THE DEFLATION FEAR: WHAT IS IT REALLY?
Is Inflation a picture of class-warfare with the rich winning and the poor losing? If so, what does that make deflation?
I was reading articles on the web today and I came across a story on the LA Times by Tom Petruno entitled "We All Want A Deal -- That's What's Scary'. One quote in this story really jumped out at me:
Without a doubt, the men and woman fighting so desperately to contain the deflation, choosing to saddle our children with a staggering amount of both debt and inflation, and seemingly willing to crucify the U.S. Dollar in order to try to keep deflation from winning, are panick-stricken by the spectre of the nakedly-defined concept above: they don't want to transfer any of their wealth to the consumers. They would rather destroy America that transfer wealth to the consumers, America's working poor. They don't mind taking, taking, and taking wealth from America's and the world's consumers. That is the natural state of things, isn't it: the rich robbing the poor. That's what our system is set up to guarantee. The other side of the equation -- giving back -- allowing prices to recede, as the high tide recedes into the low tide -- is NOT aceptable and must be fought with every ounce of our energy and every astonishing formula of trickery.This is deflation in action: falling prices that are, in effect, a transfer of wealth from landlords, goods producers and retailers to consumers.
We have just passed through a two-decade cycle of inflation, of economic bubble creation, that made the rich much richer and made the rest of us more indebted to the rich. Talk about your golden age for bankers, lenders, insurance companies, retailers, landlords...
The government tells us we have no real inflation. They have devised a sophisticated formula that essentially ignores all inflationary price gains UNLESS the price increases are matched by rising salaries of common working Americans. Of course, American businesses have also been working diligently to keep American salaries from growing, exporting manufacturing jobs to Mexico, China, Vietnam and India -- turning America into a service economy, with meager salaries and mixed employment benefits. The global economy, the darling concept of Republican financial stragegists, was a two-edged sword: (1) to lower production and labor costs; (2) to destroy the power of unions in America. This strategy worked to perfection. Excpet there now is no one left to finance the global economy's attempted climb out of the black hole of depression.
So, we are told, even when energy prices gained 10-fold, when oil flew up from $10/barrel to $150/barrel, when housing prices quadrupled in three years, when higher education costs increased over 1400% percent in two decades, when medical costs, represented by medical insurance premiums gained 10% per year for a whole decade beginning in 1999, when the price of a new automobile increased 1100% in a generation...still, the government assured us, we had moderate inflation.
In fact, we need to re-define the concept of 'inflation'. Inflation and economic expansion are the same thing. Keeping consumer salaries stuck in neutral and adding cheap debt to the picture changes nothing really. Inflation is economic expansion. We have been inflating the economy since 1983 -- and now our overlords in Washington and on Wall Street will do anything to keep this feeding frenzy going, rather than to allow deflation to set in, for prices to reverse, and for consumers to be relieved from the incessant price gains of the past three decades.
Inflation in the Costs of Higher Education?
From 1976 to 2007, University of Oregon full-time tuition for non-resident graduate students increased from $320 per term to $5447 per term, an increase of 1602%. To put this in perspective, a person earning $20,000 per year in 1976 (a reasonable salary at the time), would need to be making $320,400 in 2007 in order to keep up with this suggested inflationary rate.
A person earning $60,000 in 1976 (a higher administration type salary), would need to be making $961,200 in 2007 in order to be keeping up with this inflationary rate.
Inflation in the Costs of Automobiles?
When I was entering college in 1970, a new Volkswagon bug cost $1700. Today, a new bug costs $20,000. This is an increase of 1100%. A person making $20,000 in 1970 would need to be making more than $215,000 dollars today to keep up with that inflation rate.
Inflation in the Housing Market?
We all know about this, right? That's why we've had a 'correction' in housing prices? The chart below shows a pretty clear picture of housing inflation accompannied by salary stagnation.
Real wages (unless you were a Michael Jordan, a Michael Jackson, a Bernnie Madoff, or a fellow traveler at Goldman Sachs) stopped growing in 1970. They have been declining ever since. The elimination of high-paying jobs by 'business efficiency' is the main reason for this. The fact that the main part of this 'efficiency' is, as always, substituting technology for workers -- and, this time, sending jobs overseas does not help the picture of declining real wages. The chart below shows this pretty precisely. But the price of houses (even with the first leg of this correction) have moved in the opposite direction.
Of course, as we well know, not all slaries and wages have been falling. The financial industry has never had it so good. The ruling class in America -- those who are so deathly afraid of deflaltion -- have been living like kings, feeding off you and I and our children. Debt is good for banks. Inflation of debt is what makes the bottom line of the banks flow like gold -- and makes stock prices of banks soar.
The red line in the chart below represents salaries, bonuses, etc. of financial institutions; and the blue line represents the salaries of all the rest of us.
So, while common American workers (the 'fodder' in this story) have seen their salaries decline steadily over several decades, as profits for the financial industry (banks, insurance companies, brokers, investment banks -- the 'pigs' in this story) have scaled a glorious peak, common American workers have also seen their debts rise. In fact, you can mark on the chart below (see the dotted line) the year that the Republicans won back the White House. (Ignore Bill Clinton in this scenario, for he was a Democratic version of Richard Nixon, a political survivor capable to taking any shape he needed to take in order to survive in an inhospitable historical cycle.) What the picture below means is that not only was the financial industry robbing common Americans blind -- they were also robbing their children of common working Americans -- for debt is a picture that keeps on giving, and giving, and giving...to the banks, of course.
Buy a $200,000 house -- what do you pay? $285,000. Who gets the extra $85,000? The banks of course.
The American Ruling Class (Wall Street and their pet enablers in Washington DC) have been waging a hugely successfull class-war against working Americans for two decades now -- we'll look at only the most recent cycle of the expansion of credit. Now, as it appears as though deflation is setting in -- the air is being let out of the balloon -- and that there will be some form of reprieve for working Americans from the expanding powers of the Ruling Class, that prices might come down in fact, relieving American consumers from the rampant inflation of the last two decades, the rich, fueled by selfish concern as always, seek again to combat the natural cycles of expansion followed by contraction, are armed with a Fed Chariman who is intent of doing his damnedest to force continued credit expansion into the mouths of consumers in order to keep the prices of their material assets of the Ruling Class from declining.
Lower housing prices are the solution to the problem we are facing, in fact. Lower housing prices are not the problem.
Looking at the chart below of Personal Saving as a % of Personal Income vs. Ratio of Household Sector Debt to Personal Income a few things become apparent. The ratio of household debt has been climbing since the late 1940's, except for a stretch between 1965 and 1983 (a Night-Cycle in my terminology -- a period of deflation in the largest since); and that the savings rate actually gained pretty steadily until the coming in of the Republicans (a Day-Cycle in my terminology -- when asset inflation began again). This chart has not been updated -- and Americans are trying to save again, which is not be aided by the continual depression of interest rates by the current Fed chief -- the savings rate of Americans has not been as low since the First Great Depression during the 1930's. Actually there have been many great depressions in America; and they come regularly every 18 years or so, lasiting about 18 years.
Night Cycle: (Contraction/Deflation of Credit Bubble):1965-1983
Day Cycle (Expansion/Inflation of Credit Bubble): 1983-2001
Night Cycle: (Contraction/Deflation of Credit Bubble): 2001 - 2019
Care to see another picture of the Class War against American Consumers in a historical context?
Bankers get it all. But they have never gotten so much in America as they have gotten from us over the last two decades. Notice the correlaltion of banker greed and the depressions of 1929-1947 and the current depression of 2001-2019.
So, the answer seems pretty clear: yes, there has been a class war against the American Consumer since 1983 (when the inflation of prices began) -- and the Ruling Class of bankers (et.al.) have clearly won this war. Now, that they are beginning to lose it, they will do anything to avoid giving an inch of their gains back: talk about trying to stuff an oyster in a piggy bank. Some of the Ruling Class (we hear this all the time on Fox News, Rush Limbaugh, Glenn Beck and others -- I believe Lou Dobbs has even used this line) accuse Barak Obama and the democrats of threatening the rich with 'class warfare'. They don't really mind class warfare so much, as long as they are winning. In fact they are masters at class warfare. They are the 'Masters of the Universe', in fact, a name they have apparently bestowed upon themselves, showing us that arrogance, at least, is not dead.
Tom Petruno goes on to write:
When a 20-something friend of mine recently told me she was looking for an apartment to rent in Los Angeles, I had only one bit of advice for her: Don't accept any advertised rent -- haggle with the landlord to get the price down, and demand concessions on anything and everything.
The housing crash and the recession have made this a renter's market. The cost of apartments and homes for rent can only decline. Just look at the number of "for lease" signs in every L.A. neighborhood.
This is deflation in action: falling prices that are, in effect, a transfer of wealth from landlords, goods producers and retailers to consumers.
Then Tom goes on to highlight the 'fear of deflation". What's not to like: 'Maybe this. The risk is that the new national frugality fueled by the recession could portend a true deflation -- a broad and persistent drop in prices that would be debilitating for the economy, leading to falling wages, an even weaker job market and another steep slide in the value of homes, stocks and other assets...'
Tom, these asset prices are bubbles that NEED to deflate. They have been artfully and artificially inflated. Bubbles are not 'natural' conditions.
Petruno can't help but see signs of deflationary horror on the horizon. Commercial real estate is sinking. He understands that this might lead to a total collapse of rents, which would manifest in an avalanche of commercial defaults and more bank losses. He notes that prices appear to be stabilizing in housing and stocks have rebounded and the economy seems to have bottomed. This has made deflation fears subside considerably among some economists. But he also notes a surprise voice recently added to the prophetic threat of deflation. Fed Reserve Bank of Dallas President Richard Fisher, a long-time advocate of the inflationary-picture has apparently changed sides.
The 'absence of pricing power' translates as the inability to make more profits by raising prices the U.S. consumer is willing and able to pay. Plants don't grow in nature through all 12 months. They grow; they give fruit; they return to seed; they rest. Why is it that we expect the economy to grow perpetually and never contract, never rest, never return to seed? Is there something missing in our one-sided view of reality that makes us panic when we see that we are losing expansive momentum? When the Summer passes, do we seek to use monetary policy to stop the Earth from turning?This week, Federal Reserve Bank of Dallas President Richard Fisher -- long one of the Fed's loudest voices on the threat of inflation -- had a much different message in a speech at UC Santa Barbara.
"For the immediate future," Fisher said, "the risk to price stability is a deflationary risk, not an inflationary one."
The Fed's benchmark measure of inflation is the so-called personal consumption expenditures price index, which for various reasons the central bank has come to favor over the consumer price index.
In July, Fisher said, nearly 50% of the items in the PCE basket of goods and services were falling in price, even as the gloom over the economy was supposed to be lifting.
Many businesses, he said, "are operating in the shadow of the absence of pricing power."
Southern California has become a laboratory of deflation causes and effects. The first cause was the plunge in home prices that has wiped out massive amounts of wealth since 2006 and sent mortgage defaults soaring.
Then came severe job losses that have pushed Southland jobless rates well above the national average, to 11.9% in Los Angeles County and 14.3% in the Inland Empire.
Little wonder, then, that Ralphs and Vons, two of the region's biggest grocery chains, this week launched a new round of price cuts to try to lure penny-pinching shoppers. As my colleague Jerry Hirsch noted in his story on the grocers, they're reacting in part to the threat from discounters including Wal-Mart.
For consumers, discounting wars obviously are welcome at a time like this. What the Fed worries about is a deflationary mind-set taking hold that could rival the one that crippled Japan's economy in the late-1990s, after its real estate and stock bubbles burst.
The ghost of Japan is a moster looming over the entire world now. Japan has been in deflation for nearly 20 years. If Japan is on the same 18-year cycle as America is, then Japan should start showing signs of life and expansion again. The trouble is, Japan is an export economy, with few natural resources. How will Japan begin to expand if all of Japan's markets are contracting? Did Japan, in fact, lead the rest of the world into the black hole of deflation?
Another sign that deflation is here to stay is the resiliance of the T-Bond market. Why are investors willing to pay for bonds and receive almost no interest in return? Because they fear the future. They see -- vision is no longer of an expanding Garden of Eden economically -- that the future is going to be difficult, austere, and even mean, as we return to the seed, return to the darkness of a Winter rest. The Economy has given us its fruit in this cycle. It is not going to continue fruiting for ever.
Albert Edwards, investment strategist at banking giant Societe Generale in Paris and someone who for years before last year's credit crisis was warning of a day of reckoning, believes bond buyers are seeking a haven because they see Phase Two of the crisis on the horizon: a "full-blown deflationary episode once this recovery falters."
Even as we all hunt for lower prices, we should hope Edwards is dead wrong.
If Inflation is a picture of class-warfare in which the rich triumph and everyone else lose, then what is deflation? Deflation is a return to Ground Zero. (It is interesting that the term 'Ground Zero' came back into the language in 2001 after the Muslim radical attach on the Twin Towers in New York -- 2001 being the year of the culmination of the Day-Cycle in our own calculation of expansion-contraction cycles.)
I keep returning to Petruno's opening line: 'Deflation... is a transfer of wealth from landlords, goods producers and retailers to consumers.' This is exactly what we need in America, and probably all over the Earth at the moment. We have been ruthlessly exploiting the energy of economic expansion, commercial development, confiscation of natural resources in order to make houses we don't need, golf courses we don't need, mini-malls we don't need...it is as if 'expansion for the sake of expansion' has become our religion. Do something; do anything; only just don't sit there! Some times you just have to sit there.
If Albert Einstein was correct when he said 'the Laws of Nature are the...thoughts of God', then deflation is not only inevitable, it is also a blesssing. Can one argue that sleep is a curse? Can one propose the elmination of Winter as a season, so that nature can be all light and warmth, all summer, all growth, all expansion? If the Day-Cycle, economically-speaking, is God giving blessings to the rich, then the Night-Cycle and defleation might be understood, economically-speaking, as God taking away his blessings from the rich, taking the power of tyranny away from landlords, greedy retailers, voracious bankers, and other Ruling Class wealth-confiscators.
Inflationary forces separate society into clearly defined antagonistic classes. Deflationary forces, in returning society to its seed, help to eliminate this differentiation by wealth and class. Government during the Night-Cycle also seeks to impose this 'declassification' of society, with 'equality and fairness' being the highest values, as 'freedom and daring' were the highest value during the Day-Cycle. Life separates; death coalesces.
The Hero, the force and form of the Day-Cycle energy of expansion, honors the empire, science, human society, wealth, order, class, race. The Anti-Hero, the force and form of the Night-Cycle energy is the mirror-image of the Day-Cycle Hero, the reverse force, dishonoring the corruption of empire, science, human society, wealth, order, class, race.
It is written in the Old Testament: "Honor both the Father and the Mother." The Father is the Day-Cycle, the force of expansion, inflation, the Ruling Class. The Mother is the Night-Cycle, the force of contraction, deflation, the Non-Ruling Class. When the Bible surmises that 'the meek shall inherit the Earth,' this is another way of saying that the rich will disappear during the deflation.
Both Inflation and Deflation are needed in order to fulfill Nature's cycles. In 2019 there will be a stirring of inflationary energy again -- a real stirring, not the fake stirring of 2009. But, for the time being, nothing and no one will be able to outsmart or defeat the power of the coming Deflation. There is a time for 'filling up'; and there is a time for 'emptying out'. The Lord gives; and the Lord takes away.