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No Inflation Here
If you have had your fill of Rosie for a while (not sure how that is possible, but a big hypothetical if), here is a wonderful piece by Hoisington Investment Management Company. Some great monetary and fiscal insights and a well-argued and coherent discussion on why there will be no inflation for a long time. Also lends credence to the theory that Gross very well may be spot on and the market is run by a bunch of herd-instincted, CNBC watching WOPRs.
The conventional wisdom is that the
massive increase in excess reserves might eventually
be used to make loans and reverse the economic
contraction now underway, or that the velocity of
money might increase. First, there is a very good
explanation for the surge in excess reserves. The
Fed now pays interest on its deposits, so banks
have been incentivized to shift transaction deposits
from riskier alternatives to the safety and liquidity
offered by the Fed. Historically transaction deposits
at the banks have fluctuated around 3% to 7% of a
bank's balance sheet. In the second quarter, excess
reserves averaged $800 billion which is 4.4% of
the $18 trillion of bank debt (including off balance
sheet). If this is the amount needed for transaction
purposes, then this “high powered” money is not
available for making loans and investments.
Second, velocity (V), or the turnover of
money in the economy, is far more likely to fall
than to rise. This is because V tends to fall when
financial innovation reverses downward. As this
process continues excess leverage will eventually
diminish and together they will lead V lower. This
process has already begun in the household sector.
In addition, the Fed needs an upward sloping
supply curve to get the economic ball rolling. Today
we estimate that the AS curve is flat. The reason it
is in this perfectly elastic shape, rather than upward
sloping, is that we have substantial excess labor
and other productive resources. For example, in
June the work week was at a record low while the
U6 unemployment rate was at an all time high of
16.5%. No wonder wages are deflating. Further,
industry capacity utilization was at a four decade
low at 68.3%, while manufacturing capacity was
at a six decade low for the longer running series at
65.0%. Indeed, when excess resources are extreme,
the AS curve is likely to be not only horizontal, but
shifting outward, meaning that prices will be lower
at any level of aggregate demand or GDP. Thus,
even if Fed actions could shift the aggregate demand
curve outward, which it cannot do under present
circumstances, inflation would still be a long way
down the road. Thus, theory and current evidence
clearly point to deflation as the overwhelming
economic risk.
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Another one-dimensional dezinformatsia piece designed to thwart awareness. Like all deflation pieces it concenrates on symptoms and ignores the diagnosis: national insolvency.
Not wishing to be trapped in definitions, I view national insovency leading to default as a bad thing for currency values. Call it anything you want. The default will come as one of two forms: currency debasement, or outright debt repudiation. Neither are dollar-positive. Nor is today's announcement by SIGTARP of the $23.7 Trillion hole.
Borrow $2Trillion and call me in the morning. Bullshit.
"Shiver me timbers, Gussie, I got ta git me some GOLD!!!" Jesus Cristo, why do you guys go all parabolic when reasonable people suggest that there might be deflation BEFORE your paradisical inflation party? Step back from the kool aid, for the love of Holy the Pope!
Gee Willickers...there you go throwing around those terms again. Rather than responding so...emotionally, why don't you tell me why the thing you call deflation and its attendant falling tax receipts (currently falling at 14% annual rate) can be tolerated? Tell me how governments will continue to keep the masses happy with transfer payments (another 1.5 million unemployed will run out of eligibility in a few months). Tell me how the U.S. will afford to keep the Army in 120 countries. Tell me who will loan the U.S. the $2Trillion it needs this FY, and will likely need next year as well. Tell me why Obama has delayed releasing revised FY2009 budget numbers until after Congress goes home, and hopefully for him after they nationalize the health care system with more money we don't have.
All of those things, and many more, will change the world's perception of our national solvency, and at some point the rest of the world will cut its dollar-denominated losses in an effort to save themselves. Tell me why that won't happen, ok?
I have a ninja sword in case that happens. I understnd what you're saying now, you guys are changing tack, apparently. I can't predict the future, all I'm saying is that *some* people *might* believe, with good reason and in good faith, that the value of the dollar *may* rise (duck!) in the near future, and that it *might* be good to wait *just a little bit* before pulling the trigger on the inflation trade. Ok, relax, relax, deep breath... That wasn't so bad, was it?
The world (I presume you're talking about china, OPEC and Europe holding those treasuries and CDO's) may like to cut its dollar denominated losses, but in order to do that it would have to sell at a price significant;y lower than the current market price since there are not buyers out there. That is because the world is already saturated with dollars. Most of the world debt is denominated in dollars and it is coming due very fast (10/2yr spread exhibit a). Increasing demand for faster payment of debt will ultimately drive demand for the dollar higher.
From another perspective...we have been following pretty clear cyclical patterns in terms of alternating between inflationary and deflationary cycles: 1980 was the height of the last inflationary recession, the previous major recession was the Great Depression, and in case you forgot, it was deflationary, then before that was the major post WWI recession, which was inflationary etc etc.
The point is that when debt peaks we have deflationary recessions, when it reaches a troth we have inflationary recessions. From 1990 to 2000 to 2008 we have had stronger and stronger deflationary tendencies with the rising debt. It's the economy's magical way of adjusting itself. The loss of confidence that (hyper)inflationary advocates talk about will have us buying gum with vials of gasoline. Which on second thought, can't be all that different from the hyperdeflationary (read:default) outcome I believe in.
"Which on second thought, can't be all that different from the hyperdeflationary (read:default) outcome I believe in."
Default is not dollar-positive, and that IS my point. Either we inflate away the currency trying to inflate away the debt, or we default on the debt...and destroy faith in, and therefore the purchasing power of, the currency.
Remember, FDR's response to GD1 was a step change (down) in the value of the USD.
Question. There is historical data on Treasury yields going back to 1798. It survived QE during the Civil War, WWII, and 1873 (which has strong comparison to today). Further, I've read that Japan has weathered a worse debt situation (in some ways) than the US. Their bond market hasn't gone anywhere, and their currency isn't in crisis. It's not like the ROW is in much better shape than the US.
Everybody agrees that the current fiscal regime is unsustainable. But the Politburo's spending plan won't be carried through. The politics just isn't there, the money doesn't want it, and reality tends to slap such officials in the face until they say "uncle".
So where is the currency crisis going to come from?
The currency crisis comes from a collapsing economy that can't produce enough taxes to keep the army afield, pay interest on the debt and other "mandatory" expenditures.
http://seekingalpha.com/article/147420-dear-world-please-stop-lending-th...
"But the Politburo's spending plan won't be carried through. The politics just isn't there,"
Understand that you are suggesting that the U.S. will be forced to abandon its global empire, literally bring the army home from 120 countries, lose control of oil supplies and supply routes, admit that it cannot afford transfer payments (SS, Medicare, mortgage programs, etc); individual states will throw the dependency classes into the streets.
I agree that this will ultimately happen, but I merely contend that such a loss of power/empire will be resisted to the bitter end. The bitter end manifests as the end of the buying power of the currency. We will have martial law / rationing here before the unsustainability of the system is "admitted". Think "The Ring of Power".
It is important to philosophically invigorate the core of a political resistance movement before this happens. Being granted time and motivational examples for that is something we must thank Bernanke for.
I think that our underlying ecomomy was in much better shape after WWII. I personally believe our ecomomy is a bit like a shell. There is little manufacturing left and a lot of service industries that don't generate real economic wealth. I think the dollar is toast unless we start to rebuild a manufacturing base and get our debt under control, time will tell. Actually, I think it may be too late for the dollar and when the dollar pukes, we will get inflation because of the increased cost of imports. It seems very likely that the next generation will have a lower standard of living.
Good thing the gold bugs have the shiny stuff to save them under either deflationary or inflationary scenarios.
Yup..deflation bad for gold. In October 2008. Gold fell 30% along with the rest of the market.
Deflation is good for me, as it pertains to gold; means I can buy more of it before the currency collapse, when I will be glad I had the shiny stuff. Not gold bug here: Cracks me up how the gold bugs call every rise proof of gold wisdom and every fall proof of manipulation-conspiracy. I'm just practical, and when things fail, guns gold and grub will serve you better than funny munny.
In the latest GE earnings announcement, the CFO mentioned that they had benefited from DEFLATION.
At some point, if we don't turn into Japan we could see inflation. The default risk is also an interesting angle that could force inflation on all imports.
Is that necessarily true? In deflation the dollar should strengthen and commodities including gold may decline relative to the dollar.
Never happen. If enough goldbugs buy enough ammo and bug out bags, they can tilt the world on it's axis. Really!
There was no inflation in the 2002-2007 time frame either, going by CPI so theres that.
All this "no money velocity" thinking assume conditions today will persist well into the future. As soon as heads are turned another way and the go go euphoria returns (about 15% higher on the indices from here) and all that cash that is sitting is going to find something to do. Add in Trillions for bailouts, debt sales, and national health care and we have a nice devalutaion brew in the works. A stronger dollar will tank stock and that is not the plan by the Axis Powers of finance (FED/Treasury).
My 2 cents, or $2.00 in deflation and 0.0002 cents in hyperinflation!
You guys are not putting the pieces together becuase it seems this scheme has been going on awhile.
Bonds have duration and it looks like foreigners started moving down the curve. Have you ever noticed that these govt. spending bills just have a price tag and they fill in the details later? It's not by accident. If you can't convince foreign buyers, then you have to convince locals to spend money they don't have. So, the Fed lowered rates and keep them low (Greenspan), so Americans could rack up debt. The govt. dressed up this new debt and called it war(Iraq/Afghan), stimulus, health care, bailout, securitization of mortgages, credit cards, auto loans, Fannie/Freddie, AIG, etc. As long as the govt. can call it local debt. Now, how do we pay for it? Have no clue. BTW, Obama is just a salesman. If he works, great, if he doesn't, they'll find another puppet for their scheme. In the meantime, the clock is ticking in the bond market. Should be wild because it sounds like they can't move the debt to the govt. fast enough, without getting the country pissed off.
Yes, all of that is true, but It doesn't seem to be effective. Still deflating. Where are the helicopters?
Didn't I read that the pool of fiat-credit that was sloshing around and got us in this mess was about 70T? And of that 70T about, what, 40T of it's gone since summer 07? That still gives us plenty of unrelenting deflation--even with 23T thrown at it. Like you imply with the helicopter comment, there's a reason why the boys said they will use "all means necessary" to fight deflation. Too bad for the inflationists that "all means necessary" isn't enough. It's going to REQUIRE technical hyperinflation just to reach parity with the deflation before the end of the decade. Ain't gonna happen.
I didn't say it was a good plan. Ben's plan does assume Monetary and Fiscal cooperation. But then they started talk of firing him, so that might have been the last straw.
BTW, Barofsky and the $27T figure came out at a weird time with Bernanke on hill. Are they preparing the country for something?
The helicopters will never lift off. The term "inflation" is a red herring; debates about monetary policy are always framed around inflation/deflation, as if those things were the only things that mattered. When the Treasury market collapses, and I believe it will, you can call it any damned thing you want to. You can map many paths to get there, including the one we're on right now.
Bernanke is trapped. Print money = currency crisis. Fail to revive failing economy = ongoing loss of tax revenues = loss of national creditworthiness = currency crisis.
The problem is reality: there isn't enough goddamned real money left.
"The problem is reality: there isn't enough goddamned real money left."
...and there's only ever been the volume of two olympic swimming pools worth of the only other thing that easily affords an globally recognized real money. Every ounce you hold is one less ounce a CB or a national treasury has to prolong their game.
I am of the belief that we are in deflation now. I also think the pwers that be have yet to come to grips with that reality. It is when they do that the "money drop" will occur. Not there yet and the green shoot/Goldman S&P earnings double forcast will keep the point of recognition out in the future.
We are definitely in the midst of deflation now. Look at the amount of credit destroyed in the last two years. Look at wages globally. Look at commodity demand curves taking a toboggan ride. No question about it. Been taking shape in some form or another since summer 07. Interesting thing to notice (that Gary North clued me in on back then) is that the FED itself was actively deflating in I think it was August 2007.
The Fed is paying interest on reserves because they want banks to buy the Treasury notes flowing through the system this year. $800 billion in excess liquidity? Sounds like money designated for Treasury purchases. Then the Fed will "buy" (read: print money) to purchase the T-bills from the participating banks. It's a classic hyperinflationary situation. So banks are deleveraging on the complex financial products? Who cares? They get paid no matter what under this scheme and can begin buying up hard assets when the Treasury is done issuing debt.
The only thing the Fed doesn't know is that Medicare and Social Security are broke (don't assume they're that smart). So the Treasury will be issuing a mountain of debt in the next 4 years. There will be just enough time for banks to seize enough assets (which will look like a recovery in GDP) and the rest of the population figuring out what's going on for inflation to set in. By that time, you'll all be the highest income tax bracket. And that is what a crack-up boom looks like.
Probably a PR move inititated by their new x-enron lobbyist. "oh what a good privately held federal reserve corportation..they pay interest on all those mountains of reserves held in spv's and siv's" ha
You're almost correct.
The first part is spot on , banks will become the lender to the Treasury in a role reversal of 2008 and mop up all the UST issuance.
They will then sit on that paper as it gains in value/ holds its value relative to any other asset class due to the L shaped recession we have mapped out for the next 10 years +.
Mutual funds will then join the party a la Japan , as 401ks shift emphasis to wealth preservation .Bill Gross is correct. If you arent rich now , youre unlikely to become so in this lifetime. Its about staying rich , not getting rich. Think about the last 10 years. Morons were becomming very wealthy. It was TOO EASY to make money.
Thats over.
Japan lost AAA status after 13 STIMULUS PACKAGES since 1991. PUSHING ON A STRING. They had too much debt after a housing bubble and creating more HASNT WORKED.
The US is not Japan argument is fatally flawed. Because it is!
Japan's currency and bonds havent debased. The opposite.
Has anyone been to Japan recently?
Debt deflation - look at Japan's housing , stock and bond markets for where we are heading. Its not the end of the World , just the end of get rich quick.
"Deflation would continue in China, he said, with excess capacity forcing prices down"
http://www.theaustralian.news.com.au/business/story/0,28124,25810773-643,00.html
TD, this is a great article on China and Australia and Deflation etc...looks like there will be no inflation in those 2 places either...and no love lost between them!
Hong Kong-based Professor Huang, who also holds a chair at the ANU ( Australian National University), said: "The jobs we create in China by investing in infrastructure can't offset the jobs lost in the labour-intensive export sector."
Deflation would continue in China, he said, with excess capacity forcing prices down.
"The headline numbers will be good, but we won't have a very happy time within the Chinese economy because of micro-economic structural issues," he said. That includes the risk of asset bubbles, as in the share and property markets. "People will hope the US economy will recover and the export market will come back, and they can enjoy the good old times," he said.
"But if the export market returns as strong as it was two years ago, political problems will soon emerge, because China already supplies 8 per cent of global exports. It can't keep increasing its exports by 20 per cent every year."
The only alternatives for China, he said, would be the government initiating another massive industrial stimulus package -- "which is unlikely" -- or addressing structural problems, by stimulating consumption and providing households with greater economic security.
He said households' share of the economy had slumped from 52 per cent to 40 per cent or less in the past decade, with the corporate sector, led by state-owned companies, and the government increasing their share.
Professor Huang said the best way to boost individuals' benefits from China's rise would be to open up the services economy,just as the market in manufactured goods had already been liberalised."
Are these people serious?: "Fiscal policy is executing a program that is 180 degrees opposite from what it should be to stimulate the economy." Didn't they hear what Joe Biden said?: "We have to spend money to avoid going bankrupt." Somebody get Hoisington on the phone and tell them there's a new fiscal sheriff in town.
Also, when is the Ultra-short Joe Biden etf to be unveiled? I want an allotment.
Fellow Zerohedgers... While the deflation argument seems most compelling to me, I've noticed that many street pundits are recently advancing the position that this recession is over based on the fact that productive capacity dropped off a cliff and now we will start to see positive (albeit weak) comparisons quarter over quarter. In my mind, these positive comparisons are meaningless given the currently rich level of most stocks and the S&P500. Does anyone have any historical context for how markets react to positive growth when it is still miserably low and what would be a reasonable multiple to put on such growth?
Ok so when CNBC keeps saying over and over again the stock market looks 6 months in advance does this mean we're ready to fall off a cliff like the stockmarket did in February?
makes sense to me...
you know since CNBC is always right on their calls
You csannot credibly analyze the risks of system breakdown ( dollar collapse/hyperinflation) by using a model of how the system works when healthy!!
The type of macro models used in the Hoisington article are fine to calculate the normal cyclical ups and downs in normal times.
Kind of like prescribing a good balaced diet and exercise to a person sufferring from cancer.