Posted on 12/10/2010 7:13:14 AM PST by SeekAndFind
At my firm, we are endlessly keeping a close eye out for the emergence of deflation, defined here as the purchasing power of the dollar going up.
Technically, inflation and deflation are terms that indicate a particular combination of money surplus or deficit (respectively), demand for money (of which velocity is but one measure), and demand for various goods and services (which themselves may be in abundance or short supply).
The reason that the inflation versus deflation debate has been so noisy, yet simultaneously so murky, is that all of these intersecting variables impact the final equation. It is like the difference between trying to balance a single broomstick on your outstretched hand versus trying to balance a broomstick with three well-greased hinges at points along its length. The former is tricky enough to balance; the latter would be impossible for nearly everyone.{FLIKE}Some try to reduce the inflation/deflation debate to a single broomstick ( all we need to do is look at declining credit and see that we are in deflation!), but in my opinion, that is far too simplistic a view. We still need to consider base money creation, velocity, and the relative level of faith in current and future monetary policy among the majority of market participants.
Because we cannot really know all the variables and how they are feeding back and forth between each other, we must simply look at the final impact to gauge where we are. Fortunately, we can do this with relative ease.
Again, what we care about at the end of the day is whether our future money will buy more, or whether it will buy less -- and, naturally, whether we will even have any coming our way.
The argument for deflation says that because of declining credit, people will hold onto whatever money they have for dear life, unsure if more money will be forthcoming. In this case, the velocity of money will slow and collapse.
The argument for inflation includes the idea that existing debts are a form of money and that the worlds central banks are busy printing up more than enough new money to swamp both the commodities markets and peoples preferences to hold something that can be created without any effort or cost.
Many in both the inflationist and deflationist camps say that prices are not worth analyzing because they are the result of, not the cause of, either "-flation." But it would be a mistake to ignore prices simply because they represent the passenger, not the driver, in the story. Knowing where the passenger is going can give you a pretty good indication of where the driver is headed, and therefore its important to keep a close eye on prices when assessing inflation/deflation.
Prices
On the plus side for inflation are commodity prices, which are again nearing their all-time peak and which have been compounding at an average annual rate of slightly more than 10% over the past decade ( SEE FIGURE 1 )
But they seem to be at a critical juncture on this longer-term time line. Either they will break out from here, or they will be rejected, creating a massive double top not unlike the one seen in the stock market in 2000 and 2007.
Still, commodities could fall back a long way before they would violate the trend line in place since early 2002, when prices began the ascent that would see them finally break out of a long-standing range.
In my book, 10 years is a respectable amount of time to assess commodity prices. Beware those who cherry-pick the 2008 topping event as their reference point, as they are missing the larger story of the trend line that I have drawn in blue above.
But commodities are just a small component of the overall price landscape. If one trusts the CPI statistic -- and I really have my doubts about its construction and methodologies (thats putting it mildly) -- then it would seem that prices are actually quite tame and that disinflation (in which inflation is declining slightly month-by-month but still rising overall) is the greater concern, as the Fed has claimed.
But even here, when viewed on a longer time frame, I really do not see anything to suggest that we are facing a dire catastrophe of price collapse ( SEE FIGURE 2 ).
What I see in the above chart is that prices first climbed at one rate between 2001 and 2004 (first red line segment on the left), then climbed at a faster rate until a blow-off in 2008, have since recovered, and are climbing again quite handily.
For the record, I happen to think that the CPI systematically undercounts inflation due to underweighting certain components (especially medical care) and completely avoiding the impact of taxes on spending and costs. Given this, the fact that the CPI is higher this year than last year, we have to score another one for inflation.
But its almost certain that inflation is higher than stated by the CPI, so we might want to rate that one just a little bit more strongly than a literal interpretation of the CPI might suggest.
On the subject of house prices, the situation strongly favors deflation. And given the importance of housing to the health of bank balance sheets and consumer wealth effects, this is certainly one of the demons that the federal government and Federal Reserve are fighting tooth and nail ( SEE FIGURE 3 ).
While house prices are above where they were a year ago, the bounce has been anemic at best and has recently turned down again. This is a very poor sign. Score one for deflation.
Stocks are now at two-year highs, bonds are up quite strongly over the past several years, and oil is at a two-year high. All of these weigh toward inflation being the dominant theme of the day.
With regard to prices alone favoring inflation, we find that commodities, stocks, bonds, medical costs, college tuition, and the CPI itself are all up over the past year, and in the case of everything but stocks, the past decade.
Conclusion
The point of this approach is to keep prices firmly in view when thinking about inflation and deflation. While the theories about the role of money and credit as the drivers of the "-flations" are very important to understand, what we really care about at the end of the day is the final impact on our purchasing power. By nearly every measure, except in limited cases sprinkled throughout (with housing being the most visible and important), we find that prices have been rising smartly. Or we could say that the dollar and other fiat currencies have been sinking, which is a more accurate way to think about the dynamic.
This should not surprise anybody, as it is the obvious result of massive printing efforts undertaken by nearly every OECD central bank in response to the prior crisis caused by too-cheap money. Nor should it confuse students of our economic system, who know that continuous increases in asset prices and real things are essential to the very functioning of the entire system. Growth is a requirement of our monetary system and, by extension, our economic system. With growth, everything is fine and the status quo can be preserved. So naturally there is strong support for all manners of growth within and across our political and financial institutions. Without growth, the system misfires and threatens to collapse.
Those who read history also know that inflation is by far the more common outcome of a situation in which there is entirely too much sovereign debt that cannot be repaid by ordinary means. All one needs is to take a quick glance at the balance sheets and off-balance-sheet obligations of practically every developed country to realize that collective insolvency is the correct term to apply.
So at this point in the story, we see that prices have been rising, our fiscal and monetary authorities are trying quite hard to foster even more rapid price escalations, and they are doing so because the system demands it of them.
Right now, based on prices, we have to score inflation as the winner, although well be the first to change our tune should the data change.
-- Chris Martenson is an economic researcher and futurist specializing in energy and resource depletion.
The only problem with deflation is that people take all their money out of investments/the bank. They no longer need 5%/year to keep up with inflation so they can just keep their money under the bed and/or spend it.
That kind of screws up the banking system.
Deflation is just a boogieman concocted by the ruling class to justify the printing of money, which is required in order to keep the pitchfork and pine-torch brigades from nailing their hides to the nearest barn wall.
I’ve never seen it. We’re certainly not seeing it now, as anyone who pays for their own groceries or buys their gasoline with their own money knows.
One more scam, taking it’s place along with anthropomorphic global warming, Freudian psychology, Keansian economics, and the works of “sexologist” Alfred Kinsey and “anthropologist” Margaret Mead.
Strangely we could possibly see both at the same time in the years to come.
There have been two periods of deflation in our history, the 1870’s and the 1930’s. The former was a prosperous time, the latter was not.
” There have been two periods of deflation in our history, the 1870s and the 1930s. The former was a prosperous time, the latter was not. “
Would the difference between the 1870’s (would ‘deflationary boom’ be a fair description?) and the 1930’s be due to other factors beyond the difference between laissez faire, and interventionist government??
So much talk about inflation - as if the governments and banksters who so desperately need it to bail themselves out of their losing gambles can will it into existence through the media.
The price of computer power and communications bandwidth has been “in a deflationary spiral” since before Gordon Moore enunciated his famous Law. I don’t hear anyone complaining about it.
Deflation naturally occurs during economic downturns. Its healthy and good. Because wages are stagnant, lower, or people are unemployed, demand drops. Because demand drops, prices drop to be more competitive. Its capitalism, and at a happy medium things balance and begin to uptick again.
However, what happens if the money supply is flooded? Well, if the money is just printed and handed out for free, it leads to a short term brake on the fall in prices, but that’s it. It prolongs the pain. People’s wages don’t go up, so they don’t increase spending.
Prices do not decline, because the government has become the primary buyer and shown a willingness to pay the going rate. Once this is understood, prices actually creep up. However, because there is no increase employment, wages do not.
And that is how you can have economic deflation of buying power, at the same time that you have monetary inflation. Either the Fed is too stupid to realize that inflation is a product of growth and not its cause, OR more likely, they don’t care about jobs at all and are focused purely on devaluing the U.S. government’s debt.
It appears they may be starting a new scheme inflating housing again of course with risk falling on the taxpayers.
No wonder Pimco is saying things will return to positive of course Pimco’s been a major beneficiary of the Feds game so much so one wonders if they have a direct line to Banana Ben and with how they have been profiting already as a result why not put a positive spin out to the media.
Government, Fannie Mae Considering Help for Housing Investors
http://www.cnbc.com/id/40590863
What’s hot for 2011: Mortgage-backed securities?
http://finance.fortune.cnn.com/2010/12/09/what%E2%80%99s-hot-for-2011-mortgage-backed-securities/
Pimco Raises 2011 U.S. Growth Forecast Becasue of `Massive’ Stimulus
http://www.economicpolicyjournal.com/2010/12/pimco-raises-2011-us-growth-forecast-n.html
“The Fed effectively telegraphed its intentions to the Street before buying the bonds. Legendary money manager Bill Gross, who oversees more than $1.2 trillion at Pacific Investment Management Co. said last month during a television interview that part of his success over the last 18 months was due to buying securities in front of the Fed, and selling them to the Fed at a premium, allowing him to profit handsomely. Gross runs PIMCO’s $252.2 billion Total Return Fund.”
In many ways yes. Roosevelt’s CCC kept wages too high while prices were falling. Businesses couldn’t afford to make and sell goods because their margins were nil.
The 1870’s were much like what electronics are today and what the fall of the USSR did in the 1990’s. Technological advancements and opening the west brought in new supply and cheaper goods overall. Lower prices and stable money means more purchasing power and people buy and invest more.
Actually deflation is always the cure for a recession/depression if wages are flexible and debt it not a burden.
The only time it is bad is if wages are inflexible and the debt burden is too high. Otherwise deflation is the natural product of recession and stimulates the economy.
All one has to do is to buy something, and you know that inflation is rampant. The Goverment indexes are not representative. e.g., gasoline prices. Stand by for $4/gal shortly.
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