With Deflation Possibly Near, This Economist Is All Abuzz

[Architect]

With Deflation Possibly Near, This Economist Is All Abuzz - WSJ.com

I subscribe to his economic outlook newsletter, and he's done pretty well so far. Being forewarned on the housing and credit bubble I sold my house and investments three years ago, putting it all into 30 year treasuries. Insert joke on tin foil hats, stopped clocks, perma-bears, can't happen here, know it alls, crystal balls, etc.

"plus retirement-panicked baby boomers curbing their spendthrift ways and pumping up their puny savings"

His research on this is worth considering.

 

[Notmuchlonger]

I don't have any jokes.How is it going to be possible to have long term deflation with money being printed fast as you can cut a tree down?

 

[deepc]

Look at the last couple years though. Usual routine is to drop interest rates to fight deflation, isn't it? More money available, price of goods stays high? Is it possible that the government has been worried about deflation all along?

There are no real estate sales happening here at anything near asking price. And any piece that does sell near the price is without a doubt mortgage fraud with a big cash back bolus going to the purchaser. Gas is down, and when they tried to get it past $2 it didn't last.

Think the author of the article is correct in that today's boomers are sweating their retirements big time now, many having lost half their life's savings gambling on the equity market. Lots of money being printed, but not much of it going to goods.

 

[Gone4Good]

I don't have any jokes.How is it going to be possible to have long term deflation with money being printed fast as you can cut a tree down?

The Fed can create reserves but needs a transmission mechanism (such as bank lending) to create money. Right now banks are hoarding cash and money is being destroyed as existing loans are marked down.

 

[ziggy29]

The Fed can create reserves but needs a transmission mechanism (such as bank lending) to create money. Right now banks are hoarding cash and money is being destroyed as existing loans are marked down.

Almost everyone is hoarding cash. I sure the heck am. And until that stops the death spiral continues. But as long as people fear losing their jobs, they won't spend or borrow even if they can afford it today. Which causes ore job losses and more destruction of wealth. Rinse, lather, repeat. Eventually something will pull us out of it, but I don't know what that would be. Somehow I think people would have to be confident that their 401Ks aren't going to zero and their jobs aren't about to be eliminated. How to instill that confidence based on what we have today seems like a pipe dream. Guarantee me that I'll have a decent job for all of the next five years and I'm going on a spending spree.

This is why serious deflation is so devastating to economies. As bad as inflation is, persistent deflation is worse in the modern economy.

 

[Bikerdude]

I think deflation could be a serious threat. The government is spending money, but only to keep the economy stable. Keeping the states from becoming insolvent. Keeping the banks from becoming insolvent. Keeping the auto makers from becoming insolvent. All while the world has over capacity in every section. The US has too many houses for sale. The US and world have too many auto makers, too many TV makers, too many PC makers etc. etc.

To avoid deflation I would think we need to see refinancing at 3.5% for 30 years and a BIG tax cut. Not $15 a week. More like $5000 per couple and $5000 to buy a car, $20,000 to buy a house. If not, we could just limp along for years.

Deflation is not all that bad for retiree's that have a stable form of income like pension or SS, as prices just keep going down. Deflation is a killer for people working and for government because wages and tax revenues keep falling. If it gets out of control it is very difficult to stop. Hopefully none of this will be required.

 

[ziggy29]

To avoid deflation I would think we need to see refinancing at 3.5% for 30 years and a BIG tax cut. Not $15 a week. More like $5000 per couple and $5000 to buy a car, $20,000 to buy a house. If not, we could just limp along for years.

Even that won't help if people don't think they'll have a job to pay it back.

It keeps coming back to giving well-capitalized entities (businesses and individuals) with strong cash flow a reason -- the confidence -- to NOT hoard cash. Right now everything happening in the economy is an inducement to hoarding cash. As long as that continues, so too will the pain. It's like a dog chasing its tail. It comes down to businesses thinking business will turn up and consumers who don't expect pink slips.

 

[Architect]

The Fed can create reserves but needs a transmission mechanism (such as bank lending) to create money. Right now banks are hoarding cash and money is being destroyed as existing loans are marked down.

This is true. The other fact is the derivatives and credit which are draining from the system. What's the nominal value of OTC derivatives, 60T? Sure derivatives are doubled counted, but it doesn't matter. Halve it, drop it by an order of magnitude, it still dwarfs anything the Fed is attempting to do. And until recently, while you couldn't buy a loaf of bread with a derivative, it acted as money in any other way (you could build a shopping mall with one). So I think this inflation meme going around is incorrect.

I think the reality is that it's taken tremendous credit creation via the shadow banking system to get the inflation we've seen over the past decade. If it wasn't for that and the post dot.com bust stimulus, we might already be in some form of mild deflation already.

 

[Gone4Good]

I think the reality is that it's taken tremendous credit creation via the shadow banking system to get the inflation we've seen over the past decade.

Which is why the Treasury & Fed are trying to jump start the shadow banking system with TALF.

 

[Dennis]

Delfation? Maybe? I don';t think will last for long though..
But, Just like Buying Equities? Wait until Deflation is at its Worse and then Buy TIPS..

You can't keep Prices low for long.. They tried this before, remember?
Then A Guy name Jimmy Carter came along... and look what happened next?

Get your $ set up to buy LT treasuries..for once Inflation takes off, it's going to go thru the roof again.. and Run to your Fed. bank and buy them ...!

That's what my Dad & CPA Uncle Did during Carters yrs...Boy did they call that one right..

 

[Hal3]

Right now banks are hoarding cash

Right now banks are hoarding cash ...

I wonder.

The market cap of Citigroup is 9.7 Billion.

According to this post:

JBlog Central - The Jewish Blog Network | Third round of bailouts for Citigroup

Taxpayers have pumped 45 Billion dollars into Citigroup and agreed to cover 90 percent of Citi’s 335 billion dollar losses.

Can that possibly be true?

So if you can buy the whole show for 9.7 Billion after pumping in 45 Billion and covering 90% of 335 Billion in losses .....

What am I missing here?

This makes no sense at all.

Lot's of cash is going in but it must be going out the back door.

They can't be hoarding it or Citigroup would be worth more.

I must be missing something very basic here.

Anyone?

 

[Gone4Good]

Taxpayers have pumped 45 Billion dollars into Citigroup and agreed to cover 90 percent of Citi’s 335 billion dollar losses.

Can that possibly be true?

So if you can buy the whole show for 9.7 Billion after pumping in 45 Billion and covering 90% of 335 Billion in losses .....

What am I missing here?

Citigroup's started 2008 with $2.2 Trillion in assets. A 10% decline in the value of its assets wipes out $220B in equity. When you consider that equities are down 50%, high yield bonds and loans are down ~35%, investment grade bonds are down ~10%, mortgage backed securities are down anywhere from 20-95%, it's not too hard to see where all of that money went.

On top of that, $800B of those assets are financed by deposits. Deposits are essentially demand obligations. In 2008 Citi's deposits shrunk by $50B. Some of that may have been because of asset sales but some of it is due to nervous people taking their money out. So one place that cash is going is to depositors. I doubt Citi added deposits in the 1st quarter of 2009 . . . which means more bailout money leaving the building and going to those awful, awful, checking account customers.

The $335B insurance is on a specific pool of assets (non-mortgage consumer credit, I believe), which are currently performing. Citigroup still takes the first loss on those loans, so it eats $33B before the government is on the hook for anything. To my knowledge it hasn't yet written down that pool of assets significantly, so the government isn't yet in the hole on that deal.

 

[Maurice]

Deflation is not near, its here. CPI-U has fallen since July-08.

 

[ziggy29]

Deflation is not near, its here. CPI-U has fallen since July-08.

True. But take away the drop in oil prices (the easy money in that crash has already been made) and what's left? Most of the prices I've seen changing haven't been "down." At least not for the relative necessities.

 

[FIRE'd@51]

Deflation is not near, its here. CPI-U has fallen since July-08.

Actually, CPI-U was up 0.4% in January. It will be interesting to see February's number (released this Wednesday).

 

[Maurice]

True, F51. It fell from July to Dec and crept up a tad in Jan. I think food fell as well as oil over that period. And let us not forget real estate.

It will be interesting to see what happens in Feb.

 

[haha]

And let us not forget real estate.

Doesn't real estate just figure in as rents? So falling house sales prices have no direct effect on CPI.

Ha

 

[Maurice]

"owners-equivalent" rent. But I suspect that's been falling as well.

 

[Architect]

In the newsletter Shilling points out that the deflation we're seeing so far is normal, garden variety recessionary type. We get it every recession, it won't be until next year that we see if it turns into chronic deflation of 2%-3%. Previously he was predicting chronic deflation of 1-2% 'good' type, but recently he's changed that to 2-3%, and a combination of 'good' and 'bad'. Good deflation is deflation of excess supply, and bad is deflation of deficient demand. Good deflation can accompany economic growth and expansion.

I've been skeptical of chronic deflation, but his other predictions (housing and credit busts, foreign equity bust, buck rally, oil/commodity crash, etc) were so good I stuck with it. Also the research on things such as baby boomer retirement savings is top drawer. Regarding deflation, I'm not so sure now.

One way to look at it (I think) is that, as a group, the boomers have tried to create retirements for themselves via these bubbles, first the dot.com, then when that went bust - housing. Now they are stuck up a creek without a bubble in sight. Well if you can't raise income, you lower expenses. As a group they'll be lowering spending for a decade or more. Add in the after effects of the credit bust and you get - I think - deflation.

 

[Cruising2022]

True. But take away the drop in oil prices (the easy money in that crash has already been made) and what's left? Most of the prices I've seen changing haven't been "down." At least not for the relative necessities.

I do see a lot more generic brands sprouting up for food and necessities. Was in 7-11 yesterday and they're doing a huge 7-11 branded generic push in their stores. Surprised the heck out of me.

WFMI and SBUX might've been easy targets, but I think KFT, CHD, PG, etc will be the surprise losers of this recession. Not to mention some of these generics are downright nummier... gimme the Wal-Mart branded lucky charms any day... 3 times the marshmallows...

 

[ziggy29]

I do see a lot more generic brands sprouting up for food and necessities. Was in 7-11 yesterday and they're doing a huge 7-11 branded generic push in their stores. Surprised the heck out of me.

The problem is, this isn't real "deflation" -- it's "substitution" which the government uses to claim deflation (or less inflation).

A box of store-brand mac and cheese is NOT the same item as a box of Kraft mac and cheese, but if consumers substitute the 20% cheaper store-brand product, the government will claim the cost of mac and cheese is 20% lower than last month even though the price of the store brand stuff was unchanged from the previous month. I think this is pretty slimy, personally.

 

[Cruising2022]

The problem is, this isn't real "deflation" -- it's "substitution" which the government uses to claim deflation (or less inflation).

A box of store-brand mac and cheese is NOT the same item as a box of Kraft mac and cheese, but if consumers substitute the 20% cheaper store-brand product, the government will claim the cost of mac and cheese is 20% lower than last month even though the price of the store brand stuff was unchanged from the previous month. I think this is pretty slimy, personally.

While I see your point, isn't competition a valid mechanism for judging downward price pressure from consumers? SBUX sailed for years on brand loyalty and expensive gourmet coffee-flavored drinks; no one was able to succeed in underpricing them. McDonald's didn't step in the cheap gourmet coffee market until they saw an opening for it (the recession) -- and now McDonald's is eating SBUX's lunch. I doubt McDonald's would've been successful if they attempted to enter the gourmet coffee market, say, 3 years ago. Doesn't the increased demand for cheaper prices, and the rise of new competitors to meet that, have any say at all?

 

[ziggy29]

WFMI and SBUX might've been easy targets, but I think KFT, CHD, PG, etc will be the surprise losers of this recession. Not to mention some of these generics are downright nummier... gimme the Wal-Mart branded lucky charms any day... 3 times the marshmallows...

For what it's worth, Wall Street didn't like the results General Mills just posted -- missed by a whopping 2 cents per share (0.85 versus expected 0.87). All the big name brand food stocks are selling off viciously today -- Kraft, Campbell, Kellogg, Heinz, et cetera.

I suspect investors may be getting on your bandwagon here.

 

[Cruising2022]

For what it's worth, Wall Street didn't like the results General Mills just posted -- missed by a whopping 2 cents per share (0.85 versus expected 0.87). All the big name brand food stocks are selling off viciously today -- Kraft, Campbell, Kellogg, Heinz, et cetera.

I suspect investors may be getting on your bandwagon here.

The problem is that only the predictions I don't bet actual money on come true.

 

[Hamlet]

What about the bubble in Treasuries?

One way to look at it (I think) is that, as a group, the boomers have tried to create retirements for themselves via these bubbles, first the dot.com, then when that went bust - housing. Now they are stuck up a creek without a bubble in sight.