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Extend And Pretend; Or Why The Inflation/Deflation Debate Is Largely Irrelevant
- 2s30s
- Bear Market
- Ben Bernanke
- Bond
- Budget Deficit
- Capital Markets
- Central Banks
- Excess Reserves
- Fed Fund Futures
- Federal Reserve
- Foreign Central Banks
- Gross Domestic Product
- Housing Bubble
- Hyperinflation
- Keynesian economics
- M2
- Monetary Base
- Monetary Policy
- President Obama
- Purchasing Power
- Reality
- Stagflation
- Unemployment
- Yield Curve
Inflation or deflation? The debate is at the heart of every argument about capital markets, fiscal policy, monetary policy, debt management, the Federal Reserve, and thus by implication unemployment and politics in general. And like every popular debate, inflation has its fanatics: those who believe no matter what, their set outcome is the certain one. Yet is [inflation/deflation] such a certainty given all the prevailing data? Greg Mankiw shares some thoughts on why that may not be the case.
A brief primer on hyperinflation:
One basic lesson of economics is that prices rise when the
government creates an excessive amount of money. In other words,
inflation occurs when too much money is chasing too few goods.
A
second lesson is that governments resort to rapid monetary growth
because they face fiscal problems. When government spending exceeds tax
collection, policy makers sometimes turn to their central banks, which
essentially print money to cover the budget shortfall.
America's sad state of economic affairs is seen by many who read into the Fed Fund futures a little more than they should, as merely a preamble into a broader inflationary scare, as the old "Don't fight the Fed" tantra reappears, and spikes equities for all those who would rather be with the Fed chairman than against him. But is this correct?
The Federal Reserve
has also been rapidly creating money. The monetary base — meaning
currency plus bank reserves — is the money-supply measure that the Fed
controls most directly. That figure has more than doubled over the last
two years.
Yet, despite having the two classic ingredients for
high inflation, the United States has experienced only benign price
increases. Over the last year, the core Consumer Price Index,
excluding food and energy, has risen by less than 2 percent. And
long-term interest rates remain relatively low, suggesting that the
bond market isn’t terribly worried about inflation. What gives?
Part of the answer is that while we have large budget deficits and rapid money growth, one isn’t causing the other. Ben S. Bernanke, the Fed chairman, has been printing money not to finance President Obama’s spending but to rescue the financial system and prop up a weak economy.
Moreover, banks have been happy to hold much of that new money as excess reserves. In normal times when the Fed expands the monetary base, banks lend that money, and other money-supply measures grow in parallel. But these are not normal times. With banks content holding idle cash, the broad measure called M2 (including currency and deposits in checking and savings accounts) has grown in the last two years at an annual rate of only 6 percent.
The disconnect between capital markets and Fed reality becomes fully apparent when considering the market's reaction to the Fed's intervention over the past two years. Assuming the absence of direct Fed intervention in equities, which is becoming increasingly more problematic, equities are currently discounting a dramatic flare up in inflation, which is contrary to what most economic strategists and that old tried and true measure - the yield curve, are saying. Yet, when the Fed essentially controls a vast portion of the bond market via Q.E., its damaging interventionism become a self-fulfilling prophecy. While a steep yield curve in the past was indicative of an economy on the brink of growth, now all a steep curve implies is more Fed intervention in the future. The last time we checked planned economies did not work out too well. How America's capital markets can have fooled themselves to so blatantly accept Fed printing euphoria with a sustainable GDP bounce will be the topic of many textbooks in the future. In the meantime, the current equities bear market rising tide is as transient as the current Chairman's attempt to validate Keynesian economics... On a long enough timeline...
And while Bernanke aims for a Golidlocks monetary trajectory, he is certainly facing a dilemma. The macro economy's "strange attractor" is certainly a deflationary outcome, due to the $15+ trillion in household wealth lost in the span of just one year. There is no way that any amount of Fed "funny money" can replace this lost purchasing power, and the resultant shift to secular consumer psychology coupled with a demographic shift, which forces ever more assets to enter run-off mode to provide annuity streams to ageing baby-boomers.
And while deflation is what keeps Bernanke up at night, it is certain that inflation could be just as big a threat if the Fed does not contain its bubble-blowing ways in time.
First, a little bit of inflation might not be so bad. Mr. Bernanke
and company could decide that letting prices rise and thereby reducing
the real cost of borrowing might help stimulate a moribund economy. The
trick is getting enough inflation to help the economy recover without
losing control of the process. Fine-tuning is hard to do.
Second,
the Fed could easily overestimate the economy’s potential growth. In
light of the large fiscal imbalance over which Mr. Obama is presiding,
it’s a good bet he will end up raising taxes for most Americans in
coming years. Higher tax rates mean reduced work incentives and lower
potential output. If the Fed fails to account for this change, it could
try to promote more growth than the economy can sustain, causing
inflation to rise.
Finally, even if the Fed is committed to low
inflation and recognizes the challenges ahead, politics could constrain
its policy choices. Raising interest rates to deal with impending
inflationary pressures is never popular, and after the recent financial crisis,
Mr. Bernanke cannot draw on a boundless reservoir of good will. As the
economy recovers, responding quickly and fully to inflation threats may
prove hard in the face of public opposition.
Alas, in the search for an answer, capital markets provide no clue: equities push higher seemingly everyday, as they price in greater economic growth and higher inflation, while the bond complex, despite a record yield curve, still has the 30 Year trading at near record low yields. If inflation is truly a concern, do not look to the biggest and most rational market in the world. As we pointed out yesterday, unsubsidizided investors (aka non-Primary Dealers), foreign central banks are shifting to a longer duration exposure, even as equities should be raising at least some eyebrows that such a portfolio shift is premature. After all, if inflation does in fact pick up, look for the long end pricing to plunge. As such the steep 2s30s is not so much an indication of perceived tail and inflation risk, but of excess demand for the short end from domestic banks sitting on record amounts of excess reserves, who are happy to take advantage of the last great subsidy the Fed has afforded them: the steep yield curve. On the other hand, with all dominant market makers now on board and participating on the same side of the trade, more and more professionals are summoning those two status quo dreaded words: the Minsky Moment.
Regardless who ends up right in the [deflation/inflation] debate, one thing is certain - the Fed will without an iota of doubt mismanage the current "exit" process and the outcome will certainly be one which will further imperil the economic and political future of this country, as whether we end up with deflation, inflation or alternatively, stagflation, the days of King Dollar are numbered, and with it the zombified trance that America's middle class has helped its mindless trudge through the past decade. And if there is anything a ruling elite fears more than anything, it is the shift of the silent majority into a very vocal one. Facilitating this form of political suicide is the insanity which will be the current banker bonus season - allowing bankers to extract massive taxpayer capital arising from direct middle-class funding in the form of interventions, and dollar debasement in the form of the steep yield curve (funded through $2 trillion in Fed security holdings), on the back of imaginary marks-to-market which are there to "justify" Wall Street's record profits, with the complicity of the regulators and the accountants, is merely yet another transient house of cards which just like the housing bubble, will inevitably topple. Yet this time, with the budget deficit already running at 11%+ of GDP, the bailout will not come, or if it does, it will be on the back of a socialist-style, 60% tax for everyone and everything, which will be the last straw for America's economic and political back.
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Mankiw wrote my economics textbook for college, and he toots his horn in it about every fifteen seconds. There are probably 500 sentences that start with "When I was economic advisor to Bush, I..."
With that said... "Inflation occurs when too many dollars are chasing too few goods"
But that doesn't happen if the printed dollars are being used to shore up bank balance sheets and are not being circulated.
That's why I vehemently disagree with the hyperinflation argument.
I had a Mankiw book as well. That book actually set me back in my understanding of economies. At times I couldn't in good conscience write the book answer on tests, it felt like lying.
Still I would say the "inflation is everywhere monetary" is the result of economic proofs purposefully designed to assume away reality. Inflation can come from a currency collapse. A kleptocracy can impose rents throughout the economy. A government can appropriate stores of value. All these would lead to rising prices.
If we're truly on the decline then hyperinflation will come at some point on the way to ruin. Day-to-day that kind of statement is as relevant as the understanding that in 5 billion years our sun will explode. But hyperinflation is possible and it will happen barring some radical change in course.
If anyone else is currently in this situation, just phrase the opening sentence of your answers thusly: "According to Mankiw, ".
The 'teacher' gets the answer he wants, and you get to keep your self-respect. Everybody wins.
That's why I vehemently disagree with the hyperinflation argument.
How can you disagree with something that you do not understand?
I am Chumbawamba.
Our economy is basically a house of cards right now. It seems to me, more than anything, foreigners control our destiny. For example, China has enough dollars right now to line the Great Wall. What do you think would happen if China and others decide to start dumping dollars and/or we see a tsunami of dollars flooding into the U.S. buying up our assets in exchange for our crappy paper. It seems to me you would then have inflation in overdrive - a shortage of goods, and way to many dollars. What china is doing right now is analogous to, say, your kid borrowing money from you, and then borrowing more money from you to make payments on the borrowed money. How long does China, or you, put up with this?
Mankiw obviously is a ma-oron. However, they LOVE to load the arguements...hence the AJ look-a-like Glen Beck covering truth and forcing choices within his (or "their") arguement (Hegelian). $ not being circulated? Fagetaboutit. In this corner the Plunge Protection Team (chastity belt?) as the worlds "greatest" "hedge" "fund".
Buy Silver.
The author says that banks are content to hold all the excess reserves rather than engage in normal lending. I think what is really holding back lending is the absence of enough willing and credit-worthy borrowers. There is already too much debt and most Americans have already lost a lot of money (as the author points out). The QE efforts of the Fed are doomed because they are essentially pushing on a wet noodle. They are running out of time because the process is getting too expensive.
We are piling--balancing?--risk on risk. The excess liquidity is there all right. Think of it as potential energy, or water behind a dam. If it did flood through 'normal' pricing channels there would be an effect. In fact today the liquidity is held by large banks and only used to play the stock market, and you can see the erosion in value for dollar that has resulted (and gold sniffing that out). So you have actual deflation, because the ultimate corporate game is to see if the US population can be terrified into accepting outright pay cuts, but in the presence of a live threat of inflation/hyperinflation. Will the threat materialize? Given the propensity of markets to form linkages and arbitrage no matter what VIPs think, consider it a certainty. The timing? Whatever is least convenient.
Or, in old form English haiku for maximum decadance:
'Flations all around;
Funny to see rats fleeing
Levitating ships.
" because the ultimate corporate game is to see if the US population can be terrified into accepting outright pay cuts"
It's not like they have a choice. I know of many people that have had to take pay cuts. When it's a choice between 90% of my income or nothing I prefer to take 90%. When you get into anything to do with the housing sector there is so little work out there you have to take what you can get. I'm lucky I'm in maintenance in a manufacturing facility and unless we shut our doors completely they need our dept. to keep the machines running. Hopefully they don't find a way to make our product cheaper in China. The last portion of that article puts it all in a nutshell, they are getting rich off of our backs. If Socialized Healthcare goes through I can't wait to see where they get the $60 Bn they paid off the unions with. Bend over.
"if the Fed does not contain its bubble-blowing ways in time."
Simply taking into account their consistently miserable performance in this area, why would anyone think they'd get it right this time?
Steve Keen the Australian economist has argued quite convincingly that Banks create loans in order to RESPOND to a demand for loans. Banks create a supply parameter not a demand parameter. The transmission mechanism is the reverse of conventional money supply wisdom. This is one reason why the enormous rise in bank reserves has not led to more bank lending (same in UK). Households and business don't want the banks damn money, neither a loan nor the plastic. This is deflationary behaviour in its truest sense. Hunker down, avoid risk. Buy when offers can no longer be resisted.
Which is why they will stay away from engaging in any exit process for as long as possible.
Deciding to do nothing is still a decision...
Equity inflation occurs when too much fiat is chasing too few stocks.
Banks don't hold and hoard "idle" fiatscos. Only Colombian drug lords do such a thing.
This equity inflation is by design, not by accident.
It's doomed, naturally.
http://thetaildoesnotwagthedog.blogspot.com/2009/07/in-end-tail-does-not...
Their accounts are easy to spot: Fedz just look for the ones with a full $250,000.
---
From the article:
I think "mismanage" makes it better.
Seems to me that there is a more topical type of reasoning that has been missed....
What was/is the cumulative credit level before and after....
ie....2006 versus 2010 ?
And
What was/is the cumulative asset level before and after ?
.................................
This should include all credit categories and all bankable asset categories....
If the 2006 total level of both credit and assets in 2006 was $70 Trillion.....and 2010 is $40 Trillion....
Therein lies the answer to inflation/deflation....
40/70's = one possible outcome = deflation
The fiats can print away until 70/70's is met before inflation can happen....
..................................
Of course this is an indicator only....but one will find it to be accurate....
If I had a single asset before whereby the price was $70....and the total available is only $40.....then the
current price could only be $40 or less....
..................................
Thus until such an indicator is accurately constructed....one will only flutter about like a range bound stock....
What's the derivative notional again?
And you are slightly incorrect, they can print until 70/70, but only if the currency doesn't implode first.
Sword of Damocles, comes to mind
Mankiw has zero credibility and is part of the problem, not part of the solution. Why anyone would waste time reading him is unclear. The whole inflation/deflation debate is closed, due to 1) the elapsed time and 2) the lack of consensus. If you must think in these terms, what you'll have is inflation in essentials (food, gas) and deflation in everything else including wages.
Shift the frame, people--you're now in a command economy and the Fourth Branch controls everything. Read up on how command economies operate and map the paradigms to the information economy instead of the industrial economy. Then go out and get yourself some hands-on skills to create social value and a modest "means of production" to create some kind of useful artifact. And stop mithering. Creating Powerpoint shows, sitting in meetings, and calling on clients are no longer in demand.
Forget Mankiw--try C. H. Douglas, Bastiat, Knapp, and Gesell.
The article appears to be written by someone that doesn't have a clue as to how the system works.
The government is not the creation of credit ie what you use as money, the government is just one of billions of entities that creates credit. See Federal Reserve Z1 Report.
The credit system is expanding at a negative -$400B (annualized) rate at the end of Q3. Yet the system needs much more to fund itself, say where did is that interest on the $53 Trillion owed to the system at? Whooppss... doesn't exists.
+1
False hypothesis:
"The Fed has failed because...." Those who make this statement base it upon some assumptions as to what constitute the goals of the Fed.
Alternative hypothesis: "The goal of the Fed is to facilitate the transfer of wealth to an elite and consolidate the power of that elite."... By that measure it has succeeded. And it has doubly succeeded because it has convinced the masses that it made "mistakes" which will not be repeated and it feels very sorry for what happened.
The victims of the Fed's predations are analogous to victims in the "battered women's syndrome"--"He really loves me, but he has problems..he means well and says he won't do it any more", and "He says it's my fault and he's probably right."
...and she believes it and then ends up in the morgue.
DAMN STAIGHT! Someone pros)get's it.
+1, or motorcycle. And tragically, people just don't seem to learn in either case.
John Maynard Keynes, in his book, The Economic Consequences of Peace, detailed the "pincer movement" of the destructive nature of inflation on people's wealth:
I feel privileged to be on this thread with you, my fellow travelers. For you are some of the one-in-a-million who appear to get it.
I think once we officially have a double dip at the end of this year there is going to be a much worse deflationary scenario coming.
Can we find a less government-captured observer to tell us about inflation and deflation than Gregory Mankiw?
Perhaps you recall N. Gregory Mankiw, former chairman of the Council of Economic Advisors, when he recently called for, among other insane suggestions listed by Robert Wenzel in George Soros, Enemy of Free Markets, “a negative interest rate, a global carbon tax, a higher gas tax, and before the economy plunged deep into a downturn claimed, in December, 2007, said that we should stay out of the way of the Fed as it continued its money manipulations”?
Ah. The Romers and the Mankiws, the Summers and the Rubins. Washington, D.C., is just one big happy rotating university/banker/government family, overseeing US politics, finances, culture and foreign affairs. Do we really need a Congress?
Is this the same Mankiw who classifies himself as a NEW KEYNESIAN along with Robert Shiller, Mark Gertler, Paul Krugman, Kenneth Rogoff, Ben Bernanke, Lawrence Summers, David Romer (of Christina and IMF fame), Nouriel Roubini…” Who credits Harvey S. Rosen, co-director of Princeton’s Center for Economic Policy Studies, as one of four mentors who taught him how to practice economics, along with Alan Blinder, Larry Summers, and Stanley Fischer, formerly of Citigroup and Bernanke’s Depression thesis advisor and now head of Israel’s central bank.
Is this the same Mankiw who along with Christina Romer’s husband, David Romer at the IMF, are known for their “significant early contributions” to the “New Keynesian” theory as editors in 1991 of New Keynesian Economics, volumes 1 and 2.
As Matt Taibbi says:
”Princeton University's Center for Economic Policy Studies is part of the financial smoke screen; a habitat for more of the paid stooges rotating in and out of the Fed, Treasury and Oval Office. It was founded in 1989 “to support economic policy-related research in the Department of Economics, and to foster communication among experts in the academic, business, and government communities” It ”sponsors a number of programs each academic to year to bring such leaders together” to disseminate obfuscatory manifestos to confuse and lull the public sheeple back to sleep…
And…“The whole concept of a ”Council of Economic Advisors” serving special interests and sitting in the Oval Office should be swept away, along with the bankers privately owned Federal Reserve System. It is time for a rediscovery, a renaissance, of the Mises theory of the business cycle and a massive retreat of investment-banker-controlled governance over the economic sphere.”
+1
It amazes me that the human beings I see day in and out have no clue, nor care about, the conflicts of interest and moral hazard. They just file it under "political" in their brain and think it's all talking points from Fox News because I have little that's positive to say about the current administration:
"Okay, I get it. What's new? Didn't you know our government was corrupt? And I think Obama's a nice guy."
I have to come back here to maintain sanity. Maybe I am insane - I just keep repeating it and nothing changes.
I get a laugh every once in a while from the White House blog. They just keep patting themselves on the back, I mean, I really think they believe it!
Open question: how can the CPI index show inflation at a very low level when oil has shot from $35 to ~$78? If this is not well represented in the CPI, should we be formulating another price index for inflation? Or distinguish price inflation from monetary expansion?
It seems to me doubling oil does much more than a 0.2% CPI increase...
deflation inflation irrelevent lol
1934 a 1000 bill bought so much stuff
2009 now 70000 bill buys the same /
oh different tax bracket..
I can't say it any better, so I'll quote another ZH poster:
Deflation is the midwife of hyperinflation.
As we borrow/print and spend far beyond our means, this cycle will feed upon itself. As the saying goes, "When you find yourself in a hole, the first thing to do is stop digging." We don't need a more efficient excavator at this point! Allocating resources to unproductive tasks isn't the answer. The more supply and demand is "managed," and fundamentals are suppressed, the longer it will take to leave this vicious cycle.
The way I'm thinking about this right now is that the Fed's interventions are acting as a form of price fixing in assets which is giving the appearance of inflation in things that banks like to buy with their new free tax dollars. So commodities, equities, go up; dollar down; looks like inflation.
Meanwhile, back on Main street, we still have headline unemployment at 10% and U6 at 17.3%, less jobs, lower wages, and consumers coming down off the largest debt binge in history is all very deflationary. Higher commodities might leak into consumer prices some as higher raw material cost, but that is more than counterbalanced by the lack of MARGIN in consumer prices. Consumers are unwilling to pay full retail for anything anymore unless of course the government wants to give them 4000$ in free money to trade in their junker worth 500$.
The government COULD very well generate hyperinflation if it loses its mind and decides it doesn't want to stay in power, but given the choice between self preservation and the financial system... I think I know what government will choose.
Governments do not choose to introduce hyperinflation. Those that reject the currency that the government offers do.
I am Chumbawamba.
100% correct and am sure many here in ZH realize that the US dollar FIAT currency is like a religion. It is 'faith-based' and provided there are still militant fanaticals (dollarbugs) who still believe then the USD has 'value'. Of course those militants keep losing value with each passing year.
Kings and Rothschilds have gold, the peasants get paper 'promises'.
BANK RUN NOW!!!
And buy gold and silver.
A leading indicator of the American theocracy where all government activity is faith based.
Bingo! That's what "Full Faith and Credit" is all about. Once the users of the currency no longer have faith, it no longer has value. And what would you use then to transact business?
The Final Jeopardy Answer coming up right after these commercial messages!
It's threads like this that keep me coming back to ZH. All the others are just filler; something to pass the time.
It's all so very, very simple. In all of recorded history, there has never been a successful centrally planned, command economy, except for one major exception: the UK/USA, circa 1939-1945.
But as Hayek so astutely observed, it takes an absolutely existential threat to enable the type of cohesive, popular support necessary to implement such draconian measures. As soon as the threat is defeated, or even begins to dissipate (by 1944), there is a return to traditional squabbling over resources and corruption.
The point of this observation: The USA, and the British colonies before it, has been successful for 400 years due to the primacy of private property & the rule of law. All of this has been discarded in a mad game of delusional belief in the efficacy of magical creatures.
The bottom line is that we cannot possibly afford the sum total promised social costs and current defense expenditures without achieving some incredibly radical productivity improvements.
The likelihood of pulling this off in the current environment is nil. The real outcome will be much more similar to the USSR simply disappearing from sight. This is our future; in the meantime, we wait, watch & listen.
+1x10^100
Great post, B9K9!
I agree, this is a very good post.
Right on, my canine brother.
What about China c. 2000 - 201?
John Williams’ Shadow Government Statistics in its subscriber Commentary Number 272 issued January 15, 2010 reports that by its Alternative Consumer Inflation Measures “adjusted to pre-Clinton (1990) methodology, annual CPI growth rose to 6.1% in December, versus 5.1% in November, while the SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, rose to about 9.7% (9.68% for those using the extra digit) in December, versus 8.8% in November.
"The average pre-Clinton (1990-base) inflation for 2009 versus 2008 was 3.0% compared with 7.2% in 2008 versus 2007. The average SGS-Alternate Consumer Inflation Measure (1980-base) showed inflation for 2009 versus 2008 at 7.0% compared with 11.6% in 2008 versus 2007.
“The SGS-Alternate Consumer Inflation Measure adjusts on an additive basis for the cumulative impact on the annual inflation rate of various methodological changes made by the BLS. Over the decades, the BLS has altered the meaning of the CPI from being a measure of the cost of living needed to maintain a constant standard of living, to something that no longer reflects the constant-standard-of-living concept. Roughly five percentage points of the additive SGS adjustment reflect the BLS’s formal estimate of the impact of methodological changes; roughly two percentage points reflect changes by the BLS, where SGS has estimated the impact not otherwise published by the BLS.”
Commentary 272 headlines:
December Annual Inflation 2.7% (CPI-U), 9.7% (SGS)
Unusually Cold Weather Boosted December Production
Fed Shows Recession Ended Mid-2009 But Double-Dip Is in Place.
http://www.shadowstats.com
Not true, the fed buys MBS and that money is used to buy treasuries.
We also need to realize that inflation will not solve the debt crisis of the middle class. As jobs are lost, new jobs pay less. Income will not keep up, there will be no wage price spiral.
A BIG reason why US inflation numbers are so low is that in addition to their being fudged is that when the fed prints money it is a claim against goods all over the world not just the US. This is due to our trade deficit exporting the funds overseas. We have exported inflation to the rest of the world. Many bog cities in Asia and elsewhere have 5% or so reported inflation for many years. If that money stayed in the US or comes back (-19)then you'll see those inflation numbers jump-assuming they're not "revised" somehow.
Bernanke's Flaks Hard at Work
Two "highly respected" economists, Adrei Shleifer of Harvard and Robert Vishny of Booth/Chicago have just published a half-baked/slammed together paper with a model which supports the Fed's purchase of MBS ("Asset Fire Sales and Credit Easing", NBER Working Paper 15652, January, 2010)
Their conclusion?
"When banks are liquidating collateral and asset prices are dislocated, the injection of new capital into banks, either through equity or through loans, will not by itself restart lending because banks will merely use the capital to hold onto or acquire more of these distressed assets. Speculation crowds out lending until asset prices recover. The advantage of government security purchases is precisely to raise security prices so that financial investment no longer dominates lending, and real investment can restart."
...the Fed is not bailing out bankers, it's doing this for the greater good!!!
more voodoo economics
Even in the light of the Gruber scandal, they did not mention conflicts, direct or indirect, or the lack thereof, i.e., How much money do they get from the Fed, Treasury and their affiliates?
Inflation and Deflation, What are we actually talking about?
I think it's very useful to point out what we're actually looking at when we talk about Inflation especially the Inflation numbers provided us by our governments?
Why is that important? These numbers have nothing to do with the general definition of "Inflation" namely " A rise in the GENERAL level of prices of goods and services in an economy over a period of time" cause there's nothing "general" at all about these numbers produced by the governments around the world. They only measure a couple of commodities like bred, some meat and so on and differ from country to country depending on how they made up "the Inflation Basket". Often the consumer products in this inflation basket are changed all the time to make the inflation numbers meet there wishes of under 2% inflation in the FIAT system. Example: Inside the UK inflation basket http://www.guardian.co.uk/business/2009/mar/23/ons-inflation-cpi-shopping
It's very important to realize this when talking about Inflation and Deflation. An argument often heard by Inflationists is that the Deflationist don't talk about deflation in the strict definition of being a "general price decline" but so don't the Inflationist do!?
So if you want to have a accurate discussion between the two you strictly have to follow the Inflation basket of some country to talk about Deflation but this is changed all the time to meet Inflation and not Deflation wishes of the governments, so what to do?
Maybe it's better to completely forget about this strict "general" definition, as many MSM economy gurus like Marc Faber and Peter Schiff do, and talk about Inflation and Deflation more specific pointing out the exact goods and services which inflated or deflated also because the inflation baskets are fudged with for government policy reasons not benefiting a clear and honest discussion.
Even better on a personal base is to make your own "Personal Inflation Basket" and measure the things you buy in goods and services to know what is happening with your personal purchasing power.
If we don't take this into account it never will be possible to have a useful discussion between the Inflationist and deflationist.
I have tried that, but it's hard to follow through. I have some old spread sheets around with old prices, on an old computer.
You would think someone would calculate an alternate measuer (different than SGS). I recall in the late 70s or 80s someone in Barrons used to have their own index. Had things like a hair cut, stick of gum, newspaper etc. in it.
Inflation handicapped at the start of the race. Horses running dead even. Deflation is a sprinter. Its a long race.
Buy Silver.
no lending= no spending
no credit=no spending
no job= mos def no spending
deflation is coming whether you like it or not.
sure prices can go up, but who can buy? who will buy?
exactly...
Anyone who thinks that you can't have rising inflation in an environment of rising unemployment and rising interest rates was not an adult in the period from 1968-1980.
You can also forget the Monetarist dogma that the inflation of that period was a result of a "wage-price spiral" (meaning rising wages were the cause of rising prices). Aside from the many other visible exogenous causes of rising prices, the empirical fact is that prices rose faster than wages throughout the period. Thus, the actual phenomenon was a "price-wage spiral", but that reality just doesn't fit conveniently with the anti-labor ideology of neo-liberals like Mankiw.
THE HYPOCRISY OF THE FEDERAL RESERVE
According to Esteemed ex Governor Mishkin:
Strong prudential supervision of the banking system is crucial...
Encouraging a strong bank regulatory/supervisory system takes several forms. First, bank regulatory/supervisory agencies need to be provided with adequate resources to do their job effectively. Without these resources, the bank supervisory agency will not be able to monitor banks sufficiently in order to keep them from engaging in inappropriately risky activities, to have the appropriate management expertise and controls to manage risk, or to have sufficient capital so that moral hazard incentives to take on excessive risk are kept in check.
Accounting and disclosure requirements for financial institutions, need to be beefed up considerably. Without the appropriate information, both markets and bank supervisors will not be able to adequately monitor the banks to deter excessive risk-taking. Proper accounting standards and disclosure requirements are therefore crucial to a healthy banking system.
In the event of a financial crisis, prompt corrective action by bank supervisors will stop undesirable bank activities and even more importantly, not only close down institutions that do not have sufficient net worth, but also make sure that stockholders and managers of insolvent institutions are appropriately punished. Prompt corrective action is particularly important in part because it immediately prevents banks from ``betting the bank'' in order to restore the value of the institution and in part because it creates incentives for banks not to take on too much risk in the first place, knowing that if they do so, they are more likely to be punished.
Because prompt corrective action is so important, the bank regulatory/ supervisory agency needs sufficient independence from the political process in order that it is not encouraged to sweep problems under the rug and engage in regulatory forbearance...It is important to make bank supervisors accountable if they engage in regulatory forbearance in order to improve incentives for them to do their job properly.
Opening up the actions of bank supervisors to public scrutiny makes regulatory forbearance less attractive to them, thereby reducing the principal agent problem. In addition, subjecting the actions of bank supervisors to public scrutiny reduces the incentives of politicians to lean on supervisors to relax their supervision of banks.
Mishkin, F. Journal of Banking and Finance 1999.
The country he was talking about is Mexico.
Mishkin actively promotes and supports the policies of the Geithner/Bernanke regime today, including secrecy, no strings-attached bailouts and complete forebearance.
It's not just the value of money that is important but also the amount. If you have just $10 it doesn't matter if the ham costs $100 or $1000, you simply can't buy it. In the first stage of the Weimar inflation prices were screaming upward but there wasn't enough money around for people to buy things, or that became the popular belief. Government officials began screaming for money to be printed to fill the gap. I think we are approaching a similar situation. Eventually there will be a 'Howling' by the public for more money. It's not so much that prices will rise as that many individuals will be priced out of the market for goods and services because they won't have any money. The idea that inflation won't occur because of unemployment is bogus. Just ask the ghosts of the jobless millions in Weimar Germany who ate bread made with sawdust. The inflation/deflation argument is also bogus. It's like trying to figure out what a sinking boat is doing in a rising tide while its bilge pump is running. Is it going up or down?
China is unloading the dollar.
Time and time again I read reports of China buying up hard assets in Africa, South America, Australia, etc., with dollar denominated figures. In effect, they are taking our worthless bonds and trading them for hard assets of other countries while those bonds still have some perceived value. When our currency does collapse, and those bonds become totally worthless, the sovereign countries and companies holding them are going to be mad at the US and not China. The Chinese make out like bandits, and we make out like the bad guys.
China bought our debt so as to artificially keep their currency value low. Now that we are not purchasing so much crap from China, they don't have the dollars (nor the appetite) to buy more of our bonds. We're screwed in the fact that Obama and Bernanke have turned on the spickets of debt at the exact time that no one wants to fund the spending spree.
I have explained this 1x, and I will explain it again:
World stays US centric: Deflation - Stag Deflation...
US Gov. forces / is forced - unanticipated circumstance to decouple the US Dollar from World Reserve Status - World is destabilized such that US military [as long as we can afford to maintain] - supports Dollar in short term - long term Dollar crisis in defining event [boom, not slow motion]
The US sets the world speed limit - that simple.
Is that Deflation / Inflation - its just a train wreck waiting to happen - so, longer term change equates to greater instability and probability of predictable outcomes becomes improbable - thus "RISK" increases - to the point Reward - in a universal base asset / currency [GOLD ex] must appreciate.
As far as production - World has over-produced [Deflation], Internet is a means of commune / socialism : [Deflation], Big Government expansion destroying output and internet [Inflation] - it can be said: Internet VS Gov,. expansion - race of time and Ctrl. -but, when you have output gaps this BIG - and change this FAST - that is friction you can believe in....:)
And, I have no F-ing Idea of what I am talking about.