January 23, 2008

HousingPANIC Stupid Question of the Day


Inflation or Deflation? Both? One and then the other?

Looks to me like Bernanke is betting in deflation, and using inflation and currency depreciation to keep it at bay. Now that's gambling.

What's it gonna be HP'ers? Inflation or Deflation?


Ben Bernanke is spooked. That's one explanation for the Federal Reserve chairman's decision to lead the Open Market Committee in yesterday's unprecedented 75-basis- point cut in the fed funds rate.

The Fed spoke of a ``weakening of the economic outlook and increasing downside risks to growth,'' a vague phrase that reminds us that what Milton Friedman said in 1965 is still true: ``We are all Keynesians now,'' monetary and fiscal fiddlers who think the government has a broad mandate to manage the economy.

But what Bernanke was also saying was that he fears a more general contraction of money and credit. If not outright deflation, then disinflation, a slowdown in price increases.

48 comments:

Anonymous said...

Stagflation

decaffeinated said...

I don't think it's black or white, yet. I give you three cases.

1) For businesses selling non-essential goods, they get deflation. Ooops, sorry Starbucks. If you work at one of these businesses, your future job is iffy.

2) For businesses selling essential goods, they get inflation as the masses chase these products with rapidly depreciating dollars (thanks, Ben). I would guess that agribusiness, energy services, and health care are gonna' live long and prosper.

3) what about precious metals and miners? Damn, I just don't know. If the contraction in the economy is severe enough, I guess they'll eventually circle the drain as well.

Anonymous said...

can't have a depression and inflation.

pick one of the two.

keith said...

Starbucks testing a $1 cup of coffee and free refills. Smells like deflation there

Housing and stocks crashing - smells like deflation there too

Healthcare, groceries, gasoline, gold and airfares increasing - smells like inflation.

Put 'em all together what do you get?

???

keith said...

Can't have a depression and inflation? Man, go read the history books (Weimar Germany)

http://www.pbs.org/wgbh/commandingheights/shared/minitext/ess_germanhyperinflation.html

Or just go read the newspaper today (Zimbabwe)

http://africa.reuters.com/business/news/usnBAN223562.html

Anonymous said...

"keith said...

Can't have a depression and inflation? Man, go read the history books (Weimar Germany) "

You got it backwards. Hyperinflation caused a depression. The two were not happening at the same time.

Anonymous said...

When the US loses a World War and has to pay England and France trillions of war reparations and goes on a massive general strike in protest, maybe you'll have a point

until then it's koo koo for ko-ko puffs as usual on HP

mhrist said...

Man, I was at a gathering, will he drop the bills or take back the loans?

Marty

keith said...

The statement wasn't what caused what - it was that depression and inflation can't co-exist. They can and they do, just get a ticket to Zimbabwe to see for yourself.

Here's more on Germany though for the curious. A few interesting similarities with the US today:

http://tinyurl.com/ek9pe

That's inflation. But a deflation scenario is also feasible. Just look to Japan.

http://www.pbs.org/nbr/site/research/educators/060106_08b/

mhrist said...

I borrow a 1000 dollars. I buy an ounce of gold. I kill dollar. 1 ounce = 10000 dollars. I repay my 1000 + 30 (interest) loan. I keep my 89% of an ounce gold. I sell gold for 8900 and deflation starts. After sufficient deflation I buy gold again. If gold deflated 50% I end up with 2 ounces of gold. With nothing on my side. My friends did it in 3rd word country. Key is to know when the cycles hit :)

Marty

Dino said...

I don't see much inlfation in my daily life. My rent has been the same for 18 months and I see no danger of it going up in the next 18 months. Car insurance up negligibly the past few years. Cell phone plan I have costs the same as it did 5 years ago when I signed up. Cable modem went up $3 last year to $42 from $39. It had been $39 ever since I can remember.

I don't own gold, don't care to, so don't really give a rat's ass if it's $80 or $800. I live in the city and walk most places so gas costs are insignificant for me. I buy maybe 20 gallons of gas a month.

I guess food is a little more pricy these days. But I eat out ororderin almost every night so I really don't know what groceries cost to be honest.

Most important: a beer at my local bar is still $2. If that ever starts going up, then I'll be concerned about inflation.

bleak said...

We face massive financial disintermediation, and ultimately, a liquidity trap.

Banks are bogged down with bad loans. They need to shore up their balance sheets and are becoming more hesitant to lend--especially as collateral (e.g., houses) is losing value and delinquency on loans are rising.

The Fed can push rates to zero, but the money won't get to consumers.

Unless, everyone wakes up to freshly fallen hundreds on their lawns, it's out of the Fed's control.

Consumer-driven economy will never look the same again.

I predict a long, quasi-permanent recession with falling/stagnant prices as credit and the money supply contract (See Japan circa 1990). The rest of the world faces the same, as the decoupling fairy never arrives.

Some of the excesses of the past will be wrung out of the system. Say goodbye to a lot of $5 coffee chains, gourmet dog treat stores, nail salons, etc., etc..

a.creampuff said...

Krugman's blog entry on preemptive easing explains Bernake's strategy, perhaps:


Link here.

Andrew from Russia said...

Let's call it diaflation.

Anonymous said...

Overall INFLATION
because Bernake will print~

Anonymous said...

I only see deflation here.

Masses arent buying more essential goods when they dont have a job, they buy when they have a job and can withdraw equity out of their homes.

On your point Keith:
Healthcare, groceries, gasoline, gold and airfares increasing - smells like inflation.

I care to disagree. For starters healthcare is a monster of itself. More politics than anything else, and you know what happens when politics is involved. Groceries will deflate as less people can afford to buy those ramen soups. As you have already seen, oil is coming down and will come down until stocks come down. Gold is another monster too since people buy on uncertain times, which is now. Airfares dropped after the NASDAQ debacle, remember. Why, less business people flying (and thats a huge slice of the market). When people loose jobs, they also fly less, take less vacations, you name it.

I see deflation, deflation. Cannot have it both ways here.

Danny

Anonymous said...

I like Bleak's response above. Couldn't have said it better.

There is no decoupling here. The whole world will come down crashing after the US.

Look at Japan for a nice preview of whats coming.

I also agree with the fact that the Fed can't and wont do anything (too bad for those Helicopters). Other than cutting rates, which do nothing to fix this problem, he will do 000000000.

Danny

Anonymous said...

Inflation in tinfoil hat prices

Deflation in everything else

3rd Generation said...

"Put 'em all together what do you get?"

-A sh*t sandwich. That is what everyone is eating. Got Gas? Buy Groceries? Develop a taste for it. You might LIKE it.

Its' a lot like dimwit George sending you recently printed cash for free...

Стивен said...

Sure wish I knew, but aside from the recent inflation jump from commodities prices, looks like the deflationists will be right.

There are many different bearish views -- for simplicity, let's call them "Schiff bear" versus "Roubini bear."

"Schiff bear" says US inflation/falling dollar/US economy will be the big problems: foreign equities/gold are king, cash is worthless.

"Roubini bear" says that the US-led recession will be the big problem and the corresponding contraction will be deflationary: cash will be king, foreign equities and commodities will all tank.

The events of this month all point to "Roubini bear" being right, and "Schiff bear" (aka "Rogers bear," aka "Paul bear" ) being wrong. No one knows the future, and that could change, but here's NR's argument:

So short of such a clear stagflationary shock occurring should we worry about stagflation-lite and the risks of a rising inflation rate at the time when the US spins into a recession and the global economy slows down following the US hard landing?

The answer to this question is a clear no for the following reason: unlike a true negative supply side shock – that reduces growth while increasing inflation - a US recession followed by a global economic slowdown is a negative demand shock that has the effect of reducing US and global growth while at the same time reducing US and global inflationary pressures. Specifically such a negative demand shock will reduce inflation and across the world because of a variety of channels.


You used to say, following the Manias book, that cash will be king. We can't have it both ways: either the Fed's cuts will destroy the dollar, or cash will be king, as Manias promises us. Getting this right will be very, very important. Of course, one can always pay the price to hedge.

Mammoth said...

Danny said…
“Groceries will deflate as less people can afford to buy those ramen soups.”
-------------------------------
My @$$ the price of groceries will drop. If you expect that to happen they you’re going to wait a long, long time for nothing.

Better get used to $3.50/gallon milk, $2.00/dozen eggs, $2.00 loaves of bread, and I guarantee the price will go up from there. And holy fvck, right here in Washington State, where half of this country’s apples are grown, I have seen prices as high as $4.00/lb!

At this point in time it may be prudent for a person to secure access to a piece of land to grow some food on. Remember this post ten years from now, when you are starving and begging for something to eat.

-Mammoth

Shakster said...

I'd say that the FED is all lip service,having only very short lived effects on the Markets.The Overall economy will wring out the false valuations over the next 15 years.
Oil is an overpriced form of energy,and not in short supply by any stretch.It will get the slow grind to it's functional place within world economies.
Gold doesn't have to go up to be the better investment(nominal terms),all that has to happen ,and will is for all the overvalued items to drop to their level of balance within the economy.
Wind,solar,and other untapped energies will now rise with or without the Fed,Wall street,or DCs blessing.
The quick hit money makers will be few ,and far between although Wall street will cause bubbles in any area with that potential.
Deflation it is,but we will be fine as we adjust.
This also means Greg ,and Suzzanne will have to get real jobs.

tangelo mozilo said...

Eric Janszen (always spot on) at iTulip says the following:

"There will be no deflation. I repeat: there will be no self reinforcing spiral of debt defaults, an irreversible collapse in the money supply and a decline in the general price level. Central banks will never again allow the rate of inflation to fall below short term interest rates, nor fail to supply sufficient liquidity to meet the demands of financial markets. There will be no repeat of a 1930s US depression or the grinding 1990s Japanese deflationary recession. Instead, we will experience something new, with elements of deflations, and inflations and stagflations past – rhymes of past verses of economic misfortune – but unlike any of these past episodes except equally unpleasant. I call this new process 'Ka-Poom Theory.'"

Full article here:

http://tinyurl.com/gehk4

borkafatty said...

More like

Sag-flation!...but we will Hyper- inflate real soon ,we have no other choice...And wages better follow..otherwise.....check m8, bread and water for everyone....

Budvar said...

"When the US loses a World War and has to pay England and France trillions of war reparations and goes on a massive general strike in protest, maybe you'll have a point"

FFS, do a little research on the Wiemar hyper-inflation years. Yes, war reparations had an impact, but it wasn't the major cause. As if you hadn't been aware, the rest of the world suffered what came to be known as "The great Depression" 5 years later.

The main cause was countries borrowing more than they should have to finance a war that should never have happened, you know pretty much like the situation we have today.

LauraVella said...

Deflation in salaries, gold, houses, stocks, investments, cars, furniture.

Except: healthcare, food, energy costs, state and property taxes.

Lady Di said...

stagflation first then a deep recession/possible depression with deflation everywhere.

bleak said...

I want to clarify my opinions a little bit...

The Fed faces two undesirable choices here: drop rates to battle a slow down, or raise rates to fight inflation.

If they raise rates to fight inflation, we enter a depression (probably global). Consumption and investments tumble in the face of higher interest rates. Unemployment rises and prices in general (and for commodities) crash. (This is the Great Depression II scenario.)

If they lower rates, we enter the financial disintermediation/liquidity trap scenario I mentioned earlier. You can't force banks to lend and/or consumers to borrow. You enter a protracted period of recession and price declines (or price stagnation). Commodity prices drop as consumption and investment is reduced. (This is Japan c. 1990 scenario.)

IMHO, any way you dice this, we cannot escape a decline of output and lower future living standards. For the Fed, it's a choice of the lesser of two evils: recession over depression.

I agree with Anonymous (Danny). Those particular inflationary niches are driven by their own peculiar supply/demand characteristics. Even those areas will have to correct in the long-run.

Brian said...

It would be more correct to say you can't have monetary inflation and monetary deflation at the same time.

The money base can't be both expanding and contracting at the same time.

Housing and stocks will be deflationary.

Government spending and lower interest rates are inflationary.

The question is which one will beat the other to the finish line.

A recession is in the bag for sure.

And yes, yes, yes: You CAN have inflation and recession at the same time.

Brian

Anonymous said...

It's deflation. And I'll put it this way, this isn't an opinion. Deflation has already happened and will continue. Inflation means an increase in the money supply and credit, deflation is a decrease. Credit is massively contracting in several areas. It will contract even more once people understand how much is being lost on bad loans and the extent to which assets(mostly real estate) are depreciating.

The Fed can try to counter the deflation in credit by stimulating lending again(by lowering rates), or by conducting open market operations where they purchase treasuries, this increases the money supply because of the dollars that are exchanged for the treasuries. They seldom take this approach and very rarely change the rate of open market operations.

It's just unbelievable to me how few people understand what inflation is, what the Fed does, and more importantly what lies ahead for the US.

And to reiterate, Deflation has already happened on a large scale! What are the price of houses now, versus two years ago? The prices are way down, this is evidence of credit contraction. People buy houses with credit!

If you're investing for an inflation scenario you're going to get nailed.

Anonymous said...

And also, people confuse a change in (increase) prices with inflation. Prices increase for a ton of reasons, speculation is a big component, especially with the price of oil. Rising prices are NOT INFLATION! They are evidence of possible inflation, but can also be caused by changes in supply, demand, market manipulation etc.

An example of inflation would be the proverbial helicopter drop by Ben, or an increase in lending which won't happen because the banks are losing their shirts on bad loans.

Anonymous said...

"I borrow a 1000 dollars. I buy an ounce of gold. I kill dollar. 1 ounce = 10000 dollars. I repay my 1000 + 30 (interest) loan. I keep my 89% of an ounce gold. I sell gold for 8900 and deflation starts. After sufficient deflation I buy gold again."

Seems like a lot of work when you could just pick the correct PowerBall numbers instead. Don't let the illusion of behavioral predictability fool you; no organism can fully describe itself. Chats like this are changing the paradigm of who has what information and rewriting the rules of the game.

Anonymous said...

Anything that requires leverage will see deflation. Everything else will see inflation. It's all about the credit crunch, baby.

Anonymous said...

"Better get used to $3.50/gallon milk,"

I wish. Last gallon I bought cost $4.49.

Anonymous said...

putting aside all the technical definitions, inflation is understood by most as meaning 'things cost more than they used to'.

When the economy goes in the shitter like what is happening now, things do not cost more. Houses don't cost more. Cars don't cost more. Electronics don't cost more. When people have less money they buy less shit and the price goes down. Doesn't take a PhD to figure out that one.

Anonymous said...

"Better get used to $3.50/gallon milk, $2.00/dozen eggs, $2.00 loaves of bread, and I guarantee the price will go up from there. And holy fvck, right here in Washington State, where half of this country’s apples are grown, I have seen prices as high as $4.00/lb!"
---------------------------------

Milk is already $4.00 per gallon. Eggs are now $2.50 per dozen. American cheese slices are now $4.00 per pound. T-Bone steak is $17.00 per pound. I expect food prices to DOUBLE by this time next year, along with $200.00 per barrel oil and $7.00 per gallon gas. It's all going for FOOD, and ENERGY and clothing is a luxury.

shtove said...

a.creampuff said...

Krugman's blog entry on preemptive easing explains Bernake's strategy, perhaps:

Link here:
http://tinyurl.com/237vua

-------------

"Heck of a pose, Hanky!"

I guess one day Bush will use him to blow his nose.

Anonymous said...

When the economy goes in the shitter like what is happening now, things do not cost more. Houses don't cost more. Cars don't cost more. Electronics don't cost more. When people have less money they buy less shit and the price goes down. Doesn't take a PhD to figure out that one.


I guess you've never heard of the 1970's stagflation? How about the Weimar Republic? Food and energy prices increased to the point of pain. Home prices will drop though, because credit will be very scarce.

Anonymous said...

Mammoth,

Grocery prices might not drop, but they sure are not going higher any time soon.

I havent seen any significant job loses in the Northeast, but when it comes, it will be hard for people to raise grocery prices.

I guess it depends where you live, but I buy milk all the time at 3 bucks.

Danny

Anonymous said...

There will be no massive credit crunch because the Fed will be out lending money if they banks refuse to do so. Besides, if a bank doesn't lend money, it can't make money. The loans are still out there. I'm still getting credit card offers. It's not the loose, easy money days anymore. I guess you could say the rate of increase in money supply has come to a crawl, but the money supply itself will not decrease much.

sam said...

25% of the CPI is in housing. We can all agree that's dropping like a rock.

Reduced consumption means less plastic crap from china, lower oil demand from chinese.

So though inflation will tick up briefly, it won't be a problem.

Unless the politicians go on a massive spending spree that is.

Anonymous said...

Danny said…
“Groceries will deflate as less people can afford to buy those ramen soups.”
-------------------------------
My @$$ the price of groceries will drop. If you expect that to happen they you’re going to wait a long, long time for nothing.

Better get used to $3.50/gallon milk, $2.00/dozen eggs, $2.00 loaves of bread, and I guarantee the price will go up from there. And holy fvck, right here in Washington State, where half of this country’s apples are grown, I have seen prices as high as $4.00/lb!

We like the red Chilean grapes every winter. They are usually more expensive about $2.99/lb than the Calif grapes during season. Walked into Albertsons yesterday and they were $6.99/lb. I asked Produce Mgr whats up with that? He said all of the imported fruits and veggies have skyrocketed from the wholesaler. I think hmmm falling dollar? He said most of the stores in town aren't carrying the Chilean grapes this year. No one will buy at $6.99/lb. Our bread is running over $3 a loaf and milk is about $3.29. EVERYTHING at the market is more expensive now than last year this time. Beginning to feel like the 70's. Many of you don't remember that. You never knew how much cash to take with you to the store. Every week it would take another $20/$30 bucks to buy the same stuff. It can get really ugly, especially if you have kids. Kids can't eat Ramen everyday.

Anonymous said...

Good article today at Salon by Robert Reich about politics and the Depression Le Deux

..."So we're going to go through weeks of posturing about stimulus packages of one sort or another, and then see enacted the big fat bonanza of a temporary tax break that will likely have little effect. That, perhaps along with a few more rate cuts by the Fed. The presidential candidates will be asked what should be done about the worsening economy, and they'll give vague answers. None will likely admit the truth:

We're going to need the rest of the world to bail us out."

In other words we will be on our knees begging the rest of the world to save us. What a change 50 years makes.

Link to article:

http://tinyurl.com/3y9lgy

Juggernaut Nihilism said...

Diminished U.S. demand does not mean diminished overall demand for essential products. Our dollar will continue to depreciate on the world market, raising foreign demand for many products. Wages and asset prices will decline, but consumer prices will continue to increase. Western European economies are in at least as dire straits as the U.S. in many cases, but the East and Middle East have nowhere to go up but up after they stop subsidizing our excess. Their economies will not collapse with collapse of U.S. demand, although it will take some time for them to adjust to a new market and this will result in short-term difficulties. The fact is that the financial center of gravity in the world is changing, and this is a long process.

The Chinese are expected to have a middle class of 700 million by the 2020s. If you think they will still be buying Treasuries from our overextended economy so that we can continue to buy their goods when there is this much domestic demand, you've got another thing coming.

NC Lady said...

You can debate, argue, check your history etc. but it all comes down to one thing- HARD TIMES. When the retirees and "boomers" start feeling the effects of inflation and start checking their investments, savings, etc. you better pull the curtains, somebody with a suitcase may be coming up your driveway real soon!!

WINGS said...

Anonymous said:

When people have less money they buy less shit and the price goes down. Doesn't take a PhD to figure out that one.
_____

Doesn't take a PhD to figure out that buying shit is not good for you.

What is the price of shit, Einstein? How much do you pay for shit?

I pay nothing for shit because it's not worth anything and it's bad for you!

And I've only got a Masters degree and could figure that out.

God made dirt; dirt won't hurt.
God made sh*t; go eat it...

Yucky!

ICEMAN said...

Iceman says,


Its deflation all the way.

We might experience 1-2 years of stagflation but deflation is the end result.

Gold will still be a safehaven and cash will be king.

Supply and demand is still the price driver! If people are buying less and tighten their finances, then why would prices continue to go up.

The boomers control our destiny and %80 of this country's wealth.
Our social security system, health care, job experience, pension funds,401k, real estate, and debt all are tied to baby boomers and will drag this country to a crawl.

ITS ONLY JUST BEGUN!!!!!!!!

Anonymous said...

Sounds like out of control inflation.

Are these Hong Kong kids reading HP.

http://www.reuters.com/article/
worldNews/idUSHKG814720080124?
pageNumber=2&virtualBrandChannel
=0

Hong Kong students are piling loans and family savings into a volatile stock market, a growing trend that worries social workers in a city known for its derivatives-savvy grandmothers and stock-tipping taxi drivers.

Third-year Hong Kong University law student Ivan Lee made US$38,000 on stocks and warrants when the Hang Seng Index climbed 39 percent in 2007, but half of his gains were wiped out by a 14 percent market slide this week.

A 22-year-old graduate was recently feted in newspapers as Hong Kong's student "stock god" for transforming his family's wealth from US$9,000 to US$448,700 over a 36-month period.

Students have been lured into stocks as China's booming economy hatched hugely popular initial public offerings, such as last year's listing of Chinese internet firm Alibaba.com, which saw the stock triple on its debut.

But students say they also know how to handle the risks.

Ken Poon, at Hong Kong University, was short selling this week, having read up on how the subprime crisis was stoking fears of a U.S. recession, sending a chill through financial markets.

"I didn't actually lose money," 21-year-old Poon said. "I bet on the market falling and it did."