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Michael J. Clark was born and raised in Sinclair, Wyoming. He is a poet, novelist, artist, historian, and market analyst. His fine arts portfolio can be found at the following address: http://www.hoalantrangallery.com/MJC2.htm His writing portfolio can be found at:... More
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  • THE DEFLATION FEAR: WHAT IS IT REALLY?  24 comments
    Sep 9, 2009 9:31 AM
    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:
    This is deflation in action: falling prices that are, in effect, a transfer of wealth from landlords, goods producers and retailers to consumers.
    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.

    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.

    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."
    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?

    Petruno writes:
    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.

    Petruno writes:
    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.

    Themes: deflation
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Comments (24)
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  • Billy the whale
    , contributor
    Comments (30) | Send Message
     
    Hi Michael, I really enjoyed reading this article on the benefits of deflation. I started reading your book, too. It makes a lot of sense, and not just in the logical sense, but in the aha, this strikes me as being true on different levels kind of sense. Myths, dream language, Night and Day cycles, Apollo and Dionysus.. It's beautiful. Reminds me also of "The Power of Myth" show with Joseph Campbell. Your book is also making me aware that as in terms of personal growth, I have my own cycles of expansion and deflation. There are periods of my life where I go for the jugular and try to maximize money and relationships with people. Then there are periods where I have setbacks, or failures, which make me disappointed and depressed. But it's liberating to know that for one, this is the natural order of things and two, life has so much to offer in the shadow of loss. To feel the loneliness, the self-condemnation, the vulnerability, then deciding to do some volunteer work b/c many people are worse off and have much less. Such an experience doesn't happen when I'm focused on making progress in life and things are going well. The thought that the cup of life is always brimming even when it's empty - i'm awed by it. I feel closer to the source. I get back sensations of the world I had from my childhood. Makes me sing all the time. Thank you.
    9 Sep 2009, 01:22 PM Reply Like
  • Michael Clark
    , contributor
    Comments (8356) | Send Message
     
    Author’s reply » Thanks for your note Billy. We all have these cycles of ruthless conquest and sad self-realizations of our own mediocrity. If we're awre of the structure, then we can gain from every stage, as we pass from 'planet to planet' (metaphorically speaking), learning from both the dark and the light and also teaching others at the same time. It's a wonderful system that's been built for us (that we built and are building).

     

    I appreciated your comments.

     

    On Sep 09 01:22 PM Billy the whale wrote:

     

    > Hi Michael, I really enjoyed reading this article on the benefits
    > of deflation. I started reading your book, too. It makes a lot of
    > sense, and not just in the logical sense, but in the aha, this strikes
    > me as being true on different levels kind of sense. Myths, dream
    > language, Night and Day cycles, Apollo and Dionysus.. It's beautiful.
    > Reminds me also of "The Power of Myth" show with Joseph Campbell.
    > Your book is also making me aware that as in terms of personal growth,
    > I have my own cycles of expansion and deflation. There are periods
    > of my life where I go for the jugular and try to maximize money and
    > relationships with people. Then there are periods where I have setbacks,
    > or failures, which make me disappointed and depressed. But it's
    > liberating to know that for one, this is the natural order of things
    > and two, life has so much to offer in the shadow of loss. To feel
    > the loneliness, the self-condemnation, the vulnerability, then deciding
    > to do some volunteer work b/c many people are worse off and have
    > much less. Such an experience doesn't happen when I'm focused on
    > making progress in life and things are going well. The thought that
    > the cup of life is always brimming even when it's empty - i'm awed
    > by it. I feel closer to the source. I get back sensations of the
    > world I had from my childhood. Makes me sing all the time. Thank
    > you.
    9 Sep 2009, 03:55 PM Reply Like
  • hilotyler
    , contributor
    Comment (1) | Send Message
     
    Intresting ideas. Several things jump out at me though, the first is your claim that the median house cost in 1950 was 14,500, then you use the average wage of 3,216.00. I think you should compare to average salaries of home owners to average home prices, other wise your comparson lead one to think that in 1950 the average home owner had borrowed 4.5 times their salary, not likely. I am totally lost at how you calculated the average salary should now be 300,000, substaitially more than the average cost of a house you site at 232,000.
    10 Sep 2009, 01:39 AM Reply Like
  • Michael Clark
    , contributor
    Comments (8356) | Send Message
     
    Author’s reply » Thanks for your note hilotyler. Your being puzzled over the salary questions of 1950 vs 2006 made me puzzled also. I've changed the text to make it more clear.
    10 Sep 2009, 02:32 AM Reply Like
  • neocon4jesus
    , contributor
    Comments (24) | Send Message
     
    Please stop making sense. I'm not used to hearing it and it makes my head hurt.

     

    I think the problem is that we are living on planet Insanity, where Good is Bad, Up is Down, and falling prices God forbid are HORRIBLE I tell you. Which as you point out, are in fact good things. But yes, the powers that be don't want the little people to catch on to this. BUT, they ARE. And that my friend is the problem. The average Joe Sixpack is getting it! And that spells trouble for the US and World economy. But long term- IT FRIGGIN ROCKS! It's the end of the world as we know it, AND I FEEL FINE!

     

    peace out

     

    thelittleguylobby.org
    10 Sep 2009, 03:09 AM Reply Like
  • Michael Clark
    , contributor
    Comments (8356) | Send Message
     
    Author’s reply » Haven't heard any REM for awhile. Always nice to hear.

     

    Thanks for your comment. Yes, we are at the end of the world as we know it...and soon we'll be at the beginning of the world as we don't know it. I won't which will be more interesting?

     

    On Sep 10 03:09 AM neocon4jesus wrote:

     

    > Please stop making sense. I'm not used to hearing it and it makes
    > my head hurt.
    >
    > I think the problem is that we are living on planet Insanity, where
    > Good is Bad, Up is Down, and falling prices God forbid are HORRIBLE
    > I tell you. Which as you point out, are in fact good things. But
    > yes, the powers that be don't want the little people to catch on
    > to this. BUT, they ARE. And that my friend is the problem. The
    > average Joe Sixpack is getting it! And that spells trouble for the
    > US and World economy. But long term- IT FRIGGIN ROCKS! It's the
    > end of the world as we know it, AND I FEEL FINE!
    >
    > peace out
    >
    > thelittleguylobby.org
    10 Sep 2009, 08:40 AM Reply Like
  • Guitarnut
    , contributor
    Comments (4) | Send Message
     
    This may be the most insightful article on deflation that I have ever read. Great job, Michael!
    10 Sep 2009, 10:40 AM Reply Like
  • elcid
    , contributor
    Comments (4) | Send Message
     
    I was enjoying your article until I saw the attack against Republicans and your coddling of unions. The way I see it is that they are both at fault. The Dems for their Communist and Socialist policies and the Republicans for not aggressively turning back the New Deal, the Great Society, the CRA etc,etc.. The Republicans are actually more disgusting because they just seem to go along to get along. I am tired of seeing Republicans like Lindsey Graham get all giddy with Teddy(now dead) Kennedy and all the other demons, I mean democrats. I am finished with any compromising Republican and now consider myself to be a supporter/member of the Constitution Party. But I must say that it is all futile. America no longer exists as a free nation. We have been Communist for sometime. It was Johann Wolfgang Goethe who said, “None are more hopelessly enslaved than those who falsely believe they are free.”
    10 Sep 2009, 10:59 AM Reply Like
  • elcid
    , contributor
    Comments (4) | Send Message
     
    OMG! You write that it is the Republicans that commit class warfare. Simply poppycock. Simply mumpsimus. Where have you been? Hiding in a cave. The Dems have mastered class warfare as they preach their demonic socialist system and make false promises to the poor that the gov't is the answer. Forget God, the dems would have you believe that they are the benevolent master who will take care of the poor. They don't care for the poor but only their personal power on the backs of the poor. The Dems promise welfare then create a huge bureaucracy to control the people. In the meantime the people are given crumbs. The Dems thus set themselves up as the ruling elite who only care for the poor serfs. Hogwash! The Dems created the serfs by destroying our Constitutional Republic, freedom and liberty. Democrats are pure evil who try to set themselves up as God but God will not be mocked. He will not share His power and glory with anyone. God is the answer, not the democrats and certainly not B.O.. But recall that Obama said gov't is the answer. B.O. is an anti-Christ. Also I will share this: when B.O. initially announced that he was running for President my spirit discerned that Obama has a nazi spirit. We are now seeing it come to pass with him taking over major industry and the Czars he is bringing by his side. We also see it in the spirit of the death counselling he had in the health bill. That has since been removed but the spirit of anti-christ is there. Obama is very dangerous and we are on the brink of disaster.
    10 Sep 2009, 11:29 AM Reply Like
  • Russ Wetherill
    , contributor
    Comments (257) | Send Message
     
    The author has it precisely wrong, and demonstrates a fundamental lack of understanding of the effects of inflation and deflation.

     

    Inflation causes presently held dollars to purchase fewer future goods and services. Thus inflation will cause the rich to be able to buy less tomorrow than they could today. Conversely, deflation will cause prices to fall, thereby increasing the purchasing power of currently held dollars - in effect making the rich richer.

     

    Why the concern about deflation, then? It has something to do with the inelasticity of costs - primarily wages and benefits, and other carrying costs like debt servicing. Economists have assumed that wages are inelastic for a number of decades. This however is proving to be a false assumption since wage cuts in the form of furloughs are currently being enacted at state governments and in private corporations.

     

    Debt servicing is the real issue. When incomes drop it becomes more and more difficult to make debt service payments for a fixed amount of debt with dollars that are dropping in value.

     

    For example, if $10,000 is owed and set to be paid off in equal $1,000 payments over a ten year period, the debtor can easily make the payments provided he has take home pay of at least $1,000 per year and no other financial obligations.

     

    If his pay increases over time, as usually occurs in an inflationary environment, then his ability to pay becomes easier over time. After ten years his income may allow for $2,000 per year to service this particular debt, easily making the $1,000/yr payment an leaving another $1,000/yr for other investments.

     

    If his pay decreases, as occurs in a deflationary environment, he will be in much worse shape, however. Let's say that he now only has $500 to service his yearly $1,000 debt. He will either have to use other assets to make up the difference or default on the debt. Either way, this is a bad situation for both the debtor and the creditor since the creditor will potentially lose the yearly payment stream and have to sue to recover the property; and the debtor will lose the value invested in the property or have to divert other assets, perhaps incurring other penalties, to pay off this debt.

     

    The truly wealthy, those without debt and have cash on hand, benefit from falling prices. Inflation, however, makes the wealthy less wealthy and keeps the working poor just as poor. Deflation makes the prudent and frugal better off, but drives the imprudent, over-leveraged debtor farther into debt.

     

    Inflation is a wealth transfer mechanism from the rich to the poor, not vice-versa. Deficit spending and loose credit lending practices increase the number of dollars chasing a finite number of goods and services. This increases prices thus devaluing savings - making the rich poorer, not richer.

     

    On top of this, the government has taken more from the rich to support the very deficit spending and loose credit practices that have caused inflation to erode the savings of the wealthy in the first place. Preposterous! A man should never be forced to furnish the means of this own destruction. Outrageous!
    10 Sep 2009, 11:32 AM Reply Like
  • Michael Clark
    , contributor
    Comments (8356) | Send Message
     
    Author’s reply » Actually, Republicans engage in class warfare when they are in power. And Democrats engage in class warfare when they are in power. The Middle Class is actually the engine of change. The Middle Class joins the Republicans (the monied class) when they think they can become rich -- and when they grow tired of the chaos and lack of discipline brought on by Democratic rule -- and the the Middle Class joins the Democrats when they begin to fear thaat they too might become poor, like today.

     

    Actually, I see social growth as a dualistic process, defined by Day Periods (Republican periods) of matter, individuality, economic empire, science, reason, expansion, bubble-creation and by Night (Democratic periods) of anti-matter, group cohesion, economic deflation, mysticism, imagination, contraction, bubble-breaking... I think we need both forces, sequentially, the Father by Day and the Mother by Night.

     

    I am writing a book about this at
    www.hoalantrangallery....

     

    I was a republican and voted for Reagan in 1982. I voted for both Bushes because I felt the democrats, at that time, were irrelevant. Now I feel the same about the Republicans. We are going in to the Night. The rugged individualism, anti-big government ideology of the Republicans is stale and played, especially considering what that ideology just did to our economy and our banking system. We need more democracy at this moment -- and less superstar business greed.

     

    I think the Night belongs to the democrats -- 2001 - 2019. Republicans start to come back to life in 2019, and actually recapture power in 2028. But until then they are the Herbert Hoover clones, and sadly lacking in ideas. The Republicans are better world-creators, empire-builders, and business cheerleaders than the Democrats. But we don't need that now. We are heading into the Night, and wont' be re-building the world until 2019-2028. We're in the process of dismantling the world now.

     

    Social programs are needed during the Night, because everyone is poor and we all have to pull together, simply to survive as a nation. Individualism by Day; community of sufferers by Night.

     

    On Sep 10 11:29 AM elcid wrote:

     

    > OMG! You write that it is the Republicans that commit class warfare.
    > Simply poppycock. Simply mumpsimus. Where have you been? Hiding in
    > a cave. The Dems have mastered class warfare as they preach their
    > demonic socialist system and make false promises to the poor that
    > the gov't is the answer. Forget God, the dems would have you believe
    > that they are the benevolent master who will take care of the poor.
    > They don't care for the poor but only their personal power on the
    > backs of the poor. The Dems promise welfare then create a huge bureaucracy
    > to control the people. In the meantime the people are given crumbs.
    > The Dems thus set themselves up as the ruling elite who only care
    > for the poor serfs. Hogwash! The Dems created the serfs by destroying
    > our Constitutional Republic, freedom and liberty. Democrats are pure
    > evil who try to set themselves up as God but God will not be mocked.
    > He will not share His power and glory with anyone. God is the answer,
    > not the democrats and certainly not B.O.. But recall that Obama said
    > gov't is the answer. B.O. is an anti-Christ. Also I will share this:
    > when B.O. initially announced that he was running for President my
    > spirit discerned that Obama has a nazi spirit. We are now seeing
    > it come to pass with him taking over major industry and the Czars
    > he is bringing by his side. We also see it in the spirit of the death
    > counselling he had in the health bill. That has since been removed
    > but the spirit of anti-christ is there. Obama is very dangerous and
    > we are on the brink of disaster.
    10 Sep 2009, 12:52 PM Reply Like
  • Michael Clark
    , contributor
    Comments (8356) | Send Message
     
    Author’s reply » I didn't read your post all the way through. Obama, the anti-Christ. Actually, if you re-read Christ's message, it centered on generosity to the poor, the rich giving their money away to try to find forgivness, and find a way into heaven. Why did Jesus attack the money-changers in the temple? Because the corrupt religion was justifying wealth as a sign of God's blessing, instead of some contract with the devil. Remember when Satan took Jesus to the wilderness and offered him power over all the earth and massive wealth and earthly power. The anti-Christ does not help the weak and the poor. The anti-Christ rules the Earth, is rich and selfish and powerful -- and seeks a divided world, with a rigid class system.

     

    The religion of the right wing is based on a racial notion of white being blessed and black being cursed -- that's the nazi view. Jesus, in fact, was on the side of the weak, the lowly, the outcast, the prostitutes, the powerless.

     

    I'm sure Obama is on his own side -- and that he is as selfish as most politicians. But his programs to help poor people during a time of crisis are not a sign of his being an anti-Christ.

     

    On Sep 10 11:29 AM elcid wrote:

     

    > OMG! You write that it is the Republicans that commit class warfare.
    > Simply poppycock. Simply mumpsimus. Where have you been? Hiding in
    > a cave. The Dems have mastered class warfare as they preach their
    > demonic socialist system and make false promises to the poor that
    > the gov't is the answer. Forget God, the dems would have you believe
    > that they are the benevolent master who will take care of the poor.
    > They don't care for the poor but only their personal power on the
    > backs of the poor. The Dems promise welfare then create a huge bureaucracy
    > to control the people. In the meantime the people are given crumbs.
    > The Dems thus set themselves up as the ruling elite who only care
    > for the poor serfs. Hogwash! The Dems created the serfs by destroying
    > our Constitutional Republic, freedom and liberty. Democrats are pure
    > evil who try to set themselves up as God but God will not be mocked.
    > He will not share His power and glory with anyone. God is the answer,
    > not the democrats and certainly not B.O.. But recall that Obama said
    > gov't is the answer. B.O. is an anti-Christ. Also I will share this:
    > when B.O. initially announced that he was running for President my
    > spirit discerned that Obama has a nazi spirit. We are now seeing
    > it come to pass with him taking over major industry and the Czars
    > he is bringing by his side. We also see it in the spirit of the death
    > counselling he had in the health bill. That has since been removed
    > but the spirit of anti-christ is there. Obama is very dangerous and
    > we are on the brink of disaster.
    10 Sep 2009, 01:04 PM Reply Like
  • Michael Clark
    , contributor
    Comments (8356) | Send Message
     
    Author’s reply » Actually, if I own a company that makes cars, I benefit from inflation of prices I can charge customers, especially if I can control the cost of what I pay workers. Workers with wages decreasing and prices increasing are at a disadvantage obviously. It is much better for workers on a fixed budget to have prices going down, deflating. This is common sense.

     

    For those with a crush debt burden, deflation is not good. Deflation is not good for anyone, rich or poor, who have a crushing debt burden.

     

    In fact, deflation will compact the society back toward a starting point: those at the top with too much debt (the rich) will be hurt, those at the bottom with too much debt will also the hurt. Those in the middle, with a job and manageable debt will survive best.

     

    That is what the Night does -- the deflation -- it cuts off the two extremes. It pulls the rich back toward the middle class, financially speaking; and it pulls the poor up toward the middle class, with social programs. That is how it is designed to work.

     

    On Sep 10 11:32 AM Russ Wetherill wrote:

     

    > The author has it precisely wrong, and demonstrates a fundamental
    > lack of understanding of the effects of inflation and deflation.
    >
    >
    > Inflation causes presently held dollars to purchase fewer future
    > goods and services. Thus inflation will cause the rich to be able
    > to buy less tomorrow than they could today. Conversely, deflation
    > will cause prices to fall, thereby increasing the purchasing power
    > of currently held dollars - in effect making the rich richer. <br/>
    >
    > Why the concern about deflation, then? It has something to do with
    > the inelasticity of costs - primarily wages and benefits, and other
    > carrying costs like debt servicing. Economists have assumed that
    > wages are inelastic for a number of decades. This however is proving
    > to be a false assumption since wage cuts in the form of furloughs
    > are currently being enacted at state governments and in private corporations.
    >
    >
    > Debt servicing is the real issue. When incomes drop it becomes more
    > and more difficult to make debt service payments for a fixed amount
    > of debt with dollars that are dropping in value.
    >
    > For example, if $10,000 is owed and set to be paid off in equal $1,000
    > payments over a ten year period, the debtor can easily make the payments
    > provided he has take home pay of at least $1,000 per year and no
    > other financial obligations.
    >
    > If his pay increases over time, as usually occurs in an inflationary
    > environment, then his ability to pay becomes easier over time. After
    > ten years his income may allow for $2,000 per year to service this
    > particular debt, easily making the $1,000/yr payment an leaving another
    > $1,000/yr for other investments.
    >
    > If his pay decreases, as occurs in a deflationary environment, he
    > will be in much worse shape, however. Let's say that he now only
    > has $500 to service his yearly $1,000 debt. He will either have to
    > use other assets to make up the difference or default on the debt.
    > Either way, this is a bad situation for both the debtor and the creditor
    > since the creditor will potentially lose the yearly payment stream
    > and have to sue to recover the property; and the debtor will lose
    > the value invested in the property or have to divert other assets,
    > perhaps incurring other penalties, to pay off this debt.
    >
    > The truly wealthy, those without debt and have cash on hand, benefit
    > from falling prices. Inflation, however, makes the wealthy less
    > wealthy and keeps the working poor just as poor. Deflation makes
    > the prudent and frugal better off, but drives the imprudent, over-leveraged
    > debtor farther into debt.
    >
    > Inflation is a wealth transfer mechanism from the rich to the poor,
    > not vice-versa. Deficit spending and loose credit lending practices
    > increase the number of dollars chasing a finite number of goods and
    > services. This increases prices thus devaluing savings - making the
    > rich poorer, not richer.
    >
    > On top of this, the government has taken more from the rich to support
    > the very deficit spending and loose credit practices that have caused
    > inflation to erode the savings of the wealthy in the first place.
    > Preposterous! A man should never be forced to furnish the means of
    > this own destruction. Outrageous!
    10 Sep 2009, 01:11 PM Reply Like
  • Pater Tenebrarum
    , contributor
    Comments (416) | Send Message
     
    deflation and liberty are deeply intertwined:

     

    mises.org/story/3231
    10 Sep 2009, 06:50 PM Reply Like
  • beach bum 2009
    , contributor
    Comments (14) | Send Message
     
    Great article. I've been thinking lately that the deflation in housing was a transfer of wealth from the rich to the poor, and you have really expanded on that for me. But it was also a transfer of wealth from the slow to the nimble as stock market went to hell (666) and back. This crash was the opportunity of a lifetime for those who sold early. A good reallocation on the way back up could have been fantastic. I was down 50% along with the market, but decided to get into commodities in early March. There was definitely a transfer of wealth to me. I sold my house near the top and have been renting ever since & will become a buyer again when I feel that we are near a bottom. I am fortunate and have had much with luck, but this is definitely the time for the nimble to rise.
    10 Sep 2009, 09:52 PM Reply Like
  • Michael Clark
    , contributor
    Comments (8356) | Send Message
     
    Author’s reply » Smart man. I advised a friend of mine to dod the same; but she looked at me like I was crazy. Rent? That's throwing money away! I told her she could wait for the crash and buy back in in ten years near the bottom. She sold her house, made a nice profit, bought a larger more expensive house at the top -- and there she sits, the value of her overpriced new house dwindling. Oh, well.

     

    Best of luck. Sounds like you are making your own luck.

     

    On Sep 10 09:52 PM beach bum 2009 wrote:

     

    > Great article. I've been thinking lately that the deflation in housing
    > was a transfer of wealth from the rich to the poor, and you have
    > really expanded on that for me. But it was also a transfer of wealth
    > from the slow to the nimble as stock market went to hell (666) and
    > back. This crash was the opportunity of a lifetime for those who
    > sold early. A good reallocation on the way back up could have been
    > fantastic. I was down 50% along with the market, but decided to get
    > into commodities in early March. There was definitely a transfer
    > of wealth to me. I sold my house near the top and have been renting
    > ever since &amp; will become a buyer again when I feel that we are
    > near a bottom. I am fortunate and have had much with luck, but this
    > is definitely the time for the nimble to rise.
    11 Sep 2009, 04:30 AM Reply Like
  • beach bum 2009
    , contributor
    Comments (14) | Send Message
     
    Thanks for the reply. I dig your art as well.
    11 Sep 2009, 07:25 PM Reply Like
  • Gary A
    , contributor
    Comments (3156) | Send Message
     
    I am late to the article. It appears that inflation is something that this nation can no longer afford. It decreases the value of toxic assets banks hold. It requires a necessary response of higher interest rates. It only works when folks have access to credit.

     

    I saw milk recently go to 5 dollars a gallon. The consumer took care of that fast. They are giving milk away now. People are not forming families, not buying houses, not even getting married. The cost of living got too high. There is a breaking point and it is NOW.
    26 Sep 2009, 10:56 AM Reply Like
  • Michael Clark
    , contributor
    Comments (8356) | Send Message
     
    Author’s reply » Gary: I couldn't agree more. We had 18+ years of inflated assets; now it's time to back off and let the people of the country recover. But Ben and his friends in the Fed are going to try to pump up one more bubble for us, to try to drive up prices again. It's a sad condition we're living in now. I agree: the breaking point is NOW!

     

    On Sep 26 10:56 AM Gary A wrote:

     

    > I am late to the article. It appears that inflation is something
    > that this nation can no longer afford. It decreases the value of
    > toxic assets banks hold. It requires a necessary response of higher
    > interest rates. It only works when folks have access to credit.
    >
    >
    > I saw milk recently go to 5 dollars a gallon. The consumer took care
    > of that fast. They are giving milk away now. People are not forming
    > families, not buying houses, not even getting married. The cost of
    > living got too high. There is a breaking point and it is NOW.
    26 Sep 2009, 03:59 PM Reply Like
  • Gary A
    , contributor
    Comments (3156) | Send Message
     
    I honestly believe, Michael, that the ultimate aim was to replenish the banks, steal from the taxpayer to do so, and hope some new technology or activity comes along to actually help the real economy. They want another dot com, maybe with alternative energy.

     

    But I think we are too broke this time. I think finally too much money has gone to the top, and the rest of the folks will not have any economic growth for years. We will see won't we.

     

    I personally wish that folks will not cooperate with the corporate socialists, and actually remain frugal. Otherwise we will once again, play into the hands of the 1 percent.
    27 Sep 2009, 02:43 AM Reply Like
  • Michael Clark
    , contributor
    Comments (8356) | Send Message
     
    Author’s reply » I agree. Austerity begins at home, with us. Just save money, pay down debt, and regenerate from within.

     

    If you look at the chart in this article comparing housing costs and salaries, salaries have been declining (or going sideways, which is the same as declining in a high-inflation environment) since the early 1970's.

     

    Reagan rekindled the economy, for the rich, on the back of the indebted poor and middle class....we've been losing the battle ever since.

     

    On Sep 27 02:43 AM Gary A wrote:

     

    > I honestly believe, Michael, that the ultimate aim was to replenish
    > the banks, steal from the taxpayer to do so, and hope some new technology
    > or activity comes along to actually help the real economy. They want
    > another dot com, maybe with alternative energy.
    >
    > But I think we are too broke this time. I think finally too much
    > money has gone to the top, and the rest of the folks will not have
    > any economic growth for years. We will see won't we.
    >
    > I personally wish that folks will not cooperate with the corporate
    > socialists, and actually remain frugal. Otherwise we will once again,
    > play into the hands of the 1 percent.
    27 Sep 2009, 04:37 AM Reply Like
  • Dan in mpls
    , contributor
    Comments (244) | Send Message
     
    This is interesting and all but Im seeing holes all over it. For starters, I'm one of those greedy landlords though I have not raised my rents in a DECADE!!!!!! Ever since this housing mess began, I first lost my good tenants, then my average payers, finally the losers were moving out to buy condos as I was wondering where the landlord verification form went to. Now I know - they skipped that step to rush another closing. As a property owner, I have had a lost decade and I look forward to the coming housing crunch as banks refuse to hand even dollar to builders for a decade. I can finally catch up to making what I did ten years ago.
    A few comments up there someone makes the comment implying that consumers quit buying milk at five dollars a gallon. It was the hard working capitalist milk producer who rushed to fill his barn with cows when milk hit the roof (due to the ethanol idiocy which drove feed sky high forcing milk producers to slaughter milk cow). This, of course caused a crash in milk prices yet again. My buddy up the hill had of late been paying his banker twenty five thousand dollars a month for the privileged of milking a seven hundred head heard. Luckily, the next swing is coming there and he is able to hold out.
    American consumers just don't get so mad they won't take it anymore. If they can blow money, they will. That sad fact of life in America today is the best hope we have to get out of this mess. We can only hope the government doesn't totally destroy the system trying to save it before it rights itself.
    Finally, I will add my own two cents worth here by saying that I do think the honest greed shown by the Wall Street crowd should be curbed. Id love to see a tax on every stock transaction to take the wind out of their sales. It's always struck me as a good idea that they have a minimum 30 day ownership rule on stock purchases. If you want to own part of a company, take a look at its books and decide if you want a part of its future. Then toss the dice and live with your decision for 30 days. I guess it won't happen right away but I'd love to see it wipe all these habitual gamblers who gamble with our money. Think of all the creative genius that would be let loose on the broader economy. I hope this won't hit too close to home to my fellow seeing alpha readers!
    5 Oct 2009, 08:57 AM Reply Like
  • Michael Clark
    , contributor
    Comments (8356) | Send Message
     
    Author’s reply » Dan:

     

    Thanks for your comment. I think you're one of the few landlords in the world who didn't raise rents for a decade. I have friends who saw their rent on a small house go from $495 in 1993, when they moved in, to $850 last year.

     

    The deflation we are seeing in rents and housing will save hard-working Americans from the bankruptcy court. It will push some developers and landlords into bankruptcy it is true. The problem is that we let our bubbles run wild, pushing prices up too much too fast, forcing people to borrow against the price of living (food, housing, education, etc.) through credit cards and refinancing of their overpriced houses.

     

    Bubbles end badly. We are supposed to have a statesman running the Fed who watches out for bubbles and deflates them before they become destructive -- but, instead, we had the Leader of the Bubble Brigade in Greenspan and now we have the Adopted Son of the Leader in Bernanke, whose religion requires them to fight to the death against any deflation of asset bubbles. We all pay for this religious fanaticism, which denies the reality of half of the world.

     

    There is a lot we could do to control the behavior of our bankers -- including the taxation method you suggest -- but we need leadership in Washington to do that. So far we have mostly attempt to preserve what is already gone.
    6 Oct 2009, 12:11 PM Reply Like
  • ma11hew
    , contributor
    Comments (322) | Send Message
     
    Michael, thanks for this insightful article. I worked for AT@T for 32 years and retired last year. For many years I heard complaints about unions. Interestingly they were not from the "rich republicans" as much as the working class blue collar people who didn't have union wages. I always felt that if all working class people would strive to form union representation for fair wages and benefits then the world would become more peaceful and prosperous. One thing that you bring to a better perspective for me is this concept of deflation being positive for the lower wage earners. I always felt that deflation should be fought at all stages because it leads to higher unemployment. Now I am not so sure. Thanks again.
    24 Oct 2012, 08:42 AM Reply Like
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