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Deflation Is A Problem For The Fed
Submitted by Lance Roberts via STA Wealth Management,
The biggest worry of the Federal Reserve, and frankly every Central Banker on the planet, is deflation. The reason is that deflation, as an economic pressure, is dangerous and once entrenched becomes difficult to break. For the Fed, the fear of inflation is far less worrisome. Conventional monetary policy tools, mainly interest rates, can be used to some degree of success to stymie inflationary pressures. The problem is that such actions, as shown below, have ALWAYS led to an economic recession or negative financial consequence.
However, as can be witnessed in both Japan and the U.S., Central Bank monetary policy tools have little effect in reversing deflationary pressures.
For several years, there have been repetitive screams that inflation was imminent due to deficits, a fiat currency and expanding debt levels. Yet, the opposite has been true. The lack of inflation has been a construct of the underlying structural dynamics of the economy. Home ownership rates have plunged, technological advances and productivity increases have fostered wage suppression, and high levels of uncounted unemployed (54% of the 16-54 aged labor force) drag on economic strength.
The exceptionally low yields on government treasuries is clear evidence that inflation is not a threat. For all the money that has been spent trying to ignite the engine of economic growth; it has all remained a futile effort at this point.
Velocity Of Money
The velocity of money is defined by Wikipedia as:
"The average frequency with which a unit of money is spent on new goods and services produced domestically in a specific period of time. Velocity has to do with the amount of economic activity associated with a given money supply."
As the velocity of money accelerates, demand rises and inflationary pressures increase. However, as you can clearly see, the demand for money has been on the decline since the turn of the century.
Employment
Even with all the financial stimulation from bailouts, to QE programs, tax incentives and credits, etc., the velocity of money has waned since the end of the last recession as the economy has sputtered along at sub-par growth rates. Of course, much of that can be attributed to sustained levels of high unemployment which has suppressed both wage growth and aggregate end demand which in turn has kept businesses on the defensive. As discussed previously, the most important segment of the labor force (those between the ages of 16-54) remain largely unemployed.
"Importantly, when the employment-to-population ratio or the labor-force participation rate is discussed, the plunging levels in these ratios are often dismissed simply as a function of the 'baby boomers' heading into retirement. However, if we factor out those individuals by only looking at the employee-to-population ratio of 16-54 aged individuals as a percent of that age group the picture fails to improve."
"While the unemployment rate has certainly plunged to just 5.6%, one would be hard pressed to find that 94.4% of the population that "want to work" are actually working."
Wages
Wages are a critical weapon in defeating deflation. Wages have remained not only in a long term downtrend but have also lagged the pace of inflation over time. The median wage level today in the U.S., had it kept pace with inflation, should be closer to $90,000 annually versus $50,000 today. This suppression of wages due to rising productivity levels, and now a large and available labor pool, contributes to the lack of aggregate end demand. The deflationary pressures of declining wage growth remain a major level of concern as the disparity between rich and poor continues to growth. The chart below, from my friend Doug Short, shows the income problem.
The problem with wage deflation for the Fed is that in order for wage growth to occur, the economy really does need to begin to approach "real" full employment. As the supply of labor shrinks, the demand for increases in wages can occur. The problem is that with uncounted masses of individuals residing in the shadows, the demand for labor is swamped by the demand for jobs. This keeps wages suppressed.
The issue for the Fed is that the decline in the "unemployment rate," caused by a shrinking labor force, is potentially obfuscating the difference between a "real" and a "statistical" full employment level. While it is expected that millions of individuals will retire in the coming years ahead; the reality is that many of those "potential" retirees will continue to work throughout their retirement which will inflate the labor pool and keep a lid on future wage growth.
The Fed's repetitive "QE" programs were aimed at the very heart of the deflationary problem. The Fed was convinced that by stimulating a "wealth effect," the consumer would begin increasing consumption which would then spiral demand out into the economy. While the Fed certainly inflated asset prices higher, it has done little to translate across the broad economy. As I discussed in "For 90% There Has Been No Recovery:"
"Furthermore, the structural transformation that has occurred in recent years has likely permanently changed the financial underpinnings of the economy as a whole. This would suggest that the current state of slow economic growth is likely to be with us for far longer than most anticipate. It also puts into question just how much room the Fed has to extract its monetary support before the cracks in the economic foundation begin to widen."
While the Fed's efforts created a short term wealth effect in the stock market, the excess reserves created by the QE programs remained bottled up at the banks rather than flowing through the system. Before the 2008 financial crisis, excess bank reserves remained constant going back to 1980 averaging just $18.9 billion. Today, those excess reserves are near record levels $2.75 Trillion.
The threat of a deflation, more than six years after the last recession, remains an imminent threat. It is not just a domestic issue, but a global one. The Eurozone, Japan, and even China are all wrestling with slowing economic expansion despite success rounds of interventions.
The continued hope, of course, is that the next round of interventions will be the one that finally sparks the inflationary pressures needed to jump start the engine of economic recovery. Unfortunately, that has yet to be the case, and the rate of diminishing returns from each program continue to increase.
The collapse in commodity prices, interest rates and the surge in dollar are all clear signs that money is seeking "safety" over "risk." Maybe you should be asking yourself what it is that they know that you don't? The answer could be extremely important.
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Another piece of Useless News ;-)
BAYDA, Libya — Fighters for one of the factions battling for control of Libya seized the Benghazi (what difference does it make?) branch of the country’s central bank on Thursday, threatening to set off an armed scramble for the bank’s vast stores of money and gold, and cripple one of the last functioning institutions in the country.
The central bank is the repository for Libya’s oil revenue and holds nearly $100 billion in foreign currency reserves.
Looney
LOL, no it isn't. Deflation is not a problem for the Fed. If it was, they'd be printing money and giving it to us little people. Instead, they print to give it to the super rich.
... they print to give it to the super rich
Hey, they just gave $100 Billion to the super-poor dudes in Bengazi! ;-)
Looney
Housing in my neck of the woods has a loooong way to fall to get back to normal,
and even further to get in line with the new mini-wages.
The deflation “problem” has always been BS. IF they really wanted to generate inflation, they would print and distribute the money directly to the people until X percent inflation was realized. That's NOT their goal.
Their goal is to squeeze the last ounce of blood from the dried up turnip. The conventional tool of squeezing (rates) is no longer available so they are forced to try more exotic methods. They will fail.
Its the Owners of the Fed that create the bubbles for the simple purpose of POPPING them and buying the slaughtered assets for pennies. Simple formula that works every time. Don't complicate this.
"Here come the airstrikes on Rome."
40 year morts at 2 percent will keep er on the tracks...\
OR
life mortages with a kidney down and a pint of blood per month for insuRance premium plus p and i
We have deflation manipulation creation to mask the massive bailout of the insolvent banking sector. PM's falling, oil smashed, interest rates goosed downward are all the free market barometers of inflation. Since overall money supply doesn't seem to matter, or is presently and conveniently ignored, we have "deflation".
I don't think we do, but let's assume we do. So WTF is wrong with my purchasing power increasing? WTF is wrong with the money I earn allowing me to buy more? Isnt' that like a raise? The questions were rhetorical, because I know the Fed can't have deflation, which means an admission by them that they are at war pick-pocketing every citizen they claim to represent.
These asshats need to be shot. F'n parasites. Spreading lies that "inflation is good".
Such a backwards and absurd reality we live in because it's controlled by money changers.
next video game???? gotta start somewhere. "blood money"
You're thinking like a person (debtor) think like a bank (lender). Deflation increases defaults, which vapoize your assets (debts)
Financial “news’ and “analysis” for the most part has become self-serving financial sector propaganda.
The nominal* median household income for 2012 was $50,099; in 2000 it was $41,262. The Inflation Adjusted median household income for 2012 was $51,017; the Inflation Adjusted median household income for 2000 was $55,987.
That’s inflation.
For a retired person living on his 2000 fixed pension or his ZIRP savings, he’s stuck with a 2000 income while paying 2015 prices.
That’s devastation.
In 1973, nominal median income was $9,226, or $48,557 inflation adjusted.
http://www.davemanuel.com/median-household-income.php
*Nominal income is what your paycheck shows, income that has not been adjusted for BLS under-reported “inflation.”
The Hindenburg has been retired... It's time for the Led Zeppelin.
They have the Hindy tetherd over DC looking for terrorist
The fact they loan money into existence, impedes hyperinflation. Lolololol dumbfuckin central bankers.
Why doesn't the Treasury just bypass the Fed and print dollars directly?
Cuz that would be good for the 99%ers.
+1..............
Thats the problem. There isn't enough cash in circulation to pay off much of the Debts that are outstanding.......The Bankers will control Moar and Moar assets........the 99% are too broke to invest in the markets.
The Fed also controls Income Taxes. They have lobbiests that have bribed away control and threaten to kill the system if these powers are removed.
Not if that original loan (reserve) was created/funded through a job. The fractional lending system originally had rules, limits and oversight by the BIS. If those dollars were reinvested instead of leveraged, with all the rules being enforced.? Read the Basel accords as the BIS is trying to stomp out the leveraging, through Basel 3. Guess who wants to delay the rules, LOL. The BIS has lost control of it's subjects, the central banks. The Swiss Just did a huge Yuan/Franc deal (a few hours ago). The BIS is in Switzerland.
Leverage everything
one sentence: japan with a twist. article complete.
i do like the word velocity!
stopping power,ha
how about torque?
we will see how much velocity the euro has. another same story way more twisted.
race is on
to
the
bottom, ha again...
Maybe they should try applying Nirp to bank reserves.
Risk free bond speculation is inherently deflationary.
Deflation has been here for years - but the gowbamant keeps recalculating macros to hide this
and the MSM happily ignores this.
You want inflation? Then you need full employment, and the only way to get that is world war. Only an existential struggle for survival can put everyone to work.
When you can print without permission, instantaniously and direct it with pinpoint accuracy, through the internet in a millisecond, to shore some kind of debt: anywhere in the world. Well, you get the idea. When they are able to print as referred too, why do they need your production/job to support their system? They don't need your inflation/job anymore sturring things up, you could raise prices or create more jobs for christs sake.
There are 2 kinds of inflation creation.
One being the one that used to somewhat govern and control an expanding economy, specifically for the middle class. It's called fractional lending, right. The 1 to 9 ratio of dollar creation/reserve to loan to the next guy. The rules have softened and the orgy began.
The second is outright printing electronically for any use or duty they see fit, to shore and maintain the/their systems' integrity.
The Third is outright printing without permission.
The first one, traditional fractional reserve lending could be used to buy anything, the money changers can't control where that money flows in the economy as prices and wages would fluctuate.
The second, 'is' directable with pinpoint accuracy, of where they need that electronically created inflation to go. They deem it necessary to the stability of their system. There is somewhat foggy accounting and balance sheet reflection.
The third is off balance sheet transactions and they serve as a defense against bright idea number two failing.
Are you wanting to fight and maybe Die? Is that what you want for your Children? The Fed and it's policies have given the wealth to the 1% and they can only spend so much money........By the time it filters down the purchasing power is gone along with the savers savings. This is a system that needs inflation to remove savings, baby boomers and their inheritance is what the FED is after. The Elite want returns on their investments. They just want MOAR.
Last time we had full employment was during the classical gold standard Pryor to ww1. Fully equipped with gold trade notes.
Here in the Deflationists Lounge we are starting to worry about all this main stream deflation hate speech. We are starting to think about changing the name of the lounge in order to avoid any unpleasantness. Otherwise it is a very exciting time to be a deflationist - unless you want to buy property someplace snooty.
The threat of a deflation, more than six years after the last recession, remains an imminent threat. It is not just a domestic issue, but a global one. The Eurozone, Japan, and even China are all wrestling with slowing economic expansion despite success rounds of interventions.
FUCK OFF Lance! there is no ISSUE, though you are working real hard to make it one. Your entire piece smacks that if we don't have inflation that we are somehow buggered. Seriously man - we crossed that fucking rubicon forever ago.
Just another 10 minutes of my life I don't get back. "Deflation is bad Mmmkay!" Sick of hearing this. If prices everywhere are trending down - if velocity of money is declining to nothingness - if everything points to a deceleration.....WHY IS THIS A BAD THING!! Fuck sakes. I'm sick of hearing about this! Then getting a 6 pt. lecture on it to boot. Debt. Debt. Debt. and total malinvestment from the dislocating effects of ZIRP and various other monetary trickery is why we have hit a wall - where carnage is the only solution - that is economics! And it can't be fixed by ass clowns continuing the mantra that deflation is bad. ITS NOT BAD. It just is. Prices will fall, physical markets will clear - some will get laid off while others will be hired. Assets will exchange hands. Bad debt liquidated. And so it will go - just as it had always gone - until central banks started fucking around changing money. Unless I am missing something here, you're yelling fire in a theatre where everybody has already left.
When you change money you change everything. Stop fucking with money - things will start to make a lot more sense and then we can stop wasting time reading shit synopses like this one.
JFC!
All these charts seem as big as can be but they're more important things to worry about like under inflated footballs. Come on, please focus on the important things.
disinflated balls ...could use some more stimulus Not too much though, don't want to hyperinflate yer balls you know. That wouldn't be good.
...at the risk of sounding trite, "Fuck the Fed".
What have they done for us lately (or ever)?
Nothing!! The Unconstitutional Fed was never designed to do anything FOR us. The Fed was designed by its owners, what are now known as the TBTF banks, to do things TO us. Like transferring all of the nations wealth to the, including our wealth, to the TBTF banks.
When will Americans wake up to the fact that a coup led by the elites, TBTF banks, Democrat/Republican Party and MSM have shredded the American Constitutional Republic and replaced it with an Unconstitutional police state?
Classic liquidity trap
Deflation isn't bad. If workers aren't going to get nominal increases in wages, price deflation can at least give them a raise in real terms. Inflation is a carrot on a stick that 99.9% of the world cannot keep pace with.