to lend.

People tell me all the time, "all I care about is prices". If they really mean it, they are fools. Without credit expansion there is little hiring. Without hiring and money to pay for things, consumers cannot pay back loans and asset prices in general, crash.

Trillions of dollars in debt-inflated (thus imaginary) wealth have been wiped out in housing and the stock market because of falling credit, loss of jobs, and inability to service debt. Many homes fell in price from $500,000 to $200,000 (or equivalent percentages).

This is far more important than the price of gasoline hitting $4 or the price of carrots rising 50% to $2 a bunch. Yet, inflationists constantly fret about prices, ignoring far more important credit conditions.

Price myopia has other problems. Both Greenspan and Bernanke ignored an explosion of credit that fueled housing. Thus, a focus on prices induced errors on the way up and on the way down.

Fed Ignorance

The massive bubbles in credit and housing, were a direct consequence of Fed ignorance. Bernanke failed to see a recession and a housing bubble that would have been obvious to anyone using a proper definition of inflation.

I cannot tell someone what their definition should be, I can only point out the complete foolishness of concern over prices vs. rapid expansion or contraction of credit and credit marked-to market.

Humpty Dumpty on Inflation

Please consider this paragraph from my post Humpty Dumpty On Inflation written December 2008.

Humpty Dumpty Defines Inflation

Unfortunately there are many definitions of inflation and deflation strewn about. Some play the role of Humpty Dumpty changing meanings at whim, switching from commodity prices, to consumer prices, to expansion of base money or M3 or whatever measure of money seems to be expanding at the fastest rate.

Some do the
inflationista two-step to avoid admitting that we are indeed in deflation, choosing instead to call it "disinflation"

In short: "We are going to have a period of deflation that we will instead call disinflation."

'When I use a word,' Humpty Dumpty said, in a rather scornful tone,' it means just what I choose it to mean, neither more nor less.'

'The question is,' said Alice, 'whether you can make words mean so many different things.'

'The question is,' said Humpty Dumpty, 'which is to be master - that's all.'

It appears that the deflationista camp is incapable of comprehending a model, and the events that it forecasts, that lays out a two step process. For some reason they cannot grasp the fact governments will respond to disinflation with inflation, that the impact of those interventions is not instantaneous, and that markets historically are not very good at foreseeing the change in inflationary conditions in either direction.

Not quite. Rather it appears that some who suggested there would never be deflation are gracefully attempting to back into it, and indeed going out of their way with a two-step to pretend it is something else.

Every deflationist on the planet understands inflation will be back at some point and the Fed will attempt to do everything it can to avoid it.

When I wrote "Humpty Dumpty on Inflation", the U.S. was unquestionably in a period of deflation. However, I also clearly pointed out "Every deflationist on the planet understands inflation will be back at some point and the Fed will attempt to do everything it can to avoid it."

In retrospect, the word "every" in the above sentence is too strong.

Regardless, I explicitly pointed out deflation was not permanent while also stating on numerous occasions that the US would be back in deflation, and indeed we are.

In "Humpty Dumpty" I listed conditions (symptoms) one would expect to see in deflation, as follows.

Symptoms of Deflation

  1. Falling Credit Marked-to-Market
  2. Falling Treasury Yields
  3. Falling Home Prices
  4. Rising Corporate Bond Yields
  5. Rising Dollar

  6. Falling Commodity Prices
  7. Falling Consumer Prices
  8. Rising Unemployment
  9. Negative GDP
  10. Falling Stock Market
  11. Spiking Base Money Supply
  12. Banks Hoarding Cash
  13. Rising Savings Rate
  14. Purchasing Power of Gold Rises

  15. Rising Number of Bank Failures


When you go to a doctor for diagnosis of an illness, the first thing the doctor inquires about is symptoms. So let's do just that for the second time.

Let's take those 15 conditions one would expect to see in deflation and see how many apply.

1- Falling Credit Marked-to-Market

The mark-to-market value of credit on the balance sheets of banks and financial institutions is the hardest of the 15 items to measure. Indeed, the mark-to-market value of credit cannot be directly measured at all.

The reason is banks do not mark-to-market assets unless those assets are worth more than they paid for them. The Fed, FDIC, and FASB (Financial Accounting Standards Board) lets banks get away with just that. Mark-to-Market rule enforcement has been postponed twice. Moreover, banks hide non-performing loans off the balance sheet in SIVs and by other tactics.

However, one can easily impute the direction of of the value of credit on the balance sheets of banks and financial institutions by watching prices of bank shares.

In 2008 shares of financial corporations plunged. In March 2009, financial assets valuations soared. That action kept up for longer than I expected.

However, early this year, bank stocks started showing weakness (long before the rest of the market), then crashed in the last couple weeks.

$BKX Banking Index

The $BKX banking index is down a whopping 35% since February. Clearly the market has re-evaluated the mark-to-market value of credit on the balance sheets of banks. In a plunge like this, far greater than the overall market, there is no room for any other interpretation.

Pater Tenebrarum presents a superb analysis of the situation of U.S. and European banks in Welcome Back To The GFC, written August 11, 2011.

Bank of America (BAC) find itself increasingly under suspicion from investors, as it continues to choke on its acquisitions made during GFC, Phase 1. Readers may recall our comments on the take-over of Countrywide by BAC – at the time we noted that in our view, the takeover was done because Countrywide was one of the biggest counterparties of BAC. By taking it over, the losses that would have come due on occasion of Countrywide's bankruptcy could be swept under the rug. Moreover, BAC had invested a lot of money in Countrywide and strove to make it appear as though these investment had been wise. That the then management of BAC paid such a high price in the takeover was clearly a dereliction of its fiduciary duties. It could have gotten the carcass a few weeks later for next to nothing. Instead it decided to pay a high price for what has likely turned into a sheer bottom-less well of losses. This was then topped off with the acquisition of Merrill Lynch, likely at the behest of the administration – again in order to avert what would likely have become a major bankruptcy otherwise. If this reminds you of the story of Creditanstalt in the early 1930's, we say it should. BAC appears to be on the brink again. Its new management keeps saying that no new capital will have to be raised and that the bank's 'fundamentals are strong', but since it continues to sell 'non-core assets' at a fast clip, it evidently does need more capital. The market's verdict is rather worrisome.
That is one small clip in a lengthy but very worthwhile discussion that also includes credit default swap analysis of numerous US and foreign banks.

Nothing Fundamental Ever Changed

It is important to point out that nothing fundamental ever changed in regards to the health of US and European banks. They were and still are bankrupt. However, what did change (temporarily), is the market's mark-to-market valuation of bank assets.

Alternatively, the market was willing to overlook suspect assets, perhaps in belief that rising earnings would eventually cover the losses and more capital would not have to be raised.

The recent plunge in bank shares globally, shows without a doubt the market once again questions the value of debt on the balance sheets of banks. Once that happened everything fell apart, quite rapidly.

Those not paying attention to mark-to-market issues never saw this coming. The debt-deflationists did.

2 - Falling Treasury Yields

Yield Curve as of 2011-08-10

click on chart for sharper image

Shades of Japan

03-Mo = .01%
06-Mo = .06%
12-Mo = .09%
02-Yr = .18%
03-Yr = .33%
05-Yr = .92%
07-Yr = 1.50%
10-Yr = 2.15%
30-Yr = 3.51%

2-year, 5-year, and 10-year treasury yields hit all-time lows on 2011-08-10. This happened in spite of a downgrade of US debt by the S&P.

3 - Falling Home Prices

The Case-Shiller home price index briefly turned positive in 2010 but is now down 4% year-over-year. 10 years of price gains have been wiped out in many cities.

4- Rising Corporate Bond Yields

My proxy for corporate bonds is JNK, the Lehman High-Yield Junk Bond Index. When risk appetite drops, prices fall, and yields rise.The rapid decline in price represents a rise in yields and a reduced demand for disk.

So far we are four for four.

5 - Rising Dollar

Clearly that is not much of a rally. However, equally clearly the US dollar bottomed in May. That makes five for five.

6 - Falling Commodity Prices

Producer Price Index Finished Goods

Producer Price Index Intermediate Goods

Producer Price Index Raw Goods

The above charts from the BLS PPI Release.

$CRB - Commodities Index

Commodities peak in May, the same time the PPI went negative.

This makes six for six.

7 - Falling Consumer Prices

The above chart from the BLS CPI Release

This data point is the weakest of the lot so far given that it is a month-over-month comparison rather than year-over-year. However, in the wake of plunging crude prices, gasoline prices will drop as well. More CPI weakness will follow.

This makes seven for seven.

8 - Rising Unemployment

Let's consider both Employment and Unemployment.


There was never a rebound in employment from the last recession.

Unemployment Rate

The unemployment rate remains higher than the peak high of all previous recessions. Moreover, the unemployment report would be above 11% were it not for people dropping out of the labor force.

Let's wrap up with a look at numbers from the latest jobs report.

Household Data

The number of people employed fell by 38,000!

The only reason the unemployment rate dropped is 193,000 people dropped out of the labor force. Why? Because most of them became so discouraged they stopped looking for work. And if you stop looking for work, even if you want a job and need a job you are not considered unemployed.

The preponderance of evidence is clear.

This makes eight for eight.

9 - Negative GDP

The BEA Gross Domestic Product: Second Quarter 2011 release states "Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.3 percent in the second quarter of 2011, (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.4 percent."

This is exceptionally weak. Indeed I think GDP is below the stall rate and the US is headed for recession. I wish I had worded the condition a bit more thoughtfully. In a period of deflation GDP will be weak, not necessarily continually falling.

However, let's call this a near miss.
This makes eight for nine.

10 - Falling Stock Market

I could produce hundreds of charts for this category but let's go with the S&P 500 Index.

$SPX Daily

That makes 9 for 10.

11 - Spiking Base Money Supply

That spiking money supply would spike in deflation is counterintuitive. Yet, if one concentrates on expectations of what the Fed would do to combat deflation, that expectation is crystal clear.

However, like a drug addict on heroin, the medicine has worn off. The money sits as excess reserves at the central bank.

Base Money Supply

The Fed is clearly fighting (and now losing) the battle against deflation.

That makes ten of eleven.

12 - Banks Hoarding Cash

I wrote about banks hoarding cash and paying negative interest rates on deposits on August 4, 2011 in Bank of New York Mellon to Slap Fees on Big Deposits Following "Global Dash For Cash"; When was Hyperinflation Supposed to Start?

Excess reserves is another measure of willingness to lend.

Excess Reserves

Excess Reserve Money-Multiplier Theory is Fatally Flawed

Some have written these "excess reserves" are waiting in the wings to cause massive inflation.

It did not happen nor will it. Simply put, the excess-reserve money-multiplier theory is potty.

Banks do not lend just because they have reserves. Indeed reserves do not enter the equation at all. Rather, banks lend as long as they are not capital impaired and as long as they have good credit risks willing to borrow.

In this case, banks are capital impaired, and there are too few credit-worthy clients who want to borrow. The result is banks do not lend and money sits as excess reserves.

That makes eleven of twelve.

13 - Rising Savings Rate

The savings rate bottomed in 2007 and has generally been rising since. The rate is below the spike highs mid-recession, but the latest tick is up and the uptrend line is intact.

That makes twelve of thirteen.

14 - Purchasing Power of Gold Rises

Many deflationists thought gold would drop in deflation. However, my theory, explained years ago is as follows:

  1. Gold is money
  2. Gold is in the senior currency rises in value in deflation.
  3. Gold, as money, would would benefit (rise) in response to Fed actions to defeat deflation by printing fiat money.

It happened in the great depression and it is happening again.
That makes thirteen of fourteen.

15 - Rising Number of Bank Failures

Bank closings remain elevated. We have had 106 bank failures so far in 2011.
That makes fourteen of fifteen

Doctor, Doctor Gimme The News

If you went into a doctor and had 14 of 15 symptoms of a disease and the 15th was close, you can be sure the doctor would know what was happening.

In this case, the diagnosis is crystal clear: The US is back in deflation.

Who Called This?

Robert Murphy, in End This Agony on the Ludwig von Mises Institute says no one saw this coming.

To my knowledge, no school of economic thought predicted all of the major trends back in, say, January 2008. The conventional Keynesians employed at the White House and in major forecasting firms were completely wrong about the Obama stimulus package. The "crowding out" Chicago School types were completely wrong about the deficit's impact on interest rates. People like Peter Schiff (and yours truly) were completely wrong about consumer price inflation in 2009 and 2010. The "quasimonetarists" (who blamed Bernanke for his allegedly tight money policies) and Paul Krugman were completely wrong about gold and silver prices, and arguably about the fragility of the "recovery" in the stock market.


I take strong exception to Murphy's analysis. I offer as proof, Murphy's November 22, 2010 in Has Mish Deflated the "Inflationistas"?

Over the last two years, I have gotten perhaps dozens of requests to "deal with" the deflationist approach of Mike "Mish" Shedlock.

Mish's Framework: Credit, Deflation, and Gold

A good summary of Mish's views comes from a
September 2010 blog post — it was this one that spurred me to write the current article, egged on by a reader who enjoys both Mish and my own work. Mish writes,

Day in and day out I hear it from readers who insist that we are not in deflation and will not be in deflation because prices are rising and continue to rise. …

Such comments come from those who are not thinking clearly about what's important. Here's why:

Expanding credit (inflation) created an enormous housing bubble, a commercial real estate boom, a rising stock market, and an enormous number of jobs.

Contracting credit (deflation), burst the housing bubble, burst the commercial real estate bubble, burst the stock market bubble, resulting in millions of foreclosures and bankruptcies, millions of broken homes, millions on food stamps, 26.2 million unemployed or partially employed, and countless additional millions who are underemployed.

People notice food and energy prices because they tend to be somewhat sticky. Everyone has to eat, heat their homes, and take some form of transportation at times, but is that what's important?


In the grand scheme of things, nominal increases in food and energy prices are but a few grains of salt in the world's largest salt-shaker compared to the massive effects of rising or falling credit conditions.

So we see that Mish takes great exception to those Austrians (especially Peter Schiff) who have been warning of inflation. Rather than focusing on statistics such as the monetary base (which has exploded since the crisis in the fall of 2008), Mish defines "inflation as a net expansion of money supply and credit, with credit marked-to-market. Deflation is a net contraction of money supply and credit, with credit marked-to-market." ....

So Robert Murphy who got it right?

Murphy goes on-and-on about some of my short-term predictions that I missed. However, none of his rebuttal dealt with my theories a reader asked him to rebut!

I discussed Murphy's inability to address deflation theory in my response Failure to Consider Constraints

By the way, before anyone tells me ways the Fed can and will cause inflation, my rebuttal in advance is in the above link on constraints.

Also, and for the record, please note Bernanke's Deflation Preventing Scorecard.

Bernanke has failed to prevent deflation twice!

Murphy, Gary North, Peter Schiff and many other Austrian-economists missed constraints on the Fed and the importance of debt-deflation. That is two very bad misses.

Let me ask again, if Bernanke wants 2% inflation, home prices to go up, and asset prices to go up, why aren't they? And why are those excess reserves that North and Murphy said would come surging into the market still sitting there?

There are others who got this right as well, namely Australian economist Steve Keen and a few of my credit-minded long-wave friends.

I have learned a lot from Steve Keen and I thank him greatly. Most Austrians have refused to consider (or simply fail to understand) debt-deflation analysis and how it would impede the Fed's ability to spawn the inflation Bernanke wants, let alone the massive inflation Murphy, Schiff, and North all saw coming.

In his latest article, Murphy attacked the credibility of Krugman on inflation when Krugman got inflation (in relation to prices and treasury yields) more correct than Murphy.

To be fair, I vehemently attack Krugman all the time myself, but I pick my battles carefully. Just because someone is nearly always wrong on solutions, does not make that person wrong on everything.

Krugman made a short post the other day called That Was The Inflation Scare That Was

Point blank, Krugman is correct. Yes, it was an inflation scare. Bear in mind, Krugman has a definition of inflation I do not agree with. By Krugman's PCE measure, we are still in inflation. Regardless, I still laugh at all the inflationists and hyperinflationists who predicted massive inflation starting in 2011.

That said, I disagree with Krugman and side with Murphy on nearly every solution to every problem. Krugman's cures are fiscal madness.

In general Keynesians propose throwing more money at the problem, a setup that will inevitably lead to 200 percent debt-to-GDP problems like Japan, then a spectacular blowup as we saw in Greece.

Who got inflation picture right?

  1. Debt deflationists like Steve Keen
  2. Austrians who incorporated debt-deflation into their theories.
  3. Arguably Paul Krugman, in accordance with his definition

It pains me to defend Krugman, especially at the expense of Murphy, but those are the facts. Since those are the facts, let's not make self-serving claims that no one got the call correct.

Indeed, some select few of us (primarily in group 2 above) got, gold, treasuries, and deflation all correct, and more importantly, for the right reasons: careful analysis of debt-deflation and the impact debt-deflation would have on gold and US treasuries.

Krugman may have failed to include debt-deflation in his analysis but that is better than being wrong after being warned numerous times about the impact of debt-deleveraging and the fallacious idea that excess reserves were going to cause a massive sudden spike in inflation.

The debt-deflationists trounced the Austrians on that point.

Special Mention

I have had many feuds with Eric Jantzen at iTulip regarding deflation. He makes a distinction between deflation and debt-deflation. From a practical standpoint, in a fiat credit-based economy, debt-deflation is deflation.

Jantzen does not see it that way, preferring to call the effect "disinflation". However, a rose by any other name is still a rose and some of my arguments with Jantzen are best described as "violent agreement" about what is happening but disagreement about what to call it.

Moreover, I have nothing but praise for Jantzen's call back in 2002 "buy gold and hold on to it". He explicitly said gold, not miners, not CALLs, not other equities. The long-term trendline of gold is intact. The only other intact long-term trendline is US treasuries.

Janstzen got the gold portion of his macro-call correct. Jantzen also managed to include some "debt-deflation" analysis in his thinking, something most of the Austrians failed to do altogether.

I do not know Jantzen's record on treasuries. I do know mine. When the price of crude was $140 I called for record low treasury yields across the entire yield curve and most people thought I was crazy. I certainly missed the strength of the rebound in equities in 2010, but that chapter is still not closed as should now be readily apparent.

Finally, Jantzen's definition of inflation pertains to the purchasing power of the dollar and prices of goods and services. By that definition, Jantzen has been generally correct. Prices, have generally gone up except for very short periods of time.

However, and as I have pointed out, prices of goods and services is not what has mattered most. Trillions of dollars wiped out in housing and the debt-deleveraging that continues is still is far more important to the economy than prices of food and energy.

Practically Speaking

From a practical standpoint of economic analysis of the economy, debt-deflation (deflation) and consumer deleveraging is of paramount importance and is likely to remain of paramount importance for some time, no matter what definition one assigns to the process.

Austrian economists, as well as hyperinflationists with myopic eyes focused solely on money supply instead of debt, and everyone with ill-conceived notions of the power of the Fed, better figure that out in a hurry or they risk more horribly blown macro calls.

TOPICS: Business/Economy; Editorial
KEYWORDS: deflation; doomed; huh; inflation; zimbabwe
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1 posted on 08/13/2011 8:51:00 AM PDT by Kaslin
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To: Kaslin

you have to be a masochist to post this!

2 posted on 08/13/2011 8:54:52 AM PDT by ken21 (ruling class dem + rino progressives -- destroying america for 150 years.)
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To: Kaslin

Economists are always fighting the last war. At some time in the distant future, an economist will win a Nobel Prize for explaining the situation we’re in today.

3 posted on 08/13/2011 8:57:48 AM PDT by Mr Ramsbotham (Laws against sodomy are honored in the breech.)
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To: Kaslin

I don’t care what it’s called; inflation, deflation, stagflation. Prices are up considerably from a year ago on food products, etc. My money is worth less.

4 posted on 08/13/2011 9:01:25 AM PDT by Scotsman will be Free (11C - Indirect fire, infantry - High angle hell - We will bring you, FIRE)
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To: Kaslin


I couldn’t get past the first word. What is that word?

5 posted on 08/13/2011 9:01:52 AM PDT by Theo (May Rome decrease and Christ increase.)
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To: Kaslin

Hey, there’s a lot of meat in there to chew over.
There is a term I’ve been pushing called Biflation that covers a lot of the above. I posted a chapter from a book I just wrote that goes into Biflation here:

We are going to have both inflation AND deflation simultaneously. The macro equation is GDP= M*V which has two independent variables. That means you can’t be sure what you are going to get, inflation or deflationary credit collapse.

6 posted on 08/13/2011 9:05:26 AM PDT by DaxtonBrown (HARRY: Money Mob & Influence (See my Expose on Reid on written by me!))
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To: Kaslin

Lots of charts just to proclaim somehow “this time is different”.

Inflation is upon us. Let’s take the bull by the horns, enact significant import tariffs, and use the occasion to drive a resurgence in American manufacturing.

Ignoring the growing crisis, will only make it more painful for America’s young, to fix at even greater effort later.

If not now. When?

7 posted on 08/13/2011 9:05:53 AM PDT by Cringing Negativism Network ("Cut the Crap and Balance!" -- Governor Sarah Palin , Friday August 12 2011, Iowa State Fair)
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To: Kaslin

I don’t think the situation we’re in is at all clear cut. There are some signs of deflation, but food, energy, health, and education (college) prices have increased significantly from last year. Only energy is experiencing a pullback. However optional, big ticket items (like homes, cars) are undergoing deflation while must have consumables are undergoing inflation. The two are highly correlated, because increases in the latter dampen demand for the former. This is especially true when wages are stagnant (or decreasing) and other sources of income (like bank interest) are minimal. I think Bernake is causing damage by keep interest rates too low, but he won’t tighten because doing so would devastate Treasury prices and blow the deficit up even more. In fact, thanks to the Fed, I think we are in a “Treasury Bubble”.

8 posted on 08/13/2011 9:07:41 AM PDT by rbg81
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To: Scotsman will be Free

I’m with you. Forget the charts, analysis, mumbo jumbo.

Food,waaay up. Fuel, waaay up.

The 2 biggest variable bites in a budget.

Inflation waaay up.

9 posted on 08/13/2011 9:08:51 AM PDT by Vinnie
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To: Mr Ramsbotham
At some time in the distant future, an economist will win a Nobel Prize for explaining the situation we’re in today.

They still can't explain the stagflation of the 1970's.

10 posted on 08/13/2011 9:08:56 AM PDT by Moonman62 (The US has become a government with a country, rather than a country with a government.)
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To: Scotsman will be Free
Prices are up considerably from a year ago on food products, etc. My money is worth less.

Yes! And that's the common-sense definition of inflation. So we are in a (mildly so far) inflationary period.

Now, the author defines inflation as "a net increase in money supply and credit, with credit marked-to-market".

That's a silly nonsense statement and not useful to anyone who lives in the real world.

11 posted on 08/13/2011 9:09:34 AM PDT by Leaning Right (Why am I carrying this lantern? you ask. I am looking for the next Reagan.)
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To: riri

bookmark for later

12 posted on 08/13/2011 9:09:56 AM PDT by riri
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To: Theo

You've never had hyperinflationitis? The rash it causes is horrible! :-)

13 posted on 08/13/2011 9:16:04 AM PDT by Larry Lucido
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To: Kaslin


the charts show that people got the word and started saving. along with the savings came a lack of spending. the lack of spending results in decreased prices, or prices that don’t increase as fast, as retailers do anything they can to move inventory

there is nothing this admin has done that will rectify the situation. spending will continue, bankrupting the country and undermining the dollar.

even greenspan said they would just print more money to avoid defaulting on any loans... pushing the dollar closer and closer to zer0

14 posted on 08/13/2011 9:16:20 AM PDT by sten (fighting tyranny never goes out of style)
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To: Kaslin
Clearly that is not much of a rally. However, equally clearly the US dollar bottomed in May. That makes five for five.

The problem with using the dollar index is that it's comparing the dollar to other currencies that are also being devalued by their governments.

15 posted on 08/13/2011 9:16:29 AM PDT by Moonman62 (The US has become a government with a country, rather than a country with a government.)
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To: Kaslin

Most people can’t be bothered with all the economists’ theories or charts and care only care about their credit limit. Then others of us are more worried about our wallets now that more is suddenly going out than coming in. I don’t know about anyone else, but our check is less than it was last year because of rising health care and such. We have always lived frugally but there’s just so much belt tightening one can do before the buckle ends up meeting with itself.

There’s a discussion of rising grocery prices over on the cooking thread - and linking back to last week’s thread.

16 posted on 08/13/2011 9:17:23 AM PDT by bgill (just getting tagline ready for 6 months after '12 - Told you so.)
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To: Kaslin
BTT. Thanks for posting. This one is going to take awhile to digest.

Economists are always preening about how well their descriptive models turn into predictive ones, because that's where the money is made. Government economists try to turn questionable predictive models into normative models in the form of policy. It should be no real surprise that it so seldom works out.

17 posted on 08/13/2011 9:17:50 AM PDT by Billthedrill
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To: Kaslin
Falling Treasury Yields

The problem here is US Treasury yields are being driven down artificially by the Federal Reserve and quantitative easing. They also enjoy the "safe haven" effect.

18 posted on 08/13/2011 9:18:57 AM PDT by Moonman62 (The US has become a government with a country, rather than a country with a government.)
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To: Kaslin

I haven’t looked through this entire article, but it sounds like an argument between two people and neither sound right.

Deflation leads to inflation......because in Deflation the price drops below the cost of production and the ability to produce is scrapped.

Please notice that both are variables, the price on the market and the cost to produce. If your currency is crap, your cost of production is going to go one way and the price is going to go another for a short while. Commodities always get hit first with inflation.

The capacity to produce is always reduced to the point that when the demand comes back there isn’t enough capacity. This causes prices to rise dramatically.

Not only that, there will be fewer sellers too, so they can set higher prices.

If you through on the fact that much of what we consume comes from overseas .... that they may not want to take our money ... you get hyperinflation.

As this kicks in, it radiates to all parts of the economy hitting commodities like food early one. Resulting in bare shelves or bread that is defective with a price that will equal a week’s wages.

Think of Deflation as the trough before the crest. The bigger the trough in the wave, the bigger the coming crest.

19 posted on 08/13/2011 9:19:07 AM PDT by dila813
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To: Kaslin
Looking for a quote. I can't find it. The gist is: when the economy finds itself swinging wildly between inflation and deflation, it is a sign of pending economic collapse. This is how it went in Weimer Republic times:

As an example of deflation leading to hyperinflation, consider the case of the Weimar Republic. In 1920, Germany experienced a deflationary collapse, with the average citizen finding it harder and harder to get enough money for necessities. Banks, short of money, could not honor checks, and businesses were strapped for cash to buy materials and meet payroll. Fearing a collapse that would throw millions of workers out on the street, the German government desperately printed money in an attempt to re-inflate the economy. During this period, despite the government’s money printing, the mark actually gained in value against foreign currencies, so that prices of imported goods fell by some 50%. Eventually, as a result of the money supply’s rapid expansion, the nation’s massive foreign debt, and the shrinking economy, German citizens lost all confidence in their currency, and the Weimar Republic experienced one of the worst cases of hyperinflation in modern economic history. Billions of hoarded marks came out of hiding and entered the marketplace.

20 posted on 08/13/2011 9:19:20 AM PDT by RC one (whatever.)
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To: Kaslin


21 posted on 08/13/2011 9:22:02 AM PDT by PMAS
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To: Moonman62

Yes, we’re now in a “beggar-thy-neighbor” world of competitive currency devaluations to maintain export advantage.

This is why I maintain that “free trade” is a farce. Nations have given away their sovereign power over import/export laws and handed trade policy over to central bankers and FX spec’s.

Morons. Especially our trade policy twinks, who are morons on crack.

BTW, have you been keeping an eye peeled on what’s been happing to the last asset-backed currency in the western world, the Swiss currency? They’re beside themselves at how ferociously strong their currency is now.

22 posted on 08/13/2011 9:22:52 AM PDT by NVDave
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To: Kaslin

If you post other stuff, please ping me.

Glad to see other deflationistas coming out in force.

23 posted on 08/13/2011 9:23:51 AM PDT by BenKenobi (Honkeys for Herman!)
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To: Kaslin

Gold and platinum have doubled in price, silver has tripled in price.

Prices on Lear Jets, Lamborginis and Bentleys may be falling - most of us wouldn’t know or care.

But prices on prepacked long-term-storage food have gone up - in some cases prices have doubled or more since Obama took office.

Food prices in the supermarket have been on a steady rise.

Gasoline has gone from $1.60 a gallon three years ago to almost $4.00.

If there is deflation it’s not in the things most people buy.

24 posted on 08/13/2011 9:24:43 AM PDT by Iron Munro (One Trillion seconds = 31,709.79 YEARS / One Trillion dollars = Obama's spending for 3 months)
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To: riri


25 posted on 08/13/2011 9:25:41 AM PDT by Doomonyou (Let them eat Lead.)
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To: Kaslin

The hyperinflationists have been wrong long enough that they might as well stick with their predictions now.

Inlfation and deflation happen. The secret is to predict WHEN each will hold sway.

During inflationary times, some products will deflate. During deflationary times, some things will inflate. Those who are wrong always point to the things going against the grain and claim to be vindicated.

It’s amusing to watch the denial.

26 posted on 08/13/2011 9:25:46 AM PDT by SaxxonWoods (.....A man eventually wears the face he earns.....)
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To: Kaslin
But a highly intelligent masochist, at that. : )

Thank you for the post!

27 posted on 08/13/2011 9:29:27 AM PDT by Caipirabob ( Communists... Socialists... Democrats...Traitors... Who can tell the difference?)
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To: Vinnie

The single most important inflation indicator —> the price of ONE smallish cup of beer at AT&T Park (San Fran) jumped to $9.25 this summer! I think it was $7.50 a year ago. When I moved to the Bay Area in 1973, there was a joint in the San Fran Financial District that served 25 cent beer every Tuesday night. A 40x price jump in 40 years.

28 posted on 08/13/2011 9:33:09 AM PDT by ProtectOurFreedom
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To: Kaslin


29 posted on 08/13/2011 9:39:16 AM PDT by Ladysmith (The evil that's happening in this country is the cancer of socialism...It kills the human spirit.)
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To: ProtectOurFreedom

Is it even good beer, or some crap like Budweiser? ;^)

30 posted on 08/13/2011 9:41:40 AM PDT by WhyisaTexasgirlinPA (Going into Rehab means never having to say you are sorry....)
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To: DaxtonBrown

I’m with you due to lack of credit availability big ticket items that typically require credit to purchase are in deflation due to a drop in demand. At the same time must haves - food daily essentials etc - are in an inflationary run for two reasons 1)people get these things to survive job or no job via unemployment scrounging or govt benefits maintaining demand and 2) the companies that sell these things are increasing prices a) in a desire to maintain perception of growth for stockholders(so smaller sizes also) and b) due to increasing commodity prices caused by investors seeking inflationary protection (from increased money supply) and those areas of the market not impacted by demand fluctuation (see 1) and therefore “less risky”. If the large ticket items continue to decline in demand without the ability to address costs due to fixed labor high regulatory cost and increasing commodity price companies will be forced to leave the market until such time as the supply matches the demand however the loss of jobs will create a deflationary spiral such that no big ticket demand will surface. The increased competition in the only remaining market - necessities will then start to impact pricing in this arena in a downward manner as well. Or money will just sit on the side at minimal cost until regulatory and labor costs are addressed.

If labor and regulatoryburden can be decreased then prices can be stabilized on big ticket items allowing demand to catch up to supply and swinging toward growth again. Do your equations for price include the minimal price associated with cost long term? While a biz can operate short term at a loss to generate interest or market growth longterm it obviously leads to ruin therefore while supply and demand set the sale price there is a limit on price due to costs (including regulatory) that sets the floor beforemarket exit.

But it is currently a biflationary scenario due to one market with constant demand (necessities) and another (everything else) with decreasing demand. I’ll end my thesis here ;)

31 posted on 08/13/2011 9:42:05 AM PDT by reed13k (For evil to triumph it is only necessary for good men to do nothing.)
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To: SaxxonWoods

laugh all you want, but inflation and deflation do happen at the same time.

It is a wave, it starts at commodities and moves through the economy.

Low demand leads to low prices, prices below the cost of capability to produce is scrapped.

How do you think all these companies are reporting profits with such poor demand? They are closing factories, laying people off, scraping production lines, etc....

When demand returns, production can’t keep up, prices rise starting with commodities.

We have already been hit buy some very minor ripples but the tsunami hasn’t hit.

I hope you don’t get swept out to sea by it.

The bigger the trough, the higher the crest.

32 posted on 08/13/2011 9:45:40 AM PDT by dila813
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To: Scotsman will be Free
I don’t care what it’s called; inflation, deflation, stagflation. Prices are up considerably from a year ago on food products, etc. My money is worth less.

Don't believe those lying pricetags, the author has all his little charts and stuff.

He's mistating positions, at least mine: Which is at some point in time, somehow all of this currency that has been created MUST find a home other than where it's being horded. Once that happens - whether the money goes into commodities, goods, lending, hiring whatever - prices absolutely must rise.

To think otherwise is to reject the sciences, like math and the law of gravity (what goes up must fall somewhere.)

33 posted on 08/13/2011 9:46:07 AM PDT by AAABEST (Et lux in tenebris lucet: et tenebrae eam non comprehenderunt)
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To: WhyisaTexasgirlinPA

It was actually a very good IPA! But it sure was hard to find in the upper rows. Those “working class” seats were dominated by the Bud, Coors, Miller, etc. Interestingly, they were ALL priced at $9.25, but you got a slightly bigger cup with Bud et al. We were near the roof just slightly on the third base side of home plate — actually great seats. Very commanding view.

34 posted on 08/13/2011 9:49:38 AM PDT by ProtectOurFreedom
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To: Kaslin

Good read. Not worried about deflation. Nobody will sell things for less than they cost to produce, and production costs are generally up over the last 3 years. We are at genuine risk of a production crash due to margin collapse and slack demand, though. If/when that happens due to the dollar losing what’s left of its cache as a reserve currency, we will see severe inflationary pressure. Whether it’s categorized as hyperinflation or not, it will be extremely unpleasant from a US perspective. But that’s more of a long-term concern. That’s at least 5 years out, and may be as much as 20 years down the road.

What we’re dealing with right now is stagflation. It’s the Keynesian endpoint. We were there in the late 1970’s also until the Fed tightened monetary policy.

What’s been happening over and over for the last decade or so is that every time the macro economy picks up even the tiniest amount of steam, commodity prices immediately spike and strangle growth. There’s WAY too much liquidity sloshing around in the upper end of the markets.

Any time overall PPI exceeds CPI by a wide margin (and that has been the case nearly continuously since the dot-com bubble began to pop), you have supply shock and the conditions are ripe for textbook “stagflation” or “inflationary depression”. Whatever you want to call it, the domestic economy can’t gain any traction in an atmosphere where prices paid for basic inputs are increasing a good deal faster than retail prices for goods produced. You get margin collapse, falling real incomes, layoffs, and nobody adding production capacity.

The Fed and the US gov’t went about things ass-backwards even from a Keynesian perspective. What we needed was either added aggregate demand at the consumer level or lower costs for inputs. What we have are commodities and asset markets flush with speculative cash on top of increasing global demand sending prices for basic capital inputs (and domestic production costs) into the stratosphere. This on top of lower demand for consumer items due to inflation in commodities.

Inflationary trickle-down monetary tinkering doesn’t work if the goal is increased employment and standard of living in the US. It only appeared to for awhile thanks to production gains from the digital revolution and basically free labor in Asia keeping costs for consumer items lower than they would otherwise have been during the first part of the global commodities run-up the Fed created trying to reflate first the dot-com and then the housing bubbles.

35 posted on 08/13/2011 9:53:30 AM PDT by CowboyJay
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Deflation is a decline in the speed of money.
Inflation is an increase in the speed of money.

Deflation in a credit-based based economy means a decrease in private credit availability, even if cash has increased.

We have deflation because less money is moving, e.g. fewer homes sold at lower prices than before.

So rents can go up in price due to less demand for purchasing housing and you still have deflation.

It’s not about prices per se, but about the overall speed of money and growth/shrinkage of credit availability.

36 posted on 08/13/2011 9:58:57 AM PDT by Southack (Media Bias means that Castro won't be punished for Cuban war crimes against Black Angolans in Africa)
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To: Cringing Negativism Network
Inflation is upon us. Let’s take the bull by the horns, enact significant import tariffs, and use the occasion to drive a resurgence in American manufacturing.

Still thumping the protectionism stuff I see.

Look, if the left runs a primary candidate against Hussein, he or she will very likely be pushing your agenda. In fact Bernie Sanders (Socialist, VT) says very much the same thing every time he can get his mug in front of a TV camera.

We can't turn back time, we are in a globalized world now and US manufacturers simply need to compete. This means no bloated union contracts and yes, less pay and benefits for the type of labor that requires virtually no real education.

37 posted on 08/13/2011 10:01:55 AM PDT by Longbow1969
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To: Vinnie

Yesterday, I was shocked to see some of the prices at the local supermarket. A 12 oz package of bologna was priced at $4.59, a box of 8 store-brand frozen waffles was $4.49, and a box of my favorite cereal (Quaker Oat Squares) was $5.19.
Of course, there were many other items marked down as “specials”, but still...all over the store I saw high prices.
Watch out for Triscuit crackers, the boxes are getting smaller all the time. Cereals, also. The boxes are shrinking.

38 posted on 08/13/2011 10:03:15 AM PDT by Deo volente (God willing, America will survive this Obamination.)
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To: Scotsman will be Free

If you think that food prices are up, go talk to the owner of any restuarant that has done a Groupon deal.

You’ll get an earful.

39 posted on 08/13/2011 10:03:47 AM PDT by Southack (Media Bias means that Castro won't be punished for Cuban war crimes against Black Angolans in Africa)
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To: Longbow1969

Still downing pitchers of “free trade” koolaid at happy hour I see.

In case you’re interested in properly toasting your Chinese masters at the New Years party, the customary toast is “Gan-Bei!”

It means dry cup.

40 posted on 08/13/2011 10:09:23 AM PDT by Cringing Negativism Network ("Cut the Crap and Balance!" -- Governor Sarah Palin , Friday August 12 2011, Iowa State Fair)
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To: Moonman62

It’s completely inscrutable, and so complicated that no one can really interpret what’s going on. For instance, the Chinese produce cheap goods. They send us the cheap goods and in return we give them green pieces of paper. They take the green pieces of paper and use them to buy our government debt, which we use to finance our deficit spending. We take the green pieces of paper that they gave us to buy government debt and use them to buy more cheap Chinese goods. And that’s just one minuscule part of the entire scenario.

41 posted on 08/13/2011 10:29:42 AM PDT by Mr Ramsbotham (Laws against sodomy are honored in the breech.)
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To: Kaslin

Interesting list with the charts. Most of it true.

42 posted on 08/13/2011 10:33:46 AM PDT by Salvation ("With God all things are possible." Matthew 19:26)
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To: Mr Ramsbotham
the Chinese produce cheap goods. They send us the cheap goods and in return we give them green pieces of paper. They take the green pieces of paper and use them to buy our government debt, build Aircraft Carriers.

Fixed it for you.

43 posted on 08/13/2011 10:34:28 AM PDT by Cringing Negativism Network ("Cut the Crap and Balance!" -- Governor Sarah Palin , Friday August 12 2011, Iowa State Fair)
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To: Kaslin

The only deflation I have observed is my 401K.The thing is almost none existent.

Other than that everything else is skyrocketing.

44 posted on 08/13/2011 10:34:58 AM PDT by puppypusher (The World is going to the dogs.)
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To: Southack
Deflation is a decline in the speed of money. Inflation is an increase in the speed of money. Finally. I read, and waited, and read, and waited for someone to boil it down to the real issue at hand. Bravo.
45 posted on 08/13/2011 11:49:06 AM PDT by ImaGraftedBranch (...By reading this, you've collapsed my wave function. Thanks.)
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To: puppypusher

It does not take an economist to figure it out. Boils down to this , the Government is too big and is spending way way too much. There is a socialist is in the WH and business and banks are scared so they are hoarding cash. Money and credit is tight because of this. The economy has stopped producing enough goods so the inflation in food and fuel is supply side. Fire Obama and replace him with small govt pro business republican , scale back regulation with a special target on the EPA , cut taxes , balance the budget with deep spending cuts and get out of the way and watch us roar back!

46 posted on 08/13/2011 11:55:59 AM PDT by RED SOUTH (If you liked George W. Bush, you will LOVE Rick Perry! Follow me on twitter @redsouth72)
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To: Kaslin


47 posted on 08/13/2011 2:10:50 PM PDT by Dr.Deth
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To: BenKenobi

Mish is somewhat right ... he has been in the deflation camp for years. You can still have a deflation while commodities go up. I see laptop prices trending down and same for computer components such as memory.LED and LCD TVs are cheaper. Plasma TVs are really cheap now

48 posted on 08/13/2011 2:33:22 PM PDT by dennisw (NZT -- works better if you're already smart)
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To: dennisw

And things are not going to get any better with that arrogant pos wanting to regulate the trucking companies

49 posted on 08/13/2011 3:21:27 PM PDT by Kaslin (Acronym for OBAMA: One Big Ass Mistake America)
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To: Kaslin


50 posted on 08/13/2011 11:57:42 PM PDT by Cap Huff
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