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The Problem With Rosie On Inflation
From The Daily Capitalist
Before I start I wish to say that I highly respect David Rosenberg at Gluskin Sheff, one of the few mainstream economists to call the crash, and whose observations about the markets are always worth reading.
This morning he came out with a long-term analysis of inflation which I don't think is right. I urge you to read his commentary, below, but in general he sees one to two years of continuing "deflationary" pressure that favors the bond market and he says "inflation" will be at zero. He then see the beginning of "inflation" as the result of war and the need of government to fund it. The result, he says, will be high inflation and perhaps hyperinflation.
While you would think as a fellow doom and gloomer I would hop on his bandwagon, but for the most part I think Rosenberg's analysis of the forces behind inflation and deflation are wrong. He uses historical analysis to prove his point, but he doesn't explain the underlying factors that cause inflation or deflation, which, as I have discussed before, have to do with increases and decreases of money supply by the Fed.
He assumes that Boomers will cut back on consumption and increase savings. I agree and I went into detail on that in my Megatrends and other articles. He says that will result in "deflation." But deflation is a monetary phenomenon, not a savings problem or lack of consumption problem. We will see deflation because money supply is declining, and it has been declining since late last year.
Rosenberg conflates increases and decreases in prices with inflation and deflation.
Let's use hypotheticals to analyze this.
Assume we have an economy with a fixed supply on money.
Hypo 1: Assume that from technological advances, the cost of consumer goods decline. That is, people spend less on goods than they previously did. Rosenberg assumes that is deflation. In fact it is a supply and demand factor resulting from economic competition. It doesn't result in a decline of consumer spending. Since consumers have more money to spend on goods because of technological efficiencies they will spend more and the economy expands.
Hypo 2: Assume that Boomers, formerly big spenders and a significant part of the consumer market, now decide to cut back spending and save more. Retailers will see sales decline. They will lay off workers, have sales to reduce inventory, and hope for the best. It would be safe to say that retail goods will decline in price until supply meets demand. That's not deflation; it is a supply-demand issue.
You have to ask: what happened to the money Boomers didn't spend? Was it just locked up in the bank? No.
By saving, Boomers are saying, "We don't wish to buy stuff right now and we will save our money for future consumption." They plow money into savings accounts. As a result, interest rates decline because of the influx of Boomer cash into banks. Since consumer goods aren't selling, that sector of the economy won't borrow. What happens is that the manufacturers of industrial production goods, or goods that take a long time to make (such as homes), see the opportunity and borrow at the cheaper rate. They spend the money on commodities, machinery, technology, and labor. As the money spreads through the economy, eventually, consumption picks up, manufacturers and retailers of consumer goods see that and order consumer goods. Money is diverted from industrial production to consumer production. This is how recoveries begin. Some prices increase because of demand, others don't. It's not inflation. In inflation all prices rise over time because new money, money created out of thin air, is pumped into the economy.
Hypo 3: Assume all of a sudden everyone has $200 in their pockets rather than $100, does that make us wealthier? No. The amount of goods hasn't changed but we have more pieces of paper chasing them. This is just an increase in money supply. No new wealth was created. One of the results of an increase in money supply (inflation) is that prices go up. If the government could make us wealthy this way, why not just print money? Who needs to be productive? Price increases are not the only result of inflation; many things occur that distort the economy and lead to booms and busts.
Rosenberg associates our current "deflation", or as he sees it, declining prices, with lack of demand. He never mentions money supply. He assumes that we had low "inflation" in the last several decades because globalization and technology reduced production costs and reduced prices. That is like saying that since computers are dirt cheap today because of competition, that is deflation. No, it is a factor of supply and demand.
He then says that "deflation" will end when the government sees the need to fund its wartime expenditures. He says, "Increased credit demands to fund the war effort combined with the drop in productivity that goes along with blowing everything up is an inflationary stew." He then says that, as families and the government rebuild their balance sheets, then you'll have inflation.
I am not sure what he means here. If the government borrows more, there is a crowding out effect which makes credit more expensive for businesses. That would make it more difficult for the economy to expand. But this has nothing to do with inflation. According to his theory this would all lead to less consumer demand because of the resulting decline in GDP and that would be "deflationary." This is a Keynesian view of the economy.
When you do have inflation is when the government prints money to pay for their expenditures because they feel they can't tax folks more without getting voted out. The influx of fiat money is inflation. It doesn't have to be war. It could be the massive entitlement and spending programs recently created by the Bush and Obama Administrations. They borrow to pay for it, but taxes will pay it back. They favor inflation because it makes debt cheaper.
The nice thing about Rosenberg is, that despite his errors, his timing on deflation/inflation might be pretty good. Money supply is now declining which is deflation. In my Inflation-Deflation article, I suggest that since money supply leads the economy by 6 to 9 months, we'll have deflation and deleveraging will continue. When the Fed is convinced that GDP is declining, then they will pull out the stops and hit the "print" button through Open Market Operations which eventually will lead to an increased money supply and inflation. This monetary inflation will take another 6 to 9 months to impact the economy. So he may be right for all the wrong reasons.
It's rather disappointing to see this kind of analysis from an economist I admire and follow.
Here is his article: Breakfast with Dave, July 28 , 2010. Tyler Durden excerpts Rosenberg's article here.
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you are all over analyzing things. inflation/deflation is much simpler and more on point with econophile.
Inflation is NOT rising prices. Rising prices are a result of INFLATION. Rising wages is the only thing that leads to inflation. Hence....rising money supply. during the inflation years of 1990-2005 we saw rising wages, but not in the traditional sense. Instead of employers increasing your wages, the banks did. Everyone was borrowing and utilizing credit, the not so regarded form of money everyone seems to forget about. We can just look at is as WEALTH. rising wealth or the percieved wealth we had is what led to the 15 years of inflation we saw from 1990 to 2005. THE PROBLEM with that form of inflation is people are idiots and just like with everything in economics, to uch excess of anything is a BAD THING. For as we see the "wealth bubble" grow, there is no way to slowly let the air out. THere is no soft landing... IT IS A POP and and it leaves a hole. As asset prices fell the level of our debts remained the same or increased, depepnding on how we paid for things in the past with the promise of future payments. So, when we thought we were getting wealthier from our rising 401K's and our rising stock portfolios and our rising home values, all we were doing were digging bigger and bigger holes. Well, the 401K's are falling, the stock portfolios were beat up and the house have cratered. BUT...our debts are still there. Does anyone still have the ability to pay them??? Can we service them??? When the cash flow stops, the game is up.
Deflation is not falling prices, falling prices is a result of deflation. Falling prices are a function of lack of demand. If you think about, lowering prices should be a function of rising demand., but it is not. Falling prices is the attempt of the market to find a break even point. Lack of demand creates a temporary force of over supply. Demand can not correct until the excess of supply is worked through the system (trouble for the shadow inventory housing market out there). Excess invnetory can not be worked through without a pick up in demand, or prices so low people just have to buy. The lack of money in the system prevents peopel from buying goods just to own them. This is a very dangerous spiral that no one wants to see happen.
For a long time, I have been saying that despite my view on Ben Bernanke, he is a pretty smart guy and the deflation aspect is the view he has been taking. Everyone says he is an expert on the Depression. Who better to realize that a Government control deflationary depression would be the easiest thing to manage. With declining prices you can keep the masses from rioting, all the while you print as much money as it takes to stop the IMPLOSION of the economy. Print just enough to keep it going and HOPE it corrects itself. The only problem is any deflationary issue is not self correcting. You need outside forces to fix it for you. The CONSUMER has to be part of the fix. That is where the government comes iin and who better than Barack Hussein Obama to do that. Now that they own General Motors, have taken over the healthcare programs and have made their first move in takng over the FINANCIAL industry (yes, they will try to take that over too) they can force you to upgrade you automobile by changing environmental laws. They can force you to spend money on health insurance. They can force you to buy healthy foods to meet government imposed health criteria. Their favorite is the Green industry. For the most part, they are owned and subsidiezed by the democratic party. They can force EVERYONE to change their consumption habits, their spending habits and their lifestyles just by creating legislature to do it. The Government can effectively control how you spend, what you spend adn where you spend it. The financial industry is next. They will soon be pushing more loans on people, putting them ever deeper into debt, but it will help the economy prosper as people invariable will spend it.
WOW, how did I go from inflation/deflation to government conspiracies? Must be getting close to Friday.
So what you are saying is that BB is secretely harboring deflation targets.. I agree that if he were to discuss this openly, the financial system would have him assassinated. Actually I would consider deflation targets to be a sane way to operate once one accepts that there is nowhere to go but down.. better with a fiat pumped parachute, I suppose, than an anvil of heard driven fear. Personally I think a full on collapse would be nice to avoid if possible. But one must accept that the brakes may fail and we will still end up in the ditch. Kind of the way BP has been handling the oil volcano.. While they have a number of theories as to what is going on they are faced with a complex and novel situation... the shit is hitting the fan while everyone is watching in real time. Financial Blogs are the ROVs of the Credit Sinkhole Distaster. That kind of scrutiny leads to a lot of impetuous mistakes.
I agree with most of what you wrote, but rising wages are not the "only" way to get to inflation. Any mechanism that provides a conduit for new money entering the economy and then being spent will work.
If the Federal Government bails out the states, that would be a mechanism that would create new money/credit and get it spent in a hurry.
Get spent in what way? more unemployment wages? More benefits for workers?
Inflation is about sustainable pricing. How would this justify rising, let alone sustaining prices???
"Rising wages is the only thing that leads to inflation."
"WOW, how did I go from inflation/deflation to government conspiracies?"
Hypo 1: Assume that from technological advances, the cost of consumer goods decline. That is, people spend less on goods than they previously did. Rosenberg assumes that is deflation. In fact it is a supply and demand factor resulting from economic competition. It doesn't result in a decline of consumer spending. Since consumers have more money to spend on goods because of technological efficiencies they will spend more and the economy expands.
Your own hypo (in an otherwise well-considered article), which is a mish-mash of concepts, illustrates the difficulties, illustrates the problems we are all having trying to dope out what's really going on, and what can happen. Consider: lowering prices because of technological efficiencies (reducing producer cost) is a different animal than lowering prices because of economic competition. The producer, whose costs are lowered because of efficiencies, doesn't necessarily pass these costs savings to consumers. And economic competition could force manufacturers to accept lower profit margins without technological efficiencies. And will manufacturers simply limit supplies for various and sundry reasons? And demand doesn't always follow supply; what about the AAPL factor (gotta have despite price)? Finally, if I buy my newest techy thing cheap, I may save more, rather than spend the savings.
The analytic task is of huge difficulty.
Thank you for your comment.
1. Read it carefully, I did say competition.
2. I used technology as an example, because that's what Rosenberg does in his commentary.
Hey there Eco...
IMO, it started a LOOOOONG time ago. Where you called Rosie "shallow", I too find the theories of so many "shallow" due to their inability to get out of the historic box of singular camps such as inflation/deflation/stagflation/stagdeflation/etc...
The problem with unique phnomenon is... you can't use anything historic to define it.
A long time ago, I coined this phenomenon "Evaporflation" and wrote about it on Roubinis site. (http://www.roubini.com/us-monitor/256056/evaporflation)
I still believe this holds as true today as the vacuum we've created does not allow true price discovery to exist (S&D), nor can the vacuum allow us to gage true supply of existing cr/db due to years of compounding the errors of iflation/deflation. This has led to massive leverage in the concept of money supply, where velocity compounds gains and losses in overall supply the way a leveraged broker would take gains and losses.
When the Fed “hits the print button”, they are still creating less then 5% of the US money supply. The reason they can just add $700,000,000,000.00 in one fail swoop without doing any inflationary damage is because that credit is just going to fill the void/gap where money/credit was believed to be.
It’s too long to get into on a post… read the article I wrote like 2 years ago. It still holds true today.
If the Roubini site is blocked you can read it on Seeking Alpha right here:
http://seekingalpha.com/article/127149-evaporflation-vaporflation-and-condenflation
All the best, MA/RH
I don't know about you guys but I have been experiencing around 5% per year inflation in everything I buy since the 90s.
One exception would be housing which rocketed by 200% or 300% then dropped by half, leaving it still much higher than it started, with an averge inflation of 5% or more.
So, when everything goes up steadily except for one or 2 thing that goes up even more then drops slightly, how do you make "deflation" out of that?
Unless I am grossly mistaken supply and demand continue to function under deflation.. Also I believe we are currently experiencing disinflation or low inflation... credit flows are slowing, jobs are being lost and not replaced which is beginning to exert pressure on prime mortgages foreclosures (http://www.reuters.com/article/idUSN2910144320100729) which will further hammer the housing market...it is indeed the paradox of thrift. The economy as a whole is shrinking even though it can be relatively strong in certain regions and industries... When I first saw Little Orphan Annie as a kid, I had a very hard time understanding how Daddy Warbucks could be so dang wealthy when Annie was so dang po'.
Give it time my friend. These are major changes. If you look at a chart of the Nikkei and Japanese real estate, we are near the peak right now. Like you said, this inflationary trend has been around for a long time. It's a major trend that will take time to reverse.
Price increases are not necessarily inflation. Price may increase or decrease due to supply and demand as well - classic economics. You have to separate normal supply and demand fluctuations out to see if there is a price effect from monetary inflation or monetary deflation and most people never bother to do that, just as you have not, resulting in an assumption that any price increase is inflation.
For example, as the easy petroleum has come to the end of its rope while the Indian and Chinese economies were growing by leaps and bounds, we saw oil go from $10 per barrel in 1999 to $147 per barrel in 2007. That was far less an effect of monetary inflation and just a basic issue with supply and demand. And because oil is so fundamental to everything we do (trucking, transportation, plastics, medicine, etc.) any price increase in oil caused a price increase in any related product (which is almost all of them).
This was not primarily inflation. It was the market setting price based on supply and demand. The collapse of oil in 2008-2009 was due to the collapse of demand. Supply had risen to 86.5 million BPD but demand collapsed to 83.5 million BPD. People argue that a small drop in demand like that should not produce large swings in price but they forget that all products are priced at the margin, at the cost of the most expensive unit to produce. So Saudi Arabia, which has production costs perhaps below $20 per barrel can continue producing while the tar sands in Canada, which needed prices in somewhere north of $60 per barrel to be profitable, had to contract. During this contraction, prices overshoot (this happens often so think of what this means for real deflationary pressures) and went clear back down to $30 per barrel, yet now they are back at $75 per barrel, give or take a few dollars.
Before you can discuss inflation and deflation, you must separate them from price swings, which may be caused by inflation or deflation but may also be caused by basic changes in supply or demand. Failure to separate those components, leaves you talking about just price, which is exactly what the Federal Reserve wants so you won't think about the man behind the curtain!
Falling into the price trap is falling into Bernanke's house of mirrors, where he can continue to confuse you and others by talking about price and not about how the Fed itself has failed to perform its core legal mandate - to control credit aggregates. Instead the Fed has historically grown credit aggregates faster than both population and GDP. This is what has caused inflation. And why does the Fed do this? Because it allows the Fed to impose a hidden inflation tax on the world of whatever the inflation rate actually is. And it imposed this tax on the world to help fund the deficit spending of the US government.
Essential inflation with debt asset deflation.
Assets correct the amount they were financed...
Exactly! Look at Shadow Stats M3 (http://www.shadowstats.com/alternate_data/money-supply-charts) and you will see the overall money supply is down from $14.6 trillion to $13.8 trillion. Meanwhile inflation (http://www.shadowstats.com/alternate_data/inflation-charts) is ocillatiing between 5% and 10%. Maybe it's the conventional wisdom of the money supply to market lag-time. But to me, the picture looks more complex than current economic theory.
http://theautomaticearth.blogspot.com/2010/07/july-29-2010-deflation-rev...
Stoneleigh: The Automatic Earth has been predicting a devastating deflationary period for as long as we've been in existence, and prior to that we did so at The Oil Drum Canada. We have always and consistently said that worrying about inflation in the next few years is completely misguided.
The debt deflation that is already underway will be so destructive to our lives and societies that we must be aware of what is coming in the short term and what we can do to prepare for it, instead of worrying about a possible inflationary period that may or may not follow afterwards.
The deflation issue has recently become much more topical, as the idea is spreading now that the larger trend in the markets has turned down. It is time to review the mechanism and rationale for deflation, given that the mainstream press is suddenly all over it. Like for instance John Hilsenrath in the Wall Street Journal:
Next, Don Lee has the following in the Los Angeles Times:
Ambrose Evans-Pritchard at The Telegraph has changed his tune significantly in the last month. In June he appeared to believe that, while the situation is dire, the Fed has the tools to combat, and prevent, deflation:
More recently he has been sounding much more alarmed:
And Fauxbel -Fake Nobel- laureate Paul Krugman produces the term of the day:
which is part of this tortuous (pretend-) academic exercise:
Stoneleigh: It is surprising how many commenters, many of whom have for the longest time dismissed the possibility of deflation, often in a smugly superior manner, are ignorant of what it actually is. They look at Japan and ask how a country can become mired in a long and drawn-out deflation, and why the Japanese experience is so different from the rapid and accelerating deflationary spiral of the Great Depression.
They assume that central bankers possess the tools to prevent deflation, which suggests that they think those in control in other times or places must simply be too stupid to employ them. If it were so simple to prevent deflation then it would never have occurred anywhere, and yet it has.
Many persist in viewing deflation as a price phenomenon, rather than as the monetary phenomenon it always is. They cling to the notion of the fundamentals driving the credit markets, and then wonder why it is impossible to make accurate predictions. In short, the causation runs the other way. The availability of credit drives the real economy, because credit expansions are Ponzi schemes that generate large swings of positive-feedback (self-fulfilling prophecies) in both directions. It is only the context and scale that are different.
Japan's experience of deflation has been blunted, so far, by the enormous quantity of money that they had available to burn through, which enabled them to put off addressing the bad debt in their banking system, and by the availability of a booming global economy, which allowed them to generate wealth from exporting goods to consumer societies. We do not have these luxuries. In place of a vast pile of money, we have a vast sinkhole of debt at every level - personal, corporate, governmental.
We will not have the ability to export, partly because we produce very little of value, but also because the global market will not have the purchasing power to allow the export model to survive in any case. We will be fully exposed in the short term to the logic of our credit expansion business model, which creates primarily virtual wealth, whereas Japan was not. We will resemble Argentina (only worse), not Japan.
It is not that deflation is poorly understood, except by the mainstream, which unfortunately includes most economists. There are very clear and comprehensive explanations available for what deflation is and therefore why it is inevitable. We here at TAE have consistently, since our inception, pointed out the mechanism behind this critical aspect of our future. See for instance At the Top of the Great Pyramid, on the nature and critical importance of Ponzi dynamics, or The Big Picture According to TAE.
We have pointed out that credit expansion creates multiple and mutually-exclusive claims to the same pieces of underlying wealth-pie, thereby creating a fictitious wealth that will implode once people realize its existence and reality. Deflation is the chaotic elimination of excess claims to underlying real wealth - the collapse of a money supply that has come to be dominated by ephemeral credit and debt.
For those who are interested, one of the most concise formulations of inflation and deflation has been available for many years in the form of JK Galbraith's A Short History of Financial Euphoria, a history of the periodic rediscovery of leverage (and the consequences thereof) written in 1990. It is short, very clear and readable, and highly recommended. Galbraith points out that financial innovation has led to the formation of many bubbles throughout history, and that the collapse of the unpayable debt thereby created, which is deflation by definition, always follows.
Our current credit expansion is different only in scale, in quantity, not in quality, from what has happened time and time again in human history.
Robert Prechter, author of Conquer the Crash (2002), has been explaining deflation to anyone who would listen for many years.
(Prechter has a free e-book on deflation available (free registration required) here).
Investment analyst John Mauldin, among others, has recently started to view deflation as a threat, even though he doesn't appear to understand exactly why he should:
Stoneleigh: The role of credit is not clear here in this excerpt. Inflation is the expansion of the supply of money and credit versus available goods and services. Some 95% (or more) of our money supply is credit, and by no means all of it was created by any central bank. There have been numerous engines of credit expansion during the mania years - fractional reserve banking, the whittling away of reserve requirements, lack of attention paid to credit-worthiness, securitization, derivatives, the development of the shadow banking system, conflict-of-interest at the ratings agencies, fraud etc. When the all-inclusive credit Ponzi scheme crashes - meaning that the overwhelming supply of virtual wealth disappears and we are left with only real wealth - we will have insufficient money to run our global economy.
When the money supply is inadequate, we will be trying to do the equivalent of running a car with the oil light on, which is to say that we will be trying to run an economy with insufficient lubricant in the engine. Money is the lubricant in the engine of the economy in the same way that oil is the lubricant in the engine of a car. Without enough lubricant, the engine will seize up, and then it will not be possible o connect buyers and sellers purely for want of money, exactly as happened in the Great Depression.
The credit contraction we are seeing is an early warning signal for the real economy. Since the large-scale trend change of late April (counter-trend rallies not withstanding), we are witnessing a change of perspective among the commentators, reflecting a loss of confidence and increased fear. Confidence IS liquidity in a very real sense, and as the contagion of fear spreads, liquidity will disappear. The suspension of disbelief that the long rally brought is over, and that will lead to the next phase of the on-going liquidity crunch.
Some commentators do understand at least part of where we are going and why, like Max Keiser:
Stoneleigh: Extend and pretend cannot persist forever. There'll come a time when that proverbial kid will holler: "He has no clothes on!". At some point we will see investors trying to sell distressed assets, and then we will realize what they are actually worth (i.e. what someone will actually pay for them). When we see that they are worth pennies on the dollar, and that whole asset classes need to be repriced overnight, we will see the reality of deflation. That, almost at a stroke, will mark the destruction of the virtual wealth created during the long expansion years.
"In place of a vast pile of money, we have a vast sinkhole of debt at every level - personal, corporate, governmental."
Good luck re-inflating this sinkhole !
True deflation under a purely fiat currency regime such as that under which we labor today is nothing more than a myth and a lie, and has not one historical precedent. Stop falling for the self-serving propaganda of the power elite!
China?
That big sucking sound is China "bunging up" the works. That extra printed money just ends up in Chinese FX reserves (via US purchases of imports and interest payments). China's refusal to float its currency, and its continued expansion of FX reserves is seriously distorting the adjutsment mechanism usually apparent in an economy. Leave China out of the equation and you are bound to get the wrong results.
We will see higher prices through Chinese import prices (at WalMart, the dollar store, and the grocery store) and Chinese induced inflation (raw materials and oil).
A decline in the US dollar exchange rate is a requirement for any healing, as painful as it may be, of the US economy - but China stands in the way. The alternative path of higher US interest rates also seems impossible, so for now nothing gets better.
I think Rosie understands perfectly well all that econophile believes he doesn't. Econophile sounds like he majored in Econ, class of 2009
the words above are not econophile's (read the fine print, it's a cut and paste job from another website)
Econofile, thanks for the link to the Daily Capitalist article. Next time though, instead of cutting and pasting why not just post the link and save some pixels. Better still why not write something original or at least provide some commentary.
(actually this is the first time I have ever clicked on one of your "contributor articles" so maybe cutting and pasting is what you do)
http://dailycapitalist.com/2010/07/28/the-problem-with-rosie-on-inflatio...
The Daily Capitalist is my blog.
This article's critique of Rosenberg's thinking is itself highly simplistic and reductionist.
Nowhere in Rosie's article did I see evidence that he is unaware of the forces Econophile discusses. He is merely taking a much broader view, which is appropriate in a brief, summary article on such enormous historical trends. It is Econophile's petty criticisms which sound parochial and limited, by comparison.
Far from finding it difficult to read, verbose, and in need of editing (by half, as one poster suggested), I found it scintillating. Indeed, I would've enjoyed reading twice as much...
I wonder at those who think deflation could only last a couple of years.
First of all, it is in the nature of government to try and intervene (in this case, in that which they themselves have created), and thus prolong the pain.
And in two years of even initially moderate deflation, the damage in terms of defaulting debt, in our debt saturated reality, would become self-sustaining, and severe. The resultant loss of confidence in the credit in general would produce a societal trend that will take years to burn out.
Further, such an environment would make the issuance of fiat credit (as opposed to FRNs) moot, as the markets would devalue them (and their like) as fast as they were produced, limiting money supply creation to the speed of the actual presses (= WAY too slow).
Personally, I would Love to see the sort of severe but brief rebalancing of demand (think 1920-21) that the Fed tries so hard to avoid. A memorable pain, safely in our rear view mirror, would be just the spanking needed. But I just don't see it happening.
Government the only fiduciary that can take an ordinary recession and turn it into a depression....
Ron Paul
Modern situation in economy is not a matter of "deflation or inflation" or "money supply". It is a matter of EXISTANCE of USA and Europe Union.
current powers are doing everything by the book, it seems; the book called How To Completely Destroy The United States of America
Also,
You dont mention anything about the private debt to GDP ratio. Common sense says that there's not much - if any - carrying additional debt capacity left for the consumer. The increase in consumtion over the last decade was none other that pulling forward demand from the future. Household debt increased while real incomes were mostly flat. This is also deflationary.
"But deflation is a monetary phenomenon, not a savings problem or lack of consumption problem. We will see deflation because money supply is declining, and it has been declining since late last year.".
Wrong. Or more accurately, only half right. You are ignoring the velocity of money variable. If Helicopter Ben prints $100 trillion and gives it to me, but I hide that money in my garage without spending a dime, will that cause inflation? No. New monetary supply was created, but that money isn't circulating and thus has a velocity of 0, which means it will not affect prices one bit. Only if I go on a spending spree will that money circulate and affect prices.
Increased saving and lack of consumption are the equivalent of me hiding the cash in my garage. You can print all the money in the world, but if that money is hoarded rather than chasing goods, you will still see deflationary pressures on the price of those goods. If yesterday a widget cost $2 and today it costs $1.70, that is deflation (money more valuable in relation to goods) regardless of how much money exists.
Increased savings would not take money out of circulation if the savers put it in the bank.
The bank lends out the money putting it back in circulation. If the borrowers use the money wisely it will increase output and increase the wealth of the country.
This is how Japan beat our brains out for so many years, by saving money and plowing it back into their economy. It's the same way we beat everyone else's brains out in the late 19th and early 20th century, by saving and investing in the latest technology.
Only short sighted nitwits believe consumer spending is the secret to a strong economy.
Well the savers may put money in the bank,but in order for those banks to lend them out, they need to find those consumers/businesses that are able/willing to borrow.
In today's age businesses are awash with cash $1.8 trillion and can't do anything with them because tehre's no more room for the consumer to increase debt....
"The bank lends out the money putting it back in circulation."
Not these days, nor corporations with $2 T cash stashed overseas either...
Thing is, velocity is potentially very volatile. You may stash that trillion dollars in a garage for a while, but at some point you are going to go out and spend it (and Ben's presumably planning to keep giving you more until you do just that). That increase in spending on your part may not be terribly gradual: you may well go out and buy three yachts, seven McMansions and a Veyron Super Sport to drive into the swimming pool at the world's biggest coke and hookers party. And it's quite likely that other people who have had money dropped on them will be thinking about the same thing as you at about the same time as you - and if they weren't anyway, they will be once they see you doing it. That is (broadly) one of the ways in which hyperinflation happens. I'm not saying one's certain to happen here (I don't think there has yet been nearly enough printing for that) but that's the mechanism.
Note too that broader measures of money both have more short term impact on prices and are more volatile than narrower ones. Effectively, the ratio of broad money to base money can be seen as analagous to (and indeed probably correlated quite strongly with) velocity. Credit can contract in a hurry when deleveraging starts (as we are currently seeing). In certain circumstances, however, it could also expand with considerable rapidity.
The fundamental worry with regard to hyperinflation is that for the above reasons it is entirely possible for it to take place at some delay from expansionary monetary policy even after a discontinuation of same, which will make it devilishly tricky for monetary authorities to know if they've over-done it until it's too late. As I say, I don't think they have. Yet.
The reason why velocity will not pick up for quite a while is that all money comes originally in the form of debt. Ben can drop off a million dollars in your garage only if you chose to borrow it. As far as I know, they aren't giving away free money yet. Since the ability of most people to service more debt is limited, there is nothing Big Ben can do. When you start seeing the government start to create agencies to literally give money away, then the hyperinflation scenario might come into play. This new "small business lending facility" might be the start. What are they going to do? Lend money to businesses that banks turn down? I get this feeling that the government is creating this facility with the full knowledge that most of the money is not going to be paid back. Heck, we should probably get an application.
+ !
I doubt it too!
Bingo.
What we face, insolvency, cannot be cured by monetary policy, only fiscal policy, and not by spending more, but by borrowing and spending less...
That is what was happening in Japan at least in the late 90's, prices in continuous deflation but people hoarding money in savings accounts because of uncertainty about the future.
People need "good times" in order to start spending again. Uncertainty and a crazy manicdepressive market is poison to that, outside of employment situation alone.
Gov holding interest rates artificially low are a factor too.
Gov tax policies and Gov spending policies are a big factor as well.
Econophile,
You are wrong wrong wrong.
"But deflation is a monetary phenomenon, not a savings problem or lack of consumption problem. We will see deflation because money supply is declining, and it has been declining since late last year."
1. Which money supply are you talking about? M1, M2, M3??
2. It is easy to grasp that when savings increase, fewer money are directed at consumption which means lower demand and thus downward pressures on prices. Haven't you heard about the paradox of thrift??? I suggest you read more before embarking on a debate with Rosenberg.
3. when you are talking about deflation you need to also mention capacity utilization at 74% and unemplyment rate (the real one) at say 16-18%. This are deflationary forces.
So just by mentioning changes in money supply as causes of inflation/deflation you are very shallow.
But then again, you are not David Rosenberg.
Thank you for your comment.
I think you ought to read more carefully what I said.
1. M1 is declining (http://research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=M1&s[1][transformation]=pc1)
Austrian money supply is declining (http://trueslant.com/michaelpollaro/austrian-money-supply/)
M1 MULT is flat to declining.
Ignore M2, M3 because they include items that aren't technically cash, such as money market funds and savings accounts.
2. I thought I explained this. You also confuse supply/demand with "inflation". The paradox of thrift is a Keynesian construct that criticizes people for doing what is rational--in times of economic decline, they save rather than spend. This is wrong? I suggest you do a bit more reading. You are naive to think that Keynesian stimulus works. It never has, never will. Have you actually read Keynes? I have.
3. Cap utilization has nothing to do with inflation. If that were the case, please explain the stagflation of the 1970s when cap utilization was down but inflation skyrocketed.
You ought to learn to think before you criticize.
+1
demand pull inflation is not going to happen, currency crisis inflation is guaranteed.
When the Euro tumbled from 1.5 to 1.2, there was no demand pull inflation in Europe but all commodities got more expensive for people earning Euros.
"currency crisis inflation is guaranteed."
How can it be guaranteed when credit declined and defaulted faster than currency was created?
because just like in Europe, when the shit hits the fan, the people sell the currency and the value of that currency falls.
Spitzer, I talk to a lot of smart people who have difficulty understanding that simple concept. I think it's because they've never seen the phenomenon before even though it's happened many times in history.
In addition to a correct view of what deflation and inflation actually are, Rosie also IMHO gets it wrong about price changes. Consumer prices only briefly stopped going up in the teeth of the economic downturn. They are rising. Rosie relies on the CPI or core CPI at different times. Both measures understate consumer price rises; and core CPI is a fraudulent measure for periods other than oil embargoes, droughts etc. I believe that Treasury rates at least to the 5-year mark are well below likely price rises. Thus they are "too low" and encourage malinvestments.
While in turn money, in a capitalist society, is a credit phenomenon, no?
Econpile,
So your argument is that only supply matters, and demand doesn't matter at all?
Wrong. Access to a keyboard doesn't...
"This is how recoveries begin."
Show us the recovery.
"since money supply leads the economy by 6 to 9 months,"
Show us the tripling of the CPI or economy from tripling the monetary base in 2008.
Left out declining velocity and debt deflation, same mistake Irving Fisher made from 1929 to 1932...