Deflation: The Experts’ Latest Scare Tactic

The big, bad forecasts refuse to die. It’s time to shoot (i.e., ignore) the messenger. We need to focus on what is really happening, not the latest scary scenario being pushed by an investment manager.

The people furnishing frightening visions are not altruistic. When some wise investment manager issues a warning, question the motive – guaranteed, it’s not to help us. They have taken positions, and now they want to encourage investors to help those investments pay off.

More recent dark visions had Greece/Europe/Euro collapsing, Goldman Sachs’ SEC lawsuit leading to dramatic financial revelations and BP’s oil spill working its way around Florida while adversely affecting the energy industry.

“Some of the world’s leading investors are becoming more worried about deflation and are re-shaping their portfolios to prepare for a possible period of falling prices.

“Bond-fund heavyweight Bill Gross, investment manager Jeremy Grantham and hedge-fund managers David Tepper and Alan Fournier are among the best-known investors who are bracing for a possible bout of deflation, a development that could cripple global economies and world stock markets.”

(“Big Investors Fear Deflation,” The Wall Street Journal, “Abreast of the Market,” by Gregory Zuckerman, August 2, page C-1)

“Cripple global economies and world stock markets.” Really? So, in one month we have moved from government deficits/debts’ inflationary fear to government frugality’s deflationary fright? This is a pendulum out of control.

James Bullard, president of the Federal Reserve Bank of St. Louis, recently discussed what the Fed is up to and the issues they are wrestling with. He puts deflation in its proper place, along with other possible problems – as risks that the Federal Reserve must understand and be prepared to tackle if they occur:

“… Mr. Bullard said he didn’t believe the Fed should reopen the security-purchases program that it concluded in March, but it should be prepared to do so if more extreme deflationary threats arise.

“’This is a matter of being ready in case something else hits…. What if there’s a terrorist attack? What if there is some kind of trouble in the Asian recovery or something like that?” (“Fed’s Bullard Cautions on Low Rates,” The Wall Street Journal, by Michael Casey, July 30, page C-3)

Meanwhile, in other news, exciting stuff is happening. Much of it points to potentially good stock market profits. Here is a sampling of the latest reports:

Company earnings reports are good, highlighting successful strategies Business spending (investing) is up, particularly on technology Cash flow is so good it is also being used to repurchase shares US manufacturing executives are more upbeat: 70% expect revenues to rise and 45% expect to increase employment (KPMG International survey: “Sustained business recovery on the cards as companies look to re-start investment”) Corporations are actively raising money by issuing bonds at low interest rates And here are outstanding reports from two of America's largest companies:

The first is Exxon’s (XOM) discussion of their activities and how things are “progressing full speed ahead” and the company’s diversification is paying off: “Refining Rebound Lifts Exxon’s Profit – Higher Commodity Prices, Output Help Drive Oil Giant’s Earnings Up 91%; Gulf Drilling Moratorium Has Scant Effect” (The Wall Street Journal, by Isabel Ordonez, July 30, page B-3) The second is from Coca-Cola (KO): “Coca-Cola uncapped the most surprising outlook of the earnings season: ‘North America will be a growth market of great opportunities for the next 10 years and beyond.’”

So… Ignore the doomsayers. They’re simply using scare tactics to make a buck. Rather, follow the other buck-makers: US corporations. They can produce good returns for owners (shareholders) through sound, positive activities.

They can also wipe out huge amounts of owners (shareholders) wealth by stupid, self-serving and corrupt activities.

The cost of housing in this country was whacked in two ~ that's massive deflation!

We currently have 9.8% unemployment among citizens, and probably 55.0% or higher unemployment among 20 million illegal aliens.

That's very consistent with what the doomsayers are telling you.

Now, let's go a little further ~ by tonnage American industrial production continues to move ahead, but the dollar value is far lower. This is due to dramatic increases in productivity. Robotics and computerization will continue to reduce the cost of things ~ and we've just gotten started on that process ~ which is 100% deflationary.

I think what you are up against is using Old Economics that assumes the utility of money to evaluate New Economic conditions that work with or without money.

Don't be fooled people. Glenn Beck laid it out pure and simple last night on his show.

Deflation if it comes leads to a TOTAL and INSTANT COLLAPSE.

We had better hope things do not deflate because if the they do, we can add several more 0’s to the end of our national deficit. Our goods and holdings will be worthless but our debt won't be

Based on past, scary outlooks, unemployment should be 11-12% or higher, banks should be reeling under massive individual and commercial real estate foreclosures, consumers should be hunkered down and interested only in their savings accounts, and corporations should be struggling to make a profit as the economy sinks to or below its previous lows. More recent dark visions had Greece/Europe/Euro collapsing, Goldman Sachs’ SEC lawsuit leading to dramatic financial revelations and BP’s oil spill working its way around Florida while adversely affecting the energy industry.

Real (U-6) is well over 12%, major banks show "profit" only via the accounting trick of subtracting the decrease in the worth of their own issued debt, the "personal savings rate" for the eighth quarter in a row is double what it was before the economic collapse, business foreclosures remain at gaspingly high levels, you can't get a flight in or out of Greece most days, the universally hated Financial Reform Act has passed, and the BP well really isn't officially capped yet.

I'd say the "past, scary outlooks" were and continue to be right on the *cough* money.

With all due respect to Mr. Beck & his chalk board; deflation doesn't necessarily lead to total and instant collapse. As muawiyah said above, we're in a new economic era.

To add to the things muawiyah mentioned; electronic goods (especially computers, and their smart-phone cousins) have been decreasing in price by about 30%/year, for decades. Yet, the electronics market remains strong.

That said, to the extent that deflation is due to a collapse in demand — then it's a very bad thing, indeed.

June Pending Home Sales: Another Notable Drop

Today, the National Association of Realtors (NAR) released their Pending Home Sales Report for June showing another notable drop with the seasonally adjusted national index declining 2.6% since May and 18.6% since June 2009 as the expiration of the governments housing tax gimmick worked to damage future selling activity.

It's fairly clear from these results that one of the unintended consequences of the government's intrusion into the housing market has been to shift home sales from the future into the period preceding the tax gimmick expiration leaving the future with less potential demand.

It's important to note that with the government's tax scam now complete and little chance for similar meddling for the foreseeable future, the weaker "organic" trends have likely taken over.

[snip]

“Robotics and computerization will continue to reduce the cost of things ~ and we’ve just gotten started on that process ~ which is 100% deflationary. I think what you are up against is using Old Economics that assumes the utility of money to evaluate New Economic conditions that work with or without money.”

I think you’re really on to something here, and I would add that the real costs associated with food production are getting much lower too. Still, even if economic conditions are starting to work with or without money, how does an individual function (or survive) within this new paradigm without money?

"...how does an individual function (or survive) within this new paradigm without money?"

The government will calculate what you need and send you a check. Don't do anything, go sit on the porch and wait for your check. If it doesn't come, riot.

Debunking the Mainstream Economists Deflation Myths

BIG PICTURE – Many prominent economists define deflation as a decline in the general price level within an economy. To make matters worse, these academics use the establishment’s highly manipulated inflation data as their yardstick. Therefore, when the heavily massaged Consumer Price Index (CPI) and Producer Price Index (PPI) show a moderate increase, these folks celebrate the ‘perfect scenario’ of moderate inflation and when the CPI and PPI contract, they worry about deflation. Unfortunately, the vast majority of people blindly follow the views of the mainstream economists. Consequently, they end up making costly mistakes with their capital.

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