This page has been archived and commenting is disabled.

Guest Post: You Can't Have One Without The Other

Tyler Durden's picture




 

Submitted by Contrary Investor

You Can't Have One Without The Other?...Oh really?  Without question probably THE key macro debate these days important not only to economic, but also financial market outcomes is the debate over inflation versus deflationary eventualities ahead.  You already know the sides are divided with a lot of strong and well reasoned opinions on both sides of the equation.  We are not about to address this specific debate for as we see it, the jury remains out.  Mother Nature and Father Time argue deflation in many an asset class is still and will continue to be a reality.  Alternatively central bankers are fighting Mother Nature and Father time with everything they've got, so to speak, praying their own inspired brand of monetary inflation can outrun embedded deflationary forces still left unresolved and unreconciled in the current cycle.  And for now we are seeing a duality of outcomes.  What remains levered (real estate) is still deflating and what is unlevered and experiencing accelerating physical demand globally (commodities) is inflating.  As per investment decision making, being accepting of this current duality has been key to successful outcomes.

Again, the purpose of this discussion is not to chime in on the macro deflation versus inflation debate.  The specific purpose is to drill down and question what we see as a bit of consensus logic of the moment pertaining to inflation.  Right to the point, and we've discussed this historical truism many a time ourselves over the years, history is clear that prior bouts of headline inflation in the US have been very rightfully accompanied by wage inflation.  We offer you the following chart as to why this perception is held so dear by so many.  We're very simply looking at the year over year change in the headline CPI set against the year over year change in average hourly service sector wages (the service sector being by far the largest employer in the US).  The directional correlation here is quite high.  But we will admit, and this we believe will be very important in just a minute, that the linkage/correlation here has become a good bit less tight starting in the late-1990's.

So again, without trying to make some definitive macro call on inflation versus deflation, we know the very strong perception exists that in an environment where US wage growth is not accelerating on a rate of change basis, as is exactly the case now, there is no way higher commodity prices can ultimately be passed through into final goods prices for any extended period of time.  Without wage growth, only a draw down of personal savings can "fund" inflationary pressures for a time.  Wildly enough, post the rise in gasoline prices we saw earlier this year, the US savings rate has indeed declined a bit to help buffer the blow for now.  You can see exactly this in the recent numbers.  In essence, history tells us that there is no way inflationary pressures can continue to grow ever larger in the US if wage growth does not ultimately show up to support and perhaps help further accelerate those higher prices.  In a wage growth deprived macro US economy, there is no way higher commodity costs can exist for a sustainable period of time.  Oh really?  As we've tried to suggest a million times over the years, we're in a changed world.  Globalization changes everything.  It's no longer a one chessboard global economy, but rather a three tiered multi-dimensional macro economic gaming environment.  As you'd guess, for now the old rules do apply...until they don't.

One more quick one from the history books and we'll move ahead.  Below is a quick snapshot of year over year rate of change in US CPI, but this go around we've broadened the comparator to total US disposable personal income (DPI).  Yes, we're looking at the year over year change in DPI.  One more time there is indeed an historical correlation here, albeit given the DPI numbers are much more volatile than wages only.  But you get the concept and idea.

Remember that disposable personal income picks up income beyond wages specifically that includes interest income, rental income, transfer payments and proprietors income (small business).  This is again why so many folks on let's call it the non-sustainable inflation side of the argument have literally planted the flag.  Their position is that there is no way inflation (as meaning really higher prices for food and energy essentials) can take hold in the current environment.  In fact we do know one specific central banker who also seems convinced higher commodity prices in the current cycle are transitory and temporary, as this history we've shown you would seem to justify.  But is he still expecting to play the global economy game on one chess board?

One last view of life in what we suggest to you is a changing world.  It's an update of one you've seen before, but again is a key relationship the "temporary and transitory inflation" crowd are banking upon conceptually to validate their non-inflationary case.  Very quickly it's the nominal dollar history of West Texas crude prices alongside the same year over year change in US service sector wages.  What we've done with the light green colored bars is look at what happened historically to the rate of change in wages when crude prices accelerated meaningfully.  Key point being, since 1974 every time crude oil prices accelerated over a certain period of time, the year over year rate of change in service sector wages was accelerating.  Every single time.  The only two exceptions to this rule were seen during the periods shaded in purple - the 2007-08 period and in the present environment.

Of course we watched oil prices rocket to the moon in 2008 while the rate of change in US wages was decelerating and what happened?  Just as history would have academically predicted the US fell into a recession.  Chalk one up for the transitory and temporary crowd, right?  But we suggest that we all think much more broadly as the prior cycle that witnessed the spike in oil was not only about the increasing importance of globalization to physical commodities, but also about unchecked speculation and the growing integration of commodities as an asset class to institutional investors globally.

So we know you get the picture.  Again, as we step back and look at the lessons of history, we can see how the temporary and transitory crowd can be so adamant in their conviction that in the absence of US wage inflation, commodity price acceleration and inflation in general are unsustainable.  But as suggested, it's time to start thinking more broadly.  Specifically, it's time to starting monitoring the character of wages alright - the character of non-US wages. 

To get us thinking in this direction and to unshackle the constraints of viewing life only within the context of US historical experience, and certainly to pay homage to the three dimensional chess board that is the global economy of the moment, let's look East for anecdotes of change.  You already know that probably a few months back, the wonderful folks at Li and Fung (Asia's largest retail supply chain management firm) told us that price increases coming from Asia would be a certainty, it is now only a matter of how much of the cost increases Li and Fung customers will be able to pass through into final goods prices to their customers served.  It was only a few weeks later that the CEO of Wal-Mart said essentially the same in telling folks to expect higher prices broadly that would stick, nothing temporary about it.  It was just recently that William Fung (the Fung of Li and Fung) revealed in the Wall Street Journal that he now expects an 80% increase in wages across the Asian community over the next five years.  You'll again remember that the FoxConn employee riots of February of 2010 resulted in approximately 30% wage increases for their employees by the summer of last year.  Rising wages in the emerging markets is a certainty. 

Specifically China has been allowing wage increases we believe for a number of key reasons.  First, in the absence of significant currency revaluation, higher wages in China addresses with some immediacy the issue of inflationary pressures most importantly seen in food prices as of late.  Secondly, higher wages in China over time should help spur accelerating domestic consumption - something China knows it needs to make happen in order to allow more internal total economic balance (export model versus internal consumption model).  The five year 80% wage increase prediction by William Fung seems like a very big number, especially compared to wage gains in the US both now and over the last five years.  But the fact is that meaningful wage gains have already been occurring in China for quite some time.  As you already know, when starting from such a very low nominal wage base a decade to a decade and one half ago, the nominal gains have been small in nominal yuan terms, but large in percentage terms.  After over a decade of compounding, the numbers start to become much more meaningful.  And now when we see 30% FoxConn related numbers appearing, this issue simply takes on heightened importance.

Directly from the Chinese National Bureau of Statistics, we've put together a few views of historical reality to hopefully get us to start thinking about wages and commodity prices/inflationary pressures in a much broader context - in a global context.  Below is the history from 1995-2009 of the average wage of employed persons in China as expressed in Yuan.

Of course the year over year rate of change numbers are important.  With the exception of 1997, every year over the period covered witnessed a double digit rise in wage gains annually.  Again, not so important when the nominal Yuan wage base was small, but very important when one now contemplates 30% wage increases on a nominal Yuan wage base almost seven times larger than it was in 1995.  We're talking real money now.  A bull market in Chinese wage gains?  If the above were a stock chart, how else would one characterize this history?

Very quickly, what we've done in the combo chart below is break apart the history of Chinese wage gains between State owned and independent (private) enterprises.

Wildly enough, at least according to historical experience, wage gains at State owned enterprises have outstripped their private sector counterparts in most years.  All in the interests of maintaining the social good?  You bet it has been.  And that's still a very big issue today.  Please remember that all of the numbers we're showing you above are current only through 2009 (China's official numbers of the moment).  It is in 2010 and really now that we are staring to get anecdotes of rate of change wage acceleration well in excess of any of the rate of change numbers you've seen across the charts above.     

So why have we dragged you through these numbers?  And why should this all of this be important in investment decision making ahead?  We have a few more items to discuss that we hope at least provoke thought and reflection.  First, as a KEY global macro, we need to very importantly remember what certainly is a truism of global macro economics of the moment (and as Larry the Cable Guy would counsel us, "we don't care who you are").  And that truism is, the low cost producer sets price.  Let's face it, costs in China have in essence become the "benchmark" for so much global production over the last half decade.  We won't go into all of the outsourcing commentary as you know all of this already.  What is very important in this period of rising wage acceleration is that increasing labor costs in China allow other Asian competitors to likewise address their own domestic wage issues under the "cover" of China's all in pricing umbrella.  Point being, rising costs and ultimately prices coming out of China may indeed allow prices influenced by Asia broadly to rise.  We expect exactly this to occur.  Isn't this the very definition and characterization of a price/wage spiral?  This is exactly why we've keyed in on Chinese wage character as being a must do monitor point, not only for China specifically, but really Asia broadly.

But of course there is another issue directly linking back to our original comments about the historical correlation between US wages and commodity prices.  Although we only have the Chinese wage data stretching back to 1995, we thought we'd look at the rhythm of rate of change in Chinese wages over time set against crude oil and food prices.  Exactly as we did in one of the charts above of US wages and West Texas crude.  We're using total annual Chinese wage rate of change data below (as opposed to State owned or private company data specifically).

Who knows, maybe we're stretching to make a point for all we know, but here's what we see.  Back in the late 1990's and early part of the last decade, in the years following meaningful rate of change growth in Chinese wages, oil prices accelerated.  We marked these periods with the green circles.  Absolutely direct and definitive causation?  Of course not.  But what we would suggest is that rising Chinese wages in those periods lent a certain amount of support to growth in the total domestic Chinese economy itself.  And with macro Chinese economic growth comes a higher demand for resources. 

Do we likewise get a taste for a bit of the same in the relationship below in looking at equity prices on the Shanghai relative to the rhythm of domestic Chinese wage growth over time?  At least in the past when Chinese economic activity accelerated (theoretically as reflected by the financial market) wage growth likewise seemed to likewise accelerate in accord, and vice versa.

We'll finish up with one last relationship.  This time it's the annual rate of change in Chinese wages along side the UN real food price index at each year end period.  Have a peek.

Okay, you'll remember that when we looked at the relationship of US CPI and service sector wages that was the first chart in this discussion, we stated that historical correlations between the two had been very tight up until about the late 1990's.  Well, if you look at the chart above and the prior chart of Chinese wages and crude oil, we see the directional correlation as being pretty darn high from about 2003-present.  Is this telling us that at the margin what is occurring with wages in China since that time is having a potentially greater impact on the rhythm and reality of global commodity prices?  We think this is exactly what it's saying.  In very simple terms what we believe we are "seeing" is nothing more than the evolution of the global economy.

So again, we know you get it.  We believe declaring higher commodity prices and higher inflationary pressures a transitory or temporary phenomenon based solely on lack of meaningful US wage growth is shortsighted at best and perhaps very dangerous in investment decision making.  The reality is that we are already seeing a number of Chinese manufacturers attempt to outsource themselves in this period of higher labor costs.  Outsourcing to places like Vietnam has been done.  Unfortunately Vietnam simply is not a large enough economy to have a meaningful impact on or act to offset domestic Chinese wage trends.

Lastly, as we look ahead a number of years, we also need to remember that China is running into a demographic issue.  And they are not alone.  The long standing one child policy in China has driven two important phenomenon.  First, the population at some point will not be "replacing" itself.  Secondly the disproportionate number of men in the country speaks to the same issue - a country that will increasingly have difficulty somewhere down the road replacing its population.  Can we make the case that a worker or skilled worker shortage may appear, and have its own influence on domestic wages at some point?  We're a long way off, but headed in that general direction.  Will China drop the one child policy at some point?  We believe they will indeed.  And we can only imagine what demand for commodities and their resulting prices may look like if the Chinese birth rate were to increase.  Can you?  Indeed perhaps we can't really have inflation without wage growth.  We just suggest you be careful about to whose wages you are referring.        

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Tue, 07/05/2011 - 10:39 | 1426402 66Sexy
66Sexy's picture

The fed 'pretends' to fight Deflation.

"We conclude that the [Federal] Reserve Banks are not federal ... but are independent privately owned and locally controlled corporations...without day to day direction from the federal government." Quote by: 9th Circuit Court

Speculation is not inflation. 'Inflation' by today's standards is dictated top-bottom by governments and corporations as a justification to raise prices and cheapen debt. The Fed has everything to with this, as they create the speculation.

But remember, the fed is a private institution!

The initiative is 'Deflation'. The goal is cheap asset acquisition via economic deception.

Tue, 07/05/2011 - 10:40 | 1426438 Highrev
Highrev's picture

Looks like there's a spread to play there.

I'll go with a narrowing.

;-)

Tue, 07/05/2011 - 10:40 | 1426439 Monedas
Monedas's picture

The source of evil in the worlds left of center democracies (yes, coincidentally, that's all of them forever) is the left of center politicians that we elect in the manipulated elections ! Surprised ? The fed is in their feeding chain ! Surprised ? Swim upstream and you'll find Hillary and Barney spawning in the gravelly shoals ! Monedas 2011 Hoarders have more fun !

Tue, 07/05/2011 - 10:45 | 1426450 baby_BLYTHE
baby_BLYTHE's picture

usury has destroyed America.

Tue, 07/05/2011 - 11:02 | 1426503 mcguire
mcguire's picture

66sexy, i agree 100%.  

Tue, 07/05/2011 - 11:23 | 1426543 walcott
walcott's picture

The initiative is 'Deflation'. The goal is cheap asset acquisition via economic deception.

There it is. Starvation economics.

Tue, 07/05/2011 - 10:40 | 1426431 Popo
Popo's picture

LOL?   What happened to "not" weighing in on the inflation/deflation debate?   You *completely* took the inflation side of the argument, and literally called the deflation side "short sighted" in your closing.

Your long winded argument in 2 bullet points:

1)  Deflationists insist on the existence of a wage price spiral for inflation to occur.

2)  Don't Chinese wages count in the global analysis of rising wages?

 

 

 

 

Tue, 07/05/2011 - 10:41 | 1426442 SheepDog-One
SheepDog-One's picture

Cant have inflation, that textbook theory may look correct, however with record high unemployment foreclosures and bankruptcies, no one can pay for inflation. Thats the brick wall theyre up against. They desperately want inflation of their items on their books such as real estate, but no one can support paying for their books.

Tue, 07/05/2011 - 10:49 | 1426462 Popo
Popo's picture

Agreed.  From a policy perspective,  inflation looks like a sure thing.   But from a consumer spending perspective,   it's not so simple.   

If one is to include rising wages in Asia as part of the wage/price spiral analysis  (as the original poster suggests) -- one must believe in that deeply theoretical creature called "Asian economic self-sustainability".   Does it exist?  Not right now, at any rate.   When Western consumer spending drops off,  China will get whacked.  Hard.   Will Asia eventually come back and pick up the consumerist slack left in the wake of US and European weakness?  Yes, eventually.  But the other word for "eventually" is "deflation".

 

Tue, 07/05/2011 - 10:57 | 1426468 66Sexy
66Sexy's picture

The abstraction between inflation and speculation is rampant. You need wage growth and low unemployment for non illusory inflation. Inflation is a bottom-up effect, not top-bottom. TPTB are attempting to dictate that there is inflation, probably as a government-corporate cooperative. It's a religion: Inflation! But the fuel of it all is expectations... a.k.a speculation on future events.

This illustrates the dire failure of the current system that we all know intuitively, but can't seem to put our finger on it.

After all, it is just a shell game... typical short term profiteering and looting by those in positions of power today - nothing more.

Tue, 07/05/2011 - 11:56 | 1426639 MachoMan
MachoMan's picture

Kind of...  I'm not sure there is a perfect playbook for what we're experiencing at the moment...  but, what about cost push inflation -> hyperinflation?  Sure, demand pull requires wage growth for sure...  but what about when those in charge of the money supply purposefully devalue it beyond the breaking point?

It seems to me that we could get a hyperinflationary depression without much effort in the event the foot stays in the gas pedal a little too long...  this obviously entails a psychological adjustment to how money (especially that printed by developed nations) is viewed, but should not be discounted despite our sheep like tolerances.

Tue, 07/05/2011 - 10:52 | 1426472 qussl3
qussl3's picture

Stagflation in the west and inflation in the east.

Wage price spiral in China guarantees they export inflation while importing jobs, at least until the west becomes cheap enough again.

The skewed income and wealth distribution in the east will also further drive the income and wealth gaps with the wealthy speculating in the asset markets for a return, this will almost certainly finally end up in commodities as the east doesnt trust paper other than for a trade, and property speculation is a political dead end.

Everyone needs energy and everyone's grandmother knows it, price can only go up, but in periods of panic there may be sharp corrections, but structurally it cant get cheap in real terms.

Inflation is here simply because there are at least 2B more consumers who want a western lifestyle.

The wacked out liquidity conditons will just exagerrate moves both up and down.

Tue, 07/05/2011 - 11:02 | 1426504 66Sexy
66Sexy's picture

What is amusing is that actual wage growth in China will be deflationary, thanks to outsourcing. Higher costs, stagnant US wages means higher prices are unsustainable, LOWER PRICES and lower bottom lines, sell off's... deflation.

Tue, 07/05/2011 - 11:16 | 1426529 qussl3
qussl3's picture

China will print to infinity, if export demand cant keep the workforce employed watch them build a thousand ghost cities and print to pay for it.

China is concerned about only one thing, social unrest, gotta keep the masses working and fed, as long as the world believes the FED and perhaps soon the ECB are causing inflation China will get a free pass.

Tue, 07/05/2011 - 11:37 | 1426590 Ghordius
Ghordius's picture

Agree. And a big part of the "ghost cities" are kept as un-leveraged long term savings by private individuals, so short and mid-term prices are not the issue.

Tue, 07/05/2011 - 11:12 | 1426520 Panafrican Funk...
Panafrican Funktron Robot's picture

Yeah, remember when the Fed was so, so concerned about "runaway inflation" that they jacked up the Fed funds rate from 1% to 5.25% in a span of 24 months.  Yeah, that worked out great.

I'm currently in the deflationist camp, and it has nothing to do with wages.  We're in a balance sheet recession.  Japan has already shown the way.  We're headed in the same direction.  Guess who else is about to experience the same pain?  China!  They're currently in the late stages of our 2004-2007 cycle.  Same script, same playbook, same result incoming.   

Tue, 07/05/2011 - 11:51 | 1426625 MachoMan
MachoMan's picture

I'll venture to say that japan having a balance sheet recession is one thing, but virtually all world powers having one is another thing altogether...  where japan might still be able to export things to other countries not experiencing the same downturn, there eventually becomes no systemically removed player large enough to sustain the developed world...  tack on demographic factors and you've got a totally different ballgame.

Obviously there are some incredible similarities with not letting the market correct itself/zomies, but this exemplifies the ever present problem with induction...  our previous observation only works if all things are constant/equal... 

Tue, 07/05/2011 - 10:44 | 1426449 equity_momo
equity_momo's picture

Would this not just facilitate (manufacturing) jobs (and some service such as call centres etc) moving back to the US as the global wage arbitrage gives less incentive to set up factories in a very dangerous place to do business like China?

Oil will get more and more expensive relatively for business' to keep up the globalization game , so the silver lining will be along Jeff Rubins mantra of "regional economics"

Tue, 07/05/2011 - 11:21 | 1426489 jomama
jomama's picture

http://bpp.mit.edu/ has an interesting compilation of data.  if you can ever get it to load.

...though, i would swear it's higher than represented.  probably because the CPI shown isn't the 'true' CPI, weighted across all expenditures. http://www.munknee.com/2011/06/real-time-inflation-data-is-now-available-finally/  (the comment reposted by the editor and now by me was insightful):

 

Editor says: June 25, 2011 at 3:18 pm

A reader sent me the following comment which is well worth posting here:

I spent some considerable time trying to get familiar with what these guys attempt to do, their methodology, their mechanics and comprehensiveness and some sense about whether they have any kind of meaningful weighted index of the stuff that the average citizen uses.

For example, unless 30 or more percent of their CPI/consumer price index is allocated to housing costs (mortgage interest payments, rent, utilities, insurance) it not only isn’t useful, it is misleading. For Americans, another perhaps 20 percent has to factor in the the costs of health insurance, copayments, prescriptions, etc. Food, both for at home eat in and eat out costs of perhaps 20 percent. Transportation for going to work- public transportation, the costs of car leasing, fuel and maintenance of 20 %.

There I have 90% of a typical family’s expenditures without allocating anything for income taxes, education, entertainment, vacations, investments, savings and the myriad of other expenditures.

My point is that any data purporting to be CPI that takes its numbers off the internet, and for most nations in the world, in real time is probably nothing more than a giant hoax. It isn’t comprehensive, weighted, comparable from one nation to another, etc. I think these guys have a great concept, but the realities and obstacles of execution are virtually totally insurmountable especially in meeting what objectives they have.

I’ll take the US Bureau of Labour Statistics and Statistics Canada numbers any day simply because they purport to try to do what I think is necessary, plus we essentially know how they fudge the data. We make allowances for that. But these guys and their real time computer acquired data for most of the world updated daily. Give me an effing break!

 

Tue, 07/05/2011 - 11:01 | 1426495 swissinv
swissinv's picture

nice analysis but what happens when China is curtailing the inflation (see shibor o/n rate)? wages should actually go down hence commodity prices as well...

Tue, 07/05/2011 - 11:03 | 1426506 MadeOfQuarks
MadeOfQuarks's picture

The Chinese will certainly start consuming their own goods rather than selling them to westerners, western wages remain fairly still while asian wages increase, prices go up, and we simply buy less stuff, which works out well now that the asians are buying it instead.

I don't understand why the asians haven't allowed this to happen sooner, all they got for all their produced stuff was a shitload of promises.

Tue, 07/05/2011 - 12:56 | 1426711 66Sexy
66Sexy's picture

Buying power. Perhaps the Wall Marts and other multinational corporations can buy the goods cheap enough, because they buy in massive bulk....

No chinese corporation can come close to american corporate buying power.. the chinese simply cannot afford their own goods. The chinese government has enough subsidizing on its plate than to buy retail domestically produced goods; though they prob could if they had too. 

 Not to mention, china has no consumer credit expanionism.

China wage growth wont grow fast enough, due to gluts in education and labor. In China, there are often 10 employees for every customer.

Real chinese wage growth would result in either massive government employment subsidization (which is already apparent) or social pressures CHina doesnt want. The fact is wage growth would bring the ugly face of real capitalism to a nice, balanced social order, because less people working means more hungry folks on the streets.

In short: I dont believe China is capable of sustaining itself domestically; especially not through chinese wage growth. China is in a huge speculative frenzy that may appear to be inflation, but in reality is just another asset bubble. The clock is ticking. 

Tue, 07/05/2011 - 11:12 | 1426521 Bohemian Clubber
Bohemian Clubber's picture

inflation for things you need and deflation for things you want

Tue, 07/05/2011 - 11:18 | 1426527 Caviar Emptor
Caviar Emptor's picture

Ode to myself: 

I first expounded my theory that the US was going to experience a novel beast which I called Biflation in early 2010 here on ZH. 

To date, almost every single piece of macro data has confirmed this. You long time posters and yes you, Tyler, must be growing tired of my enumeration of factors that are inflationary versus those that are deflationary that combined present not only something unprecedented in modern US economic history, but present a huge obstacle to success in Fed monetary policy. Not to mention the poor US citizenry burdened by a double whammy the likes of which will devastate many. Sadly. 

I'm delighted that more and more are jumping on this bandwagon and recognizing that the current climate represents unique challenges that can't be lumped into the same old generic categories as in prior US economic downturns or expansions. There are many perils to not seeing all this clearly. This is not your father's stagflation, as in what happened in the 1970s, which caused the coining of the term. There is no wage inflation and there is no real estate inflation. In fact quite the opposite. That is the key reason why past economic policies will fail if applied. In fact "supply-side" monetary/political policies instituted in the 1980s to combat 1970s stagflation have directly caused the situation we face today.

There will be no easy macro answers. But in terms of your micro portfolio, only gold will provide an effective hedge against the eroding value of the dollar and most everything else.  

 

Tue, 07/05/2011 - 11:27 | 1426561 swissinv
swissinv's picture

keeping in mind that real estates are not just built in the US

Tue, 07/05/2011 - 11:53 | 1426630 Ghordius
Ghordius's picture

Don't agree. Yes, I remember your Biflation Concept and I have to admit I did not "retain" the idea...

The orthodox Stagflation explanation would be like this: Eventually, enough money is "printed" and the chase begins (higher velocity). This boost demand for "something that holds value". Which then boosts production of "durable consumption items". Then you have wage increases and all else follows.

Perhaps the scenario above leaks. For myself, I hold a much simpler model: whenever rates are artificially low, expect them to rise to compensate... I'd say it's a primitive way of reading Mises.

What happens in the Western World if rates to up to 8%? Or 10% For seven years?

Tue, 07/05/2011 - 13:19 | 1426956 MachoMan
MachoMan's picture

It wouldn't take that long before default... 

He is right, for the short-medium term...  we're going to continue to experience the same thing until inflation or deflation take hold and reach their logical conclusion (hyperinflationary depression).

People arguing about inflation or deflation always need to account for timeline.  Hell, any guess will probably have its day in the sun on our way to hyperinflationary depression.  Any which way you want to cut it, the dollar, as we know it, is dead...  if you want to blink first or last, that's your choice.

Tue, 07/05/2011 - 14:16 | 1427211 Ghordius
Ghordius's picture

What I don't get is: why Hyperinflation? The Dollar is a HUGE beast. Really tough. 50% per month!?

I have not seen many cases of Hyperinflation where you did not have some years at 20%-25% before collapse.
And the Government doing his very best to make it worse.

The French Franc added double zeros, lost them with new printed money, and then again.
The Italian Lira went up from being at parity with an ounce of silver to being 100'000 times less in one lifetime.
The Turkish Lira just struck 6 zeros, accumulated in thirty years.

I don't know how many times I bought small things with a banknote with 100'000 stamped on it AND stable prices for years.

It does not always has to be in a way Hollywood would stage it.

Tue, 07/05/2011 - 18:31 | 1427968 MachoMan
MachoMan's picture

Apples and oranges.

Our problem is that we literally have no appetite to fix the problem.  As a result, our collapse will be epic and sudden...  there have been numerous articles on this site posted regarding this same concept.

By your definition, the dollar could have added a couple zeros since 1913... 

Why hyperinflation?  Well, deleveraging and deflation causes pain/default...  which in turn causes us to lose our military hegemony and dollar/oil peg...  which in turn causes alternative currencies to be used in more transactions...  which causes failed auctions....  ultimately leading to hyperinflation...

OR, alternatively, quantitative easing (in any form you choose) combined with low interest rates (also qe) causes prices for real assets, commodities, and necessities to skyrocket in dollars...  eventually leading people to hedge with alternative forms of currency...  and a loss of faith in the dollar...

This shouldn't be that profound...  it's a question of when, not if.  [a biflationary/stagflationary environment will simply lead to one or more of the above scenarios].

Tue, 07/05/2011 - 11:17 | 1426533 skipjack
skipjack's picture

" what is unlevered and experiencing accelerating physical demand globally (commodities) is inflating"

 

Really ?  Commodities speculation is never done on margin ? Uh huh...

 

 

Tue, 07/05/2011 - 12:15 | 1426695 equity_momo
equity_momo's picture

yes that is a big flaw in the article.

Tue, 07/05/2011 - 11:25 | 1426554 jblack010
jblack010's picture

Where oh where is G. William Miller when we need him??

Tue, 07/05/2011 - 11:29 | 1426565 JR
JR's picture

Pierre Deux, the French furnishings company that opened its first upscale shop in Greenwich Village in 1967, on Thursday abruptly shuttered all 23 stores nationwide and has filed for Chapter 7 bankruptcy protection.  Chapter 7 provides for liquidation of assets.

I noticed the bankruptcy stickers on the display windows of PD yesterday in the trendy berg of Carmel by the Sea, California – overshadowing the imported French antique furniture and provincial fabrics inside.

Yes, Virginia, the economic sky is falling. 

All who proclaim that Bernanke’s stock market will save the economy, as the Fed pumps more and more money into the pockets of its favorite corporations and Wall Street families, apparently are wrong.  Pierre Deux was their kinda store, n’est-ce pas? Obama’s designated “rich,” the guy or gal earning “$150,000” or so in areas where a 1200 square foot house still sells for $600,000 and carries a $400,000 mortgage and a $9000 a year tax bill and who's supposedly getting richer by the day in the stock market, apparently has run out of "trickle-down."

Tue, 07/05/2011 - 11:33 | 1426574 I Stand Alone
I Stand Alone's picture

Isn't It true that in a true free market economy deflation (not the actual contraction money supply, but the lowering of prices as a result of production efficiency) is a good thing? Doesn't it increase the purchasing power of everyone,  and is especially beneficial to those who save? Look at the 19th century. While the value of the Dollar remained constant with respect to Gold and Silver, market and manufacturing efficiencies reduced the the actual cost of goods and services which meant that whhile those who saved were better off than those who did not, all generally benefited from the increased  purchasing power of their money.

The idea that Inflation is a more preferable evil than Deflation is plain propaganda dis-information. It only  seems to have any relevance in regards to the the [Federal] Reserve's boom and bust market manipulations. This is where they and their friends get to be the first to benefit from an Inflated the money supply, then cash in on the purchase of hard assets during the following Deflationarry bust afterwords.

It really is a very nice little scam if you're on the inside or have the resources to take advantave of the system.

Tue, 07/05/2011 - 11:52 | 1426626 UgglyBetty
UgglyBetty's picture

Sure it's better for savers, but not for Gov't that gathers inflation-adjusted taxes and pays fixed salaries to the public sector. People will always be encouraged to spend money instead of saving it, and the Govt will be happy to see wealth transfered from working people to the pockets of a few statesmen and cronies. Inflation is the best tool to concentrate wealth and redistribute poverty, that is one thing that we in third wolrd countries have learned for about 60 years now...

Tue, 07/05/2011 - 11:41 | 1426599 ZackLo
ZackLo's picture

Hyperinflation only end result...bernanke will print to buy bonds until foreigners get fed up buying those bonds to competitively devalue their currencies...the inflationary effects of QE will be the CAUSE of inflation on the margin compression side......then foreigners dump said bonds adventually 2 year hit's 30-50% bernanke panics and hit's the go button on his bloomberg terminal and it's game on! and anyone who thinks wigglemouth will let the 2 year hit 30-50% with out going print crazy to keep yields down has some screws lose to much political pressure will be on him to DO something and in the last gasp of fiat air it will ALL go up in smoke....but....the digital aspect of our money will be really interesting...if we do get cash everyone make sure to wipe your ass with hamiltons...national debt national blessing my ass!

Tue, 07/05/2011 - 11:59 | 1426635 GoldbugVariation
GoldbugVariation's picture

A lot of different things are happening because of huge currency differences: US dollar depreciation, other currencies not so much.

Goods priced in US dollars look like they have experienced massive inflation.  Which I guess they have - and it's not just a US phenomenon as a good part of international trade is priced in US dollars.

Food price inflation is real, and seems to be universal.

In the UK, some anecdotal comments from me:

*  currency feels like it has been relatively stable for the past 12 months

*  we are seeing increased prices for all food types, many goods priced 10% higher than last year or stealth increases, maintaining the same price but less product in the package (for example, one big fruit juice producer recently switched to 750ml standard size cartons instead of 1000ml). 

*  taxes, energy, utility and transportation costs are all up noticeably since last year, this hits disproportionately the lower-middle-class segment of society, who therefore have less disposable income

*  welfare section of society didn't have much disposable income anyhow, but it probably not seeing much change - I don't see any signs of extreme poverty, nobody is starving in this country

*  wages are not generally rising because although employment is still high, there is a fear of future unemployment, therefore hiring is a "buyer's market"

*  the luxury end of things, the excessive froth, the ostentatious consumerism, which is being cut down the most - some businesses in this space seeing 30-50% declines.  People are no longer buying Cristal champagne or expensive wine with their restaurant meals.  Aston Martin sales are down 20-30%.  But, there is still a very large number of people in the UK with a lot of money, high incomes: huge parts of town where most cars are German or luxury; the high-end clothing stores are still busy; the opera is still sold-out, etc.

*   housing prices are rising in the most desirable areas, partly because of European and Arab buyers purchasing UK property as a hedge against future problems in their own countries - but in the 'frothy' areas where speculative development and 'buy to let' investment by non-professional investors was rife in mid/late 2000s, prices are still depressed and there is unsold inventory - so national average looks like prices are approximately stable, this masks true effect which is rising prices for any property which anyone would actually want to buy for themselves

Tue, 07/05/2011 - 12:33 | 1426749 Madcow
Madcow's picture

forget about 'flation - this is a fiat money collapse pure and simple. 

 

Tue, 07/05/2011 - 13:02 | 1426863 jmc8888
jmc8888's picture

Yep it's both, and given what the kleptocrats do it can go either way definitively, of course, it can still correct massively the other way once one wins out.  So in the end, it will still be both.

Glass-Steagall

 

Tue, 07/05/2011 - 16:13 | 1427578 Doyle Hargraves
Doyle Hargraves's picture

The long term trend is towards inflation $ has lost nearly 100% of its value since the fed has been its manager. Deflation is "transitory" (LMAO), central banks always need inflation to spur "growth". We have just been lucky that targeted inflation by the likes of the fed have not touched off hyperinflation...yet! The link is just the official number, we all know how reliable "official" numbers are now...

 

http://146.142.4.24/cgi-bin/cpicalc.pl?cost1=1&year1=1913&year2=2011

Do NOT follow this link or you will be banned from the site!