Posted on 08/26/2010 11:04:20 PM PDT by Freedom_Is_Not_Free
* What have we forgotten the nature of inflation since the 1970s? * Where is the U.S. economy in the transition from low to higher inflation?
Monetary authorities and economists focus on inflation expectations because inflation expectations have a way of becoming reality over time. Inflation expectations, after falling hard in 2008, have been steadily rising since early 2009, and actual inflation has tracked expectations, with a time lag, as usual. Recently, however, inflation and inflation expectations have started to dip again. Is it time for the Fed to hit the deflation spiral panic button?
Expectations of future inflation are informed by the past experience of consumers, both recent and distant. The longer inflation remains tame, the longer consumers extrapolate low inflation into the future even as evidence to the contrary begins to reveal itself. Wage and manufactured goods price inflation has been so low for so long that most of us can’t recognize the shift to a more inflationary environment as it is happening today, but it is, as we’ll show.
Study the relationship between inflation expectations and all-items price indexes over time and you’ll find that consumers form their short-term expectations of all-items price inflation based largely on current energy prices, and for good reason; all-items price inflation tracks energy price inflation closely as a major input cost both to producers and consumers.
For all practical purposes, today’s consumer expectations for inflation a year from now are the same as today’s energy prices. That’s why monetary authorities focus on energy prices to manipulate both consumer and producer inflation expectations. As a deflation-fighting tool, abandoning the strong dollar policy in 2008 and allowing the dollar to depreciate was the most powerful weapon that policy makers had in the arsenal of deflation fighting tools in a zero interest...
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NO, this is no typical recession. I consider it a depression of sorts. I’m just struggling with the inflation/deflation debate. Everything looks deflationary. NVDave make great points and I don’t fade what he or Southack have been saying. The forcefulness of the inflation hawks like Schiff and Janszen and Faber and Celente is seductive and haunts my ability to discard inflation possiblities out of hand. But I keep coming back to the clear common sense thinking of people like NVDave, you and several others on this board, on whom I rely for common sense analysis, (which is why I ping you for analytical help).
All y’all have clear thinking and you have been on the right side in your general assessments for years. I will take the recommendations of you guys over any room full of economists any day. I am just struggling with the details because I have only been studying finance and the economy since I pulled all my money out of the stock market in December 2006. I like to give myself a little credit as well for at least being smart enough to see that the housing crash would impact the stock market. So I know I am smart enough to learn. I just need to keep studying, e.g. - continue reading the stuff NVDave mentioned, & etc. and keep asking questions here.
Thank you for the help. I want to put the deflation/inflation debate behind me and know with confidence what to expect for the next 5 years minimum.
Thanks again. I always appreciate your reasoned opinion.
I forgot to ping you. What can I say except that it was 4:00 am California time and I hadn’t been to bed yet? Yes, I am obsessing over the financial system. It certainly weighs heavily on my mind.
So are we really looking at stagflation or a mild depression? When I look at Eric Janszen’s graph of Japan’s CPI, I don’t see anything like a great depression but a very mild depression. Japan’s housing boom/bust was larger in scale than that of the USA.
You scared me. That’s for sure. I knew that the government took all of Fannie and Freddies debt. I never would have thought to connect it to the national debt, but DUH!, of course it is. Straight up.
OK, if I was scared before, I’m terrified now. There is virtually no limit to how much additional damage the Obama Administration could do if the Republicans fail to take over at least the House or Senate. Is it inconceivable that Obama could leave in 2012 with debt nearing 150% of GDP with a falling GDP? I don’t think so. (I have no faith whatsoever in the Republicans in charge, but they do make a reasonable roadblock when they are the minority party. As a minority they are more useful than when they are in charge and being socialist light.)
Thanks for the reminder that Fannie’s and Freddie’s debt count toward the national debt. That is obvious now that someone has pointed it out.
I thought debt above 100% GDP was a tipping point. It is news to me to read that someone who studied the matter believes the drop-dead point is at only 90% of GDP.
My real concern is that China and India have the resources and are in position to grow and fill the world’s increasing demand for goods and services. Unlike post-WW II with most of the world’s advanced nations essentially lying in bombed-out ruin, we were poised to have no competitors for our manufacturing and production for a decade or two.
We are so like Great Britain after the war and I think we are going to decline faster than Great Britain.
I don’t think we can reverse ourselves from this decline and your reminding us that the national debt is way, way over 100% GDP. Horrific.
I have always believed that as long as we were a free and moral nation, we could overcome anything with our creativity and optimism. Now I am losing faith that we can. I am losing my own optimism. But I am not taking this lying down. The day after the Republicans take the House and Senate, I will be BEATING ON my representatives to shrink the size of the national government and eliminated useless agencies.
Sorry I forgot to ping you. You are among those whose opinions I look for to get your common sense wisdom.
This is The Most Fiscally Irresponsible Government in U.S. History !
Excerpt:
Current federal budget trends are fully capable of destroying this country. There is an instinctive conclusion among the American public that President Obama's stimulus package has failed to create a sustained recovery. Unemployment has increased, not declined; consumers have retrenched; housing starts have crashed along with mortgage applications; and there is a fear that a double-dip recession may very well be in the pipeline. The public perception, reflected in Pew Research/National Journal polls, is that the measures to combat the Great Recession have mostly helped large banks and financial institutions, and that's a view common to Republicans (75 percent) and Democrats (73 percent) * * *There is another instinctive conclusion among the American people. It is that the national deficit, and the debts we have accumulated, are of critical political importance. On the national debt, the money the government has spent without the tax revenues to pay for it has produced mind-numbing numbers so large as to be disconnected from reality. Zeros from here to infinity. The sums are hard to describe; it is hard to describe an elephant, but you know one when you see one. The public knows that, shuffle the numbers as you may, the level of debt is unsustainable. * * *
Obama's policies were designed and engineered to help the 'too BIG to fail:' In short, corrupt banks and Wall Street criminals. King 0 is a nothing but a two bit shill for corrupt profiteers. He has deferred our economic policy to Bernanke who is over his head in world banking corruption. 0 may go down as the worst president in U.S. history. Certainly, he is among the most inexperienced people to occupy the Oval Office.
The U.S. would be better off if Obummer were impeached, removed from office and imprisoned !
The bond market (and currency markets to a lesser degree) tell the true story. The equities markets are delusional high-stakes gambling for those that can't afford to take time off for Vegas.
"Janszen has stubbornly stuck to his guns that we will have an inflationary depression."
Can Janszen point to the last inflationary depression that the US has suffered? No, he can't.
What is the commonality between all countries who have experienced inflationary depressions?
Answer: they all owed debt denominated in the currency of other countries. Iceland could suffer this fate if they allow the European Union to push them around. Argentina exprerienced it. Germany experienced it after World War I when the Treaty of Versailles forbid the use of German currency to repay war debt.
The US does not owe any debt denominated in foreign currency - therefore, the US cannot currently experience an inflationary depression.
We are in a deflationary spiral depression right now as I write this. The only thing masking it from the public is $1.5 trillion annually of deficit spending. Even with that, the GDP estimate is a pitiful 1.6%.
Please see my post # 26 . . .
” Obama’s policies were designed and engineered to help the ‘too BIG to fail:’ In short, corrupt banks and Wall Street criminals. King 0 is a nothing but a two bit shill for corrupt profiteers. He has deferred our economic policy to Bernanke who is over his head in world banking corruption. 0 may go down as the worst president in U.S. history. Certainly, he is among the most inexperienced people to occupy the Oval Office.
The U.S. would be better off if Obummer were impeached, removed from office and imprisoned ! “
Obama was raised from a pup by Chicago gangsters . Nothing has changed. He is paying them all off with our blood!
You are making excellent points.
Look, I feel everything is pointed to a deflationary depression. There is some terrific mindpower here convinced we are in for a deflationary depression and I take all their words to heart, including yours.
That said, the inflation hawks are so passionate, and some of them having been right about calling the housing bubble, that I have not been willing to discard their conclusions out of hand, just because I can’t clearly see their argument.
Add to that my own financial ignorance (I’ve only been studying this stuff for 3 years, but it has been ALMOST EVERY DAY!) and I don’t have the knowledge base of a NVDave or ex-Texan or you, to see clearly what you all see. I’m still struggling but I am hopeful I will come around with all of your help educating me, which is invaluable and appreciated.
I do become wary when everybody lines on one side and I do play the contrarian asking “what could they all be missing?” So when all of you are convinced of a coming deflationary depression, I double down on my scrutiny, which makes me a gadfly to all of you.
I see pretty clearly and can make a hard call, so I think things will sink in sooner or later and I will be convinced and quit bothering people for more information regarding the inflation/deflation debate. I’ve called it “unknowable” but when I finish reading all the stuff NVDave gave me to read, maybe I will “know”.
I find it fascinating that all inflationary depression you noted came from debts owed in other currencies. I have to chew on that one. That is a very interesting observation. Thanks.
Without a doubt this is the most reckless government spending in our history. Irresponsible is right. But it is not accidental. Obama doesn’t have the intelligence to wreck our economy. Obama is taking marching orders from whoever is pulling his strings. Some people say this is Soros, but I see Soros as merely the one bankrolling the attempt to push
This spending is the embodiment of Rahm Emanuel’s “never let a good crisis go to waste”. The Socialists are employing what leverage they think will collapse the economy and our financial system to bring about a socialist nation from the ashes of what is left, and bring us into a New World Order where the USA is to weak to oppose the defacto world government.
How is that for a conspiracy theory?
I’m not saying they will achieve their affect, but I believe that is what is behind the reckless spending and the manner in which it is being done. I don’t think for a second they are actually trying to fix the economy any more than that passing Obamacare was really an attempt to enhance the health of all Americans. All strategy is employed to destroy our capitalist nation, deprive us of freedom, and put us under socialist control.
Your average brain dead American is awake to the irresponsible spending and debt, but it seems to me that it is too late. The horses have left the barn. I pray we can reign in government when the Republicans re-take the house and senate, but I don’t see it. I think the die is cast. I don’t think we can come back from the brink. The race toward national Socialism has been accelerated by people allowing Obama to be elected and do all the damage he is intentionally doing on marching orders from whatever shadow group of powermongers run him and Soros, and us little people get to slide inexorably toward socialist tyranny.
Nice, huh?
To sum up my belief for the past several months:
I have believed we are heading for a deflationary depression, but have been unable to completely discard a nagging doubt we could see inflation.
I keep trying to purge that 2% doubt.
That is all I keep trying to do here. If you see my general posts here, I am constantly saying “we are heading for a deflationary depression.” I believe this, so I am not so far off the mark from all of you who KNOW.
I envy that you guys have no nagging doubt that an inflation is possible. I take to heart the wisdom of this group and I am just trying to eliminate my wishy washy belief that we could inflation.
My engineering brain won’t let me discard the possibility of inflation until I feel I have all the facts in hand, made all of the studies, have all of the data. So I keep struggling.
I know you guys are right. When I post in the forum I always say we are in or are headed for a deflationary depression. It is not as though I don’t know that. I just have this 3% doubt and I am doing my darndest to try to eliminate that doubt from my mind. That is my downfall.
I want to be able to say we are deflating, and say it with conviction, without constantly thinking “but I’m not sure...”
Which carry trade?
Janszen claims stealth inflation. Among his supporting data is reduced quantities of food products sold for the same price it used to sell for.
I took his example at face value. I’ve been thinking about it, and I think he is wrong.
During the period of oil speculation where oil ran up to $145/barrel, we had a massive rapid food inflation. Subway dropped offering a daily special. Other places raised prices and cut back quantities. The inflation was obvious.
It was then that food companies reduced quantities for their products.
Janszen is right that quantities were reduced while prices stayed the same or rose. He is wrong that is the case today. Prices on these items have fallen.
Yes, the quantity of my orange juice dropped from 64oz to 59oz, but the price has dropped back from the $4.99 of that period, and the clearance sale prices have resumed to frequent offerings.
My “half gallon” carton of Breyers ice cream is 1.5 quarts. I just checked. But I just got them at the crazy low sale price of $1.99/carton.
This is DEFLATION, not inflation. Janszen is wrong. He is stuck in the oil bubble. The shift in packaging is a remnant of the rapid adjustment caused by the oil bubble, but todays prices and sale prices have compensated for these reduced quantities.
Food prices are all over the map so I am not saying food prices are down overall, but prices are down on the items he cherry picked to make his point. If we were inflating, food prices would have held steady for these reduced quanties. Instead, they have come rapidly back down to their stabilized pre-oil bubble levels.
He is wrong about the stealth inflation as regards food prices.
Inflation/deflation is a VERY difficult and arduous conversation to have, because for it to mean anything, the conversers have to first clearly define what each of them means by the use of the key terms, and also has to clarify whether they are talking about the macro, micro or anecdotal effects.
A great many things are happening that are seriously baffling from the “common sense” or intuitive standpoint. For example, if “banks aren’t lending”, then it would seem that credit would be dear. Well, it’s not too expensive, but massively fewer people can qualify for bank lending than could only a few years ago. In addition, many people are not that eager to buy things on credit (either consumer, or business, and this is solidly borne out by the figures) either because they are rebuilding their balance sheets or do not want to expand their business(es) in the face of the regulatory uncertainties facing them. So, is that de_ or in_flationary? How do you factor in a reluctance to borrow?
De_ or in_ are not, btw, numbers you can read like a depth gauge on an underground fuel tank. A great deal is caught up in perception. This, the Fed knows better than anyone, believe me. Perceptions are ultra critical when it comes to this discussion.
You say you want to leave the discussion behind you, eg; have it be settled. I’m afraid it might not be so easy. It’s dead clear that wages are not going to rise. So if prices take off, the number of people able to buy stuff (in our 70% consumer economy) is flat out going to get choked off. We may get $8 gas. Many, many people will not be able to get to work if we do. Many will not be able to buy food. OK, you say, maybe we get a slow creepy inflation. It’s hard to say. My vote, and it’s a vote because the accumulation of individually identifable factors, is deflation. Fewer people will be able to buy stuff. Producers will not be able to raise or even hold prices, even though they might want to in the worst way.
And yet, commodities inputs are bound to get more costly with increased competition from India and China. Some foresee resource wars, or at least struggles.
I don’t find it a comforting time, at all. Strictly on economics. Then you add 0bama et al to the picture and it’s close enough to a depression to just call it one and be done with it.
My problem is, I am struggling for a black and white answer, which as you said, is impossible. My vote was also for inflation. Then I try to sleep at night and I recall visions of suffering for hyperinflations past and I think “am I positioning myself right. If the dollar becomes toilet paper, what becomes money in it’s place”.
So I too think we are in for a deflationary depression but every time I think of the suffering from hyperinflation, it makes me study to try to discount the possibility so I can slip at night. Not that deflation is any cakewalk.
My mother was a banker’s daughter during the Great Depression. Her father was a VP of Bank of America (then Bank of Italy) in San Francisco. They were not hurting in the least. They had a 12-cylinder Buick saloon bought during the 1930s. Suffering for them was pulling down the black-out shades during WW II. They were not hurting during the Great Depression.
40 blocks away, my father was walking miles to sell papers at 7 years old to add money to the family’s gross income.
I firmly believe that the secret to surviving a deflationary depression comes down to one single thing — keeping your job. Keeping your income. People starved or froze to death because they went so long without food or shelter because the family could not or would not help them.
I’m pretty confident in my job security and as a result, I feel I can ride out a deflationary depression. It won’t be fun. My father beat that clearly into my brain. I think I know what is coming. I can tighten my belt very considerably at this point and keep my house, feed myself, get to work, etc. I have taken a 15% cut in income and I can probably absorb about a 40% drop in income. I figure I will be making at best about 60% of my current official salary during the worst of what I expect to come. I think I will be OK making 60% of my official pay.
May people out there are 2 years on unemployment. Many jobs are permanently gone. The new bread lines are unemployment and food stamps. The federal government will be footing the bill for a growing number of unemployment/food stamp recipients all through the depression. It won’t surprise me if there are people on 5 years unemployment or more when all is said and done, perhaps with a cap on the value.
Yes, I want things black and white and I’m not going to get my way. I’ve said this is unknowable and I may be correct. Then I see posts by Southack and he at least has the conviction to “know” what he knows. I can’t get off the fence.
I know we are heading for a deflationary depression. I don’t think the government can print their way out of it.
Thanks for another great post for me to think about. What you wrote is true - obviously true. I appreciate your stating your opinion that we are heading for inflation.
I know just enough to know this does not mean all prices for all goods will drop. Like you said, there are commodities with high world wide deman that can rise dramatically, even as many of our assets plunge in value.
I’m ahead of the curve. At least I know a deflation is coming. At least I am constantly looking for economic signals. At least I have access to knowledgeable people here at FR, you among them.
That puts me light years ahead of the masses of sheep who are feeling the pain of economic decline, but do nothing to study the cause, are not even trying to predict the immediate future, and will be completely unprepared for anything that comes their way.
The help I get from you and others on this forum is just invaluable for help, preparation, and just for comfort.
“I appreciate your stating your opinion that we are heading for inflation.”
No, I think we will feel more like we’re in a DEflation. DE.
But again, it’s a voting process as I see it. Some elements of what we use or consume or occupy may rise, some may fall. For example, the price of gas and lettuce might rise in nominal dollars...dollars that will be harder to get (eg; keep your job...and I might say...develop some side source of income) But lettuce could rise a heck of a lot offset by a further 10% drop in real estate. The value of living wherever you live may deteriorate if, say, 10% of the police are laid off and the crime rate rises. Or if the roads acquire potholes so that 15% more citizens have to perform some form of suspension repair on their cars.
That’s what’s so snarkly about this. Some effects will be secondary, tertiary, I believe. I think, and I think most would agree, that the average standard of living of a US citizen will decline.
This is what bugs me about getting further involved in precious metals. (I already have plenty) Hard times will bring out more silver from sterling serving sets. Increased crime will endanger your stash of stealable items more than they are now. If cash goes higher and interest rates go higher, those effects could crush gold & silver.
This just isn’t linear. It’s like an 11-variable equation and the data just aren’t there to thrash it out. If you are Bill Gross and can actually influence the markets, you do so without any shame talking your book. But that’s no answer for us peons. IT’S TERRIBLY EASY to acquire a viewpoint and defend it to death. This would be Peter Schiff. I like Schiff. I just find him and most others uni-dimensional. If they are wrong, they and all their followers will get devastated. That happened with all the dollar bears not to long ago. Schiff absolutely butchered a bunch of his acctholders. But to hear him tell it, he was still right.
My humble apologies for my typo.
Deflation, deflation, deflation. I know you said “deflation”. I have no clue why I typed “inflation”. Typing to fast or freudian slip or what.
No, I read you loud and clear to say you expect deflation. I apologize for tying “inflation”. That was stupid.
Deflation! Sorry for the typo. I must be tired or something. I did go to bed at 4 am and didn’t get a full nights sleep.
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