Deflation? What Deflation? 22 comments
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One now hears a lot about deflation, or the threat of deflation. Anyone lamenting the decline in the value of stocks, real estate, or commodities will reach for this word sooner or later. Everywhere, one is bombarded with phrases such as, “Deflation reared its head as the stock market sank further today.”
So what is deflation? At its root, it is a counter-inflation of the money supply. In other words, a diminution in the volume of available currency units, brought about through uninsured bank failures (a la the Great Depression) or some natural or unnatural catastrophe.
In an expanded meaning, deflation is a counter-inflation in prices. As the money supply shrinks, the law of supply and demand ensures that each remaining currency unit becomes more valuable. As the currency becomes more valuable, its purchasing power rises and prices decline.
Yes, prices decline—not merely asset prices, but those of all goods and services in the marketplace. So when are we going to see this?
Certainly, food and fuel have retreated following the bursting of the commodities bubble. Some retailers are holding sales. But what about health care or education, or barber services? The Hair Cuttery chain has just bumped its signature $14 haircut to $16. On an official note, government figures are still showing annualized urban CPI figures (food and energy excluded) in the three-percent range.
Clearly, we are not seeing an across-the-board reduction in prices. Neither is there a diminution of the money supply, as the below chart makes clear (click to enlarge image):
Data posted with this chart on the Federal Reserve Bank of St. Louis’s website shows that the nation’s monetary base or M1—the sum total of all domestic bank reserves, deposit accounts, and notes and coins in circulation—expanded by almost 45 percent between September 10th and November 5th of this year. In fact, the Fed has to adjust the scale of this chart every week, just to keep the trend line from shooting off into space.
So where is the deflation? Some people are focused on the deflation of Wall Street balance sheets, forgetting that the money was never there to begin with. Others point to the deflation of their stock portfolios and home valuations. Again, much of that virtual wealth was not real or could never be realized.
In both cases, the default remedy is monetary inflation via government “liquidity operations” on a multi-trillion dollar scale. Of course, this bailout of fake wealth is being effected with real money. More importantly, because money gets around, what inflates balance sheets and asset prices will eventually make everything else more expensive, too. In the long run, this may counterbalance any conceivable benefit from inflationary policies.
So long as Operation Liquidity is stymied by the reluctance of banks to do anything more than bury their digital cash in the cellar, monetary hyperinflation will not lead to price hyperinflation. But is anyone thinking over the horizon? What happens when a nation consistently expands its monetary base at the rate of five percent per week? Can we keep doing this indefinitely, with no long-term consequences for the value of our currency, our savings, and the continued appeal of our government and agency bonds?
One thing is almost certain—the cost of a haircut will not deflate for a long time to come.
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The only problem is as they dump $ into their own accounts they risk inflation. And as long as the government keeps running debts it gets harder to run more and more debt to bail the banks out. So they are afraid one day bond rates start rising because there simply isn't anyone insane enough to buy them with 1-3% yield. Thus you have inflation because no one believes the government won't just start dumping more and more money in an endless spiral to pay for things they can't afford like they have all my life.
article has many holes,IMO..
Your interesting article is missing one important factor: debt is money. The huge debt on balance sheets and against inflated home equity was used as currency. This debt is money that has already been spent. (fatcat recognized this in his comment.) So, what is happening now is the government (Federal Reserve and congress) is liquidating some of the debt by printing money. This shows as up as an increase in M1, but does not go into circulation; it remains on the books of financial institutions to reduce their leverage. To the extent that not enough money is printed to replace the money already spent, defaults will occur until all the assets worth less than the debt incurred are wiped out.
Deleveraging is occurring through a combination of bankruptcy and printing money already spent. If all deleveraging occurred via bankruptcy, wide spread deflation (depression) would occur. If deleveraging occurred exclusively via printing more money, deflation would be limited and inflation would be increased. We are getting both treatments and so the deflation/inflation picture is mixed.
The problem with the current course taken is that the balance point between deflation (too much bankruptcy) and inflation (too much currency printing) is probably more like a knife edge than a broad platform. The danger of not staying on the knife edge is great.
"Debt is money" is not a "philosophy". It is the mechanics of how money works in the fiat money system that the entire world now uses. Money is created as bank loans, and to the borrowers this money is "debt". When loans are repaid the money ceases to exist.
Big Jake clearly understands how money works and this is the absolutely necessary first step to understanding how to get ourselves out of this mess.
Banks in their SIV's (leveraged at 30, 40, and 50 : 1) had real losses of the original capital we deposited to our accounts...
The FDIC couldn't cover Trillions of $'s dollars in losses...
Paulson and Bernanke panicked (rightfully) and explained it to Congress... who also panicked...
And MOST people don't even understand it....
And that's the way it is.... November 17th, 2008...
trytothink1st@yahoo.co...
The current mess being created by our hapless government will seem like a paradise compared to what will happen after January 20, 2009 as the socialism of America begins.
I fear for my country and the idiots who are allowed to vote without the mental acuity to separate dreams from reality. Promises and slogans are the stuff of fantasy and ruin.
That is, unless my starting premise is incorrect.
My vote on this, BTW, is "deflation now, but inflation (maybe even hyper) in the fairly near (year or so) future.
The velocity of money is a measure of how fast it "gets around." If the money supply increases, but the velocity decreases, your conclusion may not follow.
We just deleveraged trillions in debt and are just getting started The new money being printed will replace a small fraction of the total leveraged debt being destroyed. Nothing is going back to where it was because we cannot reproduce that debt/leverage/bubble again.
Deleveaging of bank balance sheets notwithstanding, never underestimate the ability of the parasitic political class (the 'tax eaters') to clip the coinage and destroy the financial system.
Cheerio
GT
marketrant.blogspot.co...
The reason we're in this mess is, sure, that people were taking on WAY too much debt, but that's been the case for the better part of the past 3 decades. So what actually triggered it?
Once psychology shifted more toward a lack of confidence that the debt (IOUs for money) could be paid back, things began to crumble. When that confidence crumbled, so followed prices. If -- I should probably say when -- that same psychology spreads to mainstream businesses, you WILL start to see haircut prices decrease as well.
You're already seeing it in the price of goods at the super market. But price changes for services always lag price changes for goods, because services like haircuts are not freely traded in an open market like stocks and commodities; they are decided on by the service provider alone. Once buyers (people who need haircuts) begin to refuse those prices, then service providers will be forced to lower rates. But these kinds of service price reductions can take a very long time to occur, because service providers are stubborn, and service consumers are inclined -- especially when the price of everything else (gas, food, etc) is so low -- not to argue the price of a service they've consumed for a long time.
On Nov 16 03:51 PM User 299289 wrote:
> Dear Sir,
>
> Thank you for your thoughtful and very well-written comment. However,
> I believe that your "debt is money" philosophy is precisely what
> got us into this colossal mess in the first place.
>
> Respectfully,
> Big Jake
>
>
> On Nov 16 12:58 PM jlounsbury59 wrote:
On Nov 16 09:05 AM constructe wrote:
> I meant bankers haha not bakers. The bakers and chefs of the world
> will just loose their jobs.
"The three LCD panel makers agreed to pay a total of $585 million in fines for price-fixing and pledged to cooperate in the DOJ's continuing antitrust investigation into LCD price-fixing.
The companies also face investigations by regulators in Japan and the European Union.
The DOJ penalty couldn't come at a worse time for the companies. A glut of LCD panels globally has depressed prices and the global financial crisis is hurting demand for a range of items LCD panels are used in, including the screens of computer monitors, laptops, LCD-TVs and mobile phones."