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Not Just "Inflation Versus Deflation" ... We've Got "MixedFlation" and "ExportFlation"
Many people have made persuasive arguments for inflation.
See, for example, my roundup from 2009, and Gonzolo Lira's recent essay arguing
that there is no political will to raise interest rates, and so
commodities have become the safe haven investment (replacing bonds).
Many others have made persuasive arguments for deflation.
See, for example, my post from 2009, and Charles Hugh Smith's recent essay arguing that mild deflation is good for the powers-that-be, and so they will make it happen (part II).
But perhaps debates about inflation and deflation paint with too broad a brush, or too narrow a focus ...
Too
broad a brush because the economy is not a monolith ... different asset
classes can move in different directions at the same time.
Too narrow a focus because you can't analyze what's happening in the U.S. in a vacuum in a highly global economy.
MixedFlation
As I noted in 2008:
Some people think that some prices will go up at the same time that others go down.
For example, Dominic Frisby writes:
Are
we going to see rising prices or falling prices? Of course, it depends
on the asset class – and in what currency you are measuring.
***
Falling
prices in assets associated with debt - houses and financial stocks –
and rising prices in things which you buy with cash – food, energy and
some imported goods.Adam Hamilton of Zeal LLC agrees:
Anything
typically financed by debt is likely to see its prices plunge
dramatically, like houses and cars, as the ongoing Great Bear bust
continues to destroy the gross excesses of debt via higher long rates.
Conversely, anything not typically ‘paid for’ with debt, including
groceries and general living expenses, is almost certain to rise in the
coming years. We are staring down a brutal environment of widespread
inflation marked by various sectors witnessing falling prices as debt
leverage implodes.So we may very well experience both inflation and deflation.
I wrote in July 2009:
You
know from experience that when you're in a national park, movie
theater or some other contained place, prices are higher than
elsewhere.
Basically, the stores in such places know you
can't go somewhere else, so they can charge you what I call "got you"
prices. In other words, you're a captive buyer, and they've "got you".
I've noticed the same thing with health care costs. My family's health care premiums increased 6% last year - on top of the 6% increase the year before.
This
is "got you" prices. The health care industry knows that Americans
are desperate for health care, and that if they raise prices, people
will pay.
I've previously pointed out
that inflation versus deflation is not necessarily an all-or-nothing
proposition: we can have inflation in some asset classes and deflation
in others.
So my current theory is that we will have deflation
for some time in most asset classes, but inflation in the "got you"
classes of basic necessities that everyone needs - food, energy, and
health care.
In a tough economy, companies that can squeeze broke consumers for more money will do so
I reported in September 2010:
Jeffrey Saut - Chief Investment Strategist and Managing Director of Equity Research at Raymond James - is now confirming that theory:
Inflation,
or deflation, the argument rages; yet on CNBC last Thursday I opined
that we are currently experiencing both... It appears to me that the
country’s top quintile of wage-earners (the folks with the most assets)
are experiencing deflation as their home prices have collapsed, their
401K’s are substantially below where they were in October 2007, their
bonuses have been “whacked,” and the list goes on.Meanwhile, the
lower-income households are experiencing inflation with their heath care
costs rising, food prices escalating, insurance premiums climbing,
etc.Saut thinks inflation will eventually win out:
Our
“bet” is that the inflationary forces will eventually win out because
that’s the way it has always played since the Great Depression.But
that is not controversial. Indeed, even the greatest advocates of the
deflation theory say we may eventually get inflation. For example,
David Rosenberg says that deflationary periods can last years before inflation kicks in.
Well-known financial analyst Dian L. Chu wrote in June 2010:
Despite
the seemingly tame headline inflation numbers, consumers never seem to
see price declines in certain categories like education and health.
For instance, prescription drug inflation escalated to 5% from less
than 3% in 2007 and 2008.So, it is pretty obvious what we have here--biflation--instead of deflation. Biflation is a state of the economy where inflation and deflation occur simultaneously. (Chart 1)
The
price increase of commodities is caused by the increased money flow
(via loose monetary policy) chasing them. On the other hand, the growth
of economy is tempered with high unemployment and decreasing purchasing
power. This has resulted in a greater amount of money directed toward
essential items (inflation) and away from non-essential items and
things required credit to buy such as house and cars (deflation).***
Producer Price Index (PPI) for finished goods was up 5.5% year-over-year. Further up the supply chain, signs of inflation are even more worrisome.
The PPI for intermediate goods increased 8.6% year-over-year in April, while core PPI for crude materials, excluding food and energy, shot up 60% year-over-year in April (Chart 2).
Meanwhile,
the Purchasing Manager Index (PMI) report shows manufacturing sector
expanded in May for the 10th consecutive month, and the overall economy
grew for the 13th consecutive month. Backlogs are also increasing
which further points to the inflationary pressure in the pipeline.***
While
all of that money Federal Reserve pumped into the system could in
theory cause inflation ... weak banks and slack in the economy would
weigh against that. Indeed, it is likely that crude material price
increases could begin to move down the supply chain; however, end
markets are still too weak to allow a full price increase.So, in
the near term, biflation could be around through possibly 2012 with
pockets of inflation seen in certain sectors such as energy and
feedstock chemicals, and deflation/low inflation in other sectors,
netted to a moderate headline inflation number.
I have seen many reports of rising food, commodity, energy and healthcare costs. But housing is double-dipping, and wages are declining.
So despite what die-hard inflationists or deflationists might say (and I respect both camps), things are actually mixed.
Moreover, as I pointed out last year:
Given that speculators drove up the price of oil last year,
it is possible that - especially in a stagnant economy - speculators
could drive up the prices of some asset classes and drive others down.
And see this.
ExportFlation
The
Fed's easy money policies (including, but not limited to quantitative
easing), asset purchases and other policies are sending a lot of hot money flows abroad.
In fact, America has been massively exporting inflation.
As Bloomberg noted last October:
China
renewed an attack on quantitative easing, citing the risk of increased
prices in emerging economies, a day after the Group of 20 nations said
the markets can adopt regulatory steps to cope.
China “doesn’t
support” the monetary easing that causes “imported” inflation in
developing countries, Commerce Minister Chen Deming told a forum today
in Macau, a Chinese special autonomous region. The capital inflows
increase the risk of “asset bubbles,” Jin Zhongxia, deputy director
general of the international department at the People’s Bank of China,
said at the same forum.
***
Major reserve-currency issuing
countries excessively print money to get out of their own economic
difficulties, posing a policy dilemma for emerging economies,” Jin said
in Macau today, without naming any countries. “That will impose greater
pressure on capital inflows, bigger bubbles in asset markets and
inflationary pressure.” Capital flows into emerging markets are running
at $575 billion a year, 20 percent higher than before the world
financial crisis, Goldman Sachs Group Inc. said in September.
***
Countries
from Brazil and Indonesia to South Korea imposed restrictions on
investment inflows aimed at defusing the danger of hot money, or capital
seeking short-term gains. The G-20 called on international regulators
to compile a report on best practices on financial-security policies,
including capital-flow tools.
So not only some asset
classes rising and some declining in America, but a portion of the
effects from American monetary policies are felt abroad, instead of within the U.S.
The BRIC governments, apparently, are not very happy about America's exported inflation. As Phoenix Capital Research wrote in December:
Over
the last few months I’ve noted repeatedly that THE key issue for the
financial markets is the ongoing tension building between the Fed’s
pro-inflation policy and China’s anti-inflation policy.
***
China’s
not the only one. Both Russia and Brazil have recently entered into the
“anti-inflation fray” as the below stories attest ....
***
In
plain terms, our esteemed Fed Chairman Ben Bernanke is about to find
his policies running face first into a BRIC wall. He’s been exporting
inflation abroad to the emerging markets all the while claiming it
doesn’t exist. With growing civil unrest due to soaring food and energy
prices the emerging markets are now fighting back [by raising interest
rates].
Andy Xie agrees,
arguing that 2011 will be a show-down between China's efforts to curb
it's inflation and America's efforts to export it's inflation.
Indeed, a prominent Chinese pro-democracy activist says that inflation will cause the collapse of the current Chinese regime unless it is put in check.
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yes, simply put a smash-and-grab of the treasury. The hottest of the stolen money finds its way to china, and blows it up. Is that what Blankfein meant by gods work?
Interesting: looks like some threats are being made here similar to the anthrax letters after 911
http://www.guardian.co.uk/world/2011/jan/06/two-packages-maryland-explos...
.
Confiscaflation, manipuflation, ponziflation, propagandaflation, and big hat, no cattle-flation. Just calling it looting seems simpler.
Deflating assets and inflating liabilities.
Assets only deflate just so much and then hit bottom.
Liabilities inflate to the upside with no top. Next stop - hyperinflation. Good Bye!
Yep, deflation in all the wrong places, and inflation in all the wrong places. The deflation hook was set a while ago, and we know that fish cannot be cut loose, so it's here to stay. The genie is out of the bottle, no turning back, just an issue of time now.
I am the center of my world, and in my world prices are rising...I pay more for gas, I pay more for food, I get less value for my dollar in many things these days....Price inflation certainly exists, depending on how you define "inflation" itself it can be decreasing or increasing (money supply + credit, etc)....
I believe someone around here has previously labeled this and related phenomena as biflation.
yes somone did and I thought they made a good argument great term 'biflation' something to the effect that what you have is going down in value e.g. houses and flat panel TeeVees whilst what you need or must have is going up e.g. taxes and bread
+1 Bi-
The US has mandated Ben Bernanke to starve part of the rest of the world in order to loosen them up. An empty belly offers less resistance. Blackmail by food. They will yield their resources easilier.
So keep an eye on long contracts, the US is going to snatch good deals. US style business. Nothing new.
Ben's expertise will show in the way he manages to cover the US tracks. Good luck in trying to prove the US monetary policy causes inflation.