No Chance of Inflation Anytime Soon 7 comments
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The main factors:
Government Spending and Consumer Confidence:
The previous recession of 2001 was caused by a bursting of the dot com bubble. Due to this, people in the United States lost a large amount of wealth in stock markets that was created during the boom period of 1990s.
In order to come out of the recession, government and the Fed gave impetus to the housing market by lowering interest rates and making it easy to take home loans. It was the first time Americans saw no-money-down mortgages, 110% financing and negative amortization loans.
Based on Case-Shiller and other sources, the average home prices in the United States increased over $100 K from the beginning of 2001 to the middle of 2006.
Since the United States has over 100 million houses , the wealth of the United States population increased in these 5 years by nearly $10 trillion (100 million houses increasing by $100K per house).
During this period, Government also spent around $3 trillion on wars in Afghanistan and Iraq, a large part of which came back to the US, through defense companies and contractors.
All this resulted in high consumer confidence, leading to an expansion of the economy, a corresponding rise in the stock market and inflation.
Thereafter, the fall in home prices had to happen due to the law of average returns and since the home prices had become unaffordable. It was triggered by the new Fed chairman Mr Bernanke’s relentless drive to increase the interest rates to curb inflation (mortgage rates increased by nearly 300 basis points from the beginning of 2004 to mid 2006).
From mid-2006 to now (mid-2009), the average home prices in United States have falled by around $60K. Using the same figure of 100 million homes, a wealth of $6 trillion has been destroyed, resulting in poor consumer confidence and therefore contraction of the economy.
In the current recession, government and the Fed decided to expand the Fed’s balance sheet and investing/giving loans to bankrupt organizations. The government is also planning to invest in Infrastructure to generate employment.
However, from mid-2006 to mid-2009, the Fed’s money supply (M2) has increased only $1.5 trillion, i.e. from $6.8 trillion to $8.3 trillion (ignoring the government guarantees to failing corporations, as it does not directly impact the consumers ).
It is evident that not all of this $1.5 trillion has ended up with consumers as wealth or wages.
Further, this amount is much smaller than the $6 trillion the consumers have lost in their home equity wealth.
Despite recent factors that have moved the consumer confidence higher from their lows, consumers would not be spending like before to cause any inflation.
In fact we are witnessing deflation after the government spending and government guarantees.
Dollar :
Over the past few years many, including Mr. Warren Buffett, have been proved wrong about the myth that the dollar would go down. The so called fast growing emerging economies are so small (India 7% of US, China 20% of US), that they are immediately affected by a downturn in US imports. As long as oil is imported in US currency, these major exporting countries to the US will see their currencies decline against the US dollar during recessions. Indian currency has weakened by more than 30% since 2007.
This ensures that US imports remain cheap and there is no threat of inflation from high import prices during a recession.
During the boom times the inflation in these countries is much higher than the US, thereby again keeping the dollar strong.
Wage Increase:
Due to high unemployment and the fact that the US government still has not done enough to curb the exporting of jobs from US soil, average wages cannot increase in the next few years.
Therefore, wage increases, which is an important factor to cause inflation is also ruled out.
Raw Materials:
The cost of raw materials used in the production of goods could go up if the world economy (outside the US) expands at a considerable pace, thereby stretching the supply side. However, we are barely coming out of a recession now.
Overall, in the current scenario, there is no chance of inflation in the United States at least for the next few years. The government could increase spending at a much higher rate to change that.
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This article has 7 comments:
The trick is to get the cash into the hands spenders and encourage them to spend. I can assure you, most people will have no interest in saving once real dollar evaluation kicks in. That will reflate the system quickly and put a rocket behind velocity.
Banks are withholding the authorizations given them now and will likely continue to do so until a few more apples fall off the tree and the real estate free-fall hits bottom. We are certain to go hyperinflationary at a later stage of the recession/depression though. The mechanisms for the event to occur are now in place.
On the question of general price inflation itself we also need to consider that imports have dropped dramatically and plants around the world have been shuttered. That means we are currently in an inventory consumption phase. Prices will rise as inventory is depleted or shortages arise.
Finally, when most of us here discuss inflation and in particular, hyperinflation, we are referring to a currency failure brought on by massive indebtedness, too much borrowing, monetization, reluctant lenders and a public losing faith in it's own currency. The seeds of this can be planted even in a depression.
Stimulus to date plus planned stimulus will have a dramatic effect on us all in the future. That future is likely a lot nearer than you imagine. If I were you I would be investing heavily in trade-goods now, stocking your shelves and buying some precious metals.
The future is almost here.
1) the average house price in the USA is just abovr 200k now (existing, 259k new), and it was past 150k , not 100k, in 2001, and peaked at 270k in 2006 (existing)
2) according to IMF, in 2008, US economy was 14.2 trillion vs. 4.4 trillion for China, which is not 20% at all. China has overtaken Japan as the 2nd largest economy and Germany as exporter (just about, depending how you count it). It certainly drives incremental demand.
We are certain to go hyperinflationary at a later stage of the recession/depression though. The mechanisms for the event to occur are now in place.
I have to say I'm not so sure about your hyper-inflationary statement. I'm on the side of the fence where it's believed that inflation is a product of consumption, and we simply aren't likely to see a return to spending habits like those that predominated prior to the real estate crash. I believe consumers have been burned badly enough so that they'll be far more cautious with their money in the future.
A few examples supporting this belief.
According to a recent report on Morning Edition, soft gas prices are related to declines in vehicle registrations nation-wide, with some states reporting registrations being down as much as 1.4%. It appears that last summer's threshold of elasticity of $3.85/us gallon of 87 octane petrol has declined and consumer pullback at every point of energy price increases has increased.
Bifurcation in the housing market: The majority of increases in home sales have been for homes in the <$200k range. Of the homebuilders that have survived the downturn, many are turning to "green bungalow," design concepts: very small, energy efficient homes-many of which (based upon some quick scanning of some real estate trade sites) appear to be takeoffs of homes from the early 20th century Sears Homes catalog and Gustav Stickley's Craftsman magazine.
Health Care: again, according to recent reports from NPR, both the Democrats and Republicans in Congress have largely backed away from provisions in the law that would limit healthcare costs-ergo physicians salaries (don't want to endanger local political machines that benefit from those wonderful campaign contributions from AMA members at the local level all across the country) and Americans aren't likely to see any effective reduction in health care costs. It is almost certain that as health-care continues to rise in cost, Americans will turn to a stance of defensive savings.
The whole inflation/deflation question has been hotly debated for some time and there are some very good arguments on both sides of the equation. I try to keep an open mind and will adjust my investing decisions accordingly if the future starts to unfold contrary to my very strong belief that a hyperinflation is ahead of us.
Currently we are deflating although it is my contention a resolution to our very high national indebtedness and declining competitiveness, export markets and GDP will be resolved through a rapid devaluation of the currency. When is anybodies guess. But as I pointed out above I am convinced wee are in a period of inventory consumption now. Prices could rise sharply as supplies dwindle. And in that interim period, before new supply is brought online, should stimulus be released o injected then we could see a very sudden surge in prices.
Right now, inventory levels are low and declining. There is an assumption that a new round of buying to replace stocks will boost exports from China and elsewhere and provide the fuel for an Asian led recovery. I don't see it that way though as domestic employment continues to fall and consumers save (and pay down debt) instead of spend. Timing of all these different cycles is everything and the number of variables at play is mind boggling.
Anyway, I invest according to my beliefs, both on the markets and in more personal ways. Some things I do will seem patently silly to others. For example buying up old coin and silver plate tea-sets and miscellaneous silverware at auction as one example. I get these for a tiny fraction of value and while there is very little silver content in them I believe a day may come when they acquire a barter value. The worst that can happen is I end up with a lot of nice silver plate in the house.(And it's fun to buy).
I will be the first to admit if I am wrong about the future of our economy but right now I have a certainty beyond any shadow of a doubt that a hyperinflation is in the cards. It should be short, sharp and devastating to savers and lenders. It will resolve our National indebtedness, destroy the currency as we now know it and collapse much of the financial system. It will also leave us a lot poorer and should herald the start of a protracted depression that is felt around the globe.
We will survive it just fine though and emerge much stronger than when we went in.
On Jul 11 08:41 AM LilBob wrote:
> I have to say I'm not so sure about your hyper-inflationary statement.
> I'm on the side of the fence where it's believed that inflation is
> a product of consumption, and we simply aren't likely to see a return
> to spending habits like those that predominated prior to the real
> estate crash. I believe consumers have been burned badly enough
> so that they'll be far more cautious with their money in the future.