This page has been archived and commenting is disabled.
The New Deflation
It seems that all you hear about these days is deflation. That is certainly what the bond market is telling us, with my screen blaring at me a miserable 2.93% yield for the ten year Treasury bond.
But there is a new definition for this economic malady that applies to us hapless consumers. In the new deflation, the value of our income falls, while the prices of things we need to buy are going through the roof.
It is a particularly pernicious form of deflation, as it is burning our candles at both ends at the same time. Take a look at the chart below, showing the cost of college tuition versus the consumer price index and home prices.
This hits home particularly hard, as I have just helped put three kids through college, and am reduced to riffling through the sofa cushions looking for spare change in order to meet the bills. When I graduated from the University of California in the early seventies, the tuition was $3,000 a year. Today it is $12,000, and climbing at a 30% annual rate (click here to see the chart relative to the CPI at http://www.madhedgefundtrader.com/july-22-2010.html ).
The saddest part of the story is that rampant wage deflation means that recent graduates have a grim choice between taking a poorly paid job, or no job at all. That leaves them woefully unable to repay the student loans they ran up to obtain their rapidly devaluing diplomas.
And if you were planning on becoming a teacher, forget it, unless you want to move to Saudi Arabia, Russia, or South Korea. After watching tens of millions of jobs get shipped to China over the last decade, did you expect anything less? Just ad this problem to the ever lengthening list of ways we are getting screwed.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
- advertisements -
Higher Education is becoming simply "Higher Affirmation".
A continuance of the self-esteem pumping versus education at the elementary and secondary level.
Education is a business, and they will bring in pretty much anyone as long as they have $$$ in hand.
Now that the gub'ment is providing all the student loans; look for tuition to keep ramping up.
Poor schleps like you bust your butt to pay for your kids; meanwhile, back at the cheese factory, legions of entitlement special exceptions will be getting worthless degrees paid for by the taxpayer (never to be paid back).
MHFT Did you copyright that pic?
MHFT did you know http://www.governmentcompetition.org/ is using your picture?
The author must be young. Last time this happened, it was Jimmy Carter's "stagflation." Jimmy's numbers were worse than Obama's. But the current situation feels much more unstable than Carter's.
If only we could short universities and quasi-public/quasi-private economic development entities.
(meant for post above).
Yea ZeusGekko you can go that route all you like, and still end up dying as a forced labor camp inmate. You think THEY need your new language skills? Hillarious.
Instead as Ive been writing on this forum for a couple weeks, why dont we get all these brainiac know-it-all traders here together, pool a huge fund to knock down attempts at FED volumeless ramping of the markets when they accomplish their out of the blue prop jobs? Oh, cant do that I guess, that would be actually doing something instead of sitting around whining with sympathy for our Zionist scum wingtip shoed captors. Pathetic.
Better to spend the $600 plus on Rosetta Stone and start with either Brazilian portuguese, Mandarin Chinese, or Russian if you expect to be useful in the new global economy. If you only speak english you will soon be obsolete.
Zeus Gekko
No love for India?
India follows China as the next economic power.
Deflation?
Guess what... 10Y yield just broke 4-month long downtrend and will be heading back towards 4%...
Inflation is coming, no matter what you guys have been calling for dozen months now. Where stocks will get in this environment? Figure out yourself.
Cheers!
WOW so you've totaly confirmed return to 'efficient markets' again? Gee thats swell.
again?
Tell me when it stopped being efficient?? Just look at corporate earnings?
Are they good? Yes!
Mkt should go up or down on those earnings? UP!
Is mkt efficient then? YES!
Jeez, it is that simple!
Look beyond our borders for your child's education. You can get you children an engineering degree from just outside the US borders - Puerto Rico (I know it is an unincorporated territory of the US) - for 5000 a year. Another friend of mine is a Philippino, 3000 a year for his enigeering degree. The US made him wait 1 year after he applied to have his classes accredited by the US, but after that 1 year he was considered an engineer (Civil). He will be a PE in just 1 more year than it would take someone who went to a a US institution. All the books they use are accredited and most are used by the highly rated colleges in the U.S.
Speaking of wage deflation. I know when I go lookign for a raise my company loves to point out the added wage I make. All the health costs covered by the company and they remind me that I should include that into my overall wage package. My question is this....When my company does what the government wants and joins the Government healthcare program and they no longer have to pay that part of my wage package....do I get a raise? Or should I just look at it as a salary cut????? That will be some serious wage deflation!!!!
Wait until a few nations default, a few more US cities, a few Hundred more Banks.. the stag will be removed. Full D. The Dow is where it was 10 years ago (worst record ever).. is this Inflation? Housing in decline first time in 50 years?
Staglfation sounds nice.. a little bit of this, some of that..The fed can't monetize the amt of debt that is out nor at the rate its declining.
Anything you get from the government - Inflates.
Anything you get from the private sector (purely) - deflates.
Until their little keynesian game is over that is.
"When I graduated from the University of California in the early seventies, the tuition was $3,000 a year."
When I graduated from UC Berkeley in 1975, tuition was $636/year. I assume the $3000 is adjusted for inflation?
I paid about 900 a few years later. Went on the GI bill. Do you remember the offer to buy another four years, for your children, at the same price you paid? Wish I had done that.
Must be a bad morning in Mad Hedge Fund land, to throw out one anecdotal example and call it a column. College costs are up because, for the most part, they are a heavily regulated government enterprise. At many smaller colleges where incoming classes are not full, there are deals to be had.
Other things heavily regulated by the government are up as well. Things like oil, insurance, health care, for example. My local restaurant raised prices too, exactly six months before they went out of business.
I don't know what you folks are doing, but I'm buying less of the things that are going up in price and more of the things that are going down. I have a more fuel efficient car than I did 2 years ago. Got one helluva deal on it, too. I raised the deductible on my health insurance and started working out to stay healthy. In a few years when the kids go off to college, I intend to play hardball with the admissions office because I, not they, am the one holding aces. They need my kids more than my kids need them. One more thing, Hedgemeister. Why would you pay too much to send your kids to college if their future includes job deflation? Isn't that an example of good money chasing bad? Do you make all your investment decisions this way? Is it what you mean when you say "conventional wisdom mercilessly flailed and tortured?" Seems like you're torturing more than conventional wisdom, Chief.
Agree that college tuition is a bad example of inflation. Tuition is going up rapidly in price for the same reason that health care is. If you subsidize something you get more of it. It's econ 101.
See "Making College More Expensive: The Unintended Consequences of Federal Tuition Aid"
http://www.cato.org/pub_display.php?pub_id=3344
economicmorphine
I would keep that fat. Fat people live longer, handle long hospital stays better and survive car accidents. Obese people handle heart attacks better.
I would rather be a fat person than a body builder if lost in the woods .
Seeing how things are done nowadays, the graduates will be much better off with unemployement benefits. Heck, they could probably go for some off-the records-low-salary work to make the best of both worlds. Pathetic!
In other news, the US Economy is improving, just look at the latest bubbly Housing data...
I am sorry to inform you that one cannot qualify for unemployment benefits if one has not been previously employed. Thus, a newly-graduated individual can collect exactly zero benefits.
Aha, I can smell a black-market type of service here. Get some measly job (where half the salary goes to the employer in a brown paperbag), and then you're set for the benefits.
Is anybody doing this already?
You incorrectly presume that getting a degree means employment, and that not having one is deserving of all the lack of employment. Start getting the other end of the table to just accept what we have, and just end the dislocation of workers.
Your assets are going down, while the things you need to buy are going up. of course we cant mention the dreaded 'stagflation' that would be 'racist' Im sure.
In the new deflation, the value of our income falls, while the prices of things we need to buy are going through the roof.
In deflation, the buying power of money increases, as there is less of it around. Wages and prices and employment tend to fall in a downward spiral. For example, the prices of many stocks, or stock market averages has actually fallen in many cases, so your dollar can buy more stock now than a couple years ago. However, many people have lost their jobs so they don't have the money now that they did then. So they can't afford to buy the cheaper stock. Or, substitute other commodity type goods such as flat screen tvs, even cars.
With inflation, prices are rising faster than incomes. College tuition is a startlin example of this. Energy prices too. The value of money is decreasing over time, and people tend to buy today because it will be more expensive tomorrow. With deflation people defer purchases because it will be cheaper tomorrow than today.
Stagflation is obviously a hybrid term referring to a no-growth but non-recessionary economy, with rising prices and costs and flat income leading to a declining standard of living. Inflation often occurs in the context of rapid growth, like Brazil or China, where there is a wage-price upward spiral. Stagflation is rising prices in the context of zero or low growth.
The key is that in deflation, cash is king. Money gains value over time. Who can argue that you buy more house at lower interest rates today, than you could a few years ago? That's deflation. With inflation, just the opposite: you can buy less house with higher interest rates over time. Cash is trash.
With the exception of AAPL stock, precious metals, and a few other things, for us in the US, cash is king. Can you think of anything you need to buy today because you're just sure it will be more expensive tomorrow? Quite the opposite. No one wants to buy a house that doens't have to because home values are falling.
This is USA specific. Other countries have different dynamics of course.
well done
EURO buying support mentioned since June continues and further upside is expected.
http://stockmarket618.wordpress.com
About the student loans. They amount to nothing more than slavery, as the loans are given to anybody with no regard to credit scores, yet school loans are the only loans that cannot be wiped out in bankruptcy.
Such serious repercussions should be addressed before anybody considers the easiest of loans to get, that can NEVER be defaulted on, but this is rarely considered as the sheep echo "all I need is a degree". And consider that the people that give these loans can't see these students will not have a job in this economy, but still let them sign away any future productivity.
Intentional deceptions meant to enslave. They don't care who they loan to, as it's OUR money, and they get somebody indebted forever. And the sour economy helps recruiting for them, just like it helps the military. Wake up fellow Americans!
So true - corporate slavery. And the for-profit colleges with their useless degrees are even worse. Paying $15k/year to be a nurses's tech or whatever to make $25k/yr.
And all of those government guarantees on the loans allow colleges to increase prices because the consumers are not as conscious of the costs. It's a circular reference, with the government furthering its squeeze on power.
Just look at the power of money....the interest that it earns....
A retiree has to have several times the savings to earn the same amount of interest....to the degree that inflation is more like several hundred percent in terms of what can be bought with the earning power of savings....
Perhaps the proper label is "Government Extortion by Meddling"....
You kids should get hip to the new terms
I beleive we are in a current state of bi-flation. Debt based assets decline from deleveraging, while liquidity drives an increase in commodities and equities.
We may see the dollar drop and the costs of consumables will rise eventually causing pure inflation (or stagflation) but we are not there yet.
http://en.wikipedia.org/wiki/Biflation
Meanwhile the Fed meets it's inflation targets without real job growth.
Djirk
Lot's of kids are into Bi these days
i recently looked thru the payroll costs of some university in the midwest and i couldn't believe the wages the campus police got. and the benefits you would kill for. well above 6 figures. i was left wondering where the money was coming from.
The great ponzi scheme - rife throughout.
In this crazy world dreamed up by the elite and politicians, there is nothing the matter when college graduates can't find jobs. In fact, they are then more likely to join the military to fight these wars. And we all know the economy would fall apart if we didn't have wars, aggressive or defensive.
Obama has spoken about having a civilian force to do his deeds. Because a lot of these graduates are soft from the college lifestyle of high fructose corn syrup, zero exercise, hours of South Park and Family guy episodes, and pizza four times a week, these kids won't be able to do the physical labor seen during FDR's New Deal.
What work can these kids do? The private sector won't hire people with degrees in Philosophy, Advanced Sanskrit and German Art History, so maybe they can teach elementary school to the immigrant children that this country still attracts. Just what we need. Young people who speak English as a second language who believe that manufacturing (making stuff) is for the proles, and six years of college is a worthwhile investment!
(Prediction: ZH readers won't like this realistic interpretation of our world, so please note if you junk me: the paragraphs I wrote above are much more useful from a societal / financial market perspective than this fool the Mad Hedge Fund trader)
Money Craig...Well said! Dont expect the neo-con "Rentier" clASS on ZH to appreciate the true state of the State.
Let the impotent junk you. They are of the same ilk that allowed all immigration to occur to depress wages. The same ilk that voted in a failed, cocaine/alchohol addled sub-moron named George W. Bush to destroy America, then blame the Democrats for not turning us 180 degrees overnight.
Fools.
I'm not sure what your point is, but I agree with a couple of your points. 1. Military ranks are at capacity. 2. Young people are going bankrupt for a useless degree. However, I'm not sure how two relatively obvious points are useful. Please explain to me how to short philosophy degrees.
It's a fabulous interpretation but alas wrong. Unemployment among college graduates is a whopping 4.4%. And yes I know that that Mickey D's and sbux are loaded with phd physicists but at least they have work :)
The divide between skilled and unskilled has never been so large. The statistics that .gov put out are much more sensitive to the bottom end of the Eco strata than the top and tend to miss a lot of what matters in today's economy. The quaint idea that if we all just learned to farm and run a lathe would give us endless prosperity is just that, quaint
sheep92
"The divide between skilled and unskilled has never been so large."
Skilled meaning people like Plumbers,Electricians, Carpenters, Machinists, anf various Factory workers right?
No, skilled as in the people that have created the technology that we all take for granted now that allows basically anyone anywhere for near zero cost to communicate effectively with anyone else anywhere else.
This single leap is unlocking more intellectual capital in a few short decades than all other inventions did in the entire history of man.
I am not making any sort of judgement as to the inherent worth of people based on their job classification or intellectual skill level just an observation that those people who can add intellectual value to the world equation can be rewarded beyond all historical measure. Anyone and I mean anyone can download the software development toolkit for Apple or Google phones and with the right idea can produce intellectual property with an audience of tens of millions of people which is growing by the day. This 'idea leverage' is the biggest driver of the world today and its only going to get bigger and will encompass more and more fields.
Whoopie for near zero cost to communicate effectively with anyone anywhere in the world! I think we called it "Information based economy"...How is that working out for America?
Defense spending was @385 billion in 2000. It has more than doubled--but we cant seem to beat a Third world rag-tag group of terrorists.
You insinuate that "intellectual capital" and "apps" prolifigate and improve our lot, but you cant eat, live-in, power, drive, construct, employ, heal, transport or wear much with "intellectual capital". And what powers this miracle? Electricity. Population expansion, diminished natural resource extraction, and financial corruption...as well as mis-guided military domination will not be rectified by technology.
Whoopie for near zero cost to communicate effectively with anyone anywhere in the world! ... How is that working out for America?
It has cut my transportation costs in half. I use 50% less gass, and less wear-and-tear on my car and on the roads.
And I own hand-cranked flashlights and hand-cranked radios. Have no idea how to replace them if they stop being manufactured. Smile for brightness, I guess, and talk to the neighbors for news.
great point, people argue that the rise of the US came with Europe in shambles...mostly true, but in addition to being labor and resource rich, the larger framework allowed for innovation to take off. Now China rises faster that the US but could not have done so without an already exponential curve set up by the US.
sheep92
"No, skilled as in the people that have created the technology that we all take for granted now that allows basically anyone anywhere for near zero cost to communicate effectively with anyone else anywhere else."
Not really shit without things like Wire and installers is it?
Once upon a time people who invented actually manufactured the products they designed.
If you had ever had a labor job you would comprehend the need for the skilled.
These technologies aren't worth a damn if no one can make the components or assemble them.
Once every boy scout learned how to make a Crystal radio. Try that with a Sat radio.
I would trade a hundred IT guys for a single Amish Carpenter.
"I would trade a hundred IT guys for a single Amish Carpenter."
That's the best thing I've read in a long time!
Except we are not yet at the point where an Amish carpenter is more valuable than a hundred IT guys. But yeah, that's the new fad. Based on a rumor, let the smart money start funding the Amish farmers and defunding the IT guys. Seems like a good way to jump-start the failure of the most complex systems. Trying to anticipate their failure (complex systems) and get out before they fail just may turn into a self-fulfilling prophecy.
"more valuable than a hundred IT guys": cute but stupid. My friends in the custom cabinet and counter business can not compete with the factory "unfinished cabinet" producers and unless someone wants to "fair trade" carpentry products, neither can the Amish woodworkers.
Comparing craft workers to modern infrastructure technicians is like comparing river steamboat captains to air traffic controllers: not parallel or comparable or real.
Well that depends on how you define value. Financial under the current formulation of economics, then I agree with you. Douchebags like the FaceBook founder are "more valuable" in terms of producing, as many write here, fiat currency. But if one needs someone to take 100 acres, make it run purely on local current sunlight (no petroleum fertilizers) and other biologically available energy, while preserving both the flows and purity of water, and other ecosystem services, to feed say an extended family or even small community...well, the Amish guy suddenly would find himself naming his price. While the Facebook founder probably starves.
Acknowledging natural limits of survival may feel like fad now, well, I suppose only if one lives in the "first" world.
Your point about jumpstarting failure is well taken. But there is a fine line between merely destroying our current invalid paradigm and creatively destroying it. Only the anarchists I suppose would prefer to just destroy. I'd rather creatively tear apart the system, before larger scale natural limits do it for us.
Self fulfilling maybe, but if all that happens is that I refuse to Facebook or Twitter toward a common ecological dark age, then worst case is that I sit on my farm, with abundant water, great quality of life with family, basically a front row seat to the continuing charade that Tyler et. al describe well here -- neither participating in the farce, nor allowing it to become your master.
I appreciate your point as well as your recognition that, essentially, "the job does not make the man, the man makes the job."
That said, just as in any of the more increasingly probable scenarios of the future in which "you can't eat Gold," nor can "you eat an IPhone."
We have not yet hit that key threshold, where ecological farming knowhow and ability become more highly valued than producing the next generation IPhone, but that day may well already be embedded in our likely future, due to the weight of our history and current system.
Meaning, Tainter, Holling, Homer Dixon, Hall and others have written well about how our current levels of complexity cannot be sustained, as our EROI continues to diminish. That means, I believe, that higher technological solutions that depend on ancient sunlight rather than current sunlight to operate face an uncertain future. The highest levels of complexity shall be the first to collapse.