Posted on 12/28/2008 10:42:49 PM PST by Freedom_Is_Not_Free
US consumer swan song: Cheap now, cheaper later, then expensive -- it’s all about supply
Early next year expect a Great American Consumer Fire Sale to follow on the heels of the Great American FIRE Economy fire sale of financial assets that began in 2006. While the FIRE Economy fire sale was in houses, stocks, and all bonds but US Treasury bonds, with particularly heavy depreciation in securitized debt, The Consumer Economy Fire Sale starting in Q1 2009 will be familiar to...
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I could not help thinking that a year from now many shoppers, blissfully unaware of the economic calamity that awaits them, will wish they’d understood the perversely low prices as a warning of economic trouble ahead and saved their money for later.
The holiday retailer strategy: those left with the least inventory after Christmas live to fight another day. Then the first half of 2009 goes like this.
1. After Christmas sale 20% to 50% off 2. Liquidation sale 50% to 80% off 3. 30% to 40% of retailers go out of business
Advice to readers: take advantage of the early 2009 Great American Fire Sale and go out and buy all the generators, chain saws, washing machines, fine linens, and other durable goods you’re going to need for the next few years because by the end of 2009 most of the inventory may be sold through, many retailers will be shut down, and replenishment of stocks of the survivors will likely be meager; our models say that the goods import supply will decline more precipitously than the supply of money available to pay for them. That spells severe stagflation.
(Excerpt) Read more at itulip.com ...
Interesting read.
Ping, for your humble consideration. Long but interesting point of view.
Wait for the many business failures in January.
Then, you’ll have to many dollars chasing to few goods. Prices should start going up by April.
It’s going to be bumpy in 2009, folks. imo
Who’s to say those dollars will actually be involved in chasing?
CA....
I hope you and others read the entire article and not merely the brief excerpt. I would have posted the bulk of what I hoped would be read, but I’m not certain if iTulip is to be excerpted or not, so I played it safe.
I posted the portion about short-term disinflation. His larger point, which you must read his article to appreciate, is that very high inflation is in the cards after an initial period of disinflation.
The great debate going on, the unknowable, is whether we deflate and spiral down into a deflationary depression, or whether we avoid deflation and experience significant inflation. The crisis is just starting to make itself felt, with unemployment beginning to accelerate. For those who retain work, how you prepare for the coming few years makes all the difference in the world. I’m still trying to decide if we DEFLATE or INFLATE. Eric Janzsen, like Peter Schiff, has stuck to his guns that this crisis leads to severe inflation.
To that end, I posted the article and was only able to post a teaser excerpt to garner interest, but you and others need to read the entire portion of the article regarding inflation so as to begin to evaluate this great inflation vs. deflation enigma.
Large numbers of failed businesses would undermine consumer confidence and increase unemployment. It is unlikely that the end result would be a massive spending binge.
If the demand isn’t there, it isn’t there. The only areas that could even support price inflation are the absolute necessities. Food. Fuel. Utilities. And, even these will see continued reduction in demand. Short of a full-on currency collapse, I don’t see inflation.
Great point, as current dollars are either being held in reserve or going to service debt, hence the predictable terrible Christmas sales.
I think Janzsen’s point is, after the liquidation and clearance sales at very low prices, producers will scale back on production or just go bankrupt, leading to shortages in most goods that will cause price appreciation. If that occurs, then buying basic goods will be inflationary, not because of a flood of money (demand) but because of a severe shortage in supply of goods.
I can assume then that you did not read the article linked. My PURPOSE for linking the article is to add to what Eric Janzsen has written regarding the inflation vs. deflation debate. He continues to claim we inflate hard, and I recommend you read the article and then tell us why you still don’t see inflation.
Here is an older article that lays the foundation for Janzsen’s belief regarding the inevitability of inflation. Whether you agree or disagree, he has put great thought into his views and it warrants at least a read to consider his viewpoint if you want to be informed as to where we may be going regarding inflation.
This is a MUST READ for anybody studying the inflation/deflation argument.
http://www.itulip.com/forums/showthread.php?t=417
And this is another good argument by Janzsen
http://www.itulip.com/forums/showthread.php?p=16690#post16690
Your PURPOSE in posting the article aside, this topic has been discussed at length on a number of sites, such as this one, Ticker Forum, Seeking Alpha, etcetera. I’ve read most of them.
I will tell you, again, why I don’t see inflation, outside of a full-on currency collapse ... lack of demand. The only areas with any pricing power at all are necessities.
That little word, demand, is what will matter. What you will find is that the ardent arguments for inflation, or even “HYPERINFLATION!!!” have more than a passing interest in touting that outcome. They have a profit motive, in other words.
Will some central banker, somewhere, overplay his hand and set off a Weimar repeat? It’s certainly possible. But, that is not what your author contends, is it? The contention is that too many already deflating dollars will be chasing too few goods.
I’d be much more concerned about shipping and logistics companies going under, as far as supply is concerned. That would kick off a genuine panic.
Yes, interesting read. Once foreign countries realize how quickly we’re devaluing our currency, they’ll stop taking it. Since we now import all our “stuff” from foreign countries, we won’t be getting any more stuff. We’ll have to start making it ourselves. The real U.S. economy will go wild on the upside — in time.
You can’t be serious? This is a blog!
Yes, the thrust of this article is that, after the FIRE economy burns off inventory, a great inflation is in the cards.
As you state, strong inflationary tendencies in the “basic” economy could well manifest, but my own view is that, if that becomes the case, it will only be for a time.
Mr. Janzen correctly asserts that if a government wants to, it can propagate inflation. He also states that, unlike in the ‘30s, and the Volker-induced recession of 1980 - 83, there is nothing stopping this correction, if you will.
The problem here is that, given the brake-less economy we are now experiencing, and will continue to experience for some time, the question becomes, who's more powerful - the government or the marketplace? Irresistible force or immovable object?
The problem, given this careening economic juggernaut rushing headlong into collapse, is that governmental efforts to “control” something so vast (it's global now) beget unintended consequences, and in those situations, the timing is invariably an issue (often quite poor).
My point here is that, should we attempt to reflate, in short order the efforts will hit a wall, backfire, and the issue of “control” will become all-paramount, as we witness with bated breath the collapse and destruction of a world currency.
(The concept of "pushing on a string" comes to mind here, as they find they have not the degree of control they thought they had.)
That's what I'm saying. If they think they have control of a brake-less economy, they'll take that wheel of control, along with the rest of us, straight down into economic Purgatory.
While that could happen, I don't think it will. I'm still forecasting deflation, despite the government's best efforts to save us from themselves.
Gold is rising in large part because it is a widely-perceived store of value that has stood the test of time. If you're an investor with a portfolio of any substance, you can't get away from dollar- and paper-denominated assets. That's the nature of the beast today. But if you're into gold to any degree, you know in your heart of hearts that that portion of your investments is safe from currency depreciation, and the ravages of market volatility.
In other words, in these most parlous times, you've attained the number one stratagem of investing in dangerous times - total capital preservation. When the storm is over, and even if worse comes to worse and a new currency is issued, you'll have maintained your position through all of it.
No small feat, and this is the value that gold has.
If you're worried about liquidity, then you'll have to maintain a portion of your assets in current market instruments for that purpose. The gold portion is more or less frozen, but only until such time as stability returns. That's what it's for.
This is a lot longer than I had originally planned on writing, and for that, I apologize. I guess long articles prompt long reflections such as this!
Thanks for the post.
CA....
However two things:
There will be a flood of dollars coming home. Foreign banks and nations (Japan, China, Russia, Saudi Arabia, Europe, ...) will sell the Treasuries they hold, and exchange the dollars thus obtained for other currencies.
This will be on top of efforts already in progress by the Fed and Treasury to flood our financial system with dollars. Also the exchange rate of the dollar relative to other currencies will take a serious hit, again as the dollar loses its role of the worlds reserve currency.
Wages will not follow, because unemployment will still be very high, and people who fear losing their jobs don't demand raises. People who have already lost their jobs even less so ;).
Prepare to live on less.
But Eric Janszen (EJ) is predicting a two-stage financial crisis. We are in stage one now, which is deflationary in many regards (except for short term Treasury prices and the exchange rates of the Dollar and Yen.) This stage one crash began with the collapse of the mortgage and FIRE (finance, insurance and real estate) bubble.
Stage two will be a second crash, which begins when the worlds central bankers, outside of the United States, decide that the dollars role as the worlds reserve currency has ended, and all run for the exits. Massive, perhaps awesomely rapid, sales of Treasuries and foreign exchanges out of dollars will send ten or twenty trillion dollars home to America, perhaps in the space of a few weeks or less.
That will, if it happens, almost certainly result in a massive increase of dollars floating around within America, unwanted by anyone outside America.
And that is what EJ means by "inflation". He is an economist, so he means by it "more money", which may or may not mean "higher prices."
Though, as I noted in my previous post, this will, not too surprisingly, lead quickly to higher prices.
Oh, there’s no question that the whole thing is coming undone. But, what you’re proposing is another variety of the “decoupling” that was supposed to insulate the rest of the world from US woes. As it turns out, much of the world is in as bad, or worse, shape.
In a world economy where debt had become money, money has been and is being destroyed, as rapidly as the various central banks are replacing it. Money supply in the US has actually contracted.
Where is this “other” reserve currency going to arise? The Euro? Not likely. Yen, Yuan, Peso? Ruble?
None of this seems at all plausible. Some were proposing that commodities had become the new reserve. We see how that worked out.
Yes, other nations, world wide, are hurting more or less as much as the United States. I am not predicting they do well while we don't. If you read what I wrote, I predicted a catastrophic collapse of foreign manufacturing of goods to be sold in America, for example.
I am simply agreeing with Eric Janszen of iTulip that a boat load of dollars are going to be shipped back here, likely within the coming year. There will be a massive decline of foreign held financial paper denominated in dollars. Treasuries will be sold, causing short term Treasury rates to reverse sharply upward. Dollars will be exchanged for other currencies, more regional or closer to the user. Foreigners will projectile vomit their dollars back at us. The foreign currency exchange rate of the dollar will collapse.
That increase in domestically residing dollars, in and of itself, is the very definition of what EJ means by inflation -- an increase in the available supply of currency.
Because our perception of inflation depends in part on how much of that new money China can absorb into its dollar reserves- and keep in its reserves, we do not see a proportional increase in the price level. As China hits the wall economically and has to scramble for cash those dollars will start being disgorged and will rain back into the American economy and prices will reflect that.
The advice about getting your durable goods while you can now is good.If your income is truly inflation proof, if it must rise with inflation- i.e. is based on gold- then it would be prudent to borrow as much money as you can (and can make the payments on now) because the coming price inflation will rapidly devalue the dollars you use and you will be efectively paying back a small fraction of the value of the loans you have taken on. Free money, in other words. The rest of us will find ourselves in a real bind if we are paying on loans because in every inflation the last prices to rise are wages and salaries. The higher the rate of inflation the longer the lag.
The only quibble I have with Mr. Janszen here is semantics, the word “stagflation.” That word was coined when government and academic “economists” were totally bumfuddled by tht Carter inflation that was so obviously accompanied by declining output. For Keynesian and other “economists” inflation is a synonym for expansion and the words are often used interchangeably. They are zero-sum thinkers and cannot conceive of an actual increase in wealth in the economy of the world. That is why they insist that there must be inflation all the time or the economy is failed. The number they prefer is about 3%. They would like there to be more than that but the people get agitated at higher rates and there is labor unrest, big strikes and such. Keynesians disbelieve the evidence of their senses altogether and truly believe that there is no more wealth in the world than there was in 1700. They just know that societies and individuals only get richer by impoverishing others. Thus the abject poverty in Africa is truly a result of Americans (and Europeanss) stealing the wealth of the world. Europeans are not tagged with that crime because they are trying to “share their wealth” with socialist approaches.
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