austrian63

Mish Shedlock's Inflation Scorecard: June 2009 Update

There is an excellent article by Richard C B Johnsson that shows the CPI index in Japan fluctuated between +1.0% and -1.0% year over year from 1993 to 2001. I would call this price stability not deflation.


On Jul 16 02:50 PM Between The Numbers wrote:

> On Jun 24 11:18 PM austrian63 wrote:

Seven Reasons Doug Kass Is Wrong About the Economy

Economists should focus on the long-term effects of policies and practices and not the short term. One thing that might be different now is the recognizable and unsustainable insolvency of the United States. This will eventually lead to a currency crisis, maybe not this year or next year but eventually. This will be the true "this time it's different" story.

Tax receipts will continue to fall or grow much more slowly than total outlays which will cause larger deficits each year. As the total U.S. debt approaches $15 trillion, it's approx. $12 trillion now, our lenders be very nervous about their ability to redeem they loans they already have outstanding to us (their portfolio of treasuries) and will be unwilling to purchase more treasuries at some point. This will happen we just don't know when. When it does, all bets are off for the argument "this time is just like every time."

Mish Shedlock's Inflation Scorecard: June 2009 Update

That's all very nice but all has to do is look at a few historical and empirical facts:

Check out the historical chart of the CPI for all items from 1913, the birth of the Fed to May 1, 2009.

research.stlouisfed.or...

Sorry about the link. Paste this into your browser. Does anyone seriously think we are at risk of an appreciating dollar because that is really what deflation entails. The past 96 years shows no evidence of a tendancy for sustainable deflation in a fiat currency regime. The period from 1921 to 1941 had relatively flat price levels but once deficit spending was in vogue, this stability disappeared forever.

You can look at the various charts on the St. Louis Fed's web site for differenct periods, etc. The trend toward inflation/currency devaluation is the same.

Can the Fed Always Win Against Deflation?

Interesting point about about Japan's lost decade of deflation. Asset prices have fallen in Japan but I do not believe the cost of living consumer prices have fallen on a sustainable basis. Just as asset prices have fallen in the U.S., cost of living prices have not regardless of the CPI numbers. For example, over the past 3 years the price of basic food items, auto and homeowners' insurance premiums, health insurance premiums, most service fees whether for a lawyer or a car repair, college tuition, hotel charges, etc. have not fallen. These are the items that most Americans buy on a daily, weekly, monthly basis. Most Americans do not by a home, car, share of Berkshire Hathaway or European vacation on a monthly basis. Yes these prices have "deflated" but not the prices attached to most items that most Americans need to live.

I will agree, over the past 12 months, some commodity prices have fallen as has fuel, temporarily, I might add. One very powerful conceptual argument to support Rockwell's and North's theory is that in a fiat currency regime where the central bank has unlimited power to create money, the purchasing power of money will never increase on a sustainable basis over time. The reason for this is the economics of scarcity. All resources are scarce with the exception of money since it can be created either electronically or printed at virtually no cost to the propducer (the Fed). If a resource is plentiful, such as, money, over time its value as measured by other scarce resources (e.g. gold, labor, food, oil, etc.) will be low. This is the case with fiat currency. It is not scarce by definition. Deflation is never a long-term threat because the purchasing power of the currency is always declining over time because its volume is increased at a much faster rate than the volume of other resources that are scarce by nature.

I also agree that housing prices have further fall but this is asset price deflation and can only occur is inflation existed previously. I remember all of the expert economists saying we had little to no inflation from 2001 to 2007. Funny they missed the inflation hiding in home prices.

One year of falling commodity prices does not a long-term sustainable trend make. The trend is your friend. SInce the Fed's burth in 1913, the mightly U.S. Dollar has lost over 90% of its purchasing power. Anyone still a believer in sustained deflation? If the value of the dollar "cannot be controlled by the Fed" then who, pray tell, was responsible for its decline? Only the Fed can create dollars so if it was not the Fed it must have been some very slick counterfitters who have been increasing the supply of dollars over the past 95+ years in order to reduce its purchasing power.

I do have one question for any interested reader: I hear a lot about the output gap precluding inflation. Does an output gap imply idle capacity and thus a lower level of the production of goods and services than would otherwise be the case? If so, does this imply fewer goods and services available in the market place to be purchased? If there are fewer goods and services (they are more scarce) but there is more money (M1, M2, M...) with which to purchase these goods and services, does this not imply rising prices over time? Yes, there may be many unemployed people due to the output gap whose demand will fall but the new money being created is making its way into someone's bank account or wallet (new government employees, recipients of TARP funds, bonuses paid to Goldman Sachs and PIMCO employees from the new money created, stimulus money to the states for make work projects, etc., etc) and will be used to purchase the ever more scarce goods and services available due to this output gap.

This seems like a scenario in which the unemployed will not only lose their income but what little they may have saved will purchase less than it otherwise would.

In conclusion, I agree with Rockwell and North that the Fed will ALWAYS win against deflation because it can create an unlimited amount of money out of thin air and thus make money a non-scarce resource. The less scarce money is relative to other items it is used to purchase as a medium of exchange, the lower its purchasing power and thus the higher prices will be. This is indeed Bernanke's "cure" for the recession.

Don't Be Fooled by Inflation

Ricard,

One error in your response. Bernanke has not taken unconventional steps to "DEFLATE" asset bubbles. He has taken unconventional steps to RE-INFLATE asset bubbles and therein lies the rub. There will be a very high price to pay.

Each subsequent market deflation is much more horrific than the previous one and thus requires a much larger dose of the re-inflation drug than the previous one. This is what Hayek decrobes as having "A Tiger by the tail." The cure is the disease and more cure only makes the disease worse until finally the party is unsustainable and even the U.S. Treasury and Federal Reserve with their infinite wisdom and money creation abilities will not be able to sustain the booms.


On May 10 06:21 AM Ricard wrote:

> This is a rather interesting article from Mr. Schiff.
>
> Something I've noted is that he apparently has the reputation of
> getting the macro picture spot on, but unfortunately being unable
> to transform that into portfolio gains. I'd suspect it may have to
> do with market-timing, evidenced by his bold prediction here of a
> 2-year stimulus rally.
>
> Running with this theme (which may very well be correct, and may
> actually give Cetin an A+ in weathering this downturn), it's entirely
> probable that the economy may 'fully recover' from this stimulus
> package as it did from the last one in 2002. Bernanke, like Greenspan
> before him, has taken unconventional actions in trying to deflate
> asset bubbles, and like his predecessor, may have to be held responsible
> for any unpredictable consequences. If this thesis hold true, then
> perhaps, like last time, the bubble will not pop - the landing will
> not only be soft, it will be as if the markets landed on a trampoline,
> propelling them to even higher dizzying heights, until at some point
> the subsequent fall destroys the trampoline, and the markets along
> with it. Maybe during the next 'crisis', the fed will be forced to
> adjust reserve ratios, i.e., the nuclear option.
>
> So, to summarize my rather complicated comment - maybe Schiff has
> a point - markets artificially recover, do not experience the much-needed
> recession and readjusting, and the bubble never pops. My contribution
> to this thesis is that perhaps we are setting the stage for an even
> larger and longer artificial boom.
>
> Anyway, thanks again Mr. Schiff for another interesting read.

Legitimate Green Shoots, Bond Vigilantes and the Audacity of Hope

I believe this rally is the child of the massive liquidity pumped in the economy by the Fed (money created out of thin air) and by emotion (we just want to feel better). Here are a few reasons I believe this rally is not sustainable:

If you strip out the increases in government transfer payments (1) unemployment benefits, (2) COLA's in Social Security benefits, (3) COLA's in military pension benefits, etc., personal incomes were lower in April year over year.

The residential mortgage foreclosure tsunami of prime mortgages has only just begun. Not only have these losses not been adequately reserved for yet by the banks, but these are foreclosures due to continued over reliance on debt by U.S. consumers, job losses and the shrinking real incomes of working Americans.

The commercial mortgage foreclosure storm also has not yet materialized to its fullest. The losses that will be incurred by the large banks and many regionals are not yet reserved for. This does not bode well for large increases in construction spending due to the previous misallocation of resources to this sector.

Non-existant pool of real savings - Capital is the life blood of economic growth and the U.S. has inadequate "equity" capital from real savings. Our economy has appeared to thrive on debt capital in place of equity capital from real savings over the past 20+ years. While this has seemed to be rewarding it is really a symptom of a society that constantly consumes more than it produces.

Of course America embarked on this course long before President Obama took office but I believe his policies are merely a continuation of the past policies of over spending, over leveraging and over consuming, by both government (exponential increases) and individuals that got us here. It seems we have convinced ourselves that we can mis-allocate resources for decades and never suffer the consequences of adjustment back to a sustainable model (high unemployment, decreased spending and benefits, etc.).

The following events are very likely over the next 12 to 18 months:

Much higher interest rates - this will actually be positive in the long-term as it will reward saving and accumulation of capital and not incentivise borrowing or investing in questionable projects.

Dollar devaluation - never good but now unavoidable due to the U.S. government's lack of willingness to live within its means. This will also drive higher interest rates as we must pay lenders (buyers of U.S. Treasuries) higher rates to attract their funds.

Higher and sustained unemployment - due to the shortgage of real capital, a tendancy for foreign capital to flee the U.S. and go to places where it is treated better.

Oil prices in the $100/bbl to $150/bbl range. Due primarily to currency devaluation and the flight to real assets by investors to preserve their capital.

I believe those investors who allocate into real assets, including precious metals and other currencies (espicially currencies of nations with more sustainable balance sheets) will weather the storm much better than those in traditional equity and bond investments.

The Economy on Dope: Investors Fear Inflation, Embrace Gold

I applaud you recognition of the "sham" economy mananged by the Federal Reserve Bank and its control of the fractional reserve banking system. Our system is truly "crony capitalism" in which the government's policies are intended to benefit the few at the expense of the many. This is the nature of interventionism no matter who (Left or Right) is intervening.

You stated the U.S. Ponzi scheme will continue for another 10 years without significant intervention. You need to realize the current system of zombie companies staying alive and asset prices remaining propped up only continues because of intervention. However, this intervention cannot and will not prevent the eventual collapse of the malinvestments that were funded because of the artificially low interest rates maintained by the Fed.

The biggest story now is the fact that last week we were all diverted, by the government, with the "populist" backlash against the AIG bonuses. This is in reality a non-story and most Americans should be smart enough to realize that $165 million does not have the same impact on the economy as $1 trillion. It's very interesting that Ed Liddy was being roasted on Capitol Hill on Wednesday when the Fed quitely decided to "monetize" up to $1.15 trillion of the U.S. debt. This was the real story but it was not covered as we too busy acting outraged over the AIG bonuses.

The U.S. has been partially off the gold standard since the 1930's and fully off since 1970. In the 4 to 5 thousand years of commerce with currency, only about 40 of these years has been conducted with fiat currencies. There is a reason for this and we will very likely see a currency crisis in the near future. And you can bet that Obama, Geithner, Benanke, Summers, Romer, Dodd, Frank, et.al. have foreign bank accounts, probably Swiss accounts denominated in Swiss francs and gold accounts. They will be just fine when the dollar collapses under the weight of their own stupid and selfish inflationay policies.

The Economy on Dope: Investors Fear Inflation, Embrace Gold

Your anti-semtism proves that you have no real clue. Your rubbish is a stain on this website. I have no problem with a person's right to spout their incorrect and racist garbage but I will not allow it to go unchallenged and to duvert attention from the real problems which eminate with the state.

The problem is not Jews it is government and the statist mentality that is now so readily accepted. If you had any knowlege and understanding of history you would know that business cycles, which have plagued the industrialized world for the past two centuries, are caused by the state's inetervention in monetary policy, via central banks, and the creation of money out of thin air through inflationary credit expansion. J.P. Morgan's men were prime movers of the Federal Reserve Act of 1913 and they were WASP's not Jews.

It's a shame that in an environment that needs real discussion of ideas all you can think of is Jew bashing. You should be happy with our current situation in that the public private partnerships of the government owning the banks and AIG is very similar to Germany in the 1930's. Fascism is more subtle than Communism in that the government makes it appear that the means of production are still private property but the government really controls all production decisions.

Please take a break from your religious and racial bigotry and spend some time reading and studying history, especially the past 300 years of Western economic and political history and you will be surprised what you will learn.


On Mar 22 03:17 PM MADE IN W.GERMANY wrote:

> I think jews are to blame for creating current economic depression,
> jews have too many important positions in the US government, from
> CIA to FED all are jews.
> Most investment banks ceo's are also jews, how can you explain it?
>
> In Germany there are also many jews who are allowed a top jobs, no
> problem, but they don't represent such a high proportion as in US.
>
> American people must wake up and look into the roots of the problem.

What's Wrong with the CPI

Don,

You are absolutely correct re: the CPI's understatement of general price increases. The M2 money supply grew enormously from 2002 through 2006 and this inflation in the money supply did increase ALL prices not just real estate and equities.

The CPI is a contrived metric that shows whatever the Fed and the government want it to show. We all know that you cannot create money out of thin air and not cause general price increases over time.

The Curious Case of U.S. Market Confidence

The content of the "Stimulus" bill is irrelevant. Stimulus spending by the government causes a net reduction to GDP when it is 100% financed in the capital markets. Private and sovereign equity that might have been invested in new enterprises and technologies will be "invested" in treasury securities instead. Mathematically speaking, debt financed government spending always reduces aggregate GDP because it diverts/consumes risk capital and risk capital is the primary creator of jobs, wealth and tax revenue.

The jobless rate in January of 2010 will be 11.0% and the 30 year treasury rate will be north of 5.5%.

John Taylor Clears the Way for an Informed View of the Financial Crisis

Great article. Taylor's study proves out that the Fed's belief that they can "manage" the money supply is a great example of a "pretense of knowledge." The housing boom and bust was caused by government intervention (cheap and easy credit). The congress and the fed created the boom that lead to the bust.

What is really scary now is the parties responsible for the boom and bust are going to "fix" the economy.

Bubble Economics: Have We Learned Our Lesson Yet?

Kofi,

You are absolutely correct re: your prediction of another speculative boom followed by a bust. Interventionist policies, artificially low interest rates, etc. always spawn booms (malinvestments) followed by busts (liquidation). The housing and MBS "boom" was born out of cheap and easy debt. Funny how we are being told the cure is more of the cause.

What will make the post-crisis period different than past recoveries is the true insovency of the U.S.A. Once again we are breaking new ground. If you have a chance to re-finance or lock in long-term rates over the next six months I suggest everyone take advantage of the opportunity as eventually the cost of debt will exceed anything we could have ever imagined.

Why the Stimulus Plan Won't Work

Good article and essentially true. No nation can borrow its way prosperity.

Government Panic Could Herald Dollar Panic

Unfortunately but not unexpected, the Obama team will continue the same profligate policies that have gotten us here. More stimulus any one? Beware the "fixes" the new brain trust send us. If over spending spending and over leveraging by individuals and businesses got us here how can the same behaviour by gorernment cure the malady?

Deflation Is Just Around the Corner

user 55065 hit the nail on the head. 55065, you must remember that most "experts" and writers follow the herd mentality and don't use critical thinking. Also, if they are part of the monied interests, they don't do their own grocery shopping. You are correct there is NO systemic deflation (or more appropriately no sustained decrease in the general price level). A sustained decrease in the GENERAL price level is not possible in a fiat money system.

The prices of goods and services purchased by most people on a daily basis are rising not falling. Remember, just because the herd states certain axioms over and over does not make them true. Those who are warning of deflation now never warned of the current crisis that is the unintended consequences of expansionary monetary policy. Once inflation has hit historic levels, they will be warning us of inflation.

All current policy initiatives have as their stated purpose, rflation (currency devaluation) and the ever decreasing purchasing power of the dollar will also be their unintended consequence.