The Deflation Risk Keeps Rising 27 comments
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Deflation with a capital "D" may still be a remote possibility, but it's getting tougher to dismiss the idea that deflation light is here.
Exhibit A is this morning's update on producer prices, which fell 2.2% last month. That's the fourth month running that wholesale prices turned south. We can debate exactly when, or if a deflationary climate has begun, but once it's clear to everyone that the big "D" has arrived it's probably too late to do much about it. Simply put, if there's any hope of slaying the deflation dragon, the opportunity is a pre-emptive one. But that leads us back to the question: Is deflation really here? Or is the ongoing price retreat only temporary?
One can argue that collapsing energy prices are the primary cause of the downdraft in wholesale prices. True enough. But energy prices won't keep falling forever. Indeed, crude oil has fallen sharply since the summer, when it set an all-time record of $147 a barrel in New York. In December, crude's been trading under $50. Yes, crude and other energy prices may go even lower, and that would keep downward pressure on general price indices. But aren't we close to the bottom of this downward spiral?
Perhaps, but not just yet. The warning signs of deflation are mounting, which suggests that pre-emptive action is still the prudent choice. The good news is that the Federal Reserve and central banks around the world recognize the threat and have begun reacting accordingly, i.e., administering higher doses of liquidity as an antidote to falling prices. The bad news is that the medicine isn't working, at least not yet. Perhaps all the previous stimulus will soon kick in and do the trick, but the evidence is still elusive. That suggests that even stronger measures may be needed, including fiscal stimulus.
Alas, the latest news on that front for the moment is discouraging. We're speaking of the proposed government bailout of General Motors, which appears dead in the water in the U.S. Senate. The argument for keeping GM from imploding is stronger these days, given the deflationary winds swirling about. It's unclear just how much deflationary suction a collapsing GM might generate, but whatever it is it's sure to be too much since there's a surplus of similarly negative winds blowing from other sources. That includes retail sales, which the government tells us fell again in November—down 1.8% from the previous month and off 7.4% from a year ago.
In normal times, the economy could absorb the fallout of GM and perhaps some other troubles. But these aren't normal times and there's more than a few deflationary events unfolding at once. As the overall downward pressure on prices mounts, so too does the risk that deflation light may metastasize into something more serious.
The risk associated with GM is all the greater now that conventional monetary tools are nearly out of ammunition. The effective Fed funds rate was a scant 0.11% yesterday. Recognizing that negative interest rates aren't a possibility, the game shifts to fiscal stimulus and unconventional monetary easing by the central bank.
But that opens a new can of worms since fiscal stimulus is subject to political risk, as the Senate's snub of the GM bailout reminds. Meanwhile, there's not a lot of precedent with unconventional monetary policy and so trying to juice the economy on this front amounts to an experiment running in real time. To be sure, the Federal Reserve will find some success with engaging in innovative tools and strategies. But it's debatable if such actions will suffice in keeping deflation at bay, assuming it's really a threat.
On a positive note, one could point to the fact that on a 12-month rolling basis, wholesale prices are still rising. But the trend can't be ignored. In August, the producer price index was advancing by a hefty 9.7% on a year-over-year basis. That's fallen rapidly every month since, down to a mere 0.2% rise in wholesale inflation in November from a year ago. The train is rolling and it's unlikely to stop any time soon. The only question is whether we let it roll on or do we try to derail it?
There are risks both ways, although from our perch we're more worried about letting deflation build a head of steam. It's too late to avoid risky decisions. That said, doing nothing looks like the much bigger risk.
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On Dec 12 02:10 PM Smarty_Pants wrote:
> I find it amusing that articles in this vein always use "the peak"
> as the reference point when discussing the deflation we are experiencing.
>
>
> Look further back and it is easy to see that the massive flood of
> liquidity that maestro Greenspan pumped into the economy is what
> ballooned prices to those peak levels from which we are now retreating.
>
>
> Given that the main reason why the prices advanced was simply the
> creation of more fiat money, why isn't there ever any possibility
> that the prior rise in prices is the problem and the deflation of
> same the cure which returns prices to 'normal' levels?
>
> Action Plan:
>
> 1) Mislabel inflated prices as 'normal'
> 2) Mislabel correction to original price levels as 'deflation' <br/>3)
> Solution: print even more money to support the new 'normal' inflated
> prices
> 4) Repeat Steps 1) -> 4) until the money is rendered worthless <br/>
>
> We are currently engaged in Step 3)
>
> Calls to 'provide liquidity' will only lead us to hyperinflation
> if implemented.
This is not a rerun of the Great Depression for too many reasons to enumerate.
What we can say, however, is that deep contractions always follow overheated expansions.
Just to take the example of World War I, (the period when the Federal Reserve Bank was created) after America entered the war in 1917, inflation surged to between 15% and 19% per year and unemployment dropped to 1.5%. But after the war was over, unemployment shot back up and prices dropped during a severe two year depression from 1920-22.
Most students of economic history expected a similar result after the massive expansions that produced the dot com bubble and the real estate bubble.
Whatever the case, this period is very different from the 1930s and our economic battles will be won with different tactics than those of previous periods.
Hear, hear. This is exactly what the 'bailout' of GM will do, turn it into a useless zombie institution that, thanks to the govt teat, wont be willing nor able to do the real restructuring it needs to do. Note that the bailout failed because the the GOP Senators and UAW locked horns over whether the UAW would make labor cost concessions in the next year, to bring wage costs to be competitive with folks like Toyota.
Here's the reality: Unless and until GM labor costs align with Toyota etc., they will be INHERENTLY unprofitable. So the GOP Senators were right to demand this, to ensure this bailout wasnt a money pit.
lastpoint: Harry Reid thursday night lamented the breakdown of the negotiations and said that he hated to see what would happen to the markets Friday... well the markets did fine. These guys who think govt bailout of GM will save anything are full of beans.
Merry Christmas
Bob
On Dec 12 05:26 PM Costard wrote:
> "...deflationary winds..."
>
> OK, bonds aside, now I *know* that there's a bubble in deflation
> expectations. As long as core prices are up over 4% YOY, the threat
> is neither imminent nor bankable.
>
> Robert: "The Fed was created to stop inflation and now it has us
> convinced that inflation is the best thing it can do and it is the
> solution to problems like deflation."
>
> I wouldn't normally respond to something this, but'm worried that
> a small child might wander past a computer with this page pulled
> up, read what you just wrote and, as a consequence of our poor public
> educational system, actually believe it. You're not only wrong,
> but so incredibly 100% wrong that a bear in Quebec might smell your
> wrongness, travel 5,000 miles and eat you. For the love of God,
> go read an encyclopedia entry on the federal reserve act.
You're tone sounds rather elitist. The Federal Reserve is a private bank that serves the needs of a small group of bankers. To think that reading the Federal Reserve Act of 1913 will help is ridiculous. The Federal Reserve Act is the problem. The real solution to our economic dilemma is to eliminate the debt pyramid scheme and repeal the Federal Reserve Act.
www.shadowstats.com/im...
As you can see, there's a real deflationary pressure on M3 and inflationary on M1 right now.
I look at this graphs from time to time to see the money supply flow.
Be my guest to comment it.
The dollar has lost 45% of its purchasing power in the last 20 years.
The dollar has lost 71% of its purchasing power in the last 30 years.
The dollar has lost 84% of its purchasing power in the last 40 years.
So prices go down 2% and it's a national emergency?
www.measuringworth.com.../
Ten guys in grey suits are standing in a conference room. In the middle of the conference table lies a single dollar bill. One of the suits picks it up, turns to another suit and says "hey, I will lend you this dollar in exchange for an IOU." The second guy says sure, takes the dollar, writes the IOU, and turns around to lend the dollar to a third dude in a suit. In the background, we hear the tune "round and round the mulberry bush, the monkey chased the weasle..."
Meanwhile, the first dude turns to a fourth guy and says "hey, I will sell you this IOU for a dollar." The fourth guy says hold on, I don't have dollar yet, but I will get it soon, honest, so I will give you an IOU, plus 10% interest!"
The ten guys keep this game up all day, and before long, there are billions and billions of dollars sitting in this conference room.
Meanwhile, in the background we hear "Round and round the mulberry bush, the monkey thought it was all in good fun.... POP goes the weasle!!!!"
Right about the time we hear the song get to "pop", whichever suit dude has the actual dollar leaves the room, exits the building, runs across the street, hops in a cab....
Meanwhile, upstairs, the music has stopped, and the remaining nine guys in suits are starting to think that maybe, they don't really want all these IOUs after all, now that the dollar is gone. They start to try to sell the IOUs to one another, but nobody's buying. The room becomes somewhat panicky. This is called "de-leveraging". And once these remaining nine guys figures out what's really going on, we will very soon see deflation set into that board room.
Doom and gloom. No hope. End of days. There's no dollar left on the table now, so those billions and dollars worth of IOUs are certainly worth less than they were when the dollar bill was in the room, right? And now the dollar is gone!!! And everyone knows that even if the dollar ever did come back, those billions of dollars worth of IOUs never could have ever been worth more than one dollar in the first place. The system has been exposed as a total fraud, and it cannot possibly come back EVER, right?!?!?!?
Wrong. The reason why is simple: human nature. Humans LOVE this game. It's fun to sing "round and round the mulberry bush", cranking out billions and billions of dollars in paper assets, all from just one lousy buck. When you play this game, you feel like a genius somehow, and you feel rich, which proves you are a genius. Any of us who has been here knows what I'm talking about. For those who haven't, play monopoly and when it starts to feel real, you'll get what I'm talking about.
So, that guy who took the dollar off the table and got into a cab, you know what he does? Before long, he remembers that tinkling music, and gets a faraway look on his face.
He can still hear it, quietly, in his mind. Like a whisper. Round and round the mulberry bush.
He orders the driver to turn around, he dashes past security, up the elevator, bursts through the door of the conference room and says "EMERGENCY BAILOUT PACKAGE" and holds the dollar bill aloft.
Now by this point, everyone in this room knows that the game is stupid, illusory, and unstable. But they also know it is one heck of lot more fun when the music is going. And worse, they know the guy next to them thinks so, too. Everyone is sort of pawing the ground a bit, looking at that one dollar, thinking of how many IOUs they can accumulate if they move in first....
I don't know at what point it will happen, but by god, at some point, probably pretty soon, and probably even LOUDER than before....
...round and round the mulberry bush, the monkey chased the weasle, the monkey thought it was all in good fun.....
- By Alex Trias
On Dec 13 02:21 PM auto44 wrote:
> Where is all the money stored? People don't seem to have it,they
> are all mostly in deep debt. Banks don't seem to have it, they mostly
> seem desperate. How about companies do they have cash or debt? Can
> anyone tell me where all the ? Who is going to start spending the
> cash so folks can make a living? I don't know can anyone help me?
>
>
> Merry Christmas
>
> Bob
>
On Dec 13 07:53 PM Roowns wrote:
> Too see if it's a deflation or inflation take a look at this chart.
>
>
> www.shadowstats.com/im...
>
> As you can see, there's a real deflationary pressure on M3 and inflationary
> on M1 right now.
> I look at this graphs from time to time to see the money supply flow.
>
> Be my guest to comment it.
Where did the dollar come from and how did it get on the table? Who made it and why did they make it?
On Dec 13 10:23 PM alex trias wrote:
> Deflation? In America? What's the argument? Okay, here it is. It
> starts like this.
>
> Ten guys in grey suits are standing in a conference room. In the
> middle of the conference table lies a single dollar bill. One of
> the suits picks it up, turns to another suit and says "hey, I will
> lend you this dollar in exchange for an IOU." The second guy says
> sure, takes the dollar, writes the IOU, and turns around to lend
> the dollar to a third dude in a suit. In the background, we hear
> the tune "round and round the mulberry bush, the monkey chased the
> weasle..."
>
> Meanwhile, the first dude turns to a fourth guy and says "hey, I
> will sell you this IOU for a dollar." The fourth guy says hold on,
> I don't have dollar yet, but I will get it soon, honest, so I will
> give you an IOU, plus 10% interest!"
>
> The ten guys keep this game up all day, and before long, there are
> billions and billions of dollars sitting in this conference room.
>
>
> Meanwhile, in the background we hear "Round and round the mulberry
> bush, the monkey thought it was all in good fun.... POP goes the
> weasle!!!!"
>
> Right about the time we hear the song get to "pop", whichever suit
> dude has the actual dollar leaves the room, exits the building, runs
> across the street, hops in a cab....
>
> Meanwhile, upstairs, the music has stopped, and the remaining nine
> guys in suits are starting to think that maybe, they don't really
> want all these IOUs after all, now that the dollar is gone. They
> start to try to sell the IOUs to one another, but nobody's buying.
> The room becomes somewhat panicky. This is called "de-leveraging&...
> And once these remaining nine guys figures out what's really going
> on, we will very soon see deflation set into that board room. <br/>
>
> Doom and gloom. No hope. End of days. There's no dollar left on the
> table now, so those billions and dollars worth of IOUs are certainly
> worth less than they were when the dollar bill was in the room, right?
> And now the dollar is gone!!! And everyone knows that even if the
> dollar ever did come back, those billions of dollars worth of IOUs
> never could have ever been worth more than one dollar in the first
> place. The system has been exposed as a total fraud, and it cannot
> possibly come back EVER, right?!?!?!?
>
> Wrong. The reason why is simple: human nature. Humans LOVE this game.
> It's fun to sing "round and round the mulberry bush", cranking out
> billions and billions of dollars in paper assets, all from just one
> lousy buck. When you play this game, you feel like a genius somehow,
> and you feel rich, which proves you are a genius. Any of us who has
> been here knows what I'm talking about. For those who haven't, play
> monopoly and when it starts to feel real, you'll get what I'm talking
> about.
>
> So, that guy who took the dollar off the table and got into a cab,
> you know what he does? Before long, he remembers that tinkling music,
> and gets a faraway look on his face.
>
> He can still hear it, quietly, in his mind. Like a whisper. Round
> and round the mulberry bush.
>
> He orders the driver to turn around, he dashes past security, up
> the elevator, bursts through the door of the conference room and
> says "EMERGENCY BAILOUT PACKAGE" and holds the dollar bill aloft.
>
>
> Now by this point, everyone in this room knows that the game is stupid,
> illusory, and unstable. But they also know it is one heck of lot
> more fun when the music is going. And worse, they know the guy next
> to them thinks so, too. Everyone is sort of pawing the ground a bit,
> looking at that one dollar, thinking of how many IOUs they can accumulate
> if they move in first....
>
> I don't know at what point it will happen, but by god, at some point,
> probably pretty soon, and probably even LOUDER than before.... <br/>
>
> ...round and round the mulberry bush, the monkey chased the weasle,
> the monkey thought it was all in good fun.....
>
> - By Alex Trias
In any case, next week should be interesting with the FOMC meeting, triple witching,etc.
On Dec 13 01:13 PM Freedoms Truth wrote:
> I have an idea, let's capitalize the failed banks and make them zombie
> institutions. Oh wait, that's what Japan did. "
>
> Hear, hear. This is exactly what the 'bailout' of GM will do, turn
> it into a useless zombie institution that, thanks to the govt teat,
> wont be willing nor able to do the real restructuring it needs to
> do. Note that the bailout failed because the the GOP Senators and
> UAW locked horns over whether the UAW would make labor cost concessions
> in the next year, to bring wage costs to be competitive with folks
> like Toyota.
>
> Here's the reality: Unless and until GM labor costs align with Toyota
> etc., they will be INHERENTLY unprofitable. So the GOP Senators were
> right to demand this, to ensure this bailout wasnt a money pit.<br/>
>
> lastpoint: Harry Reid thursday night lamented the breakdown of the
> negotiations and said that he hated to see what would happen to the
> markets Friday... well the markets did fine. These guys who think
> govt bailout of GM will save anything are full of beans.
What will happen is the US dollar will be devalued. Why do you think gold has jumped from $700 to $820 recently? It is because the market can see what is coming.
If you don't believe me then take it from the man in charge of the FED. He has already told people what will happen if there is a risk of deflation in his 2002 speech.
www.federalreserve.gov...
MD
On Dec 13 02:57 AM MiddleOfRoader wrote:
> Social Security benefits will be increasing 5.8% for January, a not
> too shabby increase for that segment of the population.
same the cure which returns prices to 'normal' levels?" Smarty
Yes sir, this would work but it is the cruel Fractional Reserve Banking (FRB) solution to the money they create from nothing to prevent runaway inflation. Deflation is one cruel solution, since at banker whim, by simply slowing the issue of new loans, the economy can be made to run backward. Will this get rid of the malinvestments? Yes, but the resulting terror of an economy running backward feeds on itself and destroys otherwise sound businesses. The most prudent will survive ,of course ,but such extreme prudence would not be necessary with an honest banking and money model.
Merry Christmas, Smarty and gang, in case I miss you.
Before the National Economists Club, Washington, D.C.
November 21, 2002
Japan
The claim that deflation can be ended by sufficiently strong action has no doubt led you to wonder, if that is the case, why has Japan not ended its deflation? The Japanese situation is a complex one that I cannot fully discuss today. I will just make two brief, general points.
First, as you know, Japan's economy faces some significant barriers to growth besides deflation, including massive financial problems in the banking and corporate sectors and a large overhang of government debt. Plausibly, private-sector financial problems have muted the effects of the monetary policies that have been tried in Japan, even as the heavy overhang of government debt has made Japanese policymakers more reluctant to use aggressive fiscal policies (for evidence see, for example, Posen, 1998). Fortunately, the U.S. economy does not share these problems, at least not to anything like the same degree, suggesting that anti-deflationary monetary and fiscal policies would be more potent here than they have been in Japan
And using peak speculated oil highs don't help your point