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Guest Post: If You Want to Help the Poor and the Middle Class, Encourage Deflation

Tyler Durden's picture




 

Submitted by Charles Hugh Smith from Of Two Minds

If You Want to Help the Poor and the Middle Class, Encourage Deflation

If we step out of the conventional brainwashing about how bad deflation is, we discover it's actually good and it's inflation that's bad.

We have been brainwashed into believing that inflation is good and deflation is bad. The truth is that inflation is good for banks and bad for households, while deflation is bad for banks and good for households.

Since ours is a bank credit system enforced by the Central State, what’s bad for the banks is presumed to be bad for everyone.

This is simply not true. Inflation is “good” for borrowers, but only if their income rises while their debts remain fixed. For everyone with stagnant income--and that's 90% of the nation's households--inflation is just officially sanctioned theft.

The conventional view can be illustrated with this example. Let’s say a household earns $50,000 a year and they have a fixed-rate mortgage of $100,000. If they set aside 40% of their income to pay the mortgage, that’s $20,000 a year. This means they can pay off their mortgage in five years. (To keep things simple, let’s ignore interest.) Let’s say the household’s annual grocery bill is $5,000—10% of the annual income.

If inflation causes all prices and incomes to double, the household income rises to $100,000 and groceries cost $10,000--still 10% of the annual income. In this sense, inflation hasn’t changed anything: it still takes the same number of hours of work to buy the household’s groceries.

We can say that the purchasing power of an hour of labor hasn't changed; whether the hour is converted into $1 or $1 million, that money buys the same quantity of goods and services as it did before the inflation.

But inflation does something magical when incomes rise and debts remain fixed: now 40% of the household income is $40,000, and so the household can pay off the fixed-rate mortgage in only two-and-a-half years.

Why is inflation good for the banks? After all, the mortgage is paid with depreciated money that no longer buys what it used to. Inflation benefits the banks for the simple reason that it enables the household to make its debt payments and borrow more.

Remember that banks don’t just earn profits on interest, they make money on transaction fees: issuing loans and processing payments. The more loans they originate and manage, the more money they make. The more debt and leverage increase, the more money the banks make.

Banks don’t actually hold many of the loans they originate. They bundle the loans and sell them to investors, a process called securitization. The banks bundle the loans into a security such as a mortgage-backed security (MBS) that can be sold in pieces to investors around the world. (Near-worthless mortgages always have a ready buyer: the Federal Reserve.)

The bank made its money when it originated the loan. Future inflation hurts the investors who bought the loan, not the bank. The bank sold the loan and booked the profit. To make more money, it needs to originate more loans. And to do that, it needs consumers who feel richer because inflation has boosted their nominal (face value) income.

It’s all an illusion, of course; it still takes the same number of hours of labor to buy groceries. But this illusion of having a higher income encourages households to borrow more. This is how inflation greatly benefits banks.

But the mechanism falls apart if incomes don’t rise along with prices for goods and services. When incomes stay the same and prices of goods and services rise, the household is poorer-- their income buys less than it did before inflation.

The mechanism also falls apart if interest rates rise while income stays flat. In adjustable rate loans and credit cards, for example, the interest rate can adjust higher; the rate is not fixed.

This is the situation we find ourselves in: 90% of households are experiencing stagnant or declining income, even as inflation raises the cost of goods and services every year. Adjusted for (probably understated) official inflation, the median household income has fallen 8% in the past five years.

Income, Poverty and Health Insurance Coverage in the United States: 2011 According to the Census Bureau, "In 2011, real median household income was 8.1 percent lower than in 2007."

Major expenses like medical insurance and college tuition have been rising at 5% to 6% a year for decades, twice the official rate of inflation.

The Federal Reserve’s policies are explicitly intended to create 3% inflation, as this benefits the banks. But since wages and incomes are declining for 90% of households, the Fed’s policy is stealing purchasing power from households and enriching the banks. The Fed is a “reverse Robin Hood,” stealing from the poor to give to the rich. The Real Reverse Robin Hood: Ben Bernanke and his Merry Band of Thieves (August 31, 2012)

Since we’ve been brainwashed into uncritically believing deflation is bad, we haven’t thought it out for ourselves. Take computers as an example: we can buy more memory and computer power every year with less money. The cost of computers has deflated for decades. Calculated in 2012 dollars, I paid $5,350 for my first Macintosh computer in 1985. Last year I bought a Hewlett-Packard PC for $450, less than 10% of the cost of a computer in 1985, and the PC has 1,000 times the power and memory of a 1985-era computer.

This is deflation in action: our money buys more goods and services every year. How is this bad? If deflation is good when it comes to computers, how does it suddenly become bad when applied to everything else?

Not only is deflation good for the household with fixed or declining income, it’s also good for the economy. How many people could afford a computer in 1985? Very few. How many can afford a computer now that they cost one-tenth as much? Almost everyone can afford one, even those households that are officially near the poverty line ($23,000 for a family of four in 2012).

If inflation had driven up the cost of computers while income stayed flat, even fewer people could afford computers, and manufacturers would have a much smaller market.

It’s important to remember that adjusted for inflation, the median income for the lower 90% of wage earners (138 million people) has been flat since 1970--forty years. Only the top 10% (14 million people) actually gained income, and only the top 5% gained significantly (+90%). The only way 90% of the populace can buy more goods and services is with deflation.

Let’s consider a household that earns $1,000 a month that enables them to buy 100 good and services. At 4% inflation, in five years the household will only be able to afford 80 goods and services, because inflation stole 20% of the value (purchasing power) of their income. Those producing and selling goods and services have lost 20% of their market.

At 4% deflation, in five years they can afford 120 goods and services--20% more. If you are producing a good or service, your market has expanded by 20%.

Let’s total the consequences of inflation and deflation. With 4% inflation, households are poorer, as they can buy fewer goods and services, and those producing goods and services see their market shrink by 20%. Inflation is a disaster for everyone but the banks.

With deflation, households’ purchasing power increases by 20% and the market for goods and services also increases by 20%. If productivity rises more than 20% over five years, companies can actually produce and sell 20% more goods and make more profit than they did five years before.

What the banks and their neofeudal enforcer the Federal Reserve want is for households to become poorer but more heavily indebted. They don’t want households to be able to afford more goods and services--they want households to have to borrow more money to buy more goods and services because issuing more loans is how banks make huge profits.

Politicians love bank profits as much as the banks because they collect tens of millions of dollars in contributions (in more honest terms, bribes) from the banks. Politicians don’t care if 90% of American households get poorer every year thanks to inflation created by the Federal Reserve: the 1/10th of 1% live in a completely separate world than the 99.9%.

The banks and their politician partners love inflation because it lines their pockets with tens of billions of dollars in profit. They have worked very hard to convince the 99.9% that inflation is good and deflation is bad, but it’s simply not true. Inflation is a slow, continual theft that robs the hard-working productive members of society and transfers the wealth to the banks and their crony lapdogs, the politicians and lobbyists.

Banks and the Federal Reserve hate deflation because people can buy more goods and services without borrowing money to do so.

If the Federal Reserve’s nightmare comes true and deflation occurs, something else happens that the banks fear and loathe: marginal borrowers default on all their debts. Rather than being easier to pay, the debts become more difficult to pay as money gains value. Marginal borrowers no longer get the “boost” of inflation, so they increasingly default on their loans.

How is it bad for hopelessly over-indebted, overleveraged households to default on all their debt and get a fresh start? Exactly why is that bad? What is the over-indebted household losing other than a lifetime of debt-serfdom, stress and poverty?

The banks have to absorb the losses, and since they are so highly leveraged, the losses drive the banks into insolvency. They are bankrupt and must close their doors.

Note that 99.9% of the people benefit when bad banks absorb losses and close their doors. Only the bank managers, owners and bond holders lose, and everyone else gains as an unproductive, poorly managed bank no longer burdens the economy with its malinvestments and risky bets.

The Federal Reserve’s policy of protecting the wealth and power of the banks while stealing from wage earners via inflation is a catastrophe for the nation and the 99.9% who are not financiers, politicians and lobbyists.

If you want to do something for the poor and middle class, encourage deflation.

 

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Tue, 09/18/2012 - 10:48 | 2806929 fuu
fuu's picture

Deflate Bitchez!

Tue, 09/18/2012 - 10:52 | 2806962 GetZeeGold
GetZeeGold's picture

 

 

We're printing so much money....deflation is sure to happen!

Tue, 09/18/2012 - 11:02 | 2807001 Oh regional Indian
Oh regional Indian's picture

ARGAIV........

Tue, 09/18/2012 - 11:06 | 2807006 dlmaniac
dlmaniac's picture

 

If we could buy a house at 300K instead of 400K, we'd have 100k freed up so that we could buy perhaps a new car, a new set of furniture, a new HDTV, have a few trips to Carribean and so on. Our standard of living would acutally go up with a lower real estate price.

This is not even Econ-101. It's elementary school common sense, and yet beyond our Ivy League Econ-elites to understand.

 

Tue, 09/18/2012 - 11:14 | 2807049 mayhem_korner
mayhem_korner's picture

 

 

...umm...only if you had the $400K and weren't planning on borrowing any of it for the house.

Tue, 09/18/2012 - 11:24 | 2807086 redpill
redpill's picture

Has Chuck ever written anything under 1,500 words?  Dude needs some Twitter therapy.

Tue, 09/18/2012 - 11:36 | 2807129 Dalago
Dalago's picture

deflation = purchasing power    It's that easy.

Tue, 09/18/2012 - 12:13 | 2807312 mayhem_korner
mayhem_korner's picture

 

 

Not if your income falls faster than prices...

Tue, 09/18/2012 - 14:05 | 2807806 Popo
Popo's picture

On the other hand,  Deflation obliterates anyone leveraged 100:1    (cough, JP Morgan Chase, cough)

..which is exactly why the megabanks try to convince everyone that deflation is "worse".   Inflation and deflation both suck.  But the latter annihilates banks.

Tue, 09/18/2012 - 16:18 | 2808351 Dalago
Dalago's picture

mayhem_kornerIt depends on where you think the price/wage spiral begins.  So... no.  Price of goods will react first then wage updates happen after earnings are reporting.  So price is a leader and wages are a lagging indicator.

Tue, 09/18/2012 - 12:25 | 2807385 petridish
petridish's picture

Jee-zus--did you read the article??  They understand it PERFECTLY.  It's idiot Americans who don't understand.

Tue, 09/18/2012 - 14:00 | 2807779 tbone654
tbone654's picture

Bernanke understands... played by Peter Falk in this clip...

http://www.youtube.com/watch?v=j4wY-3zkv6Y&feature=relmfu

11:00 minute mark to end

Tue, 09/18/2012 - 11:07 | 2807024 mayhem_korner
mayhem_korner's picture

 

 

Inflation/deflation is not the key thing...the key thing is purchasing power.  This article way oversimplifies things in trying to make the argument that the relationship between inflation/deflation and purchasing power is so straightforward. 

Tue, 09/18/2012 - 11:31 | 2807096 ACP
ACP's picture

Exactly. A constant dollar would be best for everyone, in fact. Especially those in the middle class, who need to save and plan for some years down the road.

Kinda like the entire period between 1790 until the creation of the Federal Unreserved, where inflation was almost nil.

Edit: The period of highest inflation during that time was during the civil war, which was followed by a period of deflation, back down to "equilibrium."

Tue, 09/18/2012 - 11:39 | 2807144 pods
pods's picture

The biggest scam of inflation is that it is set up to extract the productivity increases over time.

Good should become cheaper over time due to increases in productivity and competition.  With a positive rate of inflation, you are basically stealing the value due to inccreases in productivity.  

Although computers are an extreme example, IMHO, it illustrates the effect.

But overall, as you become more productive, goods are cheaper to make and thus will be able to be sold at a lower price for the same profit.

Competition allows that price to move down.

But you cannot have purchasing power increases or a higher forward value for your currency in a credit money system. It won't work.

Hell, the Federal Reserve was set up due to the fact many companies were self-financing at the turn of the century. Banks were losing their influence.

Usher in the panic of 1907, banking reform committee, a quick sojourn to Jekyll Island and voila, the recipe for enslavement was perfected.

pods

Tue, 09/18/2012 - 12:50 | 2807475 odatruf
odatruf's picture

Computers are a very bad example because the role of innovation in technology is unlike almost anything else. If autos followed that model, we would all be paying ten dollars to drive Rolls Royces and Porches.  If houses did, we would all be paying $100 to buy 2,000 sq ft urban lofts or 4,000 sq ft McMansions is the burbs.

 

Tue, 09/18/2012 - 13:51 | 2807733 Steaming_Wookie_Doo
Steaming_Wookie_Doo's picture

I'd put it to you that innovation has been stifled in other industries (but I do get your point). Heck back in the 70's there was talk of a carburetor that provided 100mpg efficiency. Not to mention other energy-related tech that has been silenced. We've been paying a huge premium to have petro-domination continue in the economy. Imagine the cost of anything if we weren't paying a massive wedge of income to petroleum, and could employ low cost energy-- I'm thinking more of water as fuel, zero point energy, not Al Gore's stupid mercury filled light bulbs.

Tue, 09/18/2012 - 14:19 | 2807881 Anusocracy
Anusocracy's picture

You're not accounting for the difference in labor, materials, and regulations in your comparisons.

Also, people have a preference for smaller electronic gadgets and larger cars and houses.

 

Tue, 09/18/2012 - 11:52 | 2807197 blunderdog
blunderdog's picture

    followed by a period of deflation

Yeah, and you know what they CALLED that "period of deflation" at the time?

"The Great Depression."

Of course, historians' perspectives changed after the 1930s, so it was renamed in the history books. 

Maybe in another 50 years we'll be calling what's going on NOW "The Great Depression" and the '30s period will become "The (previously believed to be) Great Depression."

Not that it matters much--the more important issue is the decades of widespread misery that result from the economic cycle.  If there were any kind of simple solution to THAT, someone would've found it by now.

Tue, 09/18/2012 - 13:00 | 2807512 ACP
ACP's picture

I mentioned the Civil War, not WW2.

But in the latter case, the Fed had distorted the markets so much that "equilibirum" was far, far below what most people could have imagined at that time.

Tue, 09/18/2012 - 13:19 | 2807581 blunderdog
blunderdog's picture

Back to History class...

After the Civil War was what we now call "The LONG Depression."  It occurred before the Fed came into existence.   You referred to it as a "period of deflation," which is all well and good considering you weren't trying to survive through it. 

At the time it was occurring, however, people called it the GREAT Depression, because they didn't have the advantage of knowing what was coming 60-70 years later.

Interesting, too--what comes 60-70 years after the "Great Depression" of the '30s?

I don't put much stock in simplistic wave analysis--two dimensional analysis is only effective for extremely simple relationships--but I DO think the reason history rhymes so often is because human behavior at any given time is heavily influenced by people's age. 

A human lifespan (in theory) would be a useful yardstick to plot against historical cycles if you want to understand why and how things happen over and over again.

Tue, 09/18/2012 - 14:30 | 2807932 Anusocracy
Anusocracy's picture

"but I DO think the reason history rhymes so often is because human behavior at any given time is heavily influenced by people's age. "

I would guess that it has more to do with whether the Idiocracy Meters or the Evilometers are in the plus or minus range.

Humans are domesticated animals that can go feral.

Tue, 09/18/2012 - 15:56 | 2808304 blunderdog
blunderdog's picture

The "idiocy"/"evil" *needle* hasn't moved in at least a thousand years.  It's the *scale* that's been jumping all over the place.

Tue, 09/18/2012 - 12:25 | 2807387 MeBizarro
MeBizarro's picture

Exactly. 

Tue, 09/18/2012 - 16:11 | 2808338 avidtango
avidtango's picture

I've heard (many times) Ron Paul speak about inflation vs deflation in terms of the money supply which, in the end, affects purchasing power.  He has asked the same question as many others.  "Why is it so bad to pay $2 for gas rather than $4."  Someone asked about wages and he opined that a strong currency actually went much further with a low wage than inflating prices go with a higher wage.   There is, to put it bluntly, no limit on the up side. 

And when one considers the criminal methods used in computing inflation you want to scream.

Tue, 09/18/2012 - 11:16 | 2807061 whatsinaname
whatsinaname's picture

I agree with the headline - did not read the article.

Prices need to come to reality based on real GDP growth not headline inflation related growth.

Tue, 09/18/2012 - 11:23 | 2807081 mayhem_korner
mayhem_korner's picture

 

 

The only way prices will come to reality is if you eliminate fiat currency.  Currency needs to be backed by something(s) physical, tangible, scarce and needed and act as a conduit for the barter system that underlies. 

Tue, 09/18/2012 - 11:50 | 2807187 MachoMan
MachoMan's picture

We've tried that before...  we screw it up like everything else...  we need a lot more than just a seemingly more stable system to avoid runaway prices.

Tue, 09/18/2012 - 12:25 | 2807369 LMAOLORI
LMAOLORI's picture

 

 

"If You Want to Help the Poor and the Middle Class"

So funny is this a comedy skit?

 

Fed Up: Bernanke Declares War On The Poor,Elderly,Middle Class


Bernanke Buoys Big-Bank Stocks

 

Tue, 09/18/2012 - 10:45 | 2806930 LawsofPhysics
LawsofPhysics's picture

wait what? Wages actually matter?

Tue, 09/18/2012 - 11:08 | 2807025 Sudden Debt
Sudden Debt's picture

Have you every heard that a wage increase doesn't stimulate a employee to work harder?

IT'S COMPLETLY TRUE!

just a sidenote... It's completly true when that person makes more than 350.000$ a year.

Employers like to fence with the first line of that well known fact and always tend to forget to tell the second. Because it mostly only applies to themselves...

Tue, 09/18/2012 - 11:54 | 2807202 aint no fortuna...
aint no fortunate son's picture

what's a wage?

Tue, 09/18/2012 - 10:45 | 2806931 backhandtopspin...
backhandtopspinslicer's picture

IF IF IF IF IF IF IF IF IF IF

Tue, 09/18/2012 - 10:53 | 2806965 GetZeeGold
GetZeeGold's picture

 

 

Crap it's stuck again......just kick it.

 

Tue, 09/18/2012 - 12:35 | 2807423 Rylie
Rylie's picture

If you aunt had balls she'd be your uncle.

Tue, 09/18/2012 - 10:46 | 2806932 Cognitive Dissonance
Cognitive Dissonance's picture

"If we step out of the conventional brainwashing about how bad deflation is, we discover it's actually good and it's inflation that's bad."

Clearly you have missed a few programming session Charles. Please report to your nearest FEMA camp for re-education.

<Don't make us send in SWAT to assist you.>

Tue, 09/18/2012 - 10:49 | 2806952 New England Patriot
New England Patriot's picture

Mmm, deflation.

Tue, 09/18/2012 - 10:50 | 2806957 Budd aka Sidewinder
Budd aka Sidewinder's picture

If everybody files bankruptcy then everybody starts over with the same FICO score, no?

Tue, 09/18/2012 - 10:51 | 2806960 levelworm
levelworm's picture

Guys, seriously? Deflation? How about 1931 again?

Tue, 09/18/2012 - 10:58 | 2806977 GetZeeGold
GetZeeGold's picture

 

 

Dude.....that was the Germans They screw everything up.

 

Those guys are paying 50 year old Greeks to retire on the beach wearing nothing but speedos.....they're batshit crazy!!!

Tue, 09/18/2012 - 11:19 | 2807068 10mm
10mm's picture

The horror of such a sight.

Tue, 09/18/2012 - 11:22 | 2807076 Terrorist
Terrorist's picture

In 1930 21% of the labor force was in agriculture. Add support services and you can understand...

Tue, 09/18/2012 - 10:51 | 2806961 Dr. Engali
Dr. Engali's picture

Making the assumption that anybody in power wants to help the poor and middle class make the whole post moot.

Tue, 09/18/2012 - 11:04 | 2807008 mayhem_korner
mayhem_korner's picture

 

 

If the rate of borrowing exceeds the rate of income growth (individual level) or real production growth (aggregate), buying power is reduced.  That's it.

Rolling in the "class" angle just turns this piece into rhetoric.

Tue, 09/18/2012 - 10:53 | 2806967 yogibear
yogibear's picture

Carlin described the reason.

http://www.youtube.com/watch?v=O2xqt8fyjxI

 

 

Tue, 09/18/2012 - 10:58 | 2806984 DaveyJones
DaveyJones's picture

smart enough to run the machines, dumb enough to accept the conditions

Good old George

Tue, 09/18/2012 - 10:56 | 2806971 MachoMan
MachoMan's picture

I think the author walks a tenuous tightrope with the notion that our expanding credit system does not account for a significant portion (if not all) of the cost availability of items like personal computers and their components.  The demand, research, development, and resource extraction pulled forward through our credit system are all inescapably intertwined with the prices of goods.  Price deflation in one sector cannot be used as a lynch pin for the virtues of deflation...  [NOTE: this is not even deflation...  inflation and deflation occur through an increase or decrease in the money supply...  if the author's version of deflation is correct, then we have simultaneous deflation and inflation...  no].

Is the absence of massive credit expansion good for the common man?  Sure...  good point.  But is the withdrawal of credit, at a time when credit has been massively expanded and banks have been backstopped no matter what, a good thing?  Is it necessarily going to lead to anything that won't naturally occur when the levee breaks, so to speak?  Will the common person actually be better off in the interim by maintaining the status quo?

Tue, 09/18/2012 - 10:55 | 2806975 dolph9
dolph9's picture

It's all about the housing, student debt, and (to a lesser extent) auto debt sectors.

They want you to keep on paying that mortgage and student debt forever, for a lifetime.  And they will keep you alive on food stamps to do it.

They want to turn you into a debt slave rather than take any loss whatsoever. 

There are only two ways out:  either people default en masse, or people refuse to take on debt, en masse.  A few people doing these here or there won't make a difference.

Tue, 09/18/2012 - 11:00 | 2806992 DaveyJones
DaveyJones's picture

"the only way to win the game is not to play"

it's incredibly simple

and it probably scares the shit out of them

that's why they constantly scare the shit out of us

Tue, 09/18/2012 - 11:12 | 2807042 ptoemmes
ptoemmes's picture

Wife and I just paid off the mortgage - early.  Yeah!  You would not believe - maybe you would - how much push back/resistance we got from the bank (not even a TBTF bank) to do that.  They even "routed" us to their re-finance department.  Finally, we had to threaten them - just so we could get it paid off.  Waiting to see if they clear the mortgage and deed.

 

 

Tue, 09/18/2012 - 11:19 | 2807069 mayhem_korner
mayhem_korner's picture

 

 

Great story, dude.  You pricked their balloon.  Tell it again.

Tue, 09/18/2012 - 11:28 | 2807102 edifice
edifice's picture

Better make damn sure they honor your repayment and process the paperwork correctly... I'd have my lawyer on speed-dial, if I were you...

Tue, 09/18/2012 - 12:29 | 2807402 MeBizarro
MeBizarro's picture

If you have a fixed 15-year rate at current rates, that's almost certainly a very foolish thing to do. 

Tue, 09/18/2012 - 12:53 | 2807486 odatruf
odatruf's picture

As (almost) always, it depends on the situation.

 

Tue, 09/18/2012 - 13:24 | 2807600 ptoemmes
ptoemmes's picture

Agreed...but this was a older refi at about 6% that we had been accelerating for some time.  Had 3 to go and we just just decided to snuff it.  Did not what to refi at current rates and/or try to draw equity out.

Peace of mind overrode anything else.

I am well aware that we still do not own it - renting from the local gummint via taxes and all that.

 

Pete

PS

Ayup on the attorney - thanks

Fri, 09/21/2012 - 02:18 | 2817046 Colonel Klink
Colonel Klink's picture

Problem is you may have paid off the lender you're making payments to, but another party holds the note.  They can release the mortgage but that doesn't absolve the note if incorrectly paid.  Only sure way to currently have clear title is to have a judge issue a quiet title action.  All because of MERS, the MBS debacle, and the cluster fuck nature the banks have made our real estate system.

Just sayin....

My 25 years of mortgage experience makes my BS detector scream in our current environment.

Tue, 09/18/2012 - 11:13 | 2807043 mayhem_korner
mayhem_korner's picture

 

 

People won't refuse to take on debt en masse...because it defies the (irrational) promises that they have been given.  How many are on the streets right now with a $100K+ student loan liability because they "did what they were supposed/were told to" in getting a degree?  Whoops.  And (some of) their elitist parents and "mentors" point with disdain to the "non-educated" tradesman who is working 60 hours/week wiring houses, fixing roofs, and tuning engines.

[paint the mirror black, the mirror always lies]

Tue, 09/18/2012 - 11:24 | 2807088 MachoMan
MachoMan's picture

Exactly.  The underpinning of the credit system is the simple human truth that we will spend today for the opportunity to pay tomorrow.  It happens to EVERY generation...  the only difference is that some generations personally get burned bad enough from the experience that they withdraw...  however, their children, having not experienced it directly, tend to revert.

Tue, 09/18/2012 - 11:46 | 2807167 pods
pods's picture

When these scams are set up, those in the beginning tend to make out pretty good.  It is only near the end that things tend to get bad.

Same with every ponzi scheme, legal or otherwise.

pods

Tue, 09/18/2012 - 11:49 | 2807174 DaveyJones
DaveyJones's picture

human truths for sure but this chapter may be unique. The systems are global, ridiculously complicated and run on high speed computers where the public is not allowed to play. The debt is also based on a presumption of growth at a particular rate. Something, that until now, was never questioned. But all of this is built in a physical world, a world now hitting wall after wall.       

Tue, 09/18/2012 - 12:01 | 2807246 MachoMan
MachoMan's picture

I am hoping that the internet will provide a real time alarm bell as well as monitor of our economic conditions.  I also believe we have the chance to utilize the knowledge on it to build a system that at least corrects some of the mistakes we've made this cycle (some of them I think recurring problems, which would definitely be a plus to eliminate).  The cyclical nature of our boom bust episodes provides not only chances for a bad outcome (e.g. the world as we know it to end), but also for us to correct the problems of the past and build a more stable and fair system...  

I really do not think that it is possible at this point to claim that we would have any semblance of the level of technology that we do if we did not adopt the boom bust cycle...  now, the question remains as to the degree of our misallocation of resources (a shit ton of oil for sure), but it's not as though we haven't gotten anything from the exercise.  These things tend to withstand the busts...  and we stairstep upwards on them.  Hopefully we're actually working towards something good than aimlessly meandering or, worse, being directed towards something terrible.

Tue, 09/18/2012 - 10:57 | 2806982 Jason T
Jason T's picture

in 2011, the average household spend $4150 on gasoline .. Gas averaged $3.53 a gallon.  It's higher this year!

 

$4150 was 8.3% of average household income.. 

 

Tue, 09/18/2012 - 10:58 | 2806986 Inthemix96
Inthemix96's picture

Two things you should imperically do to not get shot.

No1:  Do not under any circumstances piss the wrong person off.

No2:  Run like fuck, in a zig zag if you crossed rule No1.

Any questions?

Tue, 09/18/2012 - 11:22 | 2807030 tbone654
tbone654's picture

"serpentine shelly, serpentine" from The In-Laws (1979): Getting off the plane in Tijuara

http://www.youtube.com/watch?v=A2_w-QCWpS0&playnext=1&list=PL82A2F17ADDCBE56C&feature=results_main

Also from The In-Laws ...  A lesson in monetary policy  "print baby print"  that's all there is...

http://www.youtube.com/watch?v=GiJAcThiTH8&feature=related

Tue, 09/18/2012 - 12:54 | 2807490 odatruf
odatruf's picture

During the DC sniper days, we were given a memo offering rule # 2 as solid guidance.  No joke.

 

Tue, 09/18/2012 - 10:59 | 2806990 101 years and c...
101 years and counting's picture

"If You Want to Help the Poor and the Middle Class, Encourage Deflation"

rofl!  as if ben or the politicos give a fuck about the bottom 95%.

Tue, 09/18/2012 - 11:00 | 2806995 TicoTiger
TicoTiger's picture

I'm doing my part to "deflate" COMEX by buying gold and silver coins and not holding them in a bank.

I'm doing my part to "deflate" Wallmart by buying local goods produced by local people whenever possible.

I'm doing my part to "deflate" Microsoft by using Linux.

I'm dong my part to "deflate" MSM by turning off my television.

Is that what deflation means?

Tue, 09/18/2012 - 11:31 | 2807111 thomasincincy
thomasincincy's picture

paying in cash is my favorite

Tue, 09/18/2012 - 12:00 | 2807240 blunderdog
blunderdog's picture

Not many folks CARE what "deflation" means to anyone but themselves. 

It's either:

1) decreasing money supply
2) increasing purchasing power of a currency
3) falling prices
4) contracting credit market

The reason there's so much chatter about the subject is that people don't clarify which meaning they *intend* when they use the word.

We are currently seeing "deflation" (contracting credit market) while prices rise, so there have to be CONSTANT stupid pointless arguments about who's the bigger idiot.

Tue, 09/18/2012 - 14:01 | 2807783 Steaming_Wookie_Doo
Steaming_Wookie_Doo's picture

Yep. If a person cannot deflate his debt by doing BK, then the deflation of wages will make him more of a slave. I'm thinking specifically of student loan debt being undischargeable, as well as some states having laws making mortgage loans full recourse. If you can't get away from those two, you're screwed when the overall wage deflation hits after the debt deflation.

Tue, 09/18/2012 - 11:01 | 2806996 dobermangang
dobermangang's picture

I'll buy an I-Phone when it deflates to $20 bucks.  You can buy a decent tablet in China for $45.00. 

http://venturebeat.com/2012/09/15/hardware-is-dead/

Tue, 09/18/2012 - 14:23 | 2807903 flattrader
flattrader's picture

Forward that article to Reggie Middleton.

 

Tue, 09/18/2012 - 11:02 | 2806999 Cursive
Cursive's picture

I don't want inflation or deflation.  Both have negative consequences.  The goal should be price stability.  If we're going to have a fiat system (which, incidentally, is different from our current debt-based monetary system), then monetary growth should be capped at population growth.  That would *basically* be net neutral growth on a per capita basis.  Of course, practice is much more difficult than theory and a monetary commission could easily fudge population growth as a means to achieve an end.

Tue, 09/18/2012 - 11:03 | 2807002 Apocalicious
Apocalicious's picture

And encourage breaking up the big banks.

 

You could also encourage ending the Fed manipulation of inflation data, which masks the poors' inflation by blending it with the deflation rich people are getting. If necessary goods inflate faster than luxury goods, poor peoples' overall cost structure inflates faster than the headline CPI and rich peoples' cost structure inflates slower than CPI. = compounding effect on wealth and exponentially increasing gap, net of all other effects.

Tue, 09/18/2012 - 11:05 | 2807009 My Days Are Get...
My Days Are Getting Fewer's picture

Charles,

I think you forgot a few things, like:

the guy, who bought a $100,000 house with a $100,000 mortgage.  20% deflation means the house is worth $80,000 but his mortgage is still $100,000.

Shrinking collateral values destroy everyone.

Tue, 09/18/2012 - 11:34 | 2807125 exi1ed0ne
exi1ed0ne's picture

Deflation encourages savings and self financing, and causes problems because nominal (not real) wealth decreases.  It also decentralizes the power of money.  Inflation encourages spending and debt, and causes problems because real (not nominal) wealth increases.  It also centralizes the power of money to the lender.

I'm no Carnac the Magnificent, but deflation seems like the better option if only because money power is in the hands of the savers.

Tue, 09/18/2012 - 13:00 | 2807511 LMAOLORI
LMAOLORI's picture

 

 

They shouldn't be giving out 100% loans when people don't have any skin in the game they don't care about walking away or taking care of it. I looked at numerous foreclosures it was shameful how they were left.  The homes were worth far less and not just as a result of shrinking collateral but as a result of not being taken care, ie, routine maintenance and then many were just purposely ruined.  It costs money to be a homeowner above and beyond the payments far too many people bought more then they could afford.

Tue, 09/18/2012 - 19:01 | 2808748 JuliaS
JuliaS's picture

Declining housing values aren't a problem. Most assets degrade and depriciate over time. An item is worth as much as you were willing to pay for it when you signed the document. Don't like the deal anymore? Cease payments and surrender the asset. As simple as that. Pay the fees, keep the keys - that's what a mortgage is.

If you take out a car loan and the car depreciates while you drive it, do you go back to the dealership and demand principal reduction cause the vehicle's worth half of what it was originally? In you crash it, do you demand a full refund?

Deflation doesn't destroy value of assets. It brings expectations in line with reality. Shrinking collateral values only hurt debtors who borowed too much and did not budget?

Well, that's their problem.

And let me tell you another story.

I went car shopping awhile ago because my 25 year old clunker finally fell apart. I saved for a new car and was ready to pay the full amount in cash. Every single dealer pressured me into financing. Nobody wanted to take money. Why? Because there was no room for hidden charges in the contract.

 When you pay with your savings, you're presented with a paper with a number on it. Either you have the money and you pay it, or there's no deal. If you see that the dealer is messing with you and the digits don't match, you walk away.

 When choosing financing fees can be augmented and tagged on the back of scheduled payments. You don't have to have the money on hand in order to qualify for contract. In fact, the risk perception associated with you not being able to pay is so miniscule, the dealer is refusing cash in order to make an extra buck later. Meanwhile someone is packaging and selling off the loan, making somebody else's problem entirely.

 That's the upside-down system we live in, where debts and inflation are cheered and encouraged. If you save money to pay for things, you're frowned upon. In a normal world cash would always be prefered over debt and deflation would be treated as normal course of action. Things degrade and manufacturing efficiency increases, so most things are getting cheaper.

Tue, 09/18/2012 - 11:06 | 2807017 gwar5
gwar5's picture

Help the poor, give directly. Government spending is not charity. Keep your money away from government,starve the beast. "Deficit spending is nothing but confiscation of wealth..." Greenspan, 1966

Tue, 09/18/2012 - 11:07 | 2807018 MedicalQuack
MedicalQuack's picture

I said a while back, devaluate the algorithms, they set the value and it's a mathematicl formulas runnig with code.  Devalute it and tax the data sellers out there who make billions selling data.  That's the entire problem with over hyped math and formulas and certainnly they have value for sure but not to what the market hyped and we are out of balance. 

http://ducknetweb.blogspot.com/2012/04/devaluate-algorithm-and-tax-data....

Tue, 09/18/2012 - 11:08 | 2807026 DaveyJones
DaveyJones's picture

No matter how hard they try however, they can not completely control deflation and it exists at the same time as inflation. As more people begin to realize that inflation not only exists but is growing, they will hold money for shorter periods knowing their paper does little more than continually lose value. With that, people will buy less and less long term things and crowd up on short end necessities. Big ticket items (houses) will continue to fall. Food will continue to climb. Granted there are plenty of other factors, but this seems like a force  

Tue, 09/18/2012 - 11:17 | 2807063 Cognitive Dissonance
Cognitive Dissonance's picture

So...............go long Charmin? Mrs. Cog insists.

<You should see our spare bedroom aka "bunker".>    :>)

Tue, 09/18/2012 - 14:16 | 2807206 DaveyJones
DaveyJones's picture

yes, wipe the bankers off the face of...well you get the idea

I'm going long compost bins (related subject)

Tue, 09/18/2012 - 11:28 | 2807048 death_to_fed_tyranny
death_to_fed_tyranny's picture

The masses of sheeple can take the banksters down by defaulting on everything. I own my house outright. Had  70K in unsecured debt(CC). Used it to prep. Defaulted. When dunning letter received , sent debt validation. Been relatively quiet lately. Fight People! Don't be a sheeple! Banksters are CRIMINALS! You CREATE the money when YOU sign on the dotted line that is not a line(authorised representative). We are all debt slaves until we aren't! WHO IS JOHN GALT! I am! And you all should be too! Stop Bitching and TAKE ACTION!

Tue, 09/18/2012 - 14:08 | 2807825 flacorps
flacorps's picture

I wouldn't recommend defaulting on everything if you can pay. But if you can't, I did write a good book that can help you. http://www.myhopeseries.com

Tue, 09/18/2012 - 11:15 | 2807056 zebrasquid
zebrasquid's picture

In deflation(see The Great Depression), people lose jobs, businesses go out of business, debt becomes more burdensome, people can't pay their mortgages and go further upside-down and lose their houses in greater number...So, the only people that really benefit, again, are the "rich" that can scoop up the cheaper assets, hire people who are desperate and will work for peanuts...etc..

The "rich" always are better off, deflation, inflation.   Pays to be rich, not poor and struggling -   not a new notion for most of us.

Tue, 09/18/2012 - 18:55 | 2808817 JuliaS
JuliaS's picture

In an inflation prices rise faster than wages.

In a deflation wages fall faster than prices.

Heads - they win, tails - you loose.

Tue, 09/18/2012 - 11:16 | 2807062 Shizzmoney
Shizzmoney's picture

Adjusted for (probably understated) official inflation, the median household income has fallen 8% in the past five years.

Change I can believe in.

What suckers my generation (18-35) are.

Tue, 09/18/2012 - 11:40 | 2807064 boiltherich
boiltherich's picture

After having read the headline only, If You Want to Help the Poor and the Middle Class, Encourage Deflation I will already disagree, though I do plan to read the rest of it to see if this is some kind of joke. Deflation helps only the owners of debt because the future stream of debt repayment to them is worth more than it was when it was lent. Conversely the poor and middle classes who are the ones that owe a larger share of income will now have to service that debt with money that is worth more and is harder to get than it was when they borrowed. Not only that but deflation discourages borrowing and contracts credit so those who owe now have to repay rather than roll over all or part of their debts.

Now I will go read the rest of the post and see what theory could possibly support the thesis that deflation is good for the lower half of us.

This is deflation in action: our money buys more goods and services every year. How is this bad? If deflation is good when it comes to computers, how does it suddenly become bad when applied to everything else?

Problem is that incomes decline while debts especially that HUGE one; the fixed rate mortgage, do not. We are now in a state of stagflation with declining employment, and those still employed have declining incomes, and those who had saved (mostly through residential equity) have seen their savings DEVASTATED by deflation in the lower half of the RE market, even as the prices for food and energy have risen far faster than is reported in the CPI, who cares about iPads and big flat screen TV's? You cannot take advantage of the deflation in those items by buying them in bulk or every other day for instance to offset the increases in food and gasoline which you have to have daily.

In the meanwhile the vast dynastic fortunes of the filthy rich are every day getting larger through the largess of the Fed which has made them the biggest welfare queens on the planet (just announced they will be getting an extra 40 billion or more per month in their welfare checks indefinitely until the poor have jobs) and each day their fortunes buy an ever larger chunk of the country as the poorer 90% of us are forced into cash lifestyles that every day is a smaller share of national income.

Prices do not fall (deflate) because of the actions of banks or the policy of the Fed though they can interfere with market pricing functions for a temporary period, they fall when supply exceeds demand. Demand in turn can be repressed by lowering incomes, confiscating savings, or contracting credit so that the debtors are forced to burn through current income to service debt rather than buying goods and consuming.

Well, everybody a few years ago complained that the consumer economy was bloated and somehow rotten to the core, that what was needed was a depression to realign the economy. What do you think so far?

Tue, 09/18/2012 - 11:20 | 2807067 RKDS
RKDS's picture

I don't get how deflation helps the middle class?  I'm pretty sure that most working people would get the old "due to the economy..." talk as their wages were slashed, leaving them completely incapable of making their mortgage payment and shortly thereafter homeless.  No, this is a bankster trick, make the money worthless and get everyone on the hook for a ton of it, then turn around and pretend it's suddenly infinitely more valuable.

Tue, 09/18/2012 - 12:00 | 2807243 boiltherich
boiltherich's picture

Deflation does not help the middle class, and inflation only helps them via the lowering of the value of fixed rate debt like their mortgages and student loans IF their incomes rise in tandem with prices. What is really going to help everybody at all income levels is price stability in an era of economic expansion where the Gini coefficient is trending back to 50, which means progressive taxation and a far higher level of philanthropy (although from my point of view real philanthropy has never been anything but a myth). My great fear at this point is that economically the huge dark pools of dynastic wealth have choked off capital formation processes which drove the engine of capitalism in America for hundreds of years, that we are past the point of no return barring a vast redistribution of wealth. Not even a gold standard will do that. We are now in the terminal stages of becoming Mexico, or the Philippines, or Haiti, where all wealth is concentrated in the hands of so few and the poverty of the 99% is so great that we can effectively claim that we now reside in an oligarchy where your lives are run for you by those who know what is better for you. However they will only chose what is better for YOU if it coincidently is better for them.

Panem here we come.

Tue, 09/18/2012 - 11:21 | 2807074 WhiteNight123129
WhiteNight123129's picture

Hugh SMith is a total retarded person, we need the one who have cash (rich and corporations) to dis hoard they capital and spend it into wages. COnsumers have debts you fucker, you want the weight of their debt to go higher? The corporations and the rich need to convert their capital into circulation so that to force stagflation and higher wages so that consumer can pay their debt. UTTERLY idiotic post!

Tue, 09/18/2012 - 11:22 | 2807077 gmak
gmak's picture

All you need to know is that prices move before wages.  Wage-earners benefit from deflation (prices fall before wages do) and asset holders (the 1%) benefit from inflation (prices rise before wages - most of their wealth comes from real or financial assets).

Tue, 09/18/2012 - 11:23 | 2807082 Snakeeyes
Snakeeyes's picture

But the Fed is now succeeding in making housing MORE expensive again!

http://confoundedinterest.wordpress.com/2012/09/18/why-did-the-fed-do-qe...

Tue, 09/18/2012 - 12:22 | 2807354 boiltherich
boiltherich's picture

Residential real estate prices to buy have gone up marginally only because mortgage interest has gone down. A house payment has 4 components called PITI, principal, interest, taxes, and insurance, at any given point in the economy the consumer/prospective house buyer considers their ability to make the monthly payments consisting of those four components, if insurance or (HA!) taxes drop then they can afford more house. Since 2008 mortgage interest has dropped from about 6.5% (the rate I got when I bought in April 2008) to somewhere in the mid 3% range now, and that does not sound like that much but over 360 months on an average $200k mortgage it is a monthly chunk.

This is ONLY possible by the way because of artificially lowered supply because TPTB are keeping the shadow inventory of distressed housing off the market. And the bankster portion and the government portion (via Fannie & Freddie) of TPTB can only do that because the Fed portion has been writing welfare checks to them in the form of QE1, QE2, QE lite, Operation Twist, and now an outright monetization of more than 40 billion per month. If they were not getting all that support they would actually have to mark the value of those homes to market and dump them from their balance sheets at about 1/10 of what they went onto the balance sheets for. The foreclosed homes, the REO inventory will never be allowed onto the market for reasons I have stated before, they simply will be held forever on the books though they have rotted into the ground.

To recap that reason:

Banks do not book a mortgage at the purchase price they lend to you so you can move in, they book the entire stream of 360 payments over the life of the mortgage as an asset. During the peak of the housing bubble in just the last three years of the BushCo Administration banks lent 5 trillion in RE loans, but as I point out they were not booked at 5 trillion which would have been bad enough in a downturn, they were booked at 15 trillion which is the actual repayment schedule, and then they leveraged THAT! Every single bank in the world would collapse within 24 hours if houses had to be marked to market value and sold, even if they were drip fed into the market over five years or so it would still bring every bank to zero, that is why we call them ZOMBIE banks.

Tue, 09/18/2012 - 11:25 | 2807083 WhiteNight123129
WhiteNight123129's picture

Hugh SMith confuses circulation increase and increase in nominal wages with rise in prices (relative price increase). Two different things. Enough of the utter bullcrap of this blog.

Tue, 09/18/2012 - 11:24 | 2807085 sunnyside
sunnyside's picture

When we started making policy decisions based upon what is best short term for bankers and debtors we screwed the pooch.  Fixing it now requires hitting the reset button.

 

Tue, 09/18/2012 - 12:13 | 2807249 Getting Old Sucks
Getting Old Sucks's picture

I don't understand how that would work.  I assume you mean that all debt is forgiven.  Fine, but who forgives it?  The banks, who issue those debts with deposited funds from all of us?  Then we're forgiving it, right?  Wait though, FDIC guarantees those deposits.  Sorry, but the FDIC is broke.  Then, there are the pension funds who bought debt securities who will also have to forgive the debt.  Then the pensioners forgive the debt, right?  Wait though, The PBGC guarantees a limited amount of everyone's pension.  Sorry, the PBGC is broke.  The insurance companies sell annuities and insurance policies reinvesting that money in fixed income equities including debt.............................................................................................................

 The only one that can do it is the FED approved by the GOV printing it all up.  Then what happens?  The debt is simply transferred to the unborn who never borrowed a dime.  Take heart though, there will eventually be a reset.  At that time, everyone except TPTB will go to ZERO> wealth & debt.

 

Tue, 09/18/2012 - 11:26 | 2807092 ebworthen
ebworthen's picture

Another argument for defaulting on your obligations, since Wall Street and Washington have defaulted on theirs.

Tue, 09/18/2012 - 11:29 | 2807104 nickels
nickels's picture

Inflation creates the vig that politcians take for running the game.

Tue, 09/18/2012 - 11:29 | 2807106 gmak
gmak's picture

If you have lots of debt - default. If it's student debt - get a job, borrow from a credit card to pay back the student loan and then default.  It's not rocket science.  there is no glory in being a debt slave the rest of your working life.

 

Why should banks get trillions of dollars because of bad decisions, yet students be forced to wear the yoke.

Tue, 09/18/2012 - 11:48 | 2807177 amadeusb4
amadeusb4's picture

Didn't credit cards close that loophole in the last bankruptcy reform law?

Tue, 09/18/2012 - 12:04 | 2807263 gmak
gmak's picture

Then borrow money from some other source. It's all the same. Do an end run around the student debt.

Tue, 09/18/2012 - 13:45 | 2807703 flacorps
flacorps's picture

The loophole is only closed if you make more than the median income in your area. If that's the case, you're stuck in a Chapter 13. However, bankruptcy is not the be-all and end all. In many cases you can come out much better through "informal bankruptcy" (which once went by the name "being a deadbeat") and perhaps making a strategic settlement here or there, otherwise waiting out the statute of limitations or even fighting off lawsuits using one grounds or another.

I wrote a book for people who find themselves deep in debt. It's called "Debt Hope: Down and Dirty Survival Strategies" ... http://www.myhopeseries.com

Tue, 09/18/2012 - 11:32 | 2807114 f16hoser
f16hoser's picture

Yeah but they want to destroy the middle class. It's in their grand plan.

Tue, 09/18/2012 - 11:32 | 2807115 Fix It Again Timmy
Fix It Again Timmy's picture

I buy stuff - I buy stuff that is cheaper - That is veeery good, man!  Any pencil, limp-dick PhD central banker who tells me that is a bad thing can go to hell - I say ya r a dum mo fk'r...

Tue, 09/18/2012 - 11:32 | 2807116 amadeusb4
amadeusb4's picture

This is an idiotic article that could have been stopped dead in its tracks if only the author answered his own question, "If deflation is good when it comes to computers, how does it suddenly become bad when applied to everything else?" Becuase general deflation STOPS SPENDING which drives the economy.

This article is akin to making the case for the medieval practice of blood letting to heal people. If you're sick then let's let the bad blood out to make you better. How can that be bad?

Tue, 09/18/2012 - 14:24 | 2807909 DaveyJones
DaveyJones's picture

think of it in relative terms. It's not deflation, it's a badly needed and natural correction / balance to a diseased inflation manufactured by the government and the banks

Tue, 09/18/2012 - 18:26 | 2808738 Bazza McKenzie
Bazza McKenzie's picture

It's amazing how falling prices, not just on computers but a whole raft of electronics, such as mobile phones, TVs, stereos have stopped people spending!  Of course I'm not sure what fantasy universe that was in.  In the real world, sales of those products escalated.

I suppose that as long as food prices were dropping you'd stop eating, and if the price of clothes were falling you'd go naked instead of buying any clothes, and if the price of gas was going down you'd stop driving.  Not the rest of us.

Before the Fed, US prices were overall fairly stable but, within that there were periods when prices rose and periods when they fell.  The economy did not stop growing during the latter.  The claim that under gradual price deflation there would be a reduction in economic activity is a lie perpetuated by inflationists to hide their theiving purpose.

Tue, 09/18/2012 - 18:37 | 2808770 amadeusb4
amadeusb4's picture

 



 

Pumping It Up

NEW: Newsletters writers are available to chat with Members, comments are found below each post.

While Stock World Weekly is on vacation, please enjoy the Market Shadows newsletter. 

Market Shadows Newsletter: Pumping It Up

(Musical accompaniment: "Pump it up, until you can feel it, Pump it up, when you don't really need it…" Elvis Costello)

 

Full newsletter: MarketShadows "Pumping it Up" (Sept. 16 2012)

Highlights:

Quantitative – INFINITE – easing (QE) will again be the central and primary force driving our financial markets into the foreseeable and not-so-foreseeable future. Dr. Ben Bernanke stepped on the gas of his incredible money-printing machine. His monster, Bernankenstein, is showing no signs of fatigue.

QE is not new. Our neighbor to the West, Japan, embarked on this process over 20 years ago. In 1989 in Japan, asset prices were in a bubble. In some areas of the country, the price per square foot of real estate hit $139,000. When the Japanese real estate market and the Tokyo stock exchange jointly collapsed, trillions of dollars were wiped out. Japan's economy had been driven by its high rates of reinvestment, so the crash hit particularly hard. Subsequently, investments were increasingly directed out of the country (China, India).

As a repercussion of the loss of investment, Japanese manufacturing firms soon lost a significant degree of their technological edge. The negative effects combined, and Japanese products became less competitive overseas. Lower consumption both internally and externally began feeding a deflationary spiral that has not ended yet.

Popular financial blogger Mish Shedlock has been arguing, correctly, that the US will "go in and out of deflation over a period of years, just like Japan."

Mish defines his terms as follows:

  • Inflation: a net increase in money supply and credit, with credit marked-to- market.
  • Deflation: a net decrease in money supply and credit, with credit marked-to- market.

According to Mish, "If one woodenly sticks to the view that inflation and deflation are about prices (while ignoring a devastating collapse in housing), then yes, the US is still in a period of inflation. Likewise, if one foolishly sticks to measures of money supply like M1, M2,.. then the US is also in a period of inflation.

“[But] neither money supply nor the CPI can adequately explain interest rates, housing prices, lack of jobs, and numerous other real-world phenomena. In the real-world, in a credit-based economy, it is credit that matters." (Zero Hedge Provides Empirical Proof of Deflation (However, He Does Not Even Realize It))

Mish: "Failure to include credit in the definition of inflation and the analysis of economic activity causes many problems. Credit influences consumer prices, jobs creation, and asset prices. The mark-to-market value of credit influences the ability and willingness of banks to lend.

"From a practical standpoint of economic analysis of the economy, debt-deflation (deflation) and consumer deleveraging is of paramount importance and is likely to remain of paramount importance for some time, no matter what definition one assigns to the process." (Yes Virginia, U.S. Back in Deflation; Inflation Scare Ends; Hyperinflationists Wrong Twice Over)

There are many ways deflation hurts an economy:

  1. De-leveraging: The high debt of house- holds and corporations cause people to increase savings, decrease spending, and pay down debts. This takes cash out of circulation.
  2. Bank lending: In the face of falling asset prices (house prices), banks become less willing to lend. This lending con- straint causes ripple effects, as capital goods and services become underuti- lized.
  3. Wealth effect: Asset prices (houses, stocks) decline, spending decreases.
  4. Manufacturing/production: At optimal capacity, what goes into an assembly line comes out for consumption. When money is tight, demand decreases, inventories rise, and prices fall.
  5. Lower profit margins: Profit margins come under pressure. This leads to higher unemployment as firms cut costs. Weaker profit margins often translate into lower stock prices.
  6. Employment: Employees are expensive. Employment usually takes a hit early in a deflationary cycle. This can lead to more de-leveraging, as people shift from spending to paying off debt.
  7. Decreasing spending: Consumers post- pone purchases when they expect pric- es to fall.
  8. Increasing debts: The real value of debt rises as price levels fall. This also de- creases spending.
  9. Real borrowing costs increase during deflationary periods because prices are falling. The relative interest paid on loans increases. This inhibits borrowing.

 

From: http://www.philstockworld.com/2012/09/18/pumping-it-up/

 

You are welcome.

Tue, 09/18/2012 - 18:49 | 2808800 Bazza McKenzie
Bazza McKenzie's picture

If you choose to define a word in a way that suits your purposes and is different from the meaning most people give to the same word then you can produce any outcome you like.  But that is just sophistry not logic.

Tue, 09/18/2012 - 11:33 | 2807118 wagthetails
wagthetails's picture

yup...all QE is essentially the left's version of trickle down.  Although I still woulnd't call deflation good.  the fact is, nothing is every good for everyone.  deflation helps the lower class while inflation helps the upper class.  I'm not against helping lower class, but will that really help economic output?  do you really think lots of companies and ideas will be launched out of the lower class?  it may be cold...but not everyone in the upper class is content on cashing weekly checks from the family trust fund. 

in any case, the lower classes gov't checks (of minimum wage) will also increase with inflation. 

i guess at the end of the day, i'd be happier w/o the fed mucking with the market (neither pushing inflation nor deflation).  just focus on enforcing laws, competition and ethics. 

Tue, 09/18/2012 - 11:33 | 2807119 Getting Old Sucks
Getting Old Sucks's picture

The last company I worked for was bought and taken private by an investment group this past summer.  Many were laid of, some held on as temp, and some offered a permanent position.  The last group had to take a salary cut of between 12% and 20% to keep their jobs.  The new 401k offered had no employer contribution.  The new medical plan called for about a 50% increase in employee contribution.  These jobs were pretty decent waged positions but goes to show that workplace austerity is in motion. 

Tue, 09/18/2012 - 14:28 | 2807920 DaveyJones
DaveyJones's picture

The people who really run this place are global, don't care about this place or its people, and believe they have to bring these folks in closer line with the rest of the (third) working world.

Tue, 09/18/2012 - 17:27 | 2808562 Getting Old Sucks
Getting Old Sucks's picture

My hat off to you sir.  I never thought about that.  That really is scary and bet that most J6P haven't considered that also.  That concept is certainly worth spreading around to make all aware that our corporations are not our own and in fact can exist simply to destroy us.  Thanks again pal.

Tue, 09/18/2012 - 23:24 | 2809704 DaveyJones
DaveyJones's picture

I wish I was wrong but the evidence seems overwhelming

Tue, 09/18/2012 - 11:39 | 2807142 Red Heeler
Red Heeler's picture

 

 

Encourage Deflation?

How about: Discourage Theft?

Tue, 09/18/2012 - 11:39 | 2807143 paulie
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Too bad deflation implies plunging industrial production.

Too bad high deflation was the cause of the second world war.

Tue, 09/18/2012 - 11:43 | 2807158 blunderdog
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That's great, but why would anyone want to help the poor or middle-class?  They'll never be able to pay you back later...

Tue, 09/18/2012 - 11:46 | 2807166 MoneyShaman
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People use inflation as a general term. Mainstream economics views inflation in Keynesian origin, price inflation, which is the correct term.

 

 

A economy can grow on deflation. That is prices are lowered, because the value of currency increases, and/or competition has reduced profits. What confuses mainstream economist is that there is a difference between inflation in money supply, and deflation in economic trade. In a barter economy, there is no money, yet a barter economy can still grow nevertheless. Deflation in the context of a barter economy simply means there is less economic trade. That's it. Mainstream economics, neoclassical, New Keynesian, etc confuses price levels with value. This goes along with their mathematical pursuit of quantifying a economy of human actors.

 

In Austrian definition of inflation, Austrians make a distinct definition of inflation, there is inflation of the money supply, and there is price inflation, which can be a symptom of monetary inflation. You can have increased profits with lower prices. This is not a impossible phenomenom.

Tue, 09/18/2012 - 11:51 | 2807192 paulie
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"A economy can grow on deflation. That is prices are lowered, because the value of currency increases, and/or competition has reduced profits."

Yes, and because of that corporates start to destroy goods and lay off people in order to maintain the profits (see US 1931, when they threw away tons of milk and corn).

Price inflation occurs only when money reaches consumers. But consumers is not the only possible destination when printign money: I am thinking more investments in infrastructures.

Tue, 09/18/2012 - 11:58 | 2807221 MoneyShaman
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You are terribly confused. Great Depression was caused by a credit expansion. 1920's saw a booming economy, yet no evidence of price inflation by neoclassical observation. Price stability is a fictious theory based on nothing. It serves no social benefit. Gold standard wasn't the cause of the Great Depression. Monetary incompetence was.

Tue, 09/18/2012 - 12:12 | 2807306 paulie
paulie's picture

No you are confused.

Deflation had brought poverty to Germany who was trying to serve the debt of the first war to a point were layoffs and misery brought Hitler and the nazis to the governemt.

Great depression was caused by the sudden interruption of that credit the same way it's happening with the euro.

"Price stability is a fictious theory based on nothing. It serves no social benefit."
Agreed.

Deflation makes your debt bigger whether you are a private company or a nation. This always leads to layoffs and the down spiral of the economy.

 

Tue, 09/18/2012 - 12:21 | 2807350 paulie
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I am just adding this.

Deflation may work as described by Tyler, if and only if there is NO interest to pay on no debt.

Experience in Europe suggests (see spain whose debt rose from 300 billion in 2000 to 1000+ billions in 2010) that in presence of debt, deflation brings about internal deflation (reduction of salaries and services) and the plunging of internal demand and the fall of the economy altogether.

In Italy in the 1980s we had such a law whereby when the government printed your salary got increased by the same amount in percentage. It worked better than the euro today.

Tue, 09/18/2012 - 14:40 | 2807992 MoneyShaman
MoneyShaman's picture

Again you are painting deflation and inflation as a black and white thing without knowing what exactly you are talking about. You use the mainstream view of deflation, that is economic contraction associated with price declines. Prices are information. Prices falling are not the cause of a economic contraction. A barter economy that has a economic decline has no such thing as price deflation, because a barter economy uses no money. Great Depression was caused by a boom in credit that went bust. Similar to how the housing crisis came to fruition. Prices are not static, they are dynamic, and always change all the time due to business fluactuations, or business cycles. Monetary inflation creates the illusory effect of wealth gain. Consumers miscalculate their own net worth by seeing their assets rise in prices like their house, or 401k, so they spend more. Investors, and producers miscalculate consumer wealth.

Tue, 09/18/2012 - 11:49 | 2807183 Shizzmoney
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Computer example is prudent, but also a bit shortsighted: the only reason why these things are so low, is b/c they are made by Chinese slave workers at pennies on the dollar.

Add to that an economy that is struggling to spur demand.  "Abundance" is not the sole reason why these tech gadgets are falling in price.

Imagine what the price of an iPhone would be if it was made with American Labor?  In a sense, the corporations use of Chinese slave loabor bascially admits, the inflation is too damn high as it is!

Tue, 09/18/2012 - 11:52 | 2807193 Tao Jonesing
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CHS does not seem to understand either deflation or the root cause of PC prices going down over the years (hint: it wasn't "deflation").

This post goes beyond the ideological blinders that the self-proclaimed free thinker occasionally wears and lands him deep in idiot territory.

 

 

Tue, 09/18/2012 - 12:13 | 2807315 Chump
Chump's picture

Instead of parenthetical hints that are not actual hints, why don't you add to the discussion and explain your reasoning?

Tue, 09/18/2012 - 12:03 | 2807260 MoneyShaman
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I would just like to add about inflation hurts the poor, and middle class. Yes it does. Inflation is a engine of theft, and only those who have the means to not be robbed are specific group of people, that is investors, and producers, bankers, people who can make money of of inflation. Working people no, employers are not going to look at inflation graph and say, "Ok since inflation was this high, we are going to raise your wage to this much according to how much money printing". That's nonsense. Inflation attacks money as unit of account, store of value, and medium of exchange. The irony is mainstream economic theory says that inflation is good, because we can't afford deflation, so we must accept depreciated wages, or at best scenerio flat wages.

Tue, 09/18/2012 - 12:07 | 2807281 DaveA
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Deflation is horrible. Look at computers for instance -- the cost to process and store a given amount of data has fallen by half every eighteen months for the last sixty years. That's why computers have been the world's least successful industry.

Tue, 09/18/2012 - 12:13 | 2807314 EmileLargo
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Dropping computer prices is not "deflationary" as it does not reduce the quantity of money and credit in the system. The "deflation" that scares the Keynesians is "debt deflation" in which massive quantities of credit is liquidated. That process (as seen from the 1930s and documented by Irving Fisher) is not painless. The benefit of it is that it eliminates bad debts faster than the inflationary nonsense the policy makers are currently pursuing. And from an Austrian point of view, it means that capital gets reallocated to productive activities faster.

Tue, 09/18/2012 - 14:01 | 2807758 Marco
Marco's picture

The problem is capacity for growth ... the rich want to get richer, if their best avenue for that is invesment in productive activities, that's what they will do. If natural resource limits are putting a crimp on growth and the oppurtunity for productive activies ... well, there is always rent seeking.

Tue, 09/18/2012 - 12:09 | 2807291 EmileLargo
EmileLargo's picture

No. Deflation or inflation - both are going to screw the poor and the middle class. There is no "easy" way out when you've built up an economy on consumption and leverage. There is no painless way out of this. To pretend otherwise as a Keynesian Inflationist or a Deflation lover is disingenuous.

Tue, 09/18/2012 - 12:20 | 2807356 uncle_vito
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I have always expected the US to go into deflation like Japan.  When I thought about how I would position my portfolio for this occurance, it seemed that my situation would not be so bad.

I am hoping housing depreciation continues.   When more folks can afford to buy houses, the economy should be helped.  Banks will hate it but so what.

Tue, 09/18/2012 - 12:34 | 2807422 MeBizarro
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Japan has been able to go through their extended deflation period because of the massive household savings rate and stored up wealth.  Lack of trust in alternative investments (e.g., equitites, bonds) by the averrage Japanese citizens also helped.

US households don't remotely have the level of savings or household debt levels that Japan households did in the early 1990s.

Tue, 09/18/2012 - 12:41 | 2807370 Haager
Haager's picture

Utter BS, it doesn't matter for most of the middle class or less which one - deflation or higher inflation - would be better. Actually both did live in an environment which was designed to support some inflation, and the people adapted to it. They lend on some scale, they had an income, some a saving and so on. If the parameters are changed, the plans - which are made usually on middle term expectatiosn - become the point of interest. Most poor and middle class people can't change these plans in the short term, so they're stuck into what the now different environment will offer to  them - and in nearly all cases they're on the losing side.

And with politics protecting the big ones the small ones become losers twice. 

Tue, 09/18/2012 - 12:32 | 2807414 MeBizarro
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This post is a massive convulated mess.  It brings together way too many different topics (overall deflation vs deflation in consumer goods due to innovation/productivty gains), ignores present realities (household debt levels), and doesn't point out the simple fact that it is inflation in services (e.g., education, healthcare) that have exploded the past 30 years while until 2008 consumer goods actually declined in most US households as a % of annual spending. 

Tue, 09/18/2012 - 12:36 | 2807428 KickIce
KickIce's picture

I would agree pre bailout.  Under current circumstances all defation does is gives the bankers the opportunity to buy the world for pennies on the dollar.

The only way to restore the free market is to hang the bastards and confiscate their ill-gotten assets.

Tue, 09/18/2012 - 13:46 | 2807679 Marco
Marco's picture

The problem is of course the smart bastards are all hiding behind 7 proxies ... in the end the only distuingishing feature the bastards have is that they are rich.

So if you are going to advocate confiscation be fully aware where that takes you ... just taking down the figure heads will only recover a very small percentage, to take all of it back you need to be less discriminating ... and there will be collateral damage.

Tue, 09/18/2012 - 12:44 | 2807459 Hillbillyfreak
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If the Federal Reserve’s nightmare comes true and deflation occurs, something else happens that the banks fear and loathe: marginal borrowers default on all their debts.

In a deflationary depression, which ultimately would occur, the ranks of "marginal borrowers" would increase in numbers.  The economy is dynamic, not static.  We just went through a period when the marginal borrowers defaulted, and it has spilled over into what one would pre-collapse consider worthy borrowers; because the result of the defaults by the marginal borrowers was many people losing their jobs; ergo, the creation of a new group of marginal borrowers that can't service their debt.  What happens when the new set of marginal borrowers default?  The Feds actions the last five years has been to prevent the spiral from continuing.  (I'm not endorsing anything they've done for the last 100 years, just saying they are trying to prevent a deflationary collapse.)  

The banks have to absorb the losses, and since they are so highly leveraged, the losses drive the banks into insolvency. They are bankrupt and must close their doors.

One person's loan is another person's deposit.  The banks are undercapitalized and over leveraged.  When the banks close their doors, the deposits go poof.  (A large percentage of the deposits are already poof, but we aren't supposed to worry about that.)  So, the Fed does Qufinity now to try to put a floor under the financial system or the FDIC pays out deposit insurance later when the banks close their doors.  FDIC is under funded and couldn't cover all the loses anyway.  So, its pay me now or pay me later.  (I'm not defending what the Fed has done for the last 100 years, just saying they don't want to entertain the FDIC option.) 

Deflation is good if you hold cash and don't have any debts.  I don't disagree that inflation is bad, but deflation could be worse.  And, I am the first to argue that most if not all of the pain for the last five years has been passed down to Joe Citizen and not enough pain (financial and criminal) has been felt by the banking elite.  But, is there such a thing as "controlled deflation".  Can you deflate the debt bubble without crashing the economy?  A financial reset may be a healthy event in your view, but can it be done without crashing the financial system and the economy?  

Tue, 09/18/2012 - 12:45 | 2807461 KickIce
KickIce's picture

dup

Tue, 09/18/2012 - 13:12 | 2807539 Marco
Marco's picture

The problem with deflation is that it removes debt, but it doesn't adress the wealth inequality ... it will not reset the situation to the 70s, it will just cripple most families with rent rather than mortgage payments.

Tue, 09/18/2012 - 13:28 | 2807623 Dr. Sandi
Dr. Sandi's picture

We don't need no stinkin' deflation, biflation, inflation or reflation.

What we need is for the blood sucking parasites in charge of the financial institution to play by the rules and honor the contracts that they happily forced upon the rest of us.

Meanwhile, the only way we're going to get things fixed is to auger this baby into the ground as hard and as fast as we can do it. Wrecking it may not make it better, but at least we get a new flight crew.

 

Tue, 09/18/2012 - 13:53 | 2807735 Rick Masters
Rick Masters's picture

@Boiltherich: your comment was an extremely well-thought out repsonse for someone who hasn't even read the article. It was more informative than the article and I hope everypne reads it.. BRAVO!

Tue, 09/18/2012 - 13:54 | 2807747 Seasmoke
Seasmoke's picture

if everyone defaults on their debt (which is unsecured , including most mortgages) = we can finally RESET

Tue, 09/18/2012 - 14:05 | 2807789 Threeggg
Threeggg's picture

The worlds financial institutions balance sheets will not allow deflation.

They have a CDS backstop !

Tue, 09/18/2012 - 14:49 | 2808034 Hendiesel
Hendiesel's picture

I agree with the EVERYTHING WRITTEN.. IT is the BASIS OF ZEITGEIST ADDENDUM.. That is the second film by Peter Joseph..  Inflation only benefits the wealthy.. And as for everyone else it essentially is hidden TAX, because wages have remained stagnant for many years now.. .We the masses, sheeple, 99.9 percenters must END the FED.. AND let the REVOLUTION begin.. Demand the return of the GOLD STANDARD!!!! But most of all the Failures of over-leveraged and "gambling" banks need to fail.... No more PRIVATIZED GAINS, AND SOCIALIZED LOSSES; FOR the mentally challenged people that means "I keep what I profit and everyone chips-in when I lose"...  

Tue, 09/18/2012 - 16:05 | 2808331 sessinpo
sessinpo's picture

Interesting thread and topic.

Deflation and inflation are market forces that do the same thing. It exposes market imbalances and tries to rebalance them. There are good things and bad things for both depending on your financial situation.

Regardless of what occurs, someone and often many will get hurt. But overall, for the health of a nation, it is positive as it resets and liquidates malinvestments and returns the markes to a more relative equilibrium until the next phase of imbalance occurs. You know, the business cycle.

One can do okay or even well in either environment if they are positioned correctly. And as for comments regarding that we are printing money so much, that we have to have inflation. Considering all the money that has been printed, we should have already experienced hyperinflation - $20 for a loaf of bread, $50 for a gallon of gas, etc. Where is all that money going? Well we know that banks are depositing mass amounts back at central banks even at ridiculously low rates. This allows them to have cash reserves for future crisis. Many large corporations are doing the same instead of using that money to reinvest, expand and hire more people. And at these low rates, why would you want to use your own cash when you can borrow if you need to at historically low rates. But the point is that all the trillions that has been printed in various manners and central bank gimmicks isn't circulating through the economy such as the 1970s. It is servicing old debts such as the trillions that have to rolled over each year not only by governments but by corporate bonds.

Tue, 09/18/2012 - 18:56 | 2808813 THE DORK OF CORK
THE DORK OF CORK's picture

Living in a island of deflation.....

Believe me the Bond holders don't pay , they get paid.

The debt serfs suffer as there is no money for domestic demand = no wages.

The rich hold far more units of currency then the poor & middle, therefore they can survive longer before the end comes.

Tue, 09/18/2012 - 21:34 | 2809370 StychoKiller
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Thanks Captain Obvious, you've enlightened us all!

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