Why Deflation Fears Are Overblown (Debt-addicted Washington sees bailout in higher prices)

Forbes ^ | 07/30/2010 | Michael Pento

[Zakeet]

look at the discontinued, for obvious reasons, but still competently estimated M3 ... What do you feel is the obvious reason?

M2 is contracting at the rate of about 1-2 percent and thus supports the government's contention that inflation is not yet a concern. M3, the broader measure of money (includes time deposits >= $100,000, institutional money market funds, short-term repurchase and other larger liquid assets) is soaring (5-20 percent p.a. depending on the month surveyed). People who track M3 tend to quickly become very concerned.

Why should the QE be included in the deficit totals?

Quantitative Easing represents cash out of treasury (i.e. taxpayers) straight into the pockets of fat-cat bankers to purchase toxic (i.e. almost worthless "marked to make believe") assets. It is basically a gift designed to bolster bank balance sheets and thus enable more lending. It also enables huge fat-cat bonuses when the banks generate income on the sale of previously written-off bad loans.

Since the deficit is by definition the difference between Treasury's cash receipts and cash disbursements, it is incorrect and grossly misleading to exclude QE from deficit totals.

You think the US will default on dollar denominated debt?

Let me put it this way: You feed the current deficit amount into a spreadsheet program, make any reasonable assumption for future tax receipts based on any reasonable rate of economic growth, cut spending as much as is "politically feasible," throw in any reasonable interest rate on outstanding debt, and try to amortize the mess. It can't happen!

Default can take many forms: delayed payments, renegotiated terms, reduced interest rates, self-defined forbearance, delayed payments, or outright repudiation. Inflation (i.e. paying back funds borrowed with money that has lower purchasing power) is a type of default. I look for all of these to happen before we get our finances back on track ... in about 20 to 30 years.

[Toddsterpatriot]

M3, the broader measure of money (includes time deposits >= $100,000, institutional money market funds, short-term repurchase and other larger liquid assets) is soaring (5-20 percent p.a. depending on the month surveyed). People who track M3 tend to quickly become very concerned.

M3 was discontinued because people who track it became concerned?

Quantitative Easing represents cash out of treasury (i.e. taxpayers)

Where did you hear that? John Williams?

Default can take many forms:

Which one happens in the next year or so?

[Zakeet]

Sometime, check out what the Bureau of Labor Statistics does and does not include in its definition of CPI-W. ... It includes food and energy. Did you have a different point?

From HERE:

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is a continuation of the historical index that was introduced after World War I for use in wage negotiation.

The core CPI index excludes goods with high price volatility, such as food and energy. This measure of core inflation systematically excludes food and energy prices because, historically, they have been highly volatile and non-systemic.

[Toddsterpatriot]

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is a continuation of the historical index that was introduced after World War I for use in wage negotiation.

The core CPI index excludes goods with high price volatility, such as food and energy.

It's true, core CPI is a totally different measurement than CPI-W.

If you look at pg 26 (PDF file), you'll see what's included.

BLS

[Zakeet]

Quantitative Easing represents cash out of treasury (i.e. taxpayers) ... Where did you hear that? John Williams?

Check this out: Quantitative Easing Explained. I also recommend you read the Bank of England pamphlet linked on the page.

Last time I checked, purchasing assets was considered a disbursement whether the funds came from cash on hand or were created out of thin air.

Default can take many forms ... Which one happens in the next year or so?

Take your pick.

[Toddsterpatriot]

Quantitative Easing represents cash out of treasury (i.e. taxpayers) ...

Check this out: Quantitative Easing Explained.

Thanks, check this out.

A central bank does this by first crediting its own account with money it has created ex nihilo (out of nothing).[1] It then purchases financial assets,

I think your source explains why it's not included in the deficit.

Last time I checked, purchasing assets was considered a disbursement

Last time I checked, the Treasury spending tax dollars is different than the Fed spending not-tax dollars.

Take your pick.

It's your imagination, not mine.

[southernnorthcarolina]

In New Jersey, compared to a year ago and especially 2 years ago, I see the following:

Oil - Down
Groceries - Down
Restaurants - Deals can be had
New Cars - Deals can be had
Energy - PSE&G lowered my natural gas rate this past winter, electric not as high this summer
Gas - Way down
College Tuition - Up but so are tuition aids from loans to out-right grants (All the government interference makes it difficult to know the real cost of education)
Tolls - Up (not the 800% that Gov Corzine wanted, but up)
Mass Transit - (NJ Transit, NYC Subway) Up - Government Run

The value of my home - Way, way down! Sorry, I'm not seeing inflation. Like ClearCase_guy, I thought by now we'd be full on Carter economy.

I'll have to admit that I don't keep up with grocery prices all that closely. It seems to me, though, that there are a lot of stealth price increases around. A "pound" of coffee now weighs 13 oz.; a "half gallon" of ice cream now contains 56 oz.; a "quart" of mayo contains 30 oz; a can of tuna is 5 oz. rather than the previous 6; and bagels come in a 5-pack.

[econjack]

Yep...we pretty much agree down the line.

My field of specialty was Cliometrics, which is the application of mathematical economic theory to historical events, especially the counterfactual (e.g., What would have happened to economic growth had there been no railroad era?). We can learn a lot from the “old guys”.

Right now, in my mind, monetary policy is like pushing on a string. If you're familiar with the LM\IS curve, the Fed is in a classical Keynesian Liquidity Trap...monetary policy is a bust. The way out is fiscal policy. However, rather than shifting the IS curve with spending like Obama and those idiots want (to buy votes), tax cuts can accomplish the same thing, which is what I think we really need.

I seriously doubt we will see a hyperinflation like those seen in post-war Germany or some Latin American and African nations. There's still time to salvage things if we can get spending under control and let the consumer start the ball rolling as part of significant tax cuts. Business and investor cuts would also be very beneficial.

[Southack]

"Year-over-year growth in the M2 money supply is 2%; therefore, since the money supply is still growing, we are experiencing inflation rather than deflation."

Nope. The real Money Supply is all cash plus all credit. Credit availability is half today what it was at its peak in late 2006.

Deflation.

[Southack]

"I’ve been waiting for inflation for a few year now. When?"

Japan's been inflating their money supply for 22 straight years and they've still got deflation.

Oh, and the Japanese savings rate has finally fallen below the U.S. savings rate.

[SeekAndFind]

Also, we have to consider the VELOCITY OF MONEY.

Companies, Businesses, Banks, Venture Capitalists, Investors, etc. are sitting on a huge pile of cash, not wanting to spend it until they are certain which way government policy goes. UNCERTAINTY is preventing money from circulating.

Because the velocity of circulation is slow, INFLATION is very tame ( for now ).

[Southack]

Velocity is down because we have deflation: falling salaries, fewer jobs, cheaper stocks, lower home prices. You know, the biggies.

Japan has had deflation for two straight decades, even though Japan has expanded their money supply and borrowed 4 times as much as has the U.S.

Why?

Because Debt Is Deflationary.

Reach a certain point and your accumulated debt becomes too big of a drag for new spending to overcome.

The Japanese all think, to a man, that if they just inflate the money supply for one more year that they will evade deflation and finally find inflation.

But does any rational person think that the 22nd year is the charm for Japan?

Of course not. Japan has been repeating the same behavior since 1989 because every Japanese was taught that deficit spending would always cause inflation; that Quantitative Easing would always cause inflation.

Not true. Not if you accumulate too much debt. Once past the debt tipping point, there’s no going back to inflation...deflation or default are your only options.

[Zakeet]

My field of specialty was Cliometrics, which is the application of mathematical economic theory to historical events, especially the counterfactual (e.g., What would have happened to economic growth had there been no railroad era?).

For some reason that reminds me of the old joke:

Bill Clinton is walking down a beach when he accidentally kicks an old bottle. A genie pops out and tells Bubba that he has been freed from a thousand year prison. As a reward, he will grant the Pervert a wish.

Bubba: How about world peace?
Genie: Sorry but genie's only have a limited amount of power. Thats way over the top.
Bubba: Ok. How about turning Hillary into a sweet, charming, gentle, loving woman?
... long pause ...
Genie: Back on number one.

My field of specialty is Operations Research applied to finance and I am a history buff. As such, I have not only heard of Cliometrics, I have been been amazed by what you guys do for some time.

Unfortunately, due time and mental constraints, my ventures into the area have been limited to such deep inquiries as, "What if the New York Daily Tribune had paid Karl Marx just a little more money ... or just a little less?"

We can learn a lot from the “old guys”.

Something that the wise in every generation always discovers, hopefully, by enough of them and hopefully before it is too late.

As I write this, I briefly pause to glance at my office walls, at framed original Szazmillio Milpengos, Rentenmarks, Assignats, Aureus from the time of Postumus, punched out coins from the Tang and Ming dynasties, pesos (Chilean, Argentinian, Bolivian, and Uruguayan), a one hundred trillion Zim-Dollar bill, and so many, many more.

Unfortunately, we never learn from either history or the "old guys.".

Right now, in my mind, monetary policy is like pushing on a string.

Anna Schwartz (still going strong believe it or not) nailed the problem in an interview published in the Wall Street Journal on October 18, 2008, aptly titled Bernanke is Fighting the Last War.

As you probably know, Helicopter Ben has his doctorate from MIT where he did most of his work on the Great Depression. Therefore, by damn, he's going to prevent us from having another one of those. But as Ms. Schwartz astutely pointed out, Dr. Bernanke is treating the wrong disease. This country's problem is insolvency, not illiquidity. The Feds are essentially applying massive doses of chemotherapy to a MI patient. We will be lucky indeed if they don't kill us.

If you're familiar with the LM\IS curve, the Fed is in a classical Keynesian Liquidity Trap...monetary policy is a bust. The way out is fiscal policy. However, rather than shifting the IS curve with spending like Obama and those idiots want (to buy votes), tax cuts can accomplish the same thing, which is what I think we really need.

I agree to a point. I would agree much more if you also include massive spending cuts. And I greatly prefer calling our situation a Classical Keynesian Liquidity caused by Lack of Confidence Trap.

I also note with great interest a quote deeply buried in Reinhart's and Rogoff's recent best seller, This Time is Different, to the effect that no country has ever grown its way out of ruined currency. I find this frank admission extraordinary coming from two persons deeply immersed in the Salt Water School with such strong ties to the current Fed/Treasury/IMF/World Bank establishment.

I seriously doubt we will see a hyperinflation like those seen in post-war Germany or some Latin American and African nations.

I hope and pray that you are right!

However, as explained elsewhere on this thread, I believe sovereign debt default is inevitable. And you know what that means.

[econjack]

Very thoughtful points all. I, too, would like to see massive cuts in gov’t spending at all levels. Indeed, I would like to see the gov’t involved only in those things envisioned by the framers of our Constitution, namely the provision of social overhead capital...those goods the private sector won't or can't provide because the aren't profitable or there isn't a viable market for them (e.g., a legal system, national defense, etc.). Entitlements is a huge step in the the wrong direction. Social experiments have been tried time and time again and every one of them have failed, yet here we are marching down the same path, ignoring the historical wreckage that's scattered all around us.

My advice? Work like hell between now and November to educate people to the dangerous path we're on and make a difference with your vote.