Deep in D: The Deflation Battle Rages On 34 comments
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For the first time since 1955, the consumer price index fell on a year-over-year basis. Last month's seasonally adjusted CPI slipped 0.1% for the 12 months through December, the Labor Department reports. On a monthly basis, the decline in CPI is more pronounced, falling by 0.7% last month--the third straight monthly decline.
Deflation, in short, is here. It's been expected for some time, as we've been discussing in recent months, including here and here. The great question, of course: How long will it last?
Team Fed is working overtime trying to keep the visit relatively brief. By dropping the central bank's key interest rate to virtually zero and otherwise buying up assets that no one else wants, Bernanke and company are pulling out all the stops to engineer inflation back into the system. So far, the policy has yet to show results. But such actions take time to work. Eventually, and perhaps quite soon, signs of progress will emerge for keeping consumer prices on an even keel. The Fed, in sum, will win, and then the real work will commence. But that's a problem for another day.
Today, the central bank can't afford to lose this battle. Lower prices are nice, of course. More importantly, falling prices give consumers some relief from the ill winds otherwise blowing in the economy, and that's stimulative generally. But there's a limit to stimulus delivered in this form. If continually lower prices endure, the trend becomes toxic for growth and business expansion. And the bottom line is that the only way out of this mess is through growth and expansion.
In some respects, the Fed's raison d'etre is on the line here. If deflation persists, at some point one can imagine Congressional hearings and the like calling for a major reordering of the Federal Reserve. The institution, after all, is a creature given life by Congress and so the Fed ultimately exists at operates at the mercy of politicians. As such, the Fed's war on deflation is also a fight for survival to keep the central bank as it now stands intact.
Change in banking generally is now being discussed openly. The prospect of nationalization, or something close, regarding several large private banks is topical these days. “We are down a path that this country has not seen since Andrew Jackson shut down the Second National Bank of the United States,” Gerard Cassidy, a banking analyst at RBC Capital Markets, tells the New York Times today. “We are going to go back to a time when the government controlled the banking system.”
Maybe, although for the moment a true nationalizing of such institutions as Citigroup (C) is still unlikely. Yes, one can argue that a quasi-nationalization is already taking place, given the rising influence that Washington has over the finance industry via all the bailout money being extended to private institutions. But outright control and management of the banking sector by the federal government still looks improbable. Then again, we don't know what 2009 will look like and so one can never say never, especially these days. Perhaps we're idealists, but the lessons of modern economics insure that policymakers won't turn the clock back to the Age of Jackson in banking. More regulation and oversight is coming, but direct ownership and unfettered management of banks is doubtful.
As for the Fed, it's not too difficult to imagine that if deflation runs on for an extended period, and inflicts havoc on the economy, the incoming Obama administration and Congress may feel pressed to take even bolder actions to stem the tide of financial implosion. The front line of this battle is winning the war against deflation. It's not clear that if the Fed fails on this front the Congress can fare any better, but that wouldn't stop politicians from trying.
But we're fairly confident that the Fed won't fail. Deflation, we believe, will be slain and inflation will return. Timing, of course, is unknown, and since timing is increasingly the politically and economically sensitive variable in 2009, there's risk ahead—lots of risk, with predictions as well as with economics.
Still, there's reason for hope. Keep in mind that the CPI needs only to flat line for a while to keep deflation at bay. Stability seems likely in the months ahead if you expect, as we do, that the bulk of the decline in energy prices—gasoline in particular—is now behind us.
The energy component of CPI has fallen now for five months straight. It's too soon to say for sure, but it looks like November was the climax of the decline, with the CPI's energy index tumbling a hefty 17% that month. In December, energy fell again, although the pace slowed considerably to an 8.3% decline. Since gasoline makes up most of the CPI's energy index, we can look to the fuel for signs of what may be coming in future inflation reports.
On that note, the March '09 gasoline futures contract appears to be stabilizing, suggesting that perhaps the great energy selloff has passed. No guarantees, of course. Yes, gasoline demand over the past 6 months has taken a hit and so have prices. But unless you really are expecting the apocalypse, energy prices generally are set to stabilize.
Demand for fuel won't keep dropping by leaps and bounds month after month after month. Or so we believe. That's not to say that energy prices won't go lower still. But on a percentage basis, the big declines are behind us. That'll go a long way in helping battle deflation, and letting the Fed keep its fancy offices on Constitution Ave.
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That is the "missing link", if you will, wage growth.
For example, if the $trillions now being printed to bail out the ruling class, or capitalist elites, was instead used to pay workers more, I bet you the "deflation spiral" would be stopped cold...
But no, the country is run for the benefit of the capitalist elites so of course, it's their "ass" which is pulled out of the "fire" first; nevermind that it was the reckless and irresponsible behavior of the capitalist elites, with their corruption of our regulatory government agencies, that led the USA, the greatest civilization in the history of the planet, to this: the start of a possible depression.
Sad... But in the history of great civilizations, the end often comes when the ruling classes become parasitic, so it was with the Roman Empire, and, apparently, so it seems it is with the once great USA.
WRONG, WRONG, WRONG !!!!
Even if that were correct, it is wrong because that's what it was last month. Read today's headlines and look at how many companies have either laid people off just today or have like Circuit City liquidated the entire company sending pink slips to 30,000 workers.
The 7.2% figure is the BLS U3 stat. It came about early during the Clinton years to artificially make unemployment figures fall to make them look like they were saving us from the Bush the Elder Recession. It only counts people who make an unemployment claim.
The BLS's U6 is a broader measurment which inlcudes people who have simply dropped off the map because their unemployment has run out and they are no longer looking for work or have gone back to school or gone to live with mommy and daddy. But these people are still UNEMPLOYED. That figure stands at....
13.5%
But if you really count apples to apples and report the unemployment figures the SAME WAY THEY DID DURING THE GREAT DEPRESSION our unemployment rate last month stands at.......
18%
That's right....18%...and growing very quickly.
So if you really knew what you were talking about, you would know how idiotic you sound when you state that the majority of people are working and will buy stuff no matter what....
Really? Then how come so many bankruptcies? How come so many lay-offs? How come China's economy is in the ditch, seeing as how much we buy from them? How come Japan's in the sh!t seeing as how much we buy from them?
How come Larry Kudlow scratches his head and proclaims not to understand why Bank of America needs more cash?
It's because you do not know the truth because you are being lied to or the information is being withheld.
The top 20 banks in the US are insolvent and unemployment is between 13.5 and 18 percent.
Wake up and quit believing the lies!
On Jan 16 12:58 PM Tradememe wrote:
> The unemployment rate is less than 8%. So, the overwhelming majority
> of people are working and they are going to buy stuff no matter what.
> People don't stop living just because there is an economic crisis.
the bigger issue from a budget problem is Medicare and other medical benefits.
and nobody wants to address the reason that is so. either they want to get rid of the benefit by choosing to allow the tax benefit to die, thus causing a major health crises as all companies bail out on it, of they refuse to address the cost side by claiming its socialistic medicine. so instead we have the most expensive corporate health care. which has a lot of the same down sides as what people gripe about a so called socialistic version. only it costs more than any of those socialistic versions! and performs worse too!
On Jan 16 02:03 PM Bob/mulligan wrote:
> Why is inflation better than deflation? Under deflation many prices
> go down. Why is that so bad? While under inflation many prices go
> up. What is good about higher prices? Inflation, caused by deficit
> spending devalues pay checks and savings. Why is that good? Why is
> a Ponzi scheme run by a private individual bad, while the largest
> Ponzi scheme, Social Security, run by the government is not bad?
Click this link to see how bad it can get in just one day...
www.cnbc.com/id/286918...
They don't even count the 30,000 from Circuit City.
If you count them, then just today alone it has been announced by various companies spanning the entire economy that 100,000+ people are being kicked to the curb.
Just today.....the month isn't even over.
I guess the only secure job is the network guru and server installers who will be called by various state unemployment claims offices who will need all sorts of new bandwidth and capacity to handle all the new claims coming their way.
The reason to avoid inflation is that you end up with a boom/bust cycle such as we are seeing now. The fed held interest rates low for too long and incited the housing bubble. The boom is nice, the bust can be quite painful.
I've actually become a fan of going back on the gold standard. No need to back every dollar with bullion, but just keep the dollar pegged to a particular value of gold - let's say $900 for right now. A gold backed dollar has a tendency to keep monetary policy honest and people's purchasing power stable. '08 is an example of what can happen if people consider investing a forms of savings - you can lose 40% of your wealth in a year. I'd much rather have a stable dollar.
I work in IT, phew I'm glad to hear my job is safe.. * craps pants *
On Jan 16 12:45 PM nayr wrote:
> fatcat, I completely disagree with you. Falling oil prices are not
> the main cause of falling prices in general. Housing started falling
> well before oil.
>
> We are deflating as trillions in global notional value disappear.
> It is a result of deleveraging valueless assets.
>
> concisetrading.blogspo.../
"...the BLS U3 stat... came about early during the Clinton years to artificially make unemployment figures fall to make them look like they were saving us from the Bush the Elder Recession."
Hogwash. This was a multi-year effort to improve the accuracy of the Current Population Survey (CPS), which is a major source of employment information.
"It only counts people who make an unemployment claim."
Again, hogwash. U3 is derived from multiple sources, including the CPS.
The BLS's U6 is a broader measurment which inlcudes people who have simply dropped off the map because their unemployment has run out and they are no longer looking for work or have gone back to school or gone to live with mommy and daddy.
No, this is U4, or maybe U5. U4 includes discouraged workers, U5 includes "marginally attached workers," who say they want to work and have looked for work sometime recently, but aren't looking now. This is the broadest measure of unemployment, and was 8.3%.
U6 includes those working part-time who would prefer to work full-time. This is commonly called under-employment.
"...the unemployment figures the SAME WAY THEY DID DURING THE GREAT DEPRESSION our unemployment rate last month stands at 18%"
How about you cite a source for this?
"The top 20 banks in the US are insolvent."
Wanna bet? I would wager a large amount of money that U.S. Bancorp is not insolvent by any measure.
Nonsense. First off, leverage. I have a feeling you don't know what it means. I invite you to find a healthcare or tech company leveraged 15:1.
Secondly, I recall last year when Sunpower's listed PE was something like 600, but that was not based on the pro-forma results usually used for calculating such things, but GAAP accounting including one-time fees that pushed profit to near-zero.
Lastly, looking at individual companies' PE's is meaningless. How about reporting the S&P 500's P/E and how it compares historically?
Cash is king (at the moment), it may not be returning much; but it is not going down either. (exchange rates are variable).
We need to deflate about $70 Trillion in debt, it will take a while.
I am actually buying some of it now to some kind of return.
Disclosures: (PGF), (PSY), (ACG).
On Jan 16 01:23 PM Socialism cannot compete! wrote:
> The Fed is the problem, not the solution -- it is a means of ripping
> off those who are prudent and save, rather than buying what they
> cannot afford. We who waited and did not buy overpriced homes are
> now being pillaged as our tax dollars are being used to pay for others'
> mistakes in that regard...and are going to see our saved dollars
> become worthless as a result of the Fed and Treasury's joint rape
> of the people at taxpayer expense!! When will we stand up and say
> "NO MORE!!!"???
Many good examples from the past.
Question? How do they relate?
I have been trying to figure that out, as an exercise for the future.
What caused the end of those dynasties? Time, self-destruction, a
smaller version of globalization?
We know that they were not competing against each other for global customers, but global discovery of each other and subsequent war(s),
was a factor.
I ask for purpose of discovering were to invest; all the debt (it has to be paid off - somewhat) or the new wave of inovation(s)?
Is it going to be alternative energy (hoping so, but doubting)?
Is it going to be the commodities needed to continue to bring 3 Billion people into the world economy?
I am betting on paying down some of the debt first (then I'll move on).
Disclosurers: (MSY), (ACG), (PSY).
On Jan 16 01:25 PM Consider_this wrote:
> I posted it before, and I'm posting it again, because it is just
> as relevant now:
>
> Inflation of prices of items (not produced in the country) without
> corresponding increase in *WAGES* of people is actually deflationary.
>
>
> It's not hard to envision why if wages don't have inflation, price
> inflation ends up deflationary overall.
>
> In the end, true inflationary spiral can happen only if WAGE is also
> inflating.
>
> My problem is that with global arbitration of wages; and production
> capacity of GOODS and ENERGY is outside of the country; and outsourcing
> controlling wage increase domestically; the only way you can get
> into an inflationary spiral within the USA; is if USD complete depegs
> with the rest of the world and goes into a downward spiral.
>
> However, that kind of inflation-attempt would happen with a high
> price: Cutoff of foreign goods and energy (too expensive); Cutoff
> of govt funding; Removal of USD as a reserve currency.
>
> Because we will lose (reasonably priced) energy and foreign goods,
> whether the economy will end up collapsing completely, thereby skipping
> wage increase (to increase wage, you need to have functioning economy
> and jobs), or be able to go into an inflation period, is unclear.
>
>
> This is the part that inflation scenario arguments that I cannot
> find. In pre-globalization days, it is possible to have Germany style
> chaos; In modern integrated era, WHAT IS THE MECHANISM to achieve
> overall wage gain?
>
> If there is no mechanism, then all these inflation talk is just HOPE
> and pushing on a string.
>
> For those that are SO SURE there's always a rebound, consider this:
>
>
> At some point, the law of number does say that that all the jobs
> that needs to be lost has been lost (Since there's only a fixed #
> of jobs to start with, not infinity) and the unemployment numbers
> will peak then.
>
> However, why will the blue recession end in the quarter that it peaked?
>
>
> Didn't Japan go though a 19 year (and counting) depression?
>
> Technically, the British Colonial Empire never recovered from it's
> collapse (it was the biggest empire at one point, with colonies spanning
> the globe).
>
> Why is everyone so sure that there *IS* a rebound? Roman never rebounded,
> China's "Tang Dynasty" (The richest economy in the world at the time)
> didn't rebound. Argentina was the richest South American country
> at one point.
>
> Why is it guaranteed that USA will rebound from this??? EVERYONE'S
> SO SURE!
>
> Another problem:
>
> Everyone's looking at employment numbers, when it's known that employment
> doesn't LEAD us out of a hole.
>
> Something else must grow first, what can grow at this time?
>
> If the economy continues to collapse like it is now, even green projects
> & innovations will start to die -- the inability to compete with
> cheap oil will kill these projects (although I believe we need them.)
>
>
> If this is a race to the bottom for nations, we collectively are
> a LONG WAY from the bottom where nothing more can give (i.e. you
> got nothing to lose)
>
> I would argue that the globe was close to that "nothing to lose bottom"
> at the end of WW2; alas I don't want such kind of bottom in future.
>
>
> So the question is what is the floor? What can "put a floor" to all
> these racing to the bottom? BUYING UP DEBTS, MONETIZING THEM AND
> DEVALUING MONEY doesn't put a floor, else Germany post WW2 would
> be the richest country left standing, not USA.
>
> From these, I would not be so sure that we're simply in another "cycle"
> and we'll cycle our way out. Black Swan event begets Black Swan outcomes,
> not historical / "cyclical" / hope-based results.
On Jan 16 01:17 PM BS Detector wrote:
> "For the first time since 1955, the consumer price index fell on
> a year-over-year basis. Last month's seasonally adjusted CPI slipped
> 0.1% for the 12 months through December, the Labor Department reports.
> On a monthly basis, the decline in CPI is more pronounced, falling
> by 0.7% last month--the third straight monthly decline."
>
> This reads awfully dire - perhaps intentionally so. Because you start
> off by highlighting these statistic, and you end by saying that in
> some part because the big declines due to energy are behind us deflation
> isn't a big worry. But you intentionally leave out perhaps the most
> important stat from the Labor report: price change for all items
> less food and energy. How did that fare?
>
> 0.0% change in December
> 1.8% change year-over-year
>
> The stats were right there. Don't bury your lead.
Weimar Germany began hyperinflation, not because wages increased, but because production decreased dramatically while wages remained the same.
Inflation is not just about increasing the money supply - it is about increasing the money supply RELATIVE to the amount of goods and services available. A reduction in output is the same as an increase in money. So if the amount of cash and credit being used by consumers remains the same but with a significant reduction in production then you get inflation.
Watch for US GDP to continue to decline but the cash and credit used by consumers will remain little changed as Obama will demand that states extend unemployment benefits for a longer period and for a wider group of people.
There probably won't be a shortage of cheap crap from China but there could be shortages of things made in the US. Specifically, when farmers can't get loans for seed or fertilizer, there is likely to be reduced agricultural production. Mining companies will also have lower production as they can't borrow money for new projects or to acquire juniors that won't survive without being acquired.
babylontoday.com/natio...
On Jan 16 01:15 PM MGA_1 wrote:
> We've definitely had deflation in assets - especially real estate.
> Real estate will continue to go down until at least the end of '12
> when the last of the option A & alt arms finish reseting. It
> will probably last for several years afterwards. With real estate
> sinking the economy, I can't imagine stocks won't follow suit.<br/>
>
> Now... the big question is with the fed printing all this money if
> & when we'll see inflation. William Poole was on bloomberg several
> days ago saying there is usually a two year lag between money printing
> and inflation. I think it might hit earlier. Additionally, how are
> we going to fund 1 Trillion $ deficits?
Really? Over what period exactly has there been inflation in prices for food, water, and energy?
"And gold is lower due to fed manipulation with that printed money interfering in a free market environment. If I had access to free unlimited amount of money,I could drive the paper market of anything down as far as I want to.So could most high school grads."
You really haven't thought this through, have you? If you have unlimited money, how do you drive the price of something DOWN? Buy less of it? Less than nothing? At some point you exit the market entirely, and the rest of the market determines the price.
And of course there's the empirical look at the facts. The Fed's balance sheet is here: www.federalreserve.gov.../, updated daily. Unchanged since a year ago, gold accounts for $11B of the Fed's $2T of assets.
"Weimar Germany began hyperinflation, not because wages increased, but because production decreased dramatically while wages remained the same."
I would argue that Weimar hyperinflation was a direct result of forced reparations following WWI.
"A reduction in output is the same as an increase in money. So if the amount of cash and credit being used by consumers remains the same but with a significant reduction in production then you get inflation."
Because production and pay are quite closely tied, this is pretty much impossible.
"Watch for US GDP to continue to decline but the cash and credit used by consumers will remain little changed as Obama will demand that states extend unemployment benefits for a longer period and for a wider group of people."
No.
1. Unemployment benefits provide only a fraction of lost income.
2. Consumers are not borrowing at the rate they were a year ago or two years ago. The decline in home values, which was used as collateral for a large amount of consumer loans, means that there simply is not as much credit being extended to consumers. This is one source of a marked increase in the personal savings rate that will show up in stats if it hasn't already.
"...there could be shortages of things made in the US. Specifically, when farmers can't get loans for seed or fertilizer, there is likely to be reduced agricultural production. Mining companies will also have lower production as they can't borrow money..."
The only reason farmers wouldn't be able to get loans for seed and fertilizer would be because of a drop in futures prices for their crops, which has happened. But take a step back. Farm production is directly driven by commodities futures; if corn is higher, a corn farmer will increase production, for example by using more fertilizer in pieces of land which have higher production costs. Since both commodities and fertilizer prices have fallen, the calculus has changed, and we may see a drop in production in any case.
BTW, why do you think Obama's going to push for extensions of unemployment benefits but not for government backed loans for farms?
As for mining, the world's miners are cutting back production as we speak, and it has nothing to do with a lack of credit. It has to do with the big drop in commodities prices.
In your Germany example, the country printed money and production dropped, while income is flat.
We're not in a cycle where production is plunging and income is flat.
Take a look at any of these stats: "Personal Income growth", "Unemployment", "Credit Growth", "Retail sales", "New weekly unemployment claims", "Underemployment figures", "Bankruptcy rate", "Foreclosure rate". These are all "income" related stats. (You can argue that credit is not income, but as far as "having money on the street" effect, they are; and that's what we've collectively been living on for the past decade or two anyway)
We're in a cycle where income is suddenly and violently contracting, and govt and production is trying to compensate, but not fast enough.
The process of compensating for income reduction (via production attenuation) will invariably lead to more income reduction and further depression. Thus, you may not want production to adjust fully anyway, coz it will be a race to the bottom once it starts.
(How would you like to live in a world, where the definition of "I'll be richer than you" (or more accurately, "I'll be less financially precarious than you") is if I consume 20% less than you? Then you'll in turn try to consume less than me to achieve an edge. i.e. race to the bottom)
Again, you support my viewpoint that it is very difficult to get inflation in this environment.
You'll have to slow, stop and reverse the aggregate income loss. This is why I mentioned the wage growth problem; (or the credit re-bubble problem, which is what the Feds are trying desperately to achieve).
Based on the "race to the bottom" as I mentioned above, last thing you want is for the deflation to blow itself over -- coz we're a long way to go from "everyone has nothing to lose" status.