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In
response to Misguided Worries
About Inflation I received an email from "GR"
telling me "The deflation metaphor is not playing out. Every month the
things I consume go up in price."
He pointed numerous price increases, including gasoline, up a nickel in a
week.
Excuse me but isn't the price of gasoline down $1.50 or more from a year ago?
More to the point, I clearly spelled out in the post that prices are
symptoms, not the definition of deflation.
Confusion
Over Inflation
Articles like these have people confused about what inflation is. Indeed
every week I have someone email me that "We have inflation and deflation
at the same time."
No we don't. It is not possible. The reason is falling prices are a symptom
of deflation not a definition of it. Falling prices frequently accompany
deflation, but they are not a necessary ingredient.
If you need a refresher course please read Inflation: What the
heck is it?.
Better yet, read and understand Fiat World
Mathematical Model.
Talking
about the auto industry and Walmart, "GR" says "They will not
sell below cost even if the demand graph drops to zero. They will somehow
find a way to get government subsidy, or else they will find a consumer
gimmick to increase the price."
Well GM sold cars at a loss for 5 years and that is why they eventually went
bankrupt. If GM sold no cars insisting they break even they would have gone
bankrupt sooner.
Currently, commercial real estate bankruptcies are growing at a massive rate.
So too are bank failures, foreclosures, and credit card defaults. And
bankruptcies, foreclosures, and credit card defaults result in the
destruction of credit, the very essence of deflation.
Somehow "GR", like many others, has
intense faith in the Fed to get prices up and consumers spending. This is in
spite of the fact that prices are falling and demand is sinking in the face
of the biggest stimulus package the world has ever seen!
Scorecard Shows How Little Power Bernanke Has
In a second email "GR" sent a long list of why what is happening
can't happen even though it clearly is. He concluded with "Celente,
Schiff, and Weber cannot be wrong, only their timing may be off."
Their timing is off indeed, perhaps by as much as Prechter's was in his
deflation call: decades. Prechter was at least right, finally. Deflation is
here. Hyperinflationists were wrong betting it would come before deflation.
And they are still waiting for Godot.
The reality is Bernanke's
Deflation Preventing Scorecard shows how little
power the Fed actually has once consumer attitudes change.
Fed Controls Price Of Gold?
A second person told me "The gold market is totally controlled by the
FED"
Bernanke is scrambling to prevent the second great depression, cannot get
consumers to buy or banks to lend, did not see any of this coming, could not
and did not prevent the housing crash, could not and did not prevent the
crash in commercial real estate, and has a scorecard of zero in preventing
deflation, yet somehow the Fed controls the piece of gold.
Really?
Deflation Denial In Spite Of Overwhelming Evidence
People have misguided faith in the Fed's ability to forever blow bubbles
although the power of the Fed is all an illusion.
It's easy to blow bubbles and get consumers to spend when consumer attitudes
are on your side. However, it's much more difficult now that consumer
attitudes towards spending and banks attitudes towards lending have
dramatically reversed.
The Wizard behind the curtain has now been exposed as a fraud. Yet, in spite
of massive evidence the Wizard is powerless to change attitudes, most
stubbornly believe in the Wizard.
The Winds Of Frugality Blow In Bernanke's Face
Please consider The Consumer Has
Dug in His Heels by Bill Bonner.
Since
1945, the US economy – and much of the rest of the world economy
– has been carried on the backs of American consumers. First, they
spent money they earned during the war years. Then, they spent money they
earned in the big boom of the ’50s and ’60s. And then they spent
money they hadn’t earned at all. They borrowed from future
earnings…increasing total US debt from just 120% of GDP in the
’70s…to 370% of GDP in 2007.
In the last 15 years of that period, especially, each time the consumer
showed a reluctance to continue spending, the feds rushed to give him more
credit. And during the final five years – the Bubble Epoque –
debt doubled.
Now, the consumer has dug in his heels. He’s not going a step further
until he unloads his excess baggage of debt.
Once again, the feds are trying to stimulate him. The Fed’s key
interest rate is practically at zero. The feds are pumping money into the
economy as fast as they can. And they’ll give a fellow up to $4,500 if
he’ll agree to kill his old car.
Even with the stimulus spending…and the stimulating low interest
rates…he’s still not willing to add debt. Of course, this is just
what happened in Japan. The public sector spent; the private sector saved.
Net result: an on-again, off-again recession that has lasted almost 20 years.
This morning’s news tells us that the federal deficit through July
comes to $1.27 trillion. We didn’t think that was possible. And despite
this inferno of new debt…the 10-year Treasury bond yields barely 3.6%.
We never thought that was possible either.
So, anything could happen. But generally, government stimulus only works when
it is not needed. That is, it only works when it goes in the same direction
as the underlying trend…not against it.
But now, the underlying trend has reversed. It’s no longer a credit
expansion; it’s a credit contraction. The consumer has had his fill of
debt. He’s cutting back on his spending and paying off debt.
That’s what the July figures show. That’s been the history of
entire downturn. That’s why it’s a depression, not a recession.
It’s a major change of direction that will take years to accomplish.
Now, stimulus is not only useless – since it is against the major trend
– its counterproductive. It delays and contradicts the adjustments that
need to be made.
Encouraging people to buy too much was what caused the problem in the first
place. Encouraging them to buy more now is not a solution; it’s just a
continuation of the same flawed policy of stimulating consumer demand…a
policy that has been in place for decades.
But now the wind is blowing in the other direction. The government may not
like it, but they can’t stop it.
That
article is a great read in entirety. I encourage you to read it. Without even
mentioning the word "attitude" that's what Bonner is talking about.
Greenspan was able to reflate time and time again because consumers were
trained "cash is trash" and to "buy the dip". Yet
Greenspan's power was an illusion, his manipulations were all in the
direction of the trend.
Japan failed to stimulate credit because of changed consumer attitudes
towards debt.
Bernanke will fail as well. Indeed he already has. His deflation prevention
scorecard is proof enough.
Crash Course For Bernanke
Flashback January 28, 2008: Inquiring minds are reviewing a Crash Course For
Bernanke
Four Reasons Bernanke Will Fail
·
Changing Social
Attitudes About Debt (People willing to walk away from
homes, save more and spend less)
·
Commercial Real Estate Crash
Underway
·
Unemployment
Soaring as Private Sector Jobs Contract
·
Global
wage arbitrage
Final analysis will show that Bernanke can change interest rates but not
attitudes, and attitudes are far more important. Indeed, changes in attitudes
will render all of Bernanke's academic theories about the Great Depression
meaningless.
Greenspan had the wind of consumers' willingness and ability to go deeper in
debt at his back. Bernanke has the wind of boomers fearing retirement in the
midst of falling home prices and impaired bank balance sheets blowing stiffly
in his face. There is no cure for what ails us other than time and price. And
with the aforementioned attitude changes, the biggest, most reckless, global
credit expansion experiment the world has ever seen is coming to an end.
Central banks are powerless to do anything about it.
Fed Subject to Real and Practical Constraints
The "central banks are powerless argument" always leads to the
inevitable response: Why can't the Fed print money and give it away to
everyone. The answer is the Fed has no power to give away money to consumers,
and even IF they had that power they would not do it. The reason is people
would pay off their loans and banks do not want to be paid back with cheaper
dollars.
The Fed will not act against its own best
interests, and giving money to consumers would be doing just that. That is a practical
constraint that nearly everyone misses! Indeed, look who was bailed out, it
sure was not consumers, it was banks at consumer expense.
Zero-Bound interest rates is a real constraint. Recently fed Governor
Janet Yellen stated the Fed wold lower interest rates if it could. Well it
can't!
Thus there are practical as well as real constraints on what
the Fed can and will do. Nearly everyone ignores those constraints in their
analysis.
Congress in theory and practice can give away money. Indeed, Congress even
does that to a certain extent. Extensions to unemployment insurance,
increases in food stamps, and cash for clunkers are prime examples.
However, those are a drop in the bucket compared to the total amount of
credit that is blowing up. Take a look at the charts in Fiat World
Mathematical Model if you need proof.
The key point is it is the difference between Fed
printing and the destruction of credit that matters! As long as credit
marked to market blows up faster than handouts and monetary printing increase
we will be in deflation. Deflation will not last forever, but it can last a
lot longer than most think.
Mish
GlobalEconomicAnalysis.blogspot.com
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