Sunday, October 24, 2010

The Fear of Deflation

During the Great Depression farmers poured milk in the streets rather than sell it for the price offered. And the result back then, Congress passed farm subsidies supports. Where is the deflation today? Don’t even mention housing, it still has another 50 percent to drop around here, just to get back to the year 2002 level. You don’t see oil refiners pouring gasoline in the streets to protest low prices.

In the 1930’s there were massive bank failures. The country lost 90% of its savings. There was no unemployment insurance or FDIC bank insurance. The deflation of that era was real, real money was lost. Measured by today’s values (adjusted for population and inflation), it was the equivalent of about 14 trillion dollars.

Anyone out there that thinks we are facing deflation, point to it, where is it? My wife just bought 4 new tires $750. Hamburger is four dollars a pound and Potato chips are four dollars a bag. Then there is Google at $600 or Apple stock at $300 per share and neither pays a dividend. The investor is chasing the wind.

The government is now dictating to private industry, like banks and health insurers, the prices they can charge (no deflation here). Not long ago, a business could charge whatever they wanted. Competition determined whether or not they survived and stayed in business. Now, by God, it’s a crime to make a profit (We need to punish these robber barons exploiting the masses)! Net result, the insurance companies are closing shop and moving their investment money to something offering better returns. Obama-care may be the only insurance left, with government “regulation” of private health plans. Do we hang these profiteers? Or recognize it for what it is, inflation.

Debt is money owed. As debtors default, the money loaned to them for that purchase normally goes up in smoke. The government process of saving debts like home loans, by buying them or guaranteeing their value is far from being deflationary. Deflation is impossible when the government prints the cash necessary, to redeem the bad loans the banks are holding on to.

The homeowner that sold his home for one million dollars got cash and the bank got an IOU from the buyer. Now the government is going to make that IOU good. Everybody wins???? Just how is that possible??? This isn’t deflation, it is massive inflation. The money received by homeowners who sold at the top is real money. The money paid by the government to reimburse the banks for the buyers that walked is printed money. The note is paid in full by the government with “thin air” funds (printed money). Instead of the funds entering the market from a home owner’s earnings for 20 to 30 years, it is printed and hits the market in bulk as a lump sum.

Deflation is where your dollar buys more and you work for lower wages. Wage earners today are getting paid the same amount per hour, and their paycheck buys less than it did last year. That’s not how deflation works. But it can’t argued, the government is saving us from the ravages of deflation. God bless them and their infinite wisdom. We just might not be very receptive as to how this plays out. Both roads, lead to the same ultimate destination, the poor house. Deflation is fast and furious; hyperinflation is slower and more painful. Congress has it figured out; if we are going to the poor house, why walk? Ride in style, take a limo!

Copyright 2010 All rights reserved


Anonymous said...

Just look at Japan. The USA is going the Japanese route. The deflation will be a long slow process. It is just beginning... hence the inflation/deflation debate. In another year most will be convinced we are trapped in a slowly descending deflationary spiral.

Jim in San Marcos said...

Hi Anon 7:29

I beg to differ. Japan stood by and watched for 8 years. They didn't run the printing presses. And then when they did, it wasn't a very gung-ho effort.

In Japan the interest rates went to zero and their banks put their savings in US Treasury's. That and the carry trade help give the Japanese banks a financial recovery plan that worked quite well over a 15 year period.

We can't take our savings and loan it to another country, we don't have any. We had to borrow foreign money just to keep this real estate ponzi scheme going.

Their stock market dropped 75% and land values dropped 80%. They ended up with a deflationary spiral because the government did nothing. Real wealth went up in smoke.

At the peak of their real estate frenzy, the total value of all of their land (an area the size of Montana) was valued at more than the value of all land in the USA. Can you imagine the amount of paper the government would have had to print to cover everyone who walked? I don't think that the net result would have been deflationary.

broc said...

The nominal prices of houses aren't going to crash to 2002 levels because of low rates. As a percentage of income (if you have it), housing isn't that expensive these days. The McMansion 5b3br that sold for $350,000, now foreclosing $200,000 out in the country side isn't going to get any cheaper.

Tyrone said...

This just in from Denninger...
Goldman came out with a report basically demanding (you know how these guys are) $4 trillion in money printing - so says the FX chatter and Zerohedge.

The result? The dollar took an instant header, down more than a 1/2% this evening alone.

How about the price of some of the things sensitive to threats of monetary debasement? These are all price changes since the futures started trading this evening - that is, they're six hour changes in price. These are all things you need to buy, either directly or indirectly.
Oil, up 1%.
Wheat, up 1.49%.
Corn, up 2.05%.
Soy, up 1.5%.
Rough Rice, up 1.51%.
Oats, up a stunning 4.27% (!)

Then we have Pelosi:
"If you want to create jobs, the quickest way to do it is to provide more funding for food stamps"
Link: Pelosi Ignoranti

Ohio Loan Officer said...

Another death-blow to the downward spiraling housing market:

Now Title Insurers are saying they may not issue Title Insurance on any foreclosed homes due to the fraud that has been uncovered.

No Title Insurance means no bank will lend on the property -- no mortgage money available means the property's value drops A LOT.

Cash buyers could still purchase a foreclosed home. But then they would have a lot of trouble selling it in the future when a title search indicates it was a foreclosed home in the past. They would only be able to sell it to another cash buyer.

Knowing that, how much would you pay for such a home?

AIM said...

Case-Schiller just came out with their latest prognosis. Home prices will fall another 20% within the next 1-2 years. But that isn't taking the latest "fraudclosure" fiasco into consideration which may cause prices to drop even faster.

Anonymous said...

Not that I eat the toxic crap, but...

McDonald’s Intends to Raise Prices


McDonald’s Corp. plans to raise menu prices to blunt higher costs, including what would be its first such increase in the U.S. in more than a year—a time when the burger chain’s sales have thrived amid lower prices.

The company expects to increase prices in the U.S. and Europe amid projections that commodity costs will rise between 2% and 3% in 2011, Chief Financial Officer Peter Bensen said Thursday during a conference call after McDonald’s reported a 10% increase in third-quarter earnings and added that October sales appear strong.

Anonymous said...

The veneer of American life is in the process of being penetrated and broken through. Reality is pushing in on us all. The immorality and lack of concern for the future has brought us into the Age of Turmoil or Age of Consequences. This is the beginning of the end.

Governments, banks and corporations will be taking hysterical and desperate measures in an attempt to deal with the turmoil. The next 20 years of your life will be very very different from your past. Before the next renaissance comes we will need to go through another dark ages.

Your money, your home, your job, your future, your savings, your pensions, your retirement, and your standard of living are all going to be impacted upon and changed.

How could we have not seen this coming?

Gerald Celente: "Current events predict future trends."

Anonymous said...

Jim --

Why do you think your view of inflation differs so drastically from that posted today by Charles at oftwominds?

Anonymous said...

Here is a good article explaining why QE will not cause inflation this time around. It is based on historical economic statistics. We are just going to have very volatile markets and uncertainty.

Jim in San Marcos said...

Hi Anon 3:09

Both of our columns deal with "our" opinions.

He tends to abstract with terms like "the Financial Power Elites which own the debt." And I tend to keep away from abstractions.

I'm saying that the people with millions are the ones who get slammed. And the guy living paycheck to paycheck will feel nothing. Of course the retiree also gets slammed, their savings will be rendered worthless.

Charles has a different slant on this, he seems to think that the financial power elites can control the outcome.

Time will tell.

Anonymous said...

Anon 3:09

Jim and Charles are both wrong;;;; deflation is gonna be the devastating problem;;; you'll know it for certain in another year;;;; gold buyers are going to get creamed too;;;; so will most in the stock market;;; everyone is disoriented right now due to all the chaos and variables and news media;;; they'll be a big rush back to the dollar and it will strengthen and those who have them will be in good shape;;;; this will happen before inflation ever takes off;;;;

Jim in San Marcos said...

Hi Anon 7:54

Our government is trashing the currency.

Free food, free rent, free unemployment. Do you want to work? If you do, why?

I don't see anyone handing out gold and silver only government checks.

I don't see this Monopoly money going too much further. Of course this is just an opinion. So take it with a pinch of T-bills.

Anonymous said...

AS things worsen;;; everyone will run back to the USD and treasuries;;; everyone is programmed to do so;;;

there is an inflation-deflation debate going on on this blog like on so many others;;; everyone seems to have their logical reasons to support their argument;;; we'll know who is right in another year or so;;;

Anonymous said...

A depression is a depression. A deflationary one is harder on people than an inflationary one. We may wind up having to live through both!

We are in contraction mode now so I think we are entering a deflationary depression that may eventually turn into an inflationary depression.

That's my two cents.

Jim in San Marcos said...

Hi Anon 7:40

Look at it this way. In deflation, your hourly wage drops. In inflation, your wages stay the same and your paycheck buys less.

The government's tax base integrity works well with inflation. It malfunctions with deflation.

As you suggest it could go both ways.

We may need to adjust your "2 cents" for inflation or deflation, depending on how it goes.

It's kind of like standing out in the middle of an intersection wondering if the vehicle that hits you is a truck or a car (bicycles don't count):>)

Thank you for your comments

Anon On A Calif Mtn said...

What is being missed here is that QE1 didn't work. QE2 won't either. The true purpose behind Bernanke's QE is only to prop up the banks.

The Fed can pump in as much money as they want but if there is no motion or velocity of money happening (known as a liquidity trap) the pumping will do no good.

Banks will prefer to hold cash rather than debts at low interest rates. The people will hold onto their cash as well as well as businesses because they are afraid and uncertain = liquidity trap. Money will not be moving at any decent velocity for quite some time.

The fact that money isn't moving despite historically low interest rates should tell you something also. It is hard to grow credit and the money supply in the face of low interest rates. Consumer borrowing is now down lower than it has been in many years.

The Feds money/credit will not reach the real economy. Don't expect inflation now.

QE will not do anything for the GDP or inflation. History shows that. All it will do is lessen velocity further, cause commodity hoarding,
lower bond yields and drive stock valuations up very high (and those won't be sustained for very long).

The weak impact of monetary stimulus on real activity arises because additional money has little force in stimulating additional capital investment during a period of general overcapacity. Instead, money is withheld in idle balances when profitable investment opportunities are scarce.

Even aggressive monetary intervention can do little to correct excess capital. Once excess capacity develops, the forces that previously led to aggressive expansion are almost played out. Efforts to prolong high investment can produce even more excess capital and lead to a more pronounced readjustment later.

I believe we'll be in contraction and deflation for awhile longer.

Anonymous said...

No one really knows where we are headed. The circumstances are too new, different and complicated than anything in US history: QE; credit crisis; recession/depression; socialization of banks, mortgage companies, industries; derivatives; global economy; Wall St; public unions; government intervention; etc. etc. etc.

It seems that it is deflation and will continue as such for a while but who really knows?

Jim in San Marcos said...

Hi Anon 9:55

I don't see the deflation. We just had a housing bubble bust and I think a lot of people think that the drop in housing prices has to be a sign of deflation.

Deflation is where your dollar goes further and at the gas pumps and the grocery stores, that just isn't happening.

Who do you believe? Your wallet or Ben Bernanke?

Anon On A Calif Mtn said...

Many think we are in or going in to strong inflation because some prices are rising.

Commodity hoarding is what takes place with gold, oil, food staples, anything investors feel can shield them from uncertainty and losses.

This may indeed lead to temporary price rises. But that's not inflation. It’s just rising prices. Inflation is the sum of money and credit supply multiplied by the velocity of money. And as we've just seen, that can't rise in times such as these. It can very much go down though, and that's what deflation means.

What can happen, and does, is that people choose to hold on to what they have, which lowers the velocity of money and temporarily raises -some- prices. This will end when they have to pay up their own debts.

Anonymous said...

We had some deflation, we've had some inflation for the last year or so, now we are back to deflationary characteristics. All of you are right. We will be going through a series of deflations and inflations for some time to come a la Japan.

Jeffrey said...

If you follow Mish, deflation is a drop in money and credit. We may be printing more of the former, but the drop in the latter is greater, hence deflation.

But let's say we just look at prices. Things bought with credit ---cars, homes --- are dropping. Things bought with cash ---food, staples, health care ---are rising.

In the 1930's, much of the "sudden collapse" was due to the disappearance of vendor credit (i.e., the stock market crash) AND the excessive inventory that needed liquidation. Today, with just in time inventory, there is less of an inventory adjustment needed after the loss of credit. We've seen such adjustments in building supplies, crusise rooms and autos (again, purchased with credit) but not in farm goods. There is not surplus of the latter when farmers can simply sell it overseas due to the falling dollar.

Finally, our fiat system is dual entry. The Fed may "print", but it prints both debits and credits. The $2 trillion of excess reserves it printed is also a liability that must be retired, ie, those reserves must eventually be withdrawn and "repaid". That will be deflationary, which is why the Fed will put it off as long as possible. Since some of that liquidity was used to purchase short terms MBS, as those are repaid the reserves naturally fall. We now know the Fed has been reinvesting those repayments in treasuries, the QE Lite. So they are not yet ready to withdraw liquidity.

In short, none of this is the same as physically printing money and passing it out, as in Zimbabwe.

Jeffrey said...

Jim, one other observation. I was with you until you said the government is setting prices in banking and healthcare. Really? I think they have regulated services, i.e., they are prohibiting banks from doing certain things (such as selling liar loans to Fannie Mae) and requiring insurance companies to cover children with pre-existing conditions, but I don't know of any recent law setting maximum prices.

Jim in San Marcos said...

Hi Jeffrey

Homes have not returned to pre-bubble prices yet. So any drop in them is just a bunch of "tough love."

A lot of what was fueling our rocket economy was unlimited credit. That stopped. That second honeymoon cruise from equity sucked out of the home is long gone.

The government printing or borrowing of money is pure consumption. Nothing is produced. The idea that Uncle Sam will pay it back strikes me as rather unbelievable. They will keep borrowing until they can't pay the interest(figure three years from now).

Government is setting the prices it pays in Medicare. For that reason many doctors are not taking those patients any more. Insurance companies shouldn't be told who they can insure and under what conditions. Bill Gates can make a 98% profit on each copy of Windows 7, but try to make more than a 5 percent return in health insurance, that won't be tolerated. Plus you can't spend your profits on lavish trips or perks. Sounds like a socialist country if you ask me.

The Fed and Congress look at banks as a bunch of thieves that need to be regulated. The creation of Fannie and Freddie by Congress many years ago with the vision "everyone out to be able to own their own home," made the present mess we are now in. Congress has passed laws on how and when the banks can raise their fees and charges on credit cards. Some of the legislation is for consumer protection. But you have to ask yourself this as a banker; "Loan money for a home loan at 4% or rack in the bucks by loaning it out to credit cards at 18%?"

So the Fed is selling homes at 4 percent and the banks are loaning on credit cards at 32 percent. The trouble is, you can't force people to borrow money. It doesn't work that way. Nobody is borrowing.

I disagree with the thought that "deflation is a drop in money and credit." I look at deflation as the decrease in cost of producing goods for sale. So if labor costs dropped drastically along with energy and raw materials, I would expect deflation. None of that is happening.

Ask yourself one question: How did all of this stuff that government suddenly wants to spend money on (that they don't have) suddenly become affordable when it wasn't affordable when times were good?

Time will tell on this, the dots are all there, I guess it depends on how you connect them.

Thank you for your comments

AIM said...

Unless everyone is using the same definitions they'll get tripped up by semantics and debate or argument is a waste of time.

Keep it simple...

Inflation is more money (and credit) in circulation in relation to the available products and services. Deflation is less money (and credit) in circulation in relation to the available products and services.

I agree with anon 6:26. We've had some deflation, we've had some inflation. And we will continue to have more of both.

I'll add a little bit to it too... we have no prospects for growth and we will have a lot of volatility in the markets and the economy.

AIM said...

Let me also add this... asset devaluation, deleveraging, debt destruction and default, and inflation and stagflation all mixed up in a soup.

Jim in San Marcos said...


The same thoughts have been rolling around in my mind also; the definition of terms.

Deflation and Depression seem linked (similar sounding).

Inflation we have always lived with.

What we are experiencing here is something not so well defined.

Where once everyone supported themselves with a job, it seems like the ratio has dropped. Three people are supporting four or five (kids moving back to the nest etc).

There has been a definite contraction in spending and consumption on a personal level. We can't say the same thing about government. All of their costs are fixed in stone or are locked into a COLA.

Deflation or inflation? That is the question. Tuesday I guess we get to submit our votes to the higher ups. It could prove interesting.

No Deflation Ever said...

If you rearrange the letters in Bernanke, you'll get "Bankerne."

This man is born to be a banker. Glad to know someone's got their dream job.

Anonymous said...

J in SM: "Deflation is where your dollar buys more and you work for lower wages."

Then perhaps your expectations are the root of you misunderstanding.

Inflation: An increase in money and credit.

Deflation: a decrease in money and credit.

There is no doubt that we have seen over the last twenty - thirty years a steady increase in credit, accompanied by an steady increase in cash and notes in circulation.

Now we are at the threshold of a deflationary environment that will probably last a similar length of time.

It will have just as profound an impact on human behavior as loose credit did over the last thirty years.

Will there be price rises, sure when our whole economy depends on low cost energy, and low cost energy isn't available any more, will that have an impact? You bet.

Will food be more expensive? Sure, if you have to pay more in energy costs to produce the same amount of food, yes it'll cost more.

Will we see deflation? Can the Federal Reserve and the Western banks continue to hide the losses?

Much of the crap the Fed has taken onto its balance sheet turns out to hold nothing at all!

Can the Fed continue to take 90% losses on what it buys from the banks?

Is it trying to kick the can? Will it succeed?

AIM said...

Here are two intelligent quotes from Thomas Jefferson.

“The end of democracy and the defeat of the American Revolution will occur when government falls into the hands of lending institutions and moneyed incorporations."

"I sincerely believe that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale."

300 years ago he understood the dangers. We didn't heed them. Goodbye America.

Vote this week. It is your duty to humanity. Do what you can to get the criminal, self-serving and corrupt politicians out of office. Let's get the strong Libertarians and Independents in and start to dismantle the Republican/Democrat fiasco. Our enemie are predatory governments, corrupt politicians, and unethical banks and corporations.

Jim in San Marcos said...


I like Thomas Jefferson, he had a lot to say and he said it well. He's a fascinating read.

Rearranging the deck chairs in Congress won't solve much in my opinion. The worlds financial system has hit an iceberg.

Governments everywhere are printing money to stimulate inflation in order to stave off deflation. They will succeed. But IMHO adding water to the whiskey bottle won't keep the party going for long.

Rob in NS said...

The only thing to be accomplished by all this quantitative easing (a doublethink term if ever there was one) is to stick it to the people who have lived prudently. If all we need to do is print money and things will get better we all might as well quit our jobs and go on the dole. It will be good for environment and help offset the hot air blowing out of the worlds capitals.

Tyrone said...

Bubbles, bubbles, blow them bubbles.

And I couldn't resist posting a fragment on education.

The Biggest Debt Bubble In The History Of Our World
Not only that, but Americans are going into staggering amounts of debt in order to pay for their educations. Total student loan debt in the United States is climbing at a rate of approximately $2,853.88 per second, and today Americans owe an all-time record of more than $849 billion on student loans, which is actually more than the total amount that Americans owe on their credit cards.

Anonymous said...

Alright, Repubs took the house and made progress in the Senate.

The Repubs are a bunch of losers just like the Dems, and there is no hope for this country until we get some real leaders with intelligence and allignment with best interests for the country and people, but-- at least Obama's socialist agenda will be stopped in its tracks for the time being. Cap and Trade is dead, the Bush tax cuts will continue, and maybe Obamacare will be repealed. We're better off than we were.

Rob in Nova Scotia said...

Just got back from grocery store. Anyway I worked for about ten years in the industry. If you want to know how prices get raised it goes something like this. A pound of Bacon used to cost $3.99. What the store does if they want to raise price is jump it to 5.39 and then put it on sale for $4.99 (Canuck Bucks). Make sure you have lots of sale stickers splashed about and hope the customer doesn't figure out they are getting screwed. Oh well what's a fella to do the Ceasar Salad is much better with the Bacon especially when it's all washed down with some Red Wine. Cheers.


Tyrone said...

A past anonymous comment...

FOA, Feb '01:
Make no mistake, the world has seen the very last of cheap dollar oil. The next dynamic of that process in the transition of oil settlement support into Euro denominations. Notwithstanding Iraq's move as a convenient trial balloon, the mass of this transition will not begin until the US has clearly embarked on a slowdown. And that slowdown, energy induced as it is, will, this time, force the fed to fight it with a super inflationary buyout of anything and everything that defaults. Right down to your shoe laces. This, my friends is the inflation dynamic unleashed once a currency is removed from reserve status.

A reality...

European Central Bank, Dec '07:
...since 2002, OPEC countries have increasingly deposited their oil wealth in euro-denominated accounts (12% in the third quarter of 2001, against 25% in the second quarter of 2004) at the expense of US dollar-denominated accounts (75% in the third quarter of 2001, against 61.5% in the second quarter of 2004).