Replies

Stocks (equities) are still lower than their peak. Home prices, in general, are responding to local market situations ~ but we are still very overbuilt ~ a 15 year surplus by many estimates.

There's a possibility this year's climate will prove as cold as last years and that will raise food prices. At the moment what you are looking at are higher prices brought on by winter temperatures in Florida, Southern Texas and California.

If you recall Nixon's wage and price control deal, you saw a phenomenon of average prices rising as low cost products simply disappeared, and comparable products previously sold at a higher price continued to be sold.

With deflation you find something similar ~ the loss of previously low priced items that are then replaced by previously higher priced items.

This is a consequence of "restocking" costs. Manufacturers lower their prices much slower than the retail side in a deflationary regime.

Inflation or Deflation, What to Do and When to Act

Economics / Inflation
Apr 25, 2010 - 01:40 AM
By: Gary North

Have you ever seen a documentary where the herd of zebras is at the river's edge? The lions are behind them. The crocodiles are in front of them. What's a wise zebra to do?

Most of them wait. Then, without visible warning, they either run like mad or else plunge into the river.

Sometimes the lions win. Sometimes the crocs win. Most of the zebras survive: the ones in the middle of the pack.

This phenomenon is also known as regression to the mean.

It is easier to move forward than backward. Monitoring the lions at your rear is important mainly to know when to take your chances with the crocs.

What you should be looking for is a place in the river where there is a shallow land bridge. You can get across faster, and the crocs will have a harder time grabbing you.

The trouble is, you can't get onto the submerged land bridge fast enough if you're in the middle of the herd.

INFLATION OR DEFLATION?

[snip]

Deflation is not lower prices. Lower prices are a result of deflation. Deflation is the collapse of the money supply. And when all the bubbles go bust, as we see happening now, you get deflation. Our money is credit based. And credit/money is what is being wiped out.....as is the equity in real estate and the stock market. As these prices go down money, as we know it, is being destroyed. Which is the classical definition of deflation.

As the Austrian economist von Mises said: “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.”

Hotels, commercial property, which are yet more classes of real estate, overall wages paid into hands of consumers, decreasing credit demand from consumers and small businesses, as well as reduced credit availability to small businesses are some of the indicators that are still showing deflation.

Here’s some overview of the contribution of housing prices on core CPI:

http://www.frbsf.org/publications/economics/letter/2010/el2010-11.html

As your gut is telling you, housing is the 800lb gorilla in the living room, so to speak.

But there are monetary indicators out of the banking system which show that the amount of money in the hands of consumers is still contracting, overall. Wages certainly aren’t going up, credit isn’t increasing, etc.

The Fed publishes a circulars which are simply filled with chart porn:

The economy and the banking system:

http://research.stlouisfed.org/publications/mt/20100501/mtpub.pdf

The “real” economy, with more attention to price increases/decreases by the private sector:

http://research.stlouisfed.org/publications/net/20100401/netpub.pdf

NB charts in the one above like CPI and PPI, core (ex food/fuel) vs overall CPI/PPI - and you see that the increase in prices you’re seeing are from “food and fuel” - and the increase in food prices is mostly due to fuel, not farmers getting higher commodity prices.

Then check out “employment cost and compensation per hour” — showing the downwards trend.

Debt service payments (p12) shows the downwards trend in consumer debt, which might be leveling out, or it might be a false uptick based on recent transfer payments making some people feel flush enough to put some stuff on their credit cards. The next three months will tell us.

The rise in interest rates is a result of the Fed stopping their QE programs. With real interest rates below zero there for awhile, there was no place for rates to go up. The Fed instituted their QE program because they couldn’t push rates down any other way (eg, by offering zero or near-zero funds rates targets), so they used the brute-force hammer of QE to force rates lower than the market would have set them.

Still, at this point, believe me when I say that the Fed has to be scared witless of a rapid rise in interest rates; the Fed has put itself in the unenviable position of being one of the biggest holders of sloppy debt paper in the world, and who stands to suffer huge losses if interest rates go up while they’re still holding the paper.