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Meet The New Recession Cycle - It's Triggered By Bursting Bubbles, Not Surging Inflation
Submitted by David Stockman via Contra Corner blog,
We are now in the month of April - so the Wall Street Keynesians are back on their spring “escape velocity” offensive. Normally they accept the government’s seasonal adjustments in stride, but since Q1 is again hugging the flat line or worse, it seems that “bad seasonals” owing to an incrementally winterish winter explain it all away once again. Even yesterday’s punk jobs number purportedly reflected god’s snow job, not theirs.
What’s really happening, they aver, is that jobs are booming, wages are lifting, housing prices are rising, consumer confidence is buoyant, car sales are strong and business is starting to borrow for growth. In fact, everything is so awesome that one Wall Street economist quoted yesterday could hardly contain his euphoria:
“Consumers have emerged from the winter blues. If they spend anywhere as great as they feel right now, then this economy is going to roar over the next few months,” said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.
Since Rupkey has been expecting a roaring economy for several years now it is tempting to dismiss his latest fantasy as just the institutional cluelessness which emanates from the pitiful behemoths which pass for Japanese banks. But with only slightly more enthusiastic bombast, Rupkey is simply braying from the generic Wall Street script.
Since these people get paid a lot, have PhDs and might even be smart, how is it that they are so wrong, and have been now for five years running? There is a simple answer: They are operating on a business cycle model that is utterly erroneous and obsolete; and which therefore distorts and obfuscates the ‘in-coming’ data and the inferences and forward expectations that they derive from it.
In a word, their father’s business cycle model was premised on a “clean balance sheet” world driven by main street borrowing. In fact, however, we have now passed through the “peak debt” horizon and are in a bubble finance world driven by Wall Street speculation. That passage changes everything.
To be sure, the old fashioned main street cycle was the work of the Fed no less than today’s. After all, the business cycle itself is essentially a product of central banking.
Indeed, central banks function akin to the 12-year old who killed his parents and then begged the court for mercy on the grounds that he was an orphan. That is, they inherently generate credit inflations and the resulting economic boom and bust—–only to then claim indispensability in reversing the recessionary slump and avoiding a plunge into depressionary darkness.
But there were some big differences between then and now. The Fed of yesteryear was reactive, prudent and pre-Keynesian. It occasionally raised interest rates to “lean against the wind” in the event of too much economic boom and rising inflation; and it moderately lowered rates and loosened monetary conditions once inflation had abated and idle labor and capital resources had become too large. But mostly it was a passive watchman.
Stated differently, the gentle hand of modest federal funds rate adjustments over a few months time designed to lightly guide the macro-economy is one thing. Today’s heavy handed 75-month stretch of ZIRP and chronic financial repression aimed to control, manage and manipulate the short-run path of GDP is quite another.
Likewise, back then we had what amounted to central banking in one country—-something very different than today’s globally synchronized convoy of Keynesian central banks all racing in the same direction of ease and rampant money printing. So too, US labor costs were on par with the rest of the mainly European industrialized world versus today’s billion-plus pool of cheap labor in China and the EM.
Most importantly, back then household balance sheets were relatively unleveraged, enabling a robust response to changes in the price of credit and a consequent mobilization of consumer spending. By contrast, for 80% of today’s debt saturated household balance sheets, spending is essentially constrained to current wages and income regardless of the price of credit.
Finally, the old time capital markets were relative honest, which meant that debt and equity capital were priced correctly and that executives were rewarded for investing in long-term productive assets. Needless to say, that’s light years of difference from today’s utterly dishonest financial casino’s where debt is drastically underpriced and financial engineering maneuvers like stock buybacks and M&A deals are deeply subsidized and powerfully rewarded.
These profound differences have caused the Fed-influenced business cycle to play out far differently. In the 1960s and 1970s, for example, cutting interest rates caused housing starts and business investment to boom. Then when credit-fueled demand got way ahead of supply——wages and prices tended to accelerate sharply. You got “inflation in one country” because there was no mobilized cheap labor pool and export factories in Asia to constrain the classic wage-price-cost spiral.
Yes, there was industrial trade, but European wage levels and union-based adjustment rigidities tended to parallel those in the US, and therefore did not really function as an economic circuit breaker. So eventually, the Fed had to throw on the brakes in order to extinguish the very wage-price spiral it had triggered in the first place.
After Nixon’s destruction of the Bretton Woods gold exchange standard at Camp David in August 1971 and the elimination of the modest financial discipline that it provided, the Fed’s impact got more intense and the business cycle far more volatile. As shown below, when the Nixon-Burns regime threw open the monetary spigot in the run-up to the 1972 election, the economy boomed initially because the response to cheap and abundant credit was fast and furious.
But it soon led to a rip-roaring wage and price spiral not withstanding the clumsy system of wage and price controls that the Nixon Administration had also launched at Camp David. And it is crucial to understand how and why that played out so differently back then——compared to the allegedly inflationless tsunami of money printing today.
The big difference was no China, no endless rice paddies and rural villages that could be drained of cheap labor and mobilized into the world’s commercial economy. China’s incipient billion person anti-inflation force was starving in the rural villages owing to the calamites of the Great Leap Forward, where villagers had dutifully melted-down their hoes and plows to make backyard steel, and the Cultural Revolution, which had paralyzed economic life entirely.
So what happened was US imports soared after domestic capacity was fully used-up, touching off a world-wide boom in both investment and consumer goods. That, in turn, generated an explosion of oil and other commodity prices as world demand for raw materials temporarily outran the existing supply base.
Next, soaring oil and other commodity prices flowed back into the US economy, touching off a domestic wage and price spiral that fueled itself. In the face of rampant demand and no China hammer on wages and prices of tradable goods, its was only the Fed’s slamming on the brakes in late 1973-1974 that finally broke the inflationary tide.
Accordingly, the profound difference in the Fed’s money printing cycle then and now is crucial to understand. The following excerpt from the Great Deformation captures the essence of what happened in that post-Camp David, pre-China interval:
So what transpired during the early years of floating was a massive worldwide expansion of money and credit fueled by the Fed. This, in turn, generated the greatest bout of commodity price inflation that the world had seen since the postwar fly-up in 1919.
Crude oil led the way. Having been priced on the world market at $1.40 per barrel when Nixon’s free marketers gathered at Camp David in August 1971, it rose to an interim peak of $13 per barrel four years later. And that was a way station to its eventual top of $40 per barrel by 1980.
The dramatic post-1971 escalation of worldwide oil prices was blamed by officialdom on political rather than economic forces—and in particular the alleged market rigging of the OPEC cartel. In fact, except for a brief period around the October 1973 Mideast war, there was no systematic withholding of oil from the market.
The problem was not a shortage of oil but a flood of money and inflated demand. During 1972–1974, the global economy reached a red-hot pace of expansion, which in some part was due to the locomotive pull of the Nixon boom. For example, non-oil imports to the United States rose by 15 percent in the first year after Camp David, and then accelerated to 22 percent growth the next year and 28 percent during the twelve months ending in August 1974. These giant gains in imported goods were literally off the charts.
So as blistering US demand ignited production booms around the world, factory operating rates rose and supply chain backlogs surged everywhere on the planet. Moreover, there was another entirely new, even more potent force at work. In response to the Fed’s flood of money and credit, other central banks around the world reciprocated with their own fulsome monetary expansion.
They bought dollars and sold their own currencies in foreign exchange markets in order to forestall the upward pressure on exchange rates that was inherent in the brave new world of floating currencies. In other words, the heretofore circumspect central bankers of the world became furious money printers in self-defense as they faced the flood tide of dollars beingissued by Arthur F. Burns.
In fact, with exchange rates no longer fixed and visible, a more subtle process of competitive devaluation became the daily modus operandi of the system. In this manner, the Fed propagated its inflationary monetary policies outward to the balance of the world economy.
So it was a storm of money and credit expansion which generated the first commodity bubble after 1971, not the OPEC cartel alone or even primarily. For if the problem had been just the putative rigging of prices by the oil cartel, there is no way to explain the dozens of parallel commodity booms during the same two- to three-year time frame.
Quite obviously, there was no evidence of cartel arrangements in the markets for rice, copper, pork bellies, or industrial tallow, for example. Yet between 1971 and 1974, rice rose from $10 to $30 per hundredweight, while pork bellies climbed from $0.30 per pound to $1.
Likewise, the cost of a ton of scrap steel soared from $40 to $140; tin jumped from $2 to $5 per pound; and the price of coffee rocketed up nearly eightfold, from 42 cents to $3.20 per pound. Even industrial tallow caught a tailwind, rising from $0.06 to $.0.20 per pound, and pretty much the same pattern was reflected in the price of corn, copper, cotton, lead, lumber, and soybeans.
Needless to say, the first inflationary cycle of floating money came as a shock to policy officials, especially the Federal Reserve and its chairman. While Chairman Burns was a pusillanimous accommodator when it came to the game of hardball politics in Washington, as a matter of belief he had remained an anti-inflation hawk.
So when Nixon went into his terminal Watergate descent, Burns got his nerve back and threw on the monetary brakes. Accordingly, double-digit bank credit expansion came to a screeching halt, rising by only 1.2 percent in 1975.
As it happened, the Fed’s stimulus had worked spectacularly from a macro perspective because households had been able to borrow hand over fist to buy cars and new homes. This credit based spending surge, in turn, touched off a virtuous cycle of income and jobs gains, more spending and even more consumption.
Thus, new home construction boomed. Housing starts initially more than doubled during the three years after 1971. Then when the Fed was forced to rein in the cycle with sharply higher interest rates owing to the soaring CPI and wage inflation, construction instantly collapsed—–only to re-erupt after the Fed returned to an easing mode in late 1974.

The same pattern can be seen in the case of real business investment, where the cyclical fluctuation was even more extreme. When the Fed opened the credit spigots in 1971, net real investment in plant and equipment soared by 52% during the next two years, but then plunged by nearly 45% from the 1973 peak when the Fed was forced to close the credit spigot.
Needless to day, after the 1974-1975 easing cycle incepted, the cost of business credit fell sharply and investment spending boomed once again. In fact, real net business investment rose by 100% between 1975 and 1978—–a record never duplicated before or after.

Absent the China price, of course, wages and CPI inflation followed the same cycle because there was no ultra-low cost production alternative. That is, no place to “off-shore” production and to arbitrage labor costs. Accordingly, the Fed had no choice except to throw on the brakes twice during the decade because these vicious spurts of wage and price inflation created instant and widespread cost-of-living pain on main street.
Thus, when the Nixon-Burns money printing spree incepted in late 1971, the CPI was increasing at about a 3% annual rate, but had soared to 12% by November 1974 at the height of the global boom. After the Fed threw on the brakes and sent the US economy into a tailspin, the rate plunged to under 5% by late 1976. Then, under a renewed burst of Fed stimulus and breakneck credit expansion, CPI inflation soared to nearly 15% by early 1980.
At the end of the day, this was the inflationary blow-off that finally discredited old-fashioned Keynesianism and brought Ronald Reagan to office. And once again, the reason for the late 1970s consumer price explosion was not the presence of OPEC in the world oil market; it was the absence of the China labor force and the “china price” for tradable goods in the face of massive monetary expansion.
US Inflation Rate data by YCharts
Two big things changed after 1979-1980. First, the Maoist founders were run out of China and replaced by “red capitalists”. The latter soon discovered that state power actually flows from the end of a printing press, not the barrel of a gun.
Secondly, the White House staff finally bamboozled Ronald Reagan into getting rid of Volcker. The latter development ushered in Greenspan and the age of financial repression; the former development empowered Mr. Deng and his export factories, thereby triggering the age of the China price and global wage repression.
The rest is history and is memorialized in the two graphs below. In a word, Greenspan and his successors massively exported the inflationary impact of their policies, especially before the 2008 financial crisis.
On the one hand, they expanded domestic credit like never before, causing US credit market debt outstanding to rise from $11 trillion when Greenspan took office to $52 trillion when Bernanke falsely told panicked Congressmen in September 2008 that we were on the cusp of Great Depression 2.0.
Folks, that’s a 5X increase in barely two decades or a credit growth rate of nearly 10% annually.

Yet unlike the 1970s, there was no inflationary blow-off because the massive domestic spending fueled by the Fed’s printing press was absorbed by China and its EM supply base. Indeed, since the 1980s the US has run cumulative current account deficits of nearly $8 trillion——–consumption which was supplied from outside the four walls of the US economy and therefore did not fuel domestic inflationary pressures.

But, no, this wasn’t a case of Adam Smith’s division of labor and miracle of free trade. Nor was it a financial free lunch. Instead, this was classic vendor finance——but on an epic scale.
China, the Persian Gulf oil producers and the rest of the EM loaned us the money by running their own printing presses and buying up dollars to suppress their exchange rates and protect their mercantilist trade model. This allowed the US household sector in particular to bury itself in debt before the normal, historic mechanism of soaring interest rates could choke off the borrowing binge.
Effectively, the Greenspan-Bernanke era of massive financial repression caused the subtle and flexible tool of credit price rationing to be displaced by a blunt instrument. Namely, balance sheet saturation or “peak debt”. After 2008, households stopped borrowing because they had exhausted their capacity to carry any more debt relative to income. As shown below, household leverage ratios have actually begun to climb down from the nosebleed section of history where they had been carried in the final wave of the credit boom before the 2008 crisis.
On the business side, the data trends are slightly different, but the impact is the same. Both gross and net business debt have continued to rise since 2007, but the proceeds have been almost entirely recycled into financial engineering—including more than $2 trillion of stock buybacks and many trillions more of basically pointless M&A deals.
This diversion of the $2 trillion gain in business debt outstanding since 2007 to financial engineering is owing to the near zero after-tax cost of corporate debt. The latter has caused the enslavement of the C-suite to the instant gratification of rising share prices and stock options value in the Fed’s Wall Street casino.
The bottom line is therefore straight forward. The credit channel of monetary policy transmission is now broken and done. The impact of ZIRP and QE never leaves the canyons of Wall Street - meaning that it functions to inflate financial assets rather than main street wage and prices as it did during the era of inflation in one country.
But that makes for both a considerable irony and an incendiary danger. Today’s clueless Keynesian central bankers essentially believe that they can keep the pedal-to-the-metal until a 1970’s style inflationary spiral arises. But none is coming because the worldwide central bank money printing spree of the last two decades has generated massive excessive capacity and malinvestment all around the planet. What is coming, therefore, is not their father’s inflationary spiral, but an unprecedented and epochal global deflation.
So the central banks just keep printing, thereby inflating the asset bubbles world-wide. What ultimately stops today’s new style central bank credit cycle, therefore, is bursting financial bubbles.
That has already happened twice this century. A third proof of the case looks to be just around the corner.
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Yes Virginia, the economy is fucked.....
We bursted some bubbles of some folks...
Yep, massive deflation first
then the governments and head printers in charge will unleash the helicopter drops for real
or they could always write off all the old collapsing debt and start a new a better monetary system not based on debt money ...... lol, ok maybe not.
MuthaFuckaGangsta Union Bank
...But it's condoned by this corrupt gubamint.....
What he writes happens to be true. But he conveniently ignores a host of other anti-market issues facing American small business-FATCA, the fact that whether you like it or not, NSA and several other triple alphabet agencies, with their interference and dependencies are now all "silent"(and sometimes not so) partners" in what ever enterprise you undertake. Your banker is more responsive to Homeland Securitys' insecurities than your business's needs. And if as a small businessman anything you do becomes really profitable, those "silent partners" answer to their behemoth masters and you will be dealt with accordingly.
David is distracting from the very real domestic tyranny that ensures America will be closed for business for yet a generation at least.
well, there is no point really for him to focus on the tyranny.
Comments have been open here on ZH for a while, and there is still no mention at all of the long credit cycle and Kondratieff winter.
David Stockman has given us a great summary of the fall season of this cycle, with our exporting of inflation, the 35-year bond bull, and rise in asset prices. Where his analysis really adds is how he dissects the policy response in the mid-1970s, and how we resolved this eventually with the Greenspan regime.
Yes, deflation, yes collapse. The hyperinflation that follows is a collapse of confidence in what remains, not "printing" per se.
"The Fed of yesteryear was reactive, prudent and pre-Keynesian. It occasionally raised interest rates to “lean against the wind” in the event of too much economic boom and rising inflation; and it moderately lowered rates and loosened monetary conditions once inflation had abated and idle labor and capital resources had become too large. But mostly it was a passive watchman."
David, the Fed of yesteryear sowed the seeds. It is a cabal of corrupt bankers. Stop apologizing for them and attributing their behavior to failed ideology. You had me as a fan for a while, but I'm now realizing that you are controlled opposition.
I upvoted you. More people need to cut to the chase just as you did. Thank you. On the upside, look at all the pretty graphs, and in cornflower blue unless I am mistaken (partially color blind).
He also makes a few to many apologies for Regan. I get that he may have been suffering from his mental problems at the time, but the actions of Regan's second term are unforgivable. The '86 amnesty, Greenspan, the continued MIC spending when detente and Gorbachev's ascension (not to mention the USSR rotting from the inside since the 70's) made it wholly unnecessary. I wonder if we would have been better off with Mondale and getting a Republican not named Bush in 88.
Don't forget the the seeds of the housing bubble were sown in 1987 with the tax reform act of 1986 with the elimination of non-mortgage interest from one's taxes.
http://legal-dictionary.thefreedictionary.com/Tax+Reform+Act+of+1986.
I consider the loans that led to the S&L Crisis as Housing Bubble 0.5 (BETA Edition).
I've said the same thing. Glad to know it wasn't just in my head and somebody else saw this.
Interesting observation.
A week or so ago, there was a shooting on the entrance road to the NSA facility, at Ft. Meade, Maryland.
All the news articles mentioned " 11,000 military and 29,000 civilians with security clearance, arrive and work at the facility every day" .
20-25 years ago, in Baltimore , 20-30,000 a day worked at Bethlehem Steel, GONE.
10,000 plus at a GM plant building minivans, GONE.
10's of thousands at Koppers, Key hwy shipyard, American Can, Carling Brewery, London Fog, ........ GONE!
Replaced by 40,000 .gov paid spooks, sucking up top dollar and platinum bennies. Spying on US! We the people. Creating nothing of value. Zero, fucking ZERO net benefit to the economy. Oh, they spend their Bennie Bucks locally, but somewhere, value had to be created or robbed. Some .gov troll come and argue that a government "worker" ( that's generous) paying tax is not a circle jerk.
You fotgot to add that their daily job, employed by NSA is to post on sites like ZH
the second term of reagan was totally bush. reagan was shot by the guy who pushed him into his car to "protect" him from that kid who was a family member of a clan in the bush camp.
With Jeb waiting in the wings, isn't it about time we ask ourselves just who-the-FK these people are??
This is a good start:
http://www.bibliotecapleyades.net/sociopolitica/esp_sociopol_bush19.htm
Don't forget the NFA machinegun ban on May 15, 1986....
..
I think he still finds hope that the system can be changed. I just imagine an accelerating cycle that consumes wealth and spits out wars and famine. I hope he is right.
The interests of the political and financial classes are represented by the Fed. Their goal is to keep interest rates low. I wonder if there's an institution that represents the interests of savers...maybe pension funds? Anybody else?
If half the Fed's governors were replaced with these types of people, I wonder if that wouldn't make things better. We've had competition of interests (ostensibly) in politics, but the Fed seems to have been stacked one way since the beginning.
Famine is caused by lack of water resources, lack of arable land, with or without the ability to harvest and transport agriculture products to market.
It can be cuased by men but more often than not it is caused by short term but radical changes in the climate...which we really cannot control.
Humans are not that powerful and to believe that we are just smacks of arrogance.
While advances in technology have served to alleviate famine in the past the forces of nature are ever present and cvan be catastrophically overwhelming at times.
This is all too evidential for those who have survived catastrophic natural disasters. The victims, of course, are not aware as they have succumbed to those forces.
So we delude ourselves when we believe ourselves immune to the forces of nature.
We delude ourselves when we believe that we can overcome the threat of natural events as a result of our technology.
We delude ourselves when we believe that we can cause the man made disaster as the result of our technology.
We delude ourselves believing that we are in control of most when the truth is that we control so little.
We are not in control. Control is basically an illusion. Truly there are times that we are made victims to our circumstances. But this caveat is NOT an excuse to evade the responsibility to that little which we can actually control. The wise can discern the difference while the foolish give it no thought.
The result of the system is not famine. But lack can be caused by decisions of those who lead the sheep because the sheep yield all control and refuse to take responsibility for that little which they can control. Thus they bring lack upon themselves which is quite different to an actual famine.
Since most here have no experiential references I can understand that you will confuse missing a meal or two as hunger and confuse a lack of some food items as a famine.
But you have not seen anything yet, folks. No. You have not seen anything yet.
But you will. Oh yes. You will.
There is not a doubt in my mind.
You will experience a true famine for your failure to appreciate, your failure to ADD VALUE, to that which you have. That is what that word, appreciate, means.
Instead you have depreciated the assets, the gifts which were bestowed. You have extracted the value from that. You have added nothing to it. You have only extracted from it, as if it would last forever. And now the resources are nearing a state of depletion as a result.
That is right. Your failure to appreciate what you had will lead to your collapse. And there is none who are more deserving. Not one. Enjoy.
Tall Tom - Fine. We are to blame and will all get whats coming to us. Just do us all a favor and stop quoting Jesus who taught otherwise.
Sheep follow a shepard do they not? They are led off a cliff until they learn the shepard is a wolf. Duh. Easter scripture:
"Behold I send you out as sheep amidst the wolves." Another:
"Be wise as a serpent but gentle as a dove." Let me know Tom when you figure out what that means or at least how to be a better actor. You suck at it. Rank amateur.
Not sure who you think that you are addressing there Tom. Positions vary as a result of previous efforts. And location. Not to mention 30 years of hard yards.
Not all of the world is in the state that the U.S. is in . . . yet.
https://www.facebook.com/BiofarmProductsNewZealand
wtf is with the spaces? you do not know, at all it seems, what powers men have. You have elevated yourself into the zone of pontification. drugs?
some folks attribute the weather to gods will, quite unfair nowadays really.
Not helpful Tall Tom. Pointing out mistakes and promising punishment helps no one.
It is not finished, nor over, it is a process and you need to guide yourself and not admonish others -tempting though it is because of the obviousness of the situation.
It is true that we have no control beyond our own actions and thoughts and that it is here that the work must start. It takes a certain desire to begin that work. A certain hopelessness must be endured before the dead end can be perceived. It is like the drunk who cannot give up the bottle until they have fallen so low they beg to be released from their enslavement to alcohol.
Be gentle, encourage, show them there is hope, light and a way.
When the fall comes it is necessary that there are those who can offer hope and hold out their hands in love to the fallen. Those that lie by the roadside broken and bleeding must be helped back to health.
The answer to all who listen is simply this: you must give up the idea of control and raise your consciousness to a higher plane. From that will radiate the bounty of divine love. Man does not know what he is. He cannot know because he would assume an arrogance which would halt progress. Until men self realise they cannot know the infinite and it will be obscured by a heavy curtain from all but the most determined. Those that cannot create that determination will have to sink to the point of such despair that they will beg for it-and then you must hold out your hand.
"David, the Fed of yesteryear sowed the seeds. It is a cabal of corrupt bankers. Stop apologizing for them and attributing their behavior to failed ideology. You had me as a fan for a while, but I'm now realizing that you are controlled opposition."
+1,000
The banksters need to repay us.
The banksters can pay in gold, silver, and/or heads.
I did not read this as an apology for the bankers at all. Stockman does not compare the fed of the past to show they were once moral but instead to show the entire game and landscape has changed since the 70s. He points to china as the big wild card, and I would have to agree.
I'm sure the MIC has Obama's stick as a trigger.
Ok so what do we do about it?
Print MOAR articles about the manipulations, greed, corruption and lust for power and control within the system and wait for somebody to save us from a problem we could easily and peacefully resolve by the end of the month if we simply stopped willfully participating in this shit show.......
Don't be so liberal with the use of the word "we" buddy
LOL
Ok I buy the fact that the chinese acted as the pressure release since 1980 more and more but as the Fed moved from pillar to post from one bubble creation to suppression and back again did they do it to keep labor from rioting and keep power in the hands of those chosen or to pay off business interests and they dont care about prevoking the citizens?
They probably just took a gamble.
The decision-making they undertook was probably as whimsical as it obviously appears to the rest of us in hindsight.
They know they are crazy. They do not care. Do not expect to find any profound understanding of their actions beyond: crazy and or evil.
"What is coming, therefore, is not their father’s inflationary spiral, but an unprecedented and epochal global deflation"
In 2008-9 I was betting on hyper inflation sooner than later. Of course hardly anyone knew that the policies would lead to the opposite, deflation. But that is how it looks with hindsight. The more the Central Banks print, the less capital is really at work in the real economy. Trillions of printed dollars just inflate bullshit asset bubbles, housing and fine art and wines. But the productive economy is stripped of capital investment and wages. Wages produce demand, demand needs capital investment.
Shut every fucking bank! Fire every cunt banker. Begin to replace these whore houses with real utility banks, to take deposits from workers and then make sensible loans to small business, if even this one thing was done on a local scale, we would see a turn around. The high flying cunts on Wall-Street are drags on the economy, useless eaters, like they so much enjoy calling workers, well it is the Wall-Street Banker cabal that are useless eaters!
I tried to upvote your post but it's broken. A few, as you likely well know, did see the deflation coming, in spite of the printing. I was following Prechter, who catches hell for being wrong so often... but it's a question of timing too. On balance, the deflationists seem more right than worng at this juncture.
There is an argument too that the hyperinflation will come later, after most of the air has been let out of the balloon.
I read Stockman's book a couple of years ago. The guy is good, real good. I believed it then, even more so now.
Good on you David.
Too bad that the people who have the power to make decisions pay him so little regard.
"Too bad that the people who have the power to make decisions pay him so little regard."
What did Stockman do when he was in the government?
Greenspan wrote in the 1960's, that FED 1920's policy lead into the Great Depression. When he was later in office, he doubled down on bad FED policy. Bernanke wrote in 1988, that QE doesn't work. When in office, Bernanke massively QE'd. Both Greenspan and Bernanke did what they knew not to do.
Greenspan and Bernanke gave little regard to themselves, once they were in office.
It's unclear if the fed is wrong YET. We will know within the year. The only thing that has been dead wrong is anyone preaching an imminent market crash over the past few years. One thing is clear, things get very interesting here on out.
If you owe the bank a few thousand dollars, that's your problem. If you owe the banks 2 times your yearly in come, that's the fucking bank's problem.
If Stockman and Dent are correct then it's deflation. Does that mean dollars in your mattress make you wealthy? I am concerned that there won't be anything to buy. If you stack PM's it's more for after the reset and possibly your kids will think you the hero. If the world economy grinds to a halt maybe TP gets you a can of beans.
Deflation completes the inflation/deflation cycle. Every cycle has an up phase and a down phase. Math is an absolute.
Every boom has ended in a bust because math is an absolute. Every bubble has burst and deflated because math is an absolute.
"Does that mean dollars in your mattress make you wealthy? I am concerned that there won't be anything to buy."
Back in 2009, there were photos taken of massive lots filled with unsold cars.
This subject, as many ZHers know, is dear to my heart.
As I've said since 2010: it will not be hyperinflation or even deflation, it will be both.
I was ridiculed for saying this! "It cant't happen according to classical economics!"
Well as David said: this is not your father's economics. Not now that the old system has quietly died.
CB money printing leads to inflation of the paper economy and deflation in the real economy. The cost of necessities spirals upward and drags with it the cost of living, working, doing business and home ownership. Meanwhile incomes that derive from the productive economy (and not from inflated paper) languish and fall as does capital investment which seeks easy sure bets and sweetheart deals. Hence demand is crushed while buying power of currency erodes and erodes. And all this can happen without a bang but a whimper. Most hardly noticed creeping BIflation until now.
Interesting theory, Caviar.
You may be right...
Yeah. The way I was summarizing it my circle, back around 09-10, was that it seemed the things we need would get more and more expensive, and the things we didn't need would get less expensive (cause everyone's spending the little they have on necessities). Hasn't played out perfectly, but we're only in the 7th inning or so (guessing).
But we were seeing it a bit more as a serial phenomenon, whereas you are pointing out it is a more parallel phenomenon.
Die-flation. Dollars become Monopoly money for the purposes of the Investment game....meanwhile the cupboard is bare. They definitely need a distraction like a world war while they implement a new system of heads you lose tails we win.
"They definitely need a distraction like a world war while they implement a new system"
Actually they don't!
They needed world wars before the welfare state to keep unemployed masses off the street.
Now they keep em home on the couch in a waking coma induced by videos, bacon-wrapped pizza, drugs and kardashians.
And that, friend, is where it's all headed : a society divided between gated communities of paper trillionaires and a vast hinterland of endless couch potatoes semi-comatose in front of the tube
What the FED did.
CTRL-P hand to a banker to store ... achieved zero and the relative amount of money floating in the economy starts to shrink so you have less to spend.
Here is your inflation / deflation - the ordinary consumer feeling the pinch will buy needs like food etc. but will not be purchasing gadgets and not needed items. The economic system is based on what the consumer will pay, less money now but needed items will rise (inflation) while not needed items you can't sell collapse in price (deflation).
Awesome if you just got a little bit more than anybody else to spend and have noticed the falling price of some things like I have recently. Noticed also how the chocolate bar got 20% smaller for the same price so if an item can be downsized for the same price it will be.
What is amusing is the FED probably does not count the downsizing manipulation correctly calling it 0% because they do not compare a weight to see the 20% inflation or so.
Biflation can only last so long. It is the rubber band stretched to maximum. If the rubber band breaks then currency/system is broken and you have hyper inflation. If it snaps back the system remains whole through deflation. We are in a transitory biflation state now. I tend to think the rubber band holds and the banks and those connected are positioning themselves for the deflationary windfalls they were not prepared to reap in 2008.
Exactly.
I remember when you first posted your biflation theory many years ago !!!
"This subject, as many ZHers know, is dear to my heart.
As I've said since 2010: it will not be hyperinflation or even deflation, it will be both."
The credit bubble has not burst, yet. The bubble is larger than it was in 2007.
Sounds like the 2009 green shoots need more miracle grow.
Couple of take aways are clear to anyone who can understand Econ 100.
1 - The business cycle as we knew it is DEAD. It has been bastardized by the Fed who has created a system that does NOT enhance the real economy and can't. Why would a business invest in CAPEX or productive labor when it can jack up share prices via financial engineering and make all the offcers and board members filthy rich? And much of that can be laid at the feet of Congress who made $ pay less beneficial than stock options based on compensation plans tied to EPS performance.
2 - Clearly the actions of the Fed with QE and ZIRP were not and cannot be generally inflationary as we traditionally understood it. 6 years ago those who did not understand said that hyper inflation was right around the corner and that we HAD to buy Gold. Clearly they were 100 % WRONG. Note that we SHOULD have seen this would not be the case from Japan's experience. QE & ZIRP failed there. They gave us a 20 year warning.
3 - This will NOT end until we have a massive CRASH of financial asset prices and the entire financial system. It is inevitable as there is simply NO WAY that the fucked up mess created by the Fed and the rest of the cabal of Central Bankers can be unwound in a soft landing. We SHOULD have allowed the crash to happen in 2008 but the Fed did just the opposite of what they should have done. They simply stoked the fire harder and faster with more of what we did NOT need. QE. Low interest rates. Maniacal policy. And more digital money. Of course this will not come easily as the Fed, central bankers and politicians will simply not roll over and admit that 100 % of every one of them fucked up.
You won't get a crash as the system has changed and the stake holders will all cling to the new system for dear life. Those who profit from the paper economy (paper trillionaires aka supply-siders) will get richer and more powerful. Those who don't will be supported from birth to grave so they can consume and grow fat (real economy corpses aka demand-siders).
The central bankers have got it made. Wish I had a perpetual currency machine so I could buy up everything of value on the planet. By the time the financial bubble bursts they will own everything/one and will be able to buy all the protection they need by parcelling out a few slices of bread to schmucks to do their dirty work.
Kind'a like what is happening now, only more so.
Aren't they just stupid!
"The business cycle as we knew it is DEAD"
The business cycle is very much alive. We are at the end of the current business cycle.
The FED and government have distorted the cycle, but the cycle itself remains.
The economy is a surplus energy equation. What we had in the 1970s we do not have now. Not even close.
Japan has been on this train for 25 years. What makes anyone on ZH think it can't go another 20 for Amerika? Collapse may be coming but not any time soon.
Japan has been on this train for 25 years. What makes anyone on ZH think it can't go another 20 for Amerika? Collapse may be coming but not any time soon.
First by inflation then by deflation! Did the author forget about 2004-2014 where the cost of living practically doubled?!?! Yeah so now its deflation. It is a model figured out by Jefferson almost 250 years ago.
Our job as citizens is to raise awareness of a destructive model created by foreign adversaries. After all, what are enemies except those trying to rob you? The job of a military swearing oaths are to out a stop to it at the point of a gun.
Since they didn't and wont dont ask me to shed a tear when such and families have no benefits and no income. And sure I'll work for Chinese investors if the leaders are going to sell out Its "if you can't beat them join them." I'll probably get a Nobel for it. And I don't care if it is Jews, Chinese or Martians, you dont give up control of the commons in currency. EVER. Guess it will take WW3, a new holocaust and 1/3 of the planets population to relearn the hard way.
If deflation is to happen according to his thesis, there ought to be capEx expenditures through the roof because business investment has been so cheap for so long. I do not believe that this is the case. Businesses have instead chosen financialized routes to increasing "shareholder value". None of which improved productivity of land, labour or capital.
There may be demand side effects that cause deflation: too many people are not working. Too few are getting raises.
Guillotine the Fed. Audit the heads.
The banksters need to repay us.
Serious inflation pops up suddenly. This article only confirms it.
Is it biflation or stagflation that will get us ??
Well yes, the central bankers would like it if everyone would believe that they are stupid. Like: oh gee, I'm so sorry folks, I just didn't know, I really tried to do the right thing.
Sure.
Bubbles are inflation you silly sausage!
ZH and sites like it are controlled opposition. When your part of the team, Everything is AWESOME.
Phoenix - This "controlled" opposition argument by Radical Marijuanna is not something I agree with. He has good evolutionary understanding but seems to insinuate that nothing any of us do, leadership or citizen matters. Since we went from 2 billion to 7 billion in a hundred years that means some things were done right and progress was made.
The malthusians have been proven wrong and scarcity arguments while holding a grain of truth at times and scale are used more to justify monopoly and line pockets.
Mainstream media is also now crying foul. We are a reactive species, we mostly learn and relearn through pain. Its all controlled opposition because we can freely speak our minds (at least mostly)?
I am sure there are agents that are on this site. So? If your arguments are for posterity perhaps there is a small glean of information to share with one another. Perhaps whatever your role is in society big or small we can strive for a better, level playing field. Mankinds progress is not in a straight line. There will be casino's and debt peddlers until we finish our evolution because there is customers. But this place and others tell me prudence still wins the day over instant gratification and as an imperfect sinner all I can do is try and keep looking in that mirror (gulp).
I like the economic articles here even though much of it is bad news. At least I can be better informed how to deal with it and that has taught me patience which I really was never good at practicing. That holds benefits but I dont want this to become a book report.
Anyways, it is Easter so whatever your beliefs in the spirit of the message of rebirth, sacrifice for one another may all of you be blessed this holiday!
This article is the reason why I read ZH. Although it may come to the same in the end, it is so much deeper and profound economically speaking than the usual doom and gloom with little more basis than the gut feelings of their writers.
This situation is simply one aspect, albeit a very important one, of what is wrong in the US, UK and Europe. None of this is going to change any time soon. I've just watched a programme on RT about how everything revolves around money (as opposed to choice and value), and I'm beginning to understand the US and many of you on ZH a little better. BTW all the contributors were Americans. I now see what the problem is with big, paternalistic govt, about the progressive loss of freedom to choose thanks to govt agencies who remit is set in law made by politicians who are puppets controlled by corporations whose interests they are in place to serve. I see the same thing happening here in the UK and also in Europe. I've been struggling to understand why Obamacare has resulted in so much heat on these postings, however a phone conversation with my brother in NJ yesterday brought me up to speed. As far as I can see we are all seriously fucked, short of major changes to the status quo. Change will come of course and it may come from an unexpected direction, such as major climatic events or some kind of global pandemic; whatever, this is not about to end well.
We can't have a Capitalist future .... until the Socialist/Islamic/Fascist (redundancy) world is defeated .... consider our FED Ponzi .... as a giant dirty bomb .... to string the Socialist fucks along .... until their economies resemble Venezuela .... then electric hard money Capitalism .... will reassert itself !
Without a periscope I can't see around corners.
Neither can anyone else.
Deflation is happening to consumer income. Inflation is happening to the cost structure. similar events in history label this scenario as hyperinflation.
The greater the chasm between what the people need to purchase and what it can afford is the inflation.
Governments simply print more hoping to bridge the chasm. They simply make the chasm wider by printing. In desperation they print more and the desperate masses start hunting amongst the wealthy for what they can no longer purchase. It's a pretty nasty circle that only goes away when the toilet is flushed and a new system starts. Usually after a nasty war. You don't need to be an economist to tell you where your going. This shit show has been shown before.
See Venezuela.... Happening in real time.
Excessive credit expansion, through all its methods of operation, is the basis for the boom then bust cycles. Stockman delivers an excellent account of this process. If you want another excellent analysis, read the book "The Origin of Financial Crises" by George Cooper.
The central banks have transformed the monetary, financial and economic systems fundamentally by making unlimited amounts of capital available at the top levels of the financial system at almost zero interest cost.
Some of the most important consequences are that the interest-earning value of savings from labor has been reduced to zero and the prices of financial assets have been inflated to astronomical levels, reducing yields to almost zero.
Has anyone seen good analyses of how these changes will permanently transform the financial and economic systems long-term - eg what happens to pension funds and the insurance industry, whose basic financial models rely upon fixed-income type investments vs capital-gain speculation type investments ?
Stockman is very good at pointing out past errors in monetary and economic policy, while assigning a disproportionate share of the blame on Fed decisions. He accuses the Fed of out-of-control Keynesianism while giving little space to the responsibilities of other economic actors, like government policies and corporate greed. While usually accuate in describing events and the errors made, he has very little to say by way of alternative courses of action that may have been applied. This is due to his religious devotion to the myth of "free markets" and laissez-faire capitalism.
A lot of current criticism of Fed actions is based on it having been assigned responsibilities informally in the media and congress that do not appear in its enabling legislation. Its primary responsibility is to maintain price stability and the integrity of our money. While it is a worthwhile objective, full employment should not have been assigned to the Fed as one of its responsibilities for the simple reason that it is not something that the Fed can do by itself. The maintenance of full employment depends much more on congressional and corporate leadership decisions than anything the Fed can do.
We are currently faced with the destructive consequences of the free float of the dollar, initiated during the Nixon administration, but caused mostly by the inflationary policies of the Johnson administration. Stockman does not mention any alternative course of action to the free float, but there were some available. The best known were the efforts of the International Monetary Fund and some governments to expand Special Drawing Rights at the IMF. Some commentators, always ready to criticize anything originating in China, have accused that government of attempting to make the Yuan Renmimbi the new reserve currency. The Chinese themselves have never said that. They have recommended the reinstatement of the SDR, with the Chinese currency playing a role proportionate to its share of world trade.
Rmolineaux - The IMF stated in 2014 the Yuan was the new GRC with 38 CB's renominating in Yuan.
ZH published it but I am one that said it would happen since 2011 here. Milton Friedman made good arguments on floating currency but we tend to go with the devil we know. I wish the Chinese well, maybe they'll do a better job than we did as GRC. Time will tell. I think the Chinese know GRC is a blessing but a curse near the end of a 80 year cycle as part of the job is global policeman and they have enjoyed lots of lopsided trade without the bulk of responsibilities. My speculations are based on human nature more than technicals.
I don't care about vanity of being right, people here should know how the world works and invest/hedge accordingly. I had a good mentor that showed me the value of giving back to the community. Educating with what tools and time I have is about the best I can do. In the end, many just do what they can.