Deflation ?

[Helena]

What are the odds ?

Boomers Could Soon Feed Deflation

 

[Marshac]

Better than even I think.

 

[wabmester]

"What if," Mr. Ingram asked, "housing, autos and gasoline all get cheaper? What will housing retreating by 10 to 20 percent and gasoline falling off 26 percent do to inflation?"

The price of houses isn't reflected in the CPI (just rents and owner-equivalent rent).

Cars have been cheap for at least 5 years now.

Gas prices always drop after the summer, and this often causes the CPI to drop in the second half of the year.

Generally, the biggest deflationary risk is overproduction / overcapacity.   That was a factor in 2000, which is why Greenspan starting easing, but it doesn't seem to be a factor now.

My guess is that we'll see less consumer spending due to the housing bubble pop, which will slow inflation and the economy, but not to the point of deflation.

 

[danm]

ROTFLMAO ... I said same here a few months ago and was soundly beaten up for it. How dare I say that anything but inflation reigns? The victors then went around pounding each other on the back and congradulating themselves over beer ... This does tend to be a rather conformist group, it seems to me.

At any rate, this time I'll keep my data and conclusion to myself, but you'd have to be a blind pig ...

 

[brewer12345]

Nuts. The drivers of inflation are increasingly not from the US economy but from our overseas competitors for commodities, labor etc. (i.e. India, China and so on). I think that's why the Fed will be hard-pressed to control inflation: they can raise rates all they like, but unless China succeeds in reining in its expansion, it won't mean squat.

 

[danm]

Please - don't you know that China is busily exporting deflation? There was a brief time a year or so ago where they did same for inflation, which some suspect is the cause of the present inflation ballyhoo (which is part of it, the other parts are probably we had a new Fed chief so inflation expectations went up since easy Al isn't around anymore, effects of War on Terror spending, easy liquidity, and lots and lots of speculation due to all of the above).

The rest of the world is hardly in competetion with us, they depend on us. So China is busy buying lots of copper - for what? So the peasants can have indoor plumbing? Watch what happens in China and India as housing tanks here.

Well I should have learned my lesson, invest as you will.

Nuts. The drivers of inflation are increasingly not from the US economy but from our overseas competitors for commodities, labor etc. (i.e. India, China and so on). I think that's why the Fed will be hard-pressed to control inflation: they can raise rates all they like, but unless China succeeds in reining in its expansion, it won't mean squat.

 

[Helena]

ROTFLMAO ... I said same here a few months ago and was soundly beaten up for it. How dare I say that anything but inflation reigns? The victors then went around pounding each other on the back and congradulating themselves over beer ... This does tend to be a rather conformist group, it seems to me.

At any rate, this time I'll keep my data and conclusion to myself, but you'd have to be a blind pig ...

I'm new here.

Please share the data and your conclusions.

 

[brewer12345]

Please - don't you know that China is busily exporting deflation?

You wouldn't actually have any, um, proof or evidence supporting that position, would you? When I see the price of everything spiralling upward as China builds infrastructure and climbs the development scale (with India not far behind), I get a little skeptical that China is actually pushing us towards deflation.

 

[Helena]

The baby-boomers fueled inflation...
but the baby-boomers are aging.

The median age of the planet is increasing...
even in third world nations... but especially
in first world nations. The aging demographics
alone will eventually bring about world-wide
deflation.


http://www.un.org/NewLinks/older/99/table1.jpg

 

[danm]

I expect you to roast me for saying this, but I'm not going to go through the data and discussion here. It's far too much material, and I'm not willing to give out free economic macroeconomic education anymore. Instead I'll offer some pointers, and you can draw your own conclusions.

o For a primer, study Gary Shillings books, and subscribe to his newsletter for a monthly view of the economic climate (www.agaryshilling.com) The newsletter is rather important, but it does cost money.

o Read what Mish has to say at http://globaleconomicanalysis.blogspot.com

o Read up on what Roubini has to say http://www.rgemonitor.com/blog/roubini/

o And read what our good John Mauldin has to say (the past year say) http://www.2000wave.com/gateway.htm

In particular I recommend contemplating historical economics (available from Shilling (INSIGHT 2004-present and the two books)), with a dash of demographic study, and a large dose of common sense, and simply looking around you at the actually happening in front of you (hint, look at durable goods (autos, fridges, water heaters and such), and airlines for starters). In the meantime, try to distance yourself from the consensus babble.

If nothing else, you will learn a lot of interesting and useful information.

 

[brewer12345]

I have read/listened to all of those authors and while they do a good job as far as it goes, I mostly don't find them all that consvincing. You really think aggregate demand will drop? As people age and population growth slows, people and nations tend to become more wealthy on a per capita and aggregate basis. As people become more wealthy, they tend to consume more. Now, what they consume may change (more healthcare and electricity, fewer refrigerators and cars), but overall demand is hghly unlikely to slack off any time soon.

 

[danm]

Sounds like an argument I heard why housing will go up forever.

Aggregate demand doesn't have to drop, no siree.

 

[brewer12345]

Sounds like an argument I heard why housing will go up forever.

Aggregate demand doesn't have to drop, no siree.

OK, you are proposing a global depression?

Time to get out the tinfoil hats, boys and girls.

 

[semtex]

China export inflation and deflation?
What a magic answer to all the problem.

Things changed sine middle 1990s. Traditional theory failed because it could not factor in the China piece.

In the globalization, only two benifit, America and China. What a couple.

 

[haha]

The baby-boomers fueled inflation...
but the baby-boomers are aging.

The aging demographics
alone will eventually bring about world-wide
deflation.

Not necessarily. Demand for some things will drop, for others, increase. And remember, demand is only half of the story. Think about supply of goods and services. Boomers not only were (and are) prodigious consumers, but they also are and were prodigious producers.

There have been well educated, persuasive deflationists ever since I started paying attention to business 35 years ago. I remember John Exter, who had been an executive at the forerunner of Citibank. He explained in about 1972 why deflation had to happen. Now the fact that it didn't doesn't prove that it won't now, but to me it seems a long shot, especially given the fact that Mr. Bernanke has spent his life studying the errors that he thinks were made during the last US deflation, 75 years ago. He may look like Dopey the Dwarf, but I doubt he would leave any tactic off the table if the US were threatened, or he even thought it was threatened by deflation.

Does anyone know of any time in any large country where an enduring war caused deflation? There was a short deflation in the US after WW1, I don’t know about the other countries. WW1 was largely a money maker, rather than a money sink for the US-we came out of it with our treasury stuffed with gold and foreign obligations. Don’t think that will be the outcome of The War Against Terror.

Warren Buffet says democracy and inflation are joined at the hip, and I think that over any reasonable period of time this will be true. Of course, any one speculating can get wiped out even in a short fast break.

Ha

 

[danm]

No, but interesting conclusion. Deflation = global depression = therefore you are a nut job.

I think that it does show that you didn't study the subject as well as perhaps you think you did. It seems to me that, regardless of our individual investing beliefs (say that we are headed for hyperinflation), that all forms of inflation should be deeply studied. Inflation, disinflation, deflation, reflation, and hyperinflation (hyperdeflation (Great Depression) too, but I haven't heard the term used before). How do you know that one is occuring, unless you can see that the opposite is not? Or what flavor we are likely to be enjoying?

That's OK, I'm not trying to change your mind.

OK, you are proposing a global depression?

Time to get out the tinfoil hats, boys and girls.

 

[brewer12345]

No,  but interesting conclusion. Deflation = global depression = therefore you are a nut job. 

I think that it does show that you didn't study the subject as well as perhaps you think you did. It seems to me that, regardless of our individual investing beliefs (say that we are headed for hyperinflation), that all forms of inflation should be deeply studied. Inflation, disinflation, deflation, reflation, and hyperinflation (hyperdeflation (Great Depression) too, but I haven't heard the term used before).  How do you know that one is occuring, unless you can see that the opposite is not? Or what flavor we are likely to be enjoying?

That's OK, I'm not trying to change your mind.

I doubt you would change my mind, but i still am interested in hearing your argument for deflation. All I have gotten thus far is a vague wave at other people's work, most of which I find erudite, but unconvincing.

And yes, I've studied episodes of inflation, deflation, etc. that you very much. I'm open to debate, but you have to at least put forth an intelligible argument. Otherwise I am ready to conclude that you are a member of the tinfoil hat society (very popular these days).

 

[sgeeeee]

I would like to hear this debate. I don't find either side's argument very convincing yet.

Frankly, I don't care too much because I'm sure that no matter what happens, it will be Clinton's fault. But please discuss.

 

[danm]

Hi Ha,

Warren Buffet says democracy and inflation are joined at the hip, and I think that over any reasonable period of time this will be true.

Buffet was the right investor born at the right time, but he obviously didn't study US economic history. The U.S. democracy has reguarly enjoyed periods of deflation, always after tech booms (railroads and canals for example) .

Brewer,
Your taunting me into a discussion I don't want to spend my time on. But still, let me turn it back on you then, can you tell me, why did the housing bubble happen? Surely you've seen Shillers chart, we haven't seen anything at all like this going back to 1890 or so. Why?

 

[brewer12345]

Brewer,
     Your taunting me into a discussion I don't want to spend my time on. But still, let me turn it back on you then, can you tell me, why did the housing bubble happen? Surely you've seen Shillers chart, we haven't seen anything at all like this going back to 1890 or so. Why?

If you aren't interested in this discussion, why do you keep posting on this thread?

I think we had a housing bubble because the Fed flooded the US with unprecedented amounts of liquidity. This meant that money became very cheap and also encouraged stupid risk taking because spreads became vanishingly thin. So what?

 

[danm]

Ah, he taunts me still, now with graphics ...

Good answer, we've got a basis to start from. Why did money become cheap? To save thread space I'll answer for you, obviously the Fed lowered interest rates to an unbelievable low, something we haven't seen in (OK I haven't checked this) I believe a century. Why did they do that? What were they trying to prevent?

OK, a washout in stocks after the dot.com fun. But in the past easy Al would just lower a few points after a debacle, and that's all it took. This time they really went all out, and housing, as we might reasonable expect, responded in kind. I mean, we're so used to bubbles we don't think about it, but step outside of yourself and ponder the immense size of this housing bubble, which doesn't take somebody as smart as easy Al to see, is already in free fall. As a going away present, he was willing to create what probably is the biggest asset bubble in history. It's tremendous! But, here in the U.S., we just see this as normal.

Do you recall any of the Fed discussions at the time? You can poke around the Bank of International Settlements site to get an idea, and the various Fed sites. Tell me, what is the exact reason the Fed risked (and got) the (probable - I haven't checked this, but back of the envelope it's a reasonable guess) biggest asset bubble in history?

(I have to go offline for the rest of the day, but I can check later to see if this topic is still alive)

If you aren't interested in this discussion, why do you keep posting on this thread?

I think we had a housing bubble because the Fed flooded the US with unprecedented amounts of liquidity. This meant that money became very cheap and also encouraged stupid risk taking because spreads became vanishingly thin. So what?

 

[haha]

Hi Ha,

Buffet was the right investor born at the right time, but he obviously didn't study US economic history. The U.S. democracy has regularly enjoyed periods of deflation, always after tech booms (railroads and canals for example) .

I am open minded on this, but to invest one has to take a stance.

Markets as they now stand are showing an odd picture. Gold oil and commodities are up, CPI both core and complete are up. Yet long term treasury interest rates are quite low.

Not only do these not go together very well, just sticking with the bond market shows several oddities. Inverted yield curve and low long term treasury rates suggest possible deflation or business slowdown, yet credit spreads are relatively benign, which suggests clear sailing for the economy.

Folks, it's a conundrum.  

Regarding illustrations from the 19th century-- IMO US experience during the gold standard and prior to the founding of the Federal Reserve is not likely to be applicable to the present.

Ha

 

[brewer12345]

You slanted it heavily, but the main points of your description are more or less accurate.  I think that our housing bubble pales in comparison to what happened in Japan in the 1980s (ask Nords about what the Japanese were doing in Hawaii).  I also note that there was a big run-up in housing in the UK and Australia, and I fail to see signs of deflation there.

I agree that we will be seeing some economic fallout from the housing bubble deflating, but it is hard to believe it will be bad enough to cause a deflationary spiral a la Japan or the Depression.  If we do start to see serious economic fallout from housing, I think you will see the Fed ease a bit, but that will pull the USD down further.  The faster and farther the USD falls, the more we will be importing inflation.  So I can envision a nasty stagflationary scenario, but I am still not seeing deflation.

 

[wabmester]

I think that our housing bubble pales in comparison to what happened in Japan in the 1980s

By what measure? The only comparable measurements of magnitude I've seen are the value of total housing stock relative to GDP.

I believe Japan peaked at 140%. US housing is currently at 170% of GDP.

In any case, there are a lot of variables to consider. It's hard enough to get the direction right, so I'd be very suspicious of anybody who thinks they know the magnitude of the correction, economic impact, and inflation/deflation impact.

 

[brewer12345]

By what measure?   The only comparable measurements of magnitude I've seen are the value of total housing stock relative to GDP.

I believe Japan peaked at 140%.   US housing is currently at 170% of GDP.

In any case, there are a lot of variables to consider.   It's hard enough to get the direction right, so I'd be very suspicious of anybody who thinks they know the magnitude of the correction, economic impact, and inflation/deflation impact.

I guess you pays your money and you takes your chances. I am convinced that the bubble will take at least a few years to deflate and it will be painful, but manageable. If it pops too quickly and does too much damage, interest rates will drop serving to partially reinflate the bubble.

Since nobody can provide definitive econometric studies (there's a contradiction in terms) that prove the argument one way or the other, this is all so much marsh gas and speculation anyway. Mr. tinfoil hat-wearer seems so certain and smarmy about it that I an only conclude that he has been staring at the sun too long.