“Never predict anything, especially the future,” as Casey Stengel wisely said. “But let’s look, instead, at the past.”
Usually, I would leave this type of post to the Steves, Jazz, Ken, Roberts, Edwards, Mikes, Thomas, etc. of Angry Bear Blog and stick to my manufacturing expertise to which flow the big bucks for me; but, this is in laymen’s terms and it makes sense to me at least. Arend Brett’s latest article on Market Watch “Are We Ready For Deflation” points to deflation rather than the inflation as being the threat to the US economy today. Brett appears (in my best LSS lingo) to suggest deflation is a bigger threat to the US economy.
Albert Edwards at SG Securities believes one fact-based inflation indicator is undershooting the better known ones, such as the regular PCE and the CPI. He adds the indicator is undershooting both of the other indicators more over time. The forces of potential deflation are all around us with retailers such as Staples, Radio Shack, Penneys, Macys, Sears, Aéropostale, Coldstone, etc. announcing since the start of this year they were closing stores. Some of this is to meet the move towards more internet sales; but as Brett points out it plays hell with commercial rents and retail wages. Having returned from a trip to the area around Shanghai and Shanghai itself, China; the amount of infrastructural building going on to maintain its work force is phenomenal and much of it remains empty. “China is driving down its exchange rate in a bid to keep the factories turning faster and faster.” C&U (Eight plus One) and Tontech have huge $multi-billion investments in plants which are mostly running at a small portion of potential capacity. “There is a giant sucking sound as “quantitative easing” money gets withdrawn from emerging markets, and there are alarming signs that debt bubbles in some of those markets may be about to pop (again). “
The West appears to believe deflation is something unlikely to happen very much like the collapse of Wall Street and TBTF in 2008. We did remove all the safe guards Glass Steagall and a part of the National Bank Act provided regulating banks joining with investment firms and investing on Wall Street. Who would have thought “irrational exuberance” would have been the warning of the decade coming from the man most responsible for creating it? After all, these are reasonable men, why would they endanger their livelihood?
Nobody expected the Japanese to slide into a decade or so of deflation, yet they did as the chart below shows. “The first chart today shows the consumer price index in Japan in the run-up to its ‘infamous bubble’ in the late 1980s and there after. Deflation crept up on Japan slowly. There was even a big head-fake in 1996-7, a short-term bounce in inflation before things headed down again. Maybe it’s just a coincidence, but the path of the market-based PCE here in the west in recent years looks ominously similar. “
In the 1990s the conventional wisdom in Japan was to ‘short’ the Japanese Government Bonds—betting that inflation would pick up, interest rates would rise, and the bonds would fall in price. A generation of money managers got hosed. Prices flattened, and then fell. Interest rates fell with them. Bond prices boomed.”
Could America follow suit? The same as the Japanese money managers, US money managers believe bonds are over valued and bet inflation will pick up; but with the Fed tapering it buy, bond prices have done the opposite. Treasuy Bonds have done the opposite and the yields have come down. Hey, it is a good conversational piece and minus the models.
reference: Arend Brett; Market Watch; “Are We Ready For Deflation”
For 6 years I have characterized our situation as “Consumers can not spend what they do not have. And producers will not produce what they can not sell.”
Everyone has to eat, stay out of the weather, and use energy for the home or car. Discretionary spending has taken the brunt of the belt tightening. Large main stream chains are closing stores and laying off employees. Walmart is noticing the reduction in spending. This is over 5 years after the contraction started.
As time goes by, consumers will tighten their spending even more. Most of us are still working or retired with income. But as time goes by those still working or retired will tighten spending because they fear the loss of that income, thru inflation or retirement income cuts.
Consumers will redefine what is discretionary and what is a necessity.
Wages have already been deflated. (You lose your job, search for over a year to find another, and you accept less pay gratefully, just to have a job.)
If the prices of homes, food, and energy were deflated, human beings would be better off. But I do not expect that to happen soon. Those items are all considered necessities, at least for now.
Who gets hurt? Eventually more wage cuts will be forced on employees. Then debtors will be hurt and then their creditors. Then consumers will tighten spending even more.
In my world, real inflation is allowed by consumers choosing to spend more for individual items, and real deflation happens because consumers can not continue to spend as much for any individual item.
Could it happen? Yes, consumers can not spend what they do not have!
JimH: AGREED.
Bill,
You are opening up an issue that most people are not ready for. I think you have incredible instincts about this. Lower inflation is more possible than it appears in the news, even as Central bankers say inflation will return to 2%+ target.
Where is Henry Ford when you need him? That old communist said I have to pay my employees so they can buy my cars! What a radical idea.
Here’s a model that predicts the Fed won’t make its de facto 2% (2.5%) inflation target out to 2016:
http://informationtransfereconomics.blogspot.com/2014/03/macroeconomic-predictions-for-2016.html
It’s worrisome because the model works relatively well for Japan’s price level:
http://informationtransfereconomics.blogspot.com/2014/02/a-deflationary-monetary-expansion-case.html
http://informationtransfereconomics.blogspot.com/2014/02/this-model-is-sufficiently-awesome-to.html
Bill,
Here is a link that gives clues to inflation going lower…
http://blogs.wsj.com/economics/2014/03/11/behind-pm-abes-wage-push-in-japan-dueling-economists
“There is a giant sucking sound as “quantitative easing” money gets withdrawn from emerging markets, and there are alarming signs that debt bubbles in some of those markets may be about to pop (again). “
Where is that money going?
Japan slid into deflation because of a real estate bubble that collapsed. The difference between Japan’s real estate bubble and ours was that it was commercial real estate not residential real estate — and that it took something like a decade (I forget exactly) for the commercial real estate to drop to 13% (!) of original value.
Japans corporations owned most of this real estate and for 13 years they stopped borrowing from banks while paying down the losses to stay in the red. This caused a giant drop in bank liquidity — same as our Great Depression and Great Recession.
Japan’s economy started to recover around 1997 but Japan made FDR’s mistake and moved to stop adding demand and moved toward a balanced budget — which killed off the recovery — accounting for, first, the climb and, then, the continuing dip in Japan’s chart above.
According to Richard C. Koo, maybe Japan’s preeminent economist, if the recovery had taken hold, perhaps, real estate values may not have continued to drop (real estate values being necessarily relative).
The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession
Meanwhile back at the ranch: if anything can kill bring on American deflation it will be the continuing drop in labor’s share of income — reversible only one way …
… LEGALLY MANDATED, CENTRALIZED BARGAINING …
as instituted by post WWII continental industrialists (presumably very right wing) to stave off a European labor race-to-the-top so more money could be diverted to rebuilding.
MAGIC: requiring all employees doing similar work in the same geographic locale to negotiate one common contract with all employers prevents the race-to-the-bottom just a well. Used for 60+ years around the world (including French Canada).
I will pay anyone on this blog who can prescribe any other labor setup that might reform BOTH the course of labor AND politics in this country 64 thousand (Martian) dollars — it doesn’t have to be better than centralized bargaining; it just has to work some way at all. Bet nobody collects.
The Teamsters have something like this in their National Master Agreement.
Anybody got a better idea? Never mind better; any other idea at all to reform both?
Denis,
The Modern Monetary Theorists propose something called the Job Guarantee. http://www.levyinstitute.org/publications/?docid=1508
I’ve explained before, the U.S. could’ve completed a real recovery in 2010 and achieved a much stronger expansion with a comprehensive growth plan.
The U.S. needed a bold tax cut, to jolt the economy into a self-sustaining consumption-employment cycle (e.g. $750 billion, or $5,000 per worker for the 150 million workers at the time).
Moreover, it needed to reduce and remove up to $1 trillion of the $2 trillion a year in federal regulations (instead of piling-on more regulations, which the economy hasn’t been able to absorb), raise the minimum wage up to $15 an hour, and squander less government spending.
A stronger expansion would’ve raised tax revenue and reduced spending on the unemployed, to reduce budget deficits, and.the Fed could’ve began a tightening cycle in 2010.
End fractional reserve banking and debt created money.
Peak,
You have not explained, you have preached. There is a huge difference between the two.
EMichael March 12, 2014 10:12 am –
EMichael, Paek’s a troll; failing to understand almost all infrastructures in the USA are in decay as a result of neoliberal policies of both right and left of tax relief and a failure of trade policies of the past 30 plus years.
Linus,
I think that concentrating instead on raising the pay of — say the bottom 50% of workers 50% — and so on up from there would fill a more critical void than simply adding a few % more underpaying jobs. [Giving the bottom 50% an average $8000 yearly increase would transfer less than 4% of GDP — so not terribly undo-able. 70 million X $8000 = “only” $560 billion out of $16 trillion GDP.]
Got to keep overall perspective. Like a sub minimum wage for 18 to 24 is my big bugaboo. 18 to 24 typically have double the going unemployment rate in modern economies — for whatever reason. A sub minimum wage might put 3% more to work here (dropping from 12% to 9% at today’s overall US unemployment rate) while paying the other 88% much less and leaving all 100% of them AND US looking over our shoulder for the rest of their and our lives — worrying about not being able to get a job because some 30 year old, small immigrant is going to get out job — and other versions of the race-to-the-bargaining-bottom. But, all this may never get though to today’s keyhole (academic) liberals (like Obama) — who have no overall comprehension of the tidal wave hitting us (or how much political capital they could gain helping us resist that tidal wave).
I see, EMichael and Beene are in complete denial, and remain ignorant, while they sink with the poor in this deep and on-going depression and train wreck.
My statements are supported mathematically and empirically. You haven’t disputed anything. You contradict yourselves without even knowing it.
And, the names you call me say a lot about you and nothing about me.
PT:
What do you expect from people? You do act like an idiot at times and people treat you as such. AB is a place for discussions and you seem to abuse the word discussion.
run75441, name calling and trying to label people is not a discussion. It’s politics, which I see a lot here, including from you. Let me know when you want a real discussion, particularly about economics. Otherwise, just ignore me. I don’t need you 🙂
PT:
I help run this blog and I am offering you a piece of advice. Take it for what it is worth. I can also ask the others to just ignore you also and you will be isolated. It is up to you.
run75441, I don’t want to deal with political hacks and hopelessly biased people. So, take them with your threats and name calling. I don’t need them.
Peak, like many trolls, is a gifted writer with nothing substantive to write about — such childishly intrude their empty skills (skulls?) into the real world. :-)–