August 29, 2006

Perhaps we are, like Japan, to suffer Deflation versus inflation as our housing-fueled, debt-fueled economy collapses?

I admit, I struggle with the idea of inflation vs. deflation as our fate (as I bet Ben does too). But I'm at least open minded to the idea that as consumer spending falls off the cliff, as the consumer-debt fueled economy collapses (along with home prices), perhaps it's deflation around the corner, not inflation? Perhaps we'll see the Fed rapidly dropping rates (again) to try to get us out of the mess?

Smart people in the room chew this one over and let us know your thoughts. Cite some good sources to back up your arguments.

All asset bubbles are "Credit Bubbles." Well, Debt is just the other side of Credit. I think that Americans are running out of bubbles. No? Also, the Fed and its constituency, Bankrupters and Fraudsters of New York City (BFNYC), are running out of "options" to push more Consumption Debt (yes, mortgage is consumption debt) and Scams.

And it was the unprecedented push of Consumption Debt, mostly via "reckless mortgage lending," that has kept the US economy out of a recession for the past four years. I think that the "Bush recovery" has been pushed as far as it could be pushed already. Nicht mehr, nicht mehr, nicht mehr. (No more, no more, no more).

Now, about the Deflation case. Most people misjudge the powers of the Fed. Almost all its power, long-term, is a matter of The Confidence Game (title of a book on the Fed). Fed is in no position to inflate as most inflationists think.

Deflation will come so suddenly, as a result of the Demand Destruction leading to inflation falling very fast and going from +1.0%, YoY, to below zero within months, that Fed will not be able to pre-empt it.

Once Deflation takes root for few months it would be very hard to get rid of. The proverbial Pushing On the String (not being able to Pushing ON More Debt!) will become a reality. It would be good for Americans to learn about the limits of Fed's power in being able to manipulate the economy. Americans will also learn a thing or two about what wealth is and what an investment is.


Anonymous said...

Deflation in housing in the coastal markets. Probably followed by massive inflation because of massive money creation to support FNMA failure, bank failures, Social Security etc.

Anonymous said...

When things cost an arm and a leg, you learn to live without those things. My 90 year old grandmother still pinches pennies like she did during the depression. Habits take a long time to change.

Anonymous said...

consumers stop spending prices have to come down to chase them


panicearly said...


Smiley073 said...

If interest rates hold at the same rate, or actually drop, what will that do to the price of gold? Even if gold holds at the same value, it will be worth holding as the value of other assets fall. I'm glad I didn't sell in the last correction.

Anonymous said...

Deflation is only a possiblity in an inflationary reduced environment give the absent price ratios mending a peurto curve move above the commodities index.

Anonymous said...


As the consumer services their debt, domestic based services will fall in price.

As the dollar falls against other currencies, Wal Mart prices will increase dramatically. We will be outbid for oil and other key commodities, as our dollar tumbles.

Most Americans will be confused by the divergence in ones will have protected their weatlh with gold, silver and foreign currencies.

Anonymous said...

As Richard Russell has said - inflate or die. But my perverse side tends to agree with Puplava and anon 11:15:08 - inflation in the things you need (oil, water, food), deflation in the things you don't (plasma televisions, movie tickets, etc.)

David in JAX said...

I believe that we are going to see the government (executive and legeslative branches not the fed) ensure inflation through their idiotic economic policies. The federal government will not curb spending and are going to hammer the America people and American businesses to ensure they can keep spending when the oversees creditors start taking a second look.

Anon 11:15 said that prices will fall in the consumer services sector. I disagree. I believe prices will hold or go up and we will see a large number of layoffs in the service sector. There's a lot of fat that can be cut.

Anonymous said...

More likely stagflation. Prices for raw materials increase and real wages drop.

It's a 2nd Depression, not a recession. The recession was delayed in 2001. Now we'll have a deep dark world wide depression.

Anonymous said...

yes deflation.
consumer demand is beging to slow will only get worse,prices will fall and crash the economy including china, it and its' massive bubble in property and bad loans.if you want to feel better just watch cnbc they will always tell you how great things i hate that station, just have it on mute and check the numbers.

Anonymous said...

My 90 year old grandmother still pinches pennies like she did during the depression.Habits take a long time to change.

Nice Pun. (:

Anonymous said...

Benflation is another option. A reduction of Fed funds rates causes:

1. USD to drop another 40%.
2. Stock market will crash.
3. Prices increase.
4. Wages stagnate or decline.
5. Consumer debt causes depression.

The government is spending more ever year. Taxes don't cover our spending. The Fed prints worthless IOU's. The service on the debt will eventually overwhelm the system.

The consumer debt bubble is what will kill the economy. Housing in the foundation of growth. Without viable growth in the housing sector we'll go off a cliff.

Watch gold as an indicator for stupid policy.

Andy said...

If we follow the same path, RE won't be a good deal again til about 2018 - 2020, somewhere in there.

Now as a side note, how did gold do relative to Japan's currency at the time. It basically fell against the dollar in the time frame? Also, how about all commodities for that matter against the Japanese currency?

Juan Carlos Fuentes said...

I sincerely hope that the new BK laws will leave the current home-debtors in debtor's prison along with their families. Some of those families will have hot daughters. I will swoop in and buy those hot daughters for pennies on the dollar.

Anonymous said...

During the Great Depression, it was illegal for the public to own gold.

It was legal, however, to own silver which held its ground, 25c to 75c, during the mid to late 30s, when all other commodities (grain, copper, nickel, etc) were in a deflation.

So I predict, whether its a deflation or stagflation that a certain amount of precious metals will hold their ground in either scenario.

Anonymous said...

The Fed says in public that it does not want inflation and fights same but if you strip away all the false pretenses what they truly fear at this point is deflation. Normal business cycles demand that there be a period of deflation or price depression. It is as normal as recession, prosperity or stability. I think most people in politics and positions of authority understand this but it is a game of musical chairs. No President wants to be remembered as in "Hooverville" or "Bushtown" when you have lots of people with no money living in tents. No Federal Reserve Chairman wants to be holding the hot potato when the economy begins to crumble. During the Great Depression, prices tumbled but it didn't matter because people just didn't have any money anymore. They were tapped out, their job went away, and they had leveraged themselves to the hilt with obligations in the decade preceding the fall. The best "thing" to have was money or something easily converted into money. Goods and services cost next to nothing so a little cash went a long, long way. Figure out what it takes for you to live each month on a shoestring. Keep a minimum of 2-3 years worth of that income separate and don’t put it all in one bank to avoid problems with withdrawal restrictions placed by government measures to keep a run on any individual bank from collapsing same. Certificate Ladder in different banks works. If you go with a precious metal, keep it somewhere that it can’t be confiscated. FDR outlawed the private ownership of gold during the Depression because it undermined the value of the national currency. Caymen Islands, Canada loonies, or maybe a combination of the same. I don’t know this for a fact but I suspect Swiss francs are a pretty solid currency. Swiss are too smart and organized to go along with that "Euro" bullshit.

The American Garage is full. The cars have been parked in the driveway for a long time because the garage has been used as a storage bin and the house is packed to the rafters with the trappings of suburban living. The American can’t afford a bigger place to store more Chi-com made crap and he is starting to question the wisdom of the whole endeavor given what it costs him in total. I think most of the government branches that monitor the economic activity of the country know that the music is slowing down despite all attempts to get one more song out of the organ grinder. When a great deal of Mr. American’s wages are going toward debt servicing at already low interest rates (by historical terms) and his wages are stagnating and he pays more for the filling up the beloved S.U.V. to make the 30 mile one way commute to McSuburbia and his insurance rates and property taxes are going through the roof it isn’t going to make a dimes worth of difference if the Fed cuts rates ala the Bank of Japan or not.

I paid $2.56 for a gallon of gas this morning. The cheapest price I’ve paid for quite a while in St. Louis. I enjoyed the lower price but I also question the same. There is terrible unrest in the Middle East. Venezuela is being courted by an energy hungry Chinese government. There is a tropical storm in the Gulf that threatens to become a hurricane. There is a pipeline problem in the Alaskan oil fields. The kook running Iran who has stated he would like to wipe another country off the face of the map and who is developing a nuclear program now says he wants to have a televised debate with the American President. Our own military consumes who knows how much oil per day in the Iraq/Afghanistan conflict. School is now in session and all those big yellow buses are consuming oil as opposed to sitting idle. I would suppose that some crops are getting ready to be harvested (wheat maybe already) by oil hungry tractors and combines and yet, I have watched the price of a gallon of gas go DOWN and not up. Hmmmm?

Anonymous said...

Deflation and Inflation.

from whisky and gunpowdeer:
“Casual restaurants are no longer taking the national dining slump casually.

“In the face of a meltdown in same-store sales and falling customer counts, some of the biggest names in casual dining -- from Outback Steakhouse to Applebee's to T.G.I. Friday's -- are taking serious actions to try to salvage 2006. Some are even chopping prices.

“Excluding the weeks after Sept. 11, this is the toughest period the industry has faced in nearly a decade, says Richard Snead, CEO of Carlson Restaurants Worldwide, which owns Friday's.

“‘This is unprecedented,’ concurs Paul Avery, COO of OSI Restaurant Partners (OSI), whose brands include Outback. Beginning in November, Outback plans to cut prices across its menu, he says.

“The $68 billion casual-dining sector posted a 1.8% decline in same-store sales in June, the most recent month reported by Knapp-Track, which monitors the restaurant industry…

“• Outback. The chain has carved $1 off the price of its popular sirloin steaks in about 40% of its markets, Avery says.

How about the new deals on cars- deflation.

oil is the wild card. iran and chavez, chad throws out cheveron, saudi arabia is no longer the #1 producer of oil (its russia), mexico's field is in decline and the BP alaskan pipeline is corroded from all the water they pump-not oil!!

Mary Pemberton
Associated Press
Anchorage, Alaska -- BP's problem of corroding pipes is worsening as the nation's largest oil field ages, and more water and less oil is produced during drilling.

"Really, we are a giant water field," said Bill Hedges, BP Plc's corrosion expert, explaining that what comes up now during drilling is three-quarters water.

so oil is inflationary, food will rise, flat creens will fall.

this may well be a very interesting few years.

may want to visit mountain and load up the truck.

boycot said...

Meridian on oil:

Still Looking Vulnerable

"Little has changed this week to materially alter my sentiments expressed last week. Yes, the longer term trend still arguably is up, but this trend continues to look vulnerable to some sort of setback. Evidence of a serious slowdown in the housing sector, continues to mount in the US. Market watchers are already busy drawing parallels between housing market performance and economic performance / equity market performance. Factored into this effort is a sense that demand for energy will slow as the economy slows. Combine this with the notion that the current market rally may be running its course and that we may be heading into a 4 year cyclical bottom in the equity markets and you have the potential for a pullback in energy prices. Any violation of $69.50 could see us test the lower bounds of the up-trending regression channel that extends back to 2003. Heads up and watch closely."

That channel goes down into the $30 range, this explains why U.S. operators are balking in developing Canadian tar sands.

borkafatty said...

Juan Carlos Fuentes said...

I sincerely hope that the new BK laws will leave the current home-debtors in debtor's prison along with their families. Some of those families will have hot daughters. I will swoop in and buy those hot daughters for pennies on the dollar.

And I will be standing at the door with my 12 Gauge pointed right between your flinch I click.

I agee Deflation..and tuff times for all.

Anonymous said...

Read "The Oil Factor: How Oil Controls the Economy and Your Financial Future" by Leeb and Leeb.

They basically argue that our economy is oil based (duh) and therefore oil will have the biggest impact on it. I have only just gotten started reading it but they are basically predicting cycles of inflation and deflation or possibly at times neither but consumers worrying and behaving as if there was inflation and deflation.

Anonymous said...

In Japan, the deflation coincided with:

* popping of their simultaneous equity and housing bubble,

* the rise of disinflationary forces as China entered the world market

* Benign oil and other commodity pricing

* High savings ideology among Japanese

* Unwillingness of Japanese banks to restructure debt quickly


In the US the stock bubble has already been popped, China is starting to see inflation in their own domestic labor(!) as well as of course commodities, and US consumer is as nearsighted as ever.

And then, there's Peak Oil. Saudi Arabia, the swing producer has just peaked, with recent oil output lower than previous years. This despite record prices and their stated desire to lower prices.

In sum: guess what?

Anonymous said...

I want deflation over stagflation.

Savers get rewarded.

Anonymous said...

"I want deflation over stagflation."

No you don't. Once it takes hold, deflation is a bottomless pit. As unpleasant as inflation might be, deflation is 10X worse because people lose hope in the future. Why even build a house if you know it will be worth less the following year? Once that psychology takes hold, it's tough to shake.

Bernanke knows all of this and has studied the Great Depression. And that is why he has said many times the Fed will not allow any deflation is the U.S. economy. They will sacrifice the USD, and allow huge inflationary price and wage increases to solve our public and private debt problems. Count on it.

Anonymous said...

As Richard Russell has said - inflate or die. But my perverse side tends to agree with Puplava and anon 11:15:08 - inflation in the things you need (oil, water, food), deflation in the things you don't (plasma televisions, movie tickets, etc.)

Tuesday, August 29, 2006 11:52:59 AM

Great point.Thus We will have Stagflation-Certain commodities will rise fast-Products will die-Bye Bye GM -

Anonymous said...

And the winner is???? Stagflation.A huge decline in oil consumption is underway ,if Peak Oil is true ,well we just solved this little problem.Right now builders are going full bore into the jaws of the crash,Building will stop suddenly,the biggest wave of equity destuction is just starting.Oil prices are already falling.Unleaded has been falling for months in thee face of a record crude price.The glut is here in oil also.The futures traders Know it! DYODD!!The neocons lost the race,I think they are about to bow out,hope the dems go with them.WW111 is futile now.

Anonymous said...

The book of revelations predicted this day wouuld come.

Anonymous said...

Although I am simply a lowly loan officer who got into it after the boom, I need no statistics to hear the deafening sound of silence here in Rhode Island as to a totally stifled market. Everyone suffers, agents want to slit their wrists, sellers refuse to buckle, and would-be buyers wait... Naturally industry leaders pontificate lightly for fear of causing a panic. It only took a few upticks of long term mortgage rates over the past year to completely shut us down. that's how tenuously unsustainable these values were. Why is the Fed always the last to know? Do we need to create a pain index on a local basis to jab them with a stick a LOT sooner? "Moderate slowdown" is a fantasy term. Then again, John Q. Public bought into it the frenzy, and only heard what they wanted to hear.

Anonymous said...

RE casual dining restaurants lower sales: Is a 1.8% decline something to panic about? Sounds pretty tame. Anyone in the resaturant biz care to comment?

Aaron Krowne said...

Japan was a pretty unique situation. I think the reason their deflation was so long-lived is that global finance (esp. due to hedge funds) became so good at arbitraging the interest rate advantage out. This sucked all the liquidity out of Japan, diverting the benefit of that central bank's actions (to places like the US).

On the general subject of deflation vs. inflation: it is not an either-or situation. You can have deflation in the financial economy, and inflation in the real economy.

The financial-economy deflation happens as bubbles collapse, leverage unwinds, and loans are called in, making the quantity of "financial" money effectively smaller. This is already happening, as the Fed and Japan's central bank tighten. It was responsible for the market drop in May. And its going to hit the housing sector too in the form of nominal value drops (already begun).

However at the same time you can have inflation in the real economy. The first reason is commodities scarcity: we've already seen the price of energy, base metals, and foodstuffs increase. The same thing happened in the Depression. An exacerbating factor was a trade war. So while money suddenly became more scarce, basic goods became more expensive! Deflation and inflation at the same time.

I think there will be another inflationary factor this time: "printing money" for bailouts. Bailouts of the banking system, and "bailouts" of all the unemployed individuals. In the Great Depression, FDR refused any liquidity-based solution, so he simply nationalized business and labor and created work brigades. It was all paid for with high taxes and tariffs (which of course harmed the business recovery and ended up hurting the individual anyway).

We don't do things that way anymore, if only because the ideology is different now. This time, they'll be printing money. Helicopter Ben's Arch-Enemy is the Great Depression, and he's been itching for a crack at fighting it. We won't get a depression, but all the money printing, stubbornly dysfunctional top-down business economy, and loss of confidence in the US system will create a lengthy stagflation.

Anonymous said...

"As unpleasant as inflation might be, deflation is 10X worse because people lose hope in the future."

In this case, perhaps losing faith is a part of the awakening process.
The notion that stocks only go up, RE only goes up, one makes more money than one's parents, etc, etc, are banal post WWII idealizations than a real assessment of present day society.

Just look at the two careers tracks, chemical engineering vs pharmacy. The former earns some $60-70K/yr after years of difficult study, huge competition for co-ops/first year offers, etc. The latter, a pharmacist, is a basic biochem memorization curricula which gets one started at $70K/yr with a majority of the profession earning $95-110K/yr within a few years out of school. Now, why would someone bust one's butt to become a ChemE when pharmacy's a whole lot easier and lucrative? And you might ask yourself, how could this be? The answer is that the US had stopped manufacturing, during the past two decades, due to global financial arbitrage, and the real sciences/engineerings have gone abroad with it. Yes, pharmacist don't earn the big bucks over ChemEs in places like Indonesia, Malaysia, and Korea.

Anonymous said...

:Just look at the two careers tracks, chemical engineering vs pharmacy.

Hard sciences a.k.a. making things is either highly specialized (Ballard's fuel cells) or DOA. And this decade, much of the nation is DOA on development-to-manufacturing.
General ChemE skills are hopelessly archaic and offshored whereas the soft sciences i.e. nursing and pharmacy, are health care/insurance slush fund recipients which require govt licenses but no real talent.

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Anonymous said...

On the other hand, we could just get more prosperity. There ARE lots of problems, but there have always been lots of problems. One doesn't want to see things through rose colored glasses, but being too pessimistic is just as bad for you. It WILL be an 'interesting' time, whatever happens, just don't give up hope, LoL.

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