Skip to comments.Watch Out for Falling Prices; I Did
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 ...
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
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.
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.So Robert Murphy who got it right?
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:
In a fiat credit-based financial system, when credit is plunging businesses are not hiring. There are currently 14.9 million unemployed who want a job but do not have a job because businesses are not hiring. This is all related to the ongoing credit contraction.
When credit is plunging so do yields on treasuries and in turn yields on savings accounts.
When business earnings are under pressure or when business owners face uncertainty over consumer spending trends, businesses cut back on benefits, especially health care. Those with health care benefits are asked to chip in more of the costs. This too is a function of deflation.
When profits are weak and business uncertainty high, stock prices do not act well (at least in the long run). Those with 401Ks or personal investments are affected.
With credit falling and wages stagnant or falling, anyone in debt is likely to have a harder time paying back that debt. Foreclosures rise so do bankruptcies and divorces. Entire families have gone homeless.
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." ....
you have to be a masochist to post this!
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.
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.
I couldn’t get past the first word. What is that word?
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: http://www.futurnamics.com/biflation.php
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.
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?
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”.
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.
They still can't explain the stagflation of the 1970's.
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.
bookmark for later
You've never had hyperinflationitis? The rash it causes is horrible! :-)
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
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.
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 - http://www.freerepublic.com/focus/f-chat/2763124/posts and linking back to last week’s thread.
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.
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.
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.
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 governments 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 supplys rapid expansion, the nations 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.
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.
If you post other stuff, please ping me.
Glad to see other deflationistas coming out in force.
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.
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.
Thank you for the post!
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.
Is it even good beer, or some crap like Budweiser? ;^)
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 ;)
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 production....so 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.
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.)
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.
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.
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.
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.
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.
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.
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.
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.
Interesting list with the charts. Most of it true.
The only deflation I have observed is my 401K.The thing is almost none existent.
Other than that everything else is skyrocketing.
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
And things are not going to get any better with that arrogant pos wanting to regulate the trucking companies