Skip to comments.Deflation's Here, and the Downward Spiral Has Started
Posted on 09/19/2012 2:45:49 AM PDT by OwenKellogg
Denmark, Germany, Switzerland, and Finland have been issuing short term government notes at negative interest rates since mid-year 2012!
This dangerous precedent has happened before. Most recently, Japan experienced negative interest rates in the 1990s. The effects of the economic quandary in Japan and the efforts to restore growth were so misguided that the Japanese are still attempting a recovery. In almost twenty years, Japan has yet to make a full economic recovery.
The United States and the European Union are next and are headed into the same disaster as Japan unless decisive action is taken now.
Deflation is characterized by falling prices, falling incomes, declining value of real estate, and an inability to fund government debt and unfunded obligations.
Deflation has begun, and governments continue to push the "cliff" date as far into the future as possible when only quantitative easing is considered by the Federal Reserve and more government spending is considered by the White House.
In Scranton, Pennsylvania, for example, declining real estate prices for an overburdened tax base on top of substantial unfunded liabilities of a "rust belt" city forced the mayor to cut all municipal pay to minimum wage.
Similar situations will occur for bankrupt cities and municipalities in California. Should the unfunded mandates and obligations not be cut, an increasing tax burden on property will merely reduce property values further.
At this point, the death spiral of deflation begins, and our economy will collapse. Economic recovery will be difficult at best because deflation's spiral is so difficult to reverse. Buyers are rewarded with even lower prices by waiting to purchase goods and services.
(Excerpt) Read more at americanthinker.com ...
Trillion dollar deficits are an effective WMD.
We are heading toward a dictatorship. Lock down.
Inflation is generally hailed as a bad thing, especially in the Obama period of running the printing presses and flooding the economy with almost worthless dollars. The purchasing price of the basic dollar has plummeted. The faith and value of the backing of the US government is failing leading further devaluation of the dollar. The leads to situations such as occurred in Zimbabwe and the Confederacy as the dollars became worth less the the paper printed.
With too much money in circulation and inflation increasing to the point where groceries are becoming harder to buy, wouldn't a period of deflation be a positive? Yes, prices will fall and wages will stagnate but as monetary supply tightens, the purchasing power of the dollar will increase. Isn't this a correction we need?
- a good time to split up that weapon collection into multiple store locations - preferably extremely well concealed or buried
Sure, overvalued real estate prices are pointed to in every article like this one. I'd like to see some other examples. Prices aren't falling at the grocery store or the car dealer or the tax assessor. Anyone who believes the official CPI and the story that prices are relatively stable is...well, wrong.
Think of a 30-year fixed mortgage in a deflationary climate. Who in their right mind would ever want to keep a home if they are paying a fixed-rate mortgage for 30 years while their incomes are expected to decline over that period?
I lived in Europe when the converted the Euro. It happened overnight (literally). The next day, all the ATMs stopped giving out Francs, Deutshmarks, Drachma, Pesos, Gelder,and Lira and spit out Euros.
People were shocked how much things cost after the "conversion." A cup of coffee that was 1.5 DM became 2.0 Euros, and that was basically a tripling of the price.
I believe in the Bible, and the Bible tells us the Antichrist takes over the world's financial system.....so it is going to happen. Count on it. When? Who knows. But we should read the signs of the times.
All I see are increasing gas/diesel prices; another .10 - .25 cents for everything I buy at the supermarket every week; and virtually everything else that I need to purchase on a monthly basis.
Yeah my house has dropped in value like everyone else, but that really is just getting housing back to a realistic price that the average family can afford.
Prices aren't rising because the things we purchase are becoming more scarce. Oil, for example, is trading at a very high price even though North American refineries can't refine it fast enough to keep up with the production (this is reflected in the lower price for West Texas Intermediate compared to Brent crude). It's not the supply and demand of oil that driving the high price, it's the devaluation of the U.S. dollar.
However, this situation is a powder keg. The definition of inflation used to be "an increase in the money supply that leads to a rise in prices". (I kept an old dictionary just for this definition.) The increase in the money supply has occurred. When people and institutions finally start spending money prices will begin to increase. When they perceive the value of their dollars is decreasing they will become eager to spend money because it will be worth-less tomorrow. Demand for dollars will be low and their supply in circulation will increase This can rapidly get out of control. This is why having non-dollar assets is critical. Once the dam breaks prices will rise dramatically.
As to your question, the politicians require inflation. They have gotten the nation into an economic mess. Inflation is a tax on everyone. It's another way they can steal money so they can buy votes.
The clearest author on this topic I've found is Richard Maybury, whose Uncle Eric series makes it as simple as possible.
“Are we all headed for lower wages and a complete reset in the prices of things?”
Anyone I know who lost their job and was lucky enough to find another one is making a lot less money - even if they’re doing the same thing. Wages are being adjusted down to the “new normal” (Red Chinese peasant standards - basic necessities); the only ones protected from this are government workers (private-sector workers can bargain for better pay, though this simply accelerates the movement of those jobs overseas - or the import of Asians to do them here).
I’d like to believe that too many people still remember better times, and that they’ll vote out The Sultan in an attempt to bring them back.
Good points and explanation. But isn’t devaluation of the dollar a necessary concomitant of inflation, not deflation? I understand your point about, for lack of a better term, “structural” inflation, but it seems to me that the outcome is the same.
“Yes, prices will fall and wages will stagnate but as monetary supply tightens, the purchasing power of the dollar will increase.”
This simply isn’t happening; the only prices falling are homes (which are the ones we DON’T want falling), while food and gasoline are increasing. We are fortunate that the effects of the Obama spending became evident so quickly (in time to stop his re-election); for too long terms like “deficit” and “spending” were hard for average Americans to relate to their daily lives. We aren’t mortgaging our grandchildren’s futures, or even our children’s; we are mortgaging OUR PRESENT - and it hurts.
The USofA will also move from the US Dollar to an American Dollar which will be be valued at about 45 cents of the 1999 valuation. We are just about there now.
I don’t buy it. First, with the Fed creating (they don’t even print it anymore) trillions, the money is inflating, not deflating. Prices are up for energy and food. Real estate prices are down because of a bubble, a bad economy, and demographics, not because of the money supply. There aren’t enough young people to buy the low end homes, and low end homeowners can’t sell to move up. The largest group of homeowners are baby boomers, who if anyting are more likely to be downsizing. Of course some localities are better off than others, but that’s the general trend.
Some consumer goods may go down temporarily as manufacturers find themselves with large inventories they can’t sell, but that won’t last. They will cut production or go bankrupt.
But the price of everything else isn’t going down. Production will simply decline to a profitable level, and prices will go up in realation to fiat dollars.
“Yeah my house has dropped in value like everyone else, but that really is just getting housing back to a realistic price that the average family can afford.”
Don’t hold your breath waiting for viable bids (though you may get offers to rent the place); the next generation of American homeowners will be miniscule. Breeding is sputtering to a stop among those Americans that even bother getting married, and childless couples earning “new normal” wages no longer have their primary motivation to buy a home - the tax deductions (they don’t even need them anymore, and the property tax bills more than offset any tax benefits). People realize they need to keep their mobility to follow their jobs (a la “The Grapes of Wrath”), and even though “short sale” has replaced “foreclosure” in our lexicon, the fact is many Americans just realized that their “mortgage payments” were in fact “tax-deductible rent payments” as they find themselves out of their homes with nothing to show for years of such payments.
I believe the amnesty is just to get illegals and “replacement Americans” into these homes; they are still breeding, and even losing it after five years of payments is preferable to remaining in the Third World toilets from which they’ve fled.
Something to keep in mind here is that with a "paper currency" like the U.S. dollar, money is created as a debt instrument. If you buy a home for $300,000 and apply for a $250,000 mortgage, that $250,000 is basically created "out of thin air" when your bank borrows the money from the U.S. Treasury so they can lend it to you. You get a mortgage, the seller gets $300,000 in cash, and there is now an additional $250,000 in circulation that never existed before.
Now let's suppose you lost your job and never made even a single mortgage payment. The bank forecloses and gets the house back, which under most circumstances wouldn't be a huge problem because they can turn around and sell it for $300,000 to someone else and pay you the difference after they recover their legal costs for the foreclosure. But let's suppose that you lost your job at the same time a lot of other folks lost their jobs, and the bank can't sell the house for more than $200,000. The $300,000 that you paid to the previous owner is still out there, but $100,000 worth of assets have vanished overnight. This would include your $50,000 down payment and $50,000 worth of the bank's assets (the difference between their $250,000 loan and the $200,000 value of the home).
Multiply this story several million times, and you find yourself asking if that $100,000 in "lost" assets (or at least the $50,000 difference between the current value of the home and the mortgage balance) ever really existed in the first place. That is really what this deflationary spiral is all about. There is basic deflation in this case because money has been lost and economic activity has declined, but the Fed is buying mortgage bonds and the U.S. Treasury is printing money like crazy in an attempt to drive the "dollar value" of that home back up to $300,000.
If homes were all purchased for cash, then those prices would probably be rising, too!
(i.e., our production capacity far exceeds our ability to consume what we produce)
Our production capacity????????????????? What are you talking about?
WE DON’T HAVE ANY PRODUCTION CAPACITY! Our manufacturing base has been destroyed by our own overblown government regulations, bureaucracies, taxes, our legal system and a host of other parasitic maladies.
Our production has moved to other countries and then imported back into the U.S..
If I own a factory in China and I can use it to produce things that are exported to the U.S. and sold to American consumers for U.S. dollars, then it’s part of my production capacity for all intents and purposes. It may bother the hell out of you that it’s located in China, but there’s no question that its production is included in U.S. economic activity and it influences U.S. currency valuation through normal supply and demand considerations.
He makes a good point about the impact of property taxes in a low interest rate environment. I was considering buying a rental property, but the property taxes on even modestly priced local homes was almost prohibitive. We’re talking $7.3K annual property taxes on a condo priced at $120K. Plus the condo fee. This more than negates the advantage of low interest rates. Furthermore, the property taxes are almost sure to rise in the future.
Needless to say, I decided against the purchase.
Lock & LOAD
I agree. If we can manage the rate of deflation than the economy will heal itself.
Again, however, I am looking for evidence in some major market other than real estate to support the proposition of deflation in the article.
Anyway, interesting discussion, and we could get a lot of interesting interchange about paper currency, loan assets, and money, far beyond my ability to devote the time. Thanks for your respectful, insightful comments.
Declining income and assets.
The answer to your question is seen frequently. The answer is “jingle mail”. Homeowners who experience falling incomes and home prices, with the caveat they have little to no equity in the home, will just walk and surrender the home to the bank.
Consider the following steps:
1. Prices go down.
2. Prices go down further, giving people the expectation that prices will go down further.
3. People delay spending on non-necessities, resulting in a fall in consumption.
4. The fall in demand would mean prices fall further and less is produced.
5. Since fewer goods and services are demanded, production is cut, leading to job losses.
6. Prices fall and unemployment rises.
7. People cut spending due to a lack of income and/or expectations of further deflation.
8. Downward spiral etc.
The proper thing that Bernake should have done was to raise interest rates and stop printing money. He did exactly the wrong thing.
What bothers me more than anything else is that we have lost our heavy industrial base. Most people, including you, don’t understand what that means.
I’ll tell you what it means: In 1941 we had a huge industrial base making everything from pencils to cars and airplanes. Today, like your business, most that consider themselves American manufacturers (with foreign manufacturing facilities making the items imported and sold here in the U.S.) have removed and helped destroy our industrial base.
When Pearl Harbor was bombed, the industrial giant immediately switched to MANUFACTURING wartime machinery and equipment. That action was the single most important action that helped us win the wars on both continents and to preserve our freedoms.
Today, if the same scenario happens, we are helpless, for our manufacturing base is not here any longer. Worse yet, a huge part of our military electronics and other equipment and parts are manufactured offshore by countries that may become our enemy. In WWII all military products were manufactured here in America.
If WWIII begins, we’ve lost before we have started simply because we don’t have the industrial base that can quickly be shifted from making civilian to military machinery, equipment and all goods necessary to be self-reliant in the event of war.
That’s what burns my ass.
Might steal it (I will give you the credit) for another forum.
This is the concise summary of the explicit program that Helicopter Ben is engaged in right now. His is a war on savers, a jihad against people who defer gratification, who have long term horizons, who save for the future and who are conservative in their fiscal affairs. He rewards and reinforces fiscal irresponsibility in people and institutions. Debt is Freedom! Thrift is Slavery!
There is a special place reserved for Bernanke in Hell.
The majority of the electronics used in the Military are made overseas. Quite a few are made in or from components made in China.
The quality, reliability, and security of those parts are coming into question. In short, they are finding that the guidance chip for a missile has a “back door” in it from the OEM. Now that may not work out the way they planned, everything has a work around, but in a war situation you may not find the problem till it is to late.
Right concept, wrong target. Replace homeowners with (a) world-wide governments, including US federal, state & local; (b) international banks who are hopelessly leveraged 100:1 on non-performing loans; and (c) western military organizations (primarily US) completely dependent on printed money in order to conduct war.
Add these three together, and what do you get? An acceptance of paying ever larger shares of nominal income to pay ever increasing real debt loads - that is, deflation?
Please. They are going to blow up the currency - my guess by at least 50% over the next 3-5 years. So how do you deal with a 50% price increase across the board? Easy - price controls. Well, that creates shortages - well then, say hello to rationing.
So how does this all work in a supposedly open, self-governing republic? Again, please. All the pieces are in place - it will be mere child's play to enact any & all kinds of decrees under the various emergency power acts, especially a hot war against ... Iran. FEMA camps are at the ready to house dissidents, "hoarders", black marketers and other associated 'bad people' aka anti-government types.
It's all very, very simple if you can step back and connect the dots. Intentional (hyper)inflation is coming, and there will be all kinds of tools used to control the resulting 'blow-back' of hungry, despondent & beat down citizens.
If the cost of food, fuel, energy, clothing, household goods, services, insurance, automotive expenses, everyday expenses, etc., etc. keeps “deflating” at the current rate, I won’t be able to afford much of anything essential soon. Funny thing, I always thought money bought more and went farther during “deflation”.
There is a special place reserved for Bernanke in Hell.
It's this kind of emotionalism that will get you guys nailed. If you have any hope of making it through the bottleneck, you need to move beyond this stage of grief ASAP. Perhaps after -O- is re-elected, you will have an opportunity to experience depression. This will be a good thing, because then you'll be prepared for acceptance.
Acceptance is the recognition of what's happened to this country didn't occur overnight. It's been a long process coming, and it's now reaching its terminal point before we begin a new chapter. The new chapter is the scary part, the one were people who are completely aware hope & pray it's resolved peacefully.
you need to move beyond this stage of grief ASAP...
Grief is it? Since when is common sense grief?
I noticed your date of entry to FR as “Since 2008-03-18” and believe that you are not old enough to really understand things before your day.
In my generation we were free up until 1964 and I assume you have never experienced that “fresh air” during your lifetime so I really can’t blame your for your post.
How can inflation and deflation co-exist?
I think I see how.
The basic mechanism for measuring inflation or deflation is prices. During inflation, we normally expect that we will see higher prices. During "deflation" we would expect to see lower prices.
I think we must adjust our understanding of "deflation". What I believe we will see is very high inflation, with quickly increasing prices, along with a decline in incomes which will cause prices to be less affordable.
The secret ingredient is the rising standard of living among the Chinese, the Indians, and other developing nations.
The basic premise is that there is no economic justification for a college educated person in India, for example, to experience a lower standard of living than a similarly educated person in the States.
Today, that educated Indian DOES experience a lower standard of living. So does a similarly educated Chinese. This creates the economic pressure to move jobs to India and China. As long as the additional costs of moving the job are less than the economic benefit of lower labor, jobs will continue to move. No amount of protectionism or tariffs can eliminate this reality because we must compete in a world-wide economy to get the raw materials we need. If we don't compete, these materials will go to China or India.
Our government is dedicated to increasing the supply of "entitlements" and other government spending. They are doing this now by printing money in order to purchase government debt. This increasing supply of money will insure that dollars in the future will purchase less. At the same time, government policies are accelerating the movement of jobs overseas and creating a greater necessity to import materials rather than create them locally.
Free Trade BS. The USA was funded mostly on tariffs for the first 80 years of its existence.
We also benefitted then from very high productivity. I would claim that it was the productivity and not the tariffs that resulted in the steadily rising standard of living.
Can you describe some specific tariffs that were essential to the early success of the U.S.?
The prices are falling because nobody has the cash OR credit to buy them; they are adjusting back to the post-bubble norm (though prospective buyers have less to buy them with then prior to the bubble).
That’s an interesting scenario you presented there. What I find so scary about it is this: With no money down on the $120,000 condo and a 30-year fixed-rate mortgage at 5%, the property taxes on that condo would be almost as much as the mortgage payment itself. And this on a real estate asset with no money down and therefore no initial equity!
Again, however, I am looking for evidence in some major market other than real estate to support the proposition of deflation in the article.
This is a good point, and it's hard to pin "inflationary" and "deflationary" trends down for many products because it's impossible to compare them over a long period of time. When you look at cars or consumer electronics, for example, you usually find that they get more expensive over time for "state of the art" products ... but actually get less expensive over time when you consider how much technology advances. Compare a 2012 car with a 1980 car and you'll find that the 2012 car is much more expensive. But if you were to build a car today with 1980 technology in it, it would likely be dirt cheap.
The same goes with many different types of consumer electronics. Look at how cheap a computer gets after the technology has been on the market for even just 1-2 years. Pocket calculators are another good example. These used to be very expensive, but are now so cheap that they can practically be given away in a cereal box.
I would think that anything produced today that has seen a steep decline in demand is in a "deflationary" cycle even if the nominal price in U.S. dollars is higher. That's just my sense about this, though I may be completely wrong about it.
I'd point out, though, that the scenario you describe is precisely why the Fed is so hell-bent on propping up the banking industry by buying up all these toxic mortage-backed securities. A situation where massive numbers of borrowers go into default without giving a damn about the consequences will bring this nation's economy to the ground.
My point was that as it relates to the subject of this thread about inflation, deflation and other considerations related to commodity and product supply and demand, the question about whether a product is made in the U.S. or overseas doesn't have much of an impact at all. If anything, foreign production has had a counter-inflationary impact on the U.S. economy for any products where the cost to the consumer for a foreign-made version is much lower than it would be for an American-made one.
The well-founded concerns about the wisdom of losing our industrial base are a whole different matter, but are really the subject of a different discussion.
Thank you! You go right ahead, and don’t even feel obligated to give me any credit for it. I didn’t take any of that directly from another post, but I’ve learned so much on this subject from reading through many different threads here on FreeRepublic that I can’t really claim any of the things I post here as “my own” material.
The Federal reserve act was passed in 1913, as was the 16th amendment allowing Congress to levy an income tax. Suffrage was ratified in 1920 with the 19th, opening up the nanny state. The 1947 nat'l security act codified Fed powers to ensure continuation of government. Finally, Kennedy delivered the coup de grace with the passage of the 1965 immigration act.
I consider FR 'conservative porn', in that it delivers a fantasy version of reality to those who seemingly cannot grasp that the constitutional republic they may think still exists was long ago usurped by players who are very familiar with human nature.
Give a bunch a 'tards a veritable empty continent with abundant natural resources, and a pretty document outlining some supposed 'rights' and see how long they could keep it. As we've seen, it didn't take long at all.
But all things come to an end - it's the nature of diminishing returns. Right now, the elite have overplayed their 'nice' hand via the Ponzi, so we're gonna see the 'mean' hand brought to bear.
What I meant by my comment is to understand were we're at, and how to navigate what must necessary come. For, you see, it isn't *different* this time around.
You're making the very common mistake of confusing the "price" of something with its "cost." Just because prices are rising it doesn't mean the "cost" is rising. It simply means that the price as measured by a certain medium of exchange is rising.
To illustrate this point, just pick a specific product that you've purchased on a regular basis over many years. Put together a table showing how much that product cost each time you purchased it, then add another column to that table showing how much it would cost if you paid for it in ounces of gold instead of dollars. You'll likely find that the price of the product -- when measured in ounces of gold instead of dollars -- hasn't changed very much at all ... and may have even declined over time.
I'm OK ... How's things?
Wrong...Stagflation is here
In regards to a mortgage - as the value of the dollar plummets, isn’t it harder to pay off the debt? Other expenses would devour your budget before debt payments.