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EJ
08-17-09, 05:31 PM
http://www.itulip.com/images/summersnowballs300.jpgAugust 2009 FIRE Economy Depression update – Part I: Snowball in Summer (Update 2)

Credit crunch induced commodity, goods and services supply crash meets government money wave. Can the Fed and Congress stop what they started?

Part I: Snowball in Summer
• Liquidation fire sales ending
• Substitution and stealth inflation
• Deflation fighting policy turns dollar into third world money
• Ready for an epidemic of bank failures?

Part II: Snowball in Hell
• Debt Deflation Bear Market First Bounce Correction arrives
• Economy on or off the rails?
• Fiscal stimulus: Is it working?

We start today by recalling our advice to readers December 2008:
U.S. consumer swan song: Cheap now, cheaper later, then expensive—it’s all about supply

Early next year expect a Great American Consumer Fire Sale to follow on the heels of the Great American FIRE Economy Fire Sale of financial assets that began in 2006. While the FIRE Economy fire sale was in houses, stocks, and all bonds but U.S. Treasury bonds, with particularly heavy depreciation in securitized debt, The Consumer Economy Fire Sale starting in Q1 2009 will be familiar to anyone who lived through the 1980 to 1983 recessions when the Volcker Fed slammed the economy in a three years of contraction with rate hikes that created double digit unemployment and brought inflation down from over 12% to under 0% -- yes, resulting in a brief episode of actual deflation. Ask any old-timer coin dealer who survived it. Armageddon for them, nirvana for the FIRE Economy.

The major difference between the 1980 to 1983 recessions and the one that started in Q4 2007: the Fed created the 1980 to 1983 recessions on purpose. This one is running on its own, out of control, with no apparent obstructions – fresh sources of credit, cash, or income -- to brake the fall.

Many retailers, especially discount chains, have already cut prices to cost. Shopping with the wife at a nearby Mall this past weekend we spotted tumbleweeds rolling down the isles of full price, brand name retailers while discounters offered goods Made in China, Indonesia and other lands at absurdly low prices.

The shoppers marveled. They felt rich, no doubt, as they snapped up the well crafted goods using cash and credit earned at an exchange rate value they may not see again for many years, unaware of the ephemeral quality of the precious purchasing power they wield this holiday shopping season in the final act of a 35 year consumption fantasy financed by other peoples' savings.

The spectacle evoked images of ill fated vacationers picking fish up off the exposed sea floor at Bali resort beaches before the tsunami waters rolled back in to drown them, and the story of the young girl who happened to learn about tsunamis in school the week before and, recognizing the danger, talked her family into running for higher ground. I could not help thinking that a year from now many shoppers, blissfully unaware of the economic calamity that awaits them, will wish they’d understood the perversely low prices as a warning of economic trouble ahead and saved their money for later.

The holiday retailer strategy: those left with the least inventory after Christmas live to fight another day.

The first half of 2009 goes like this:

1. After Christmas sales: 20% to 50% off
2. Liquidation sales: 50% to 80% off
3. Then 30% to 40% of retailers go out of business

Advice to readers: take advantage of the early 2009 Great American Fire Sale and go out and buy all the generators, chain saws, washing machines, fine linens, cars, and other durable goods you’re going to need for the next few years because by the end of 2009 most of the inventory may be sold through, many retailers will be shut down, and replenishment of stocks of the survivors will likely be meager; our models say that the goods import supply will decline more precipitously than the supply of money available to pay for them. That spells severe stagflation.
How well has this forecast held up? Sadly, all too well.

Liquidation fire sales ending
AlixPartners LLP, a Michigan-based turnaround consulting firm, estimates that 25.8% of 182 large retailers it tracks are at significant risk of filing for bankruptcy or facing financial distress in 2009 or 2010. In the previous two years, the firm had estimated 4% to 7% of retailers then tracked were at a high risk for filing.

"We will have a lot fewer stores by the middle of 2009," says Nancy Koehn, professor of business administration at Harvard Business School. "It's happening very, very quickly because of the financial crisis and the recession." – Wall Street Journal, June 16, 2009
How does the supply crash look at the retail segment of the supply chain from ground level?

Let’s take a tour of the area around iTulip central, around Boston, Massachusetts.

http://www.itulip.com/images/targetburlingtonmaspring2009.jpg
Target, Burlington, MA





The inside of our local Target store in Burlington, Massachusetts looks like this. Shelf space has been cut by more about 40%. The isles are wide enough to drive through. The selection of goods is a fraction of what it was six months ago. The same is true of the Super 88 where we shop for Asian groceries. The space is half empty, and the items on the shelves no longer include expensive Japanese imports, only Chinese.


http://www.itulip.com/forums/../images/landmarkoutofbiz1.jpg






In 2006, at the height of the housing bubble, my wife and I shopped for furniture on Massachusetts Avenue in Cambridge. Six stores filled to overflowing with customers. Getting assistance from a salesperson was tough. Today only two original stores remain. One of those that went under is pictured above. A new store next door sells what I’d charitably call “student furnishings,” made of laminated particleboard and sold at astonishingly high prices. By the way, the platform bed is back.

http://www.itulip.com/images/1960sagain.jpg





This hideous Nixon era retro design chair made me wonder if the Cambridge, Massachusetts economy got its ass kicked back all the way to 1965. Not the price, however. The chair goes for $885.

http://www.itulip.com/images/outofbiz2.jpg





The landmark Design Research building that housed Crate & Barrel for the past dozen years sits empty on prime real estate in the middle of Harvard Square.

Competing stores that sell similar items are charging prices that are noticeably higher than a year ago, and far higher than during the fire sale period from Christmas 2008 until the end of Q2 2009.

What’s happening?

In a normal recession, demand falls and unit sales decline. In a debt deflation, unit sales collapse. Like this.

http://www.itulip.com/images/autounitsales1976-Aug2009.gif





Unit sales of autos collapsed during the acute crisis phase of the FIRE Economy Depression from Q1 2008 to Q2 2009 as demand fell with the availability of consumer and business credit.

Even with the government offering a $2 billion taxpayer financed spiff program to customers of auto companies, unit sales remain close to where they were at the end of the 1980s recession when the economy was 1/3 as large as the economy was in 2008. Margins are abysmal. Ford’s are -5% and its competitors’ are likely no better, but who knows? They aren’t saying. They are “private,” you see, majority owned by the government.

http://www.itulip.com/images/fordmotor.gif





The government hopes to accomplish two goals with the Cash for Clunkers program. The first is to generate excise tax revenue that it derives from auto sales. These largely cancel out the cost of the Cash for Clunker program to the government. The second is to burn through inventory quickly to get new orders on the books so that auto companies will have to re-hire employees to make more cars.

Soon car lots will fill with lower end models that will sell at significantly higher prices than the low end inventory that is now being sold through.

What about politically unconnected industries?

The auto industry is a special case. What if you do not happen to run a company in an industry that employs millions of workers who vote as a block in every election? You can’t get a government spiff program to help you sell product. You need to return to cash flow positive, and fast, before you run out of money to make payroll, pay suppliers and bankers, and of course the tax man.

Here are the latest retail sales data from Friday.

http://www.itulip.com/images/retailsales1993-Aug2009.gif





They show a modest year over year gain, reported as a sign of recovery. But here are the retail sales data minus the government supports of the auto industry.

http://www.itulip.com/images/retailsalesnetcashforclunkers.gif





That's bad but then that’s the good news. Remember when we noted the slowing in the rate of decline in personal consumption expenditures in June 2009 in a follow-up to our March 2009 First Bounce of the Debt Deflation Bear Market analysis?

Here is our best-case scenario from June:

http://www.itulip.com/images/bestcaserecoveryPCE.gif





That assumes that PCE miraculously recovers as it did during the housing bubble after the technology bubble collapsed.

Here are Friday’s PCE data.

http://www.itulip.com/images/pce1996-Aug2009.gif





We fully expected PCE to bounce along a bottom created by government spending programs, not resume a decline. We didn’t even have a worst-case scenario that covers the decline that actually occurred since then.

Add our June 2009 PCE forecast to our long record of excessive optimism.

Why did PCE resume falling? In a word, jobs. The unemployment picture is bad and, again, defying even our most pessimistic projections, continues to worsen.

http://www.itulip.com/images/unemp27weeks1947-Aug2009.gif





The number of members of the civilian labor force counted as officially unemployed for more than 27 weeks is over 18% of the total civilian population, exceeding the previous peak of 12.3% in 1983. Worse, the rate of growth shows no signs of slowing—the trend is still vertical.

We’re sick of fussing with U3, U6, and all the “alternative measures of unemployment" and we are sure the definitions will change again before this depression is over. For a solid measure of the health of the private sector, from now on we start with the official count of the total civilian labor force before the depression, and measure the portion of it that is no longer working.

Another factor hammering producers is consumer credit.

http://www.itulip.com/images/consumercredit1844-Aug2009.gif





Everyone knows that the credit crunch that followed the collapse of the securitized debt market in 2007 brought down total consumer credit during the FIRE Economy Depression that started in Q4 2007. But rarely is it observed that after the recession of 2001, that followed the crash of the technology market bubble, consumer credit never recovered as it did after every other recession since WWII.

This is one of the reasons why we believe that the FIRE Economy ended with the 2007 collapse, that the current depression is a continuation of the massive recession that would have occurred in the early 2000s if not for the housing bubble. Of course, this depression is much worse than that one might have been because debt levels were so much higher going into this one than the previous one.

As good as it gets

By our estimates, and those of the increasingly unpopular Goldman Sachs, stimulus from Q4 2008 and Q1 2009 reaches peak effect in the current quarter. This is as good as it gets. But it's not good enough: there are more stimulus programs in our future. Count on it.

Back to the plight of the goods or services producer or retailer who doesn’t have a powerful lobby in Congress like the auto industry’s.

To save yourself from the effects of high unemployment and declining access to credit among your customers, you must reduce costs.

For almost all businesses, payroll is your largest expense, so first you lay off non-essential employees and cut salaries while reducing all spending that is not directly tied to revenues—travel, advertising, marketing, and so on.

Next you try to improve unit profit margins by eliminating the least profitable products from the price list, that is, those that sell in low volumes, require expensive labor to produce, and have high input costs.

If you run a restaurant you eliminate menu items that require pricey ingredients and expensive, highly trained chefs to prepare.

You offer items that can be prepared by minimum wage labor out of lower quality ingredients. You pile the cheap ingredients up on the plate. That way it appears to customers that you are “giving them more” when of course you are giving them less.

In this environment pizza sales boom but sushi is a bust.

Most retail landlords, rather than lowering rents so that higher priced, higher margin stores can stay in business, wait until these business fail before lowering the rent to accommodate a new low margin business that moves in to replace it. Not a very clever strategy, but there it is.

Look around you and you will notice that among high-end restaurant chains one will go out of business in one town while in the next town over virtually the same restaurant survives. One key difference is that the survivor has a landlord who understands that lowering the rent is the best possible accommodation in a weak economy for a retailer because it does not result in a lowering of product or service value to the customer.

Note to retail landlords: you can raise your rents again later, but if you keep rents high you will have to lower your rent for a new low margin business that will never be able to pay you higher rents later when unit volumes rise. Of course, if your mortgage is too high to allow you to lower the rent, you are in trouble. But you already knew that (see Time at last to short commercial real estate (http://www.itulip.com/forums/showthread.php?t=4307), June 2008).

If you run a retail chain store such as Target, you survive by eliminating high cost products that take up shelf space and don’t move when consumers don’t have jobs or have taken a pay cut, and don’t have access to credit, or both.

When I went to the Target store near my home recently, customers wandered the new wide isles, mumbling and confused. “Where is my favorite fill-in-the-blank,” was a common statement overheard.

Gone.

Substitution and the weak dollar: Welcome to the third world

This is not deflation. A three quarters full box of corn flakes sold for the same price today as a full box last year is not deflation. Fish and chips made with cheap versus premium cod and sold for the same price is not deflation. Getting packed like a sardine into a passenger jet that flies a given route half as often as before the depression started is not deflation. Getting a giant plate of rice or spaghetti sprinkled with vegetables and meat is not deflation.

Inflation is more than higher prices. It is also a lower quantity and quality of goods and services for the same price, and new fees and taxes (see Inflation in America - Part I: Five signs of inflation (http://www.itulip.com/forums/showthread.php?p=34140#post34140)).

All major periods of inflation start with a supply crash, that is, a period when the supply of goods declines faster than demand.

If you are old enough to remember the OPEC oil embargo you know from first hand experience.

The oil import supply fell faster than demand. Result: rising oil prices that also pushed up the price of domestically produced oil. These costs diverted personal consumption expenditures away from other forms of consumption, leading to recession and rising unemployment. Meanwhile, cost-push inflation hammered asset prices.

Our supply crash theory from last year is that the Keynesians have the credit crunch story only half right. Yes, a sudden withdrawal of the purchasing power of household credit will cut demand, but a credit crash will cut goods and services supply even faster than demand because businesses are even more credit sensitive than consumers are. We expected many goods producers and wholesalers to go out of business, leaving the survivors with the pricing power they need to pass on higher costs to customers.

The other source of inflation is the depreciating dollar. With oil stubbornly over $60 even as oil demand falls--but not as fast as dollar demand falls--our 2007 forecast for reflation putting a floor on commodity prices forecast remains intact.

Starting this fall, inventory replenished by suppliers will be lower quality yet sold at the same price as last year’s higher quality goods or at higher prices than previously higher quality goods.

Inflation by currency deflation

To understand the process, say you are an American engineer visiting a third world country from the U.S. in 1999 when the dollar was still strong. The purchasing power of your income earned in the U.S. in dollars is higher than that of the engineer doing the same job working in the third world country you are visiting as a tourist.

Goods appear cheaper to you, purchased with dollars, than they do to your local counterpart because the purchases consume a smaller portion of your income. The engineer living in that third world country who has the same job as you earns income in the local currency—call it pesos. For the local engineer, the same purchases you made consume a larger portion of his peso income so he experiences he same goods as expensive that you think are cheap in dollars.

Since retailers largely cater to the local population that is spending pesos, versus the U.S. tourist spending dollars—except in tourist rip-off areas where prices are raised to take advantage of unaware visitors—the mix of goods available in the stores to be sold to locals are lower quality than those available in an equivalent store in the U.S. because the local population cannot afford to purchase higher quality goods.

Now think about what has happened at your local grocery and department store. Get it?

Now that the dollar has weakened, Americans can stay right here in the U.S. and experience the joys of earning a salary in a depreciated currency: low quality goods that consume an every greater portion of income.

It’s deflation alright, of the currency.

No free lunch

Diminishing product quality and choice is stealth inflation. Like a frog in slowly heated water, stealth inflation cooks your purchasing power so slowly that you hardly notice it.

Next thing you know, you’re poor.

Yes, the Fed rescued us from a deflation spiral but in the process is turning the U.S. into a third world country. Look around you.

No wonder the food stamp participation is up to an all time high of 11% of the population.

http://www.itulip.com/images/foodstampspct.gif

Consumer credit isn’t the only economic measure that never recovered
from the 2001 recession (Hat tip to iTulip member Zoog)





Meanwhile, we continue to hear forecasts of deflation and deflation spirals. It’s surreal.

Inflation is here, but don’t hold your breath waiting for your government to announce it

In fact, you can count on the opposite. As long as unemployment remains high, the Fed desperately wants to maintain low interest rates. To wit, the latest CPI report from the Department of Labored Statistics.

http://www.itulip.com/images/cpi1913-Aug2009.gif





The chart above looks convincingly like deflation, doesn’t it? It shows the percent change in the CPI year over year off more than 2.5%. However, readers will recall that CPI inflation, driven by high energy prices that later spilled over into commodity prices, later into intermediate goods prices, and so on, peaked about a year ago, around the time a gallon of gasoline sold for $3.80 versus $2.60 today, and oil sold for $135. A mere 14 months ago. The year-over-year change from those peaks, of course, appears extreme.

As explained in Deflation fare thee well – Part I: In search of real returns in an unreal world (http://www.itulip.com/forums/showthread.php?p=97954#post97954), the four-month period of disinflation we expected ended March 2009 when the dollar stopped rising and commodity prices stopped falling.

http://www.itulip.com/images/cpi2000-Aug2009.gif

The U.S. experienced a short bout of deflation we call disinflation before
the long-term inflation trend resumed



http://www.itulip.com/images/cpi192801935.gif

This is what a deflation spiral looks like, from 1930 to 1934





Doesn’t take a rocket scientist to see the difference between 48 continuous months of CPI decline and four months of CPI decline.

Here is a chart of every other deflation spiral that has occurred throughout history.

http://www.itulip.com/images/otherdeflationspirals.gif





There aren’t any, or at least in over ten years of research we have never located one. The reason? Of all of the nations of the world, only the U.S., and for a brief period Germany, remained on the gold standard during the period and inflated its currency against gold. We find it curious that even a few analysts remain in the forecasting game who are ready to risk their reputations on a prediction of a recurrence of an event that has only happened once in one country over 60 years ago and under unique circumstances. The opposite result—inflation—followed from similar indebtedness antecedents dozens of times in dozens of countries throughout the world over the past 100 years, as variations on a theme of currency depreciation and debt default.

The underlying process is similar but the government’s response and tools were completely different in 2008 than in 1930. For one thing, in the 1930s deflation spiral case a third of all banks went out of businesses and depositors lost their money. There was no FDIC to bail them out. In the current crisis less than 5% of banks have failed and not one depositor lost one dollar. Speaking of bank failures...

Ready for an epidemic of bank failures?

Even if, as we expect, another 900 or so banks fail over the next two or three years, the Treasury Department can move hundreds of billions to the FDIC. The FDIC is, for all practical purposes, an account of the Treasury Department.

http://www.itulip.com/images/non-performing1987-Q22009.gif
Catch the Wave: Nonperforming loans are rising at alarming rates for all sizes of bank, large and small




Comparing the 1990/1991 banking crisis to the one that is developing:
1990/1991 Banking Crisis
1) Non-performing loans diverged by size of bank, with the biggest banks had the largest problems
2) As the crisis deepened, the four bank classifications by size experienced non-performing loans in a wide distribution from 2.7% to 5.7%
3) The rate of increase in nonperforming loans ranged from slow for smaller banks to rapid for medium sized banks

2008/2011 Banking Crisis
1) Non-performing loans do not diverge by size of bank as banks are experiencing a rapid rise in non-performing loans
2) The four bank classifications by size experienced non-performing loans in a narrow distribution clustered between 3% to 3.9% as of Q1 2009, and rising rapidly together
3) The rate of increase in nonperforming loans for all banks regardless of size is deteriorating through the depression in near lock step

What is apparent to even the most naive observer is that the management of all of these banks, regardless of size, all did the same stupid things together, such as backing retail commercial real estate loans during a consumer credit bubble when retail floor space increased at five times the population growth rate. What could possibly go wrong? Now they are all going down together.

Some day banks will have to figure out how to compete with each other for profits and customers at the top of a credit cycle without following one another into a hell of bad loans from which they can only later escape with tax payer money.

We estimate banks will continue to fail through the end of 2011, that more than 1,000 will fail representing a total asset loss of $900B, based on RBS estimates, information from contacts at the FDIC, and our own calculations.
This does not mean that the FDIC goes bankrupt and we sit at the precipice of another 1930s period of bank runs. If you want to know the future of the U.S. banking crisis, read this. (http://www.businessweek.com/1999/99_27/b3636158.htm)

If the Fed can take trillions of bad debts off of the balance sheets of gigantic banks and insurance companies and move them to its own balance sheet, the Treasury Dept. can cover the insurance liabilities of few hundred billion dollar for smaller banks, too.

http://www.itulip.com/images/fedbalancesheet2.jpg
If the Fed can through the miracle of double entry bookkeeping add $1 triilion
worth of asset backed securities and other crap to its balance sheet,
why can't it add another $1 trillion in insured bank deposits?





The deflationsts told us many years ago that the chart above was impossible. No way, no how is the Fed going to buy all that junk. Yet no matter how many times events prove them wrong, they keep on keeping at it.

The latest gambit: falling velocity of money and a declining money supply. This is supposed to prove the deflation spiral case. Here I argue otherwise. (http://www.itulip.com/forums/showthread.php?p=106493#post106493)

No deflation spiral, nor will the U.S. experience a Japan style stag-deflation. For that a nation needs to be a net capital exporter.

Net capital exporters have to cope with the tendency of the exchange rate value of the currency to rise due to foreign exchange accumulation. Still, things have not been so bad for the average Japanese. Wages are up and inflation is down, the exact opposite of what has occurred in the U.S. over the past ten years.

http://www.itulip.com/images/japanwages.gif
Japan since 1999: Wages up

http://www.itulip.com/images/japancpi.gif
Japan: Inflation down





The U.S. is a net capital importer and has the opposite problem, mitigated only by the fact that the U.S. dollar is a reserve currency, which produces an artificial global demand for dollars. The dollar devalues as a natural consequence of the process of a reduction in the demand for the dollar that happens during economic recessions when U.S. consumers buy fewer imports and foreign capital inflows fall.

Let's not forget, the whole argument for why a trade deficit is "good for America" is that foreign capital then flows into the U.S. where it creates new jobs that are better than the making toys and clothes jobs that were exported.

http://www.itulip.com/images/netcapitalinflowsvsnetexports1974-Q22009.gif

Vendor financing deal is off: No net goods and services imports, no capital exports,
no capital export financed jobs





Now that the U.S. is not importing as much, where will the foreign direct investment come from to generate jobs in the U.S. to fuel the recovery?

I recommend to deflationists that they focus their minds on one fact: governments cannot print purchasing power.
iTulip Forecast: The U.S. will experience stagflation as the economy drifts in and out of periods of moderate to high inflation while unemployment remains high. The sources of inflation are: 1) high import costs, with energy costs exerting the greatest upward force on the prices of goods, 2) reduced quantity of goods and services, 3) industrial concentration. The challenge for investors and consumers alike will be managing through inflation volatility, high unemployment, and political uncertainly, a new problem for the U.S. that will weigh on the dollar even more than the Fed's and Federal Government's balance sheet. As the U.S. fiscal and external debt position grows increasingly precarious, the U.S. remains vulnerable to a sudden stop event.
Conclusion

The current administration’s economic advisers do not appear to understand what is happening.

They are too busy fighting the last war.

They believe we are dodging a second Great Depression by avoiding the mistakes of central bankers in the 1930s.

They are “stimulating demand” with loose monetary policy and fiscal stimulus spending.

They believe that they can then “withdraw liquidity” at the first sign of inflation, and create a perfect balance between falling unemployment and rising inflation.

The theories behind these policies are fiction.

They do not understand that they are creating structural incentives for producers to offer lower quality goods and services at higher prices to consumers, and that this inflationary domestic structural change is combining with two trade-related global structural changes: high energy import costs due to Peak Cheap Oil and rising goods and services import costs due to a switch from imported to domestically produced goods as the dollar weakens and the U.S. loses its ability to finance trade deficits.

Anti-deflation economic policy has unleashed inflationary processes that were in the wings anyway. They cannot be contained.

They have built a snowball of inflation and sent it down the mountainside.

If you live in the U.S. and remaining stores start to take on a third world look in your area, now you know why. Actually, you knew why back in December 2008 when we warned you. If you didn’t take our advice from last year and buy up all the cheap durable goods you may need for the next ten years, your window of opportunity is closing fast. You will not see cars and other durable goods this cheap, as measured in the purchasing power of your savings and income, for a very long time. Need some work done on your house? Better hurry.

http://www.itulip.com/images/summersnowballs300.jpgAugust 2009 FIRE Economy Depression update – Part II: Snowball in Hell (http://www.itulip.com/forums/showthread.php?p=116453#post116453)

Debt Deflation Bear Market First Bounce Correction arrives
Economy on or off the rails?
Fiscal stimulus: Is it working?

Since December 2008 we expected the stock market to bounce in response to fiscal stimulus spending. We missed the second leg down in Q1 2009 then noted the start of a First Bounce on March 27, comparing it to the first bounce in the Nikkei in 1993 also driven by government money.

Never keen to try to catch the very top or bottom in any bubble or government driven market--and perhaps the distinction is precious--on June 17 after the S&P had risen 28% off March panic lows, we said the First Bounce was over. The S&P went up another 6% after that before rolling over.

To time the Debt Deflation Bear Market, we keep an eye on both the results and the costs of re-inflation efforts. The direct cost of re-inflation is public debt. The indirect cost is a weaker dollar. The results can be seen in the impact on demand as measured in rail traffic, the longest running statistical measure of economic activity available that is not managed by government statisticians. more... $ubscription (http://www.itulip.com/forums/showthread.php?p=116453#post116453)

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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a warren
08-17-09, 09:10 PM
Excellent article, especially with added bonus that there was not one mention of a potential trade that may or may not pay off over the next ten minutes!

snacky
08-17-09, 09:41 PM
Hello EJ,


Why did PCE resume falling? In a word, jobs. The unemployment picture is bad and, again, defying even our most pessimistic projections, continues to worsen.

http://www.itulip.com/images/unemp27weeks1947-Aug2009.gif





The number of members of the civilian labor force counted as officially unemployed for more than 27 weeks is over 18% of the total civilian labor force, exceeding the previous peak of 12.3% in 1983. Worse, the rate of growth shows no signs of slowing—the trend is still vertical.



I think there is a labelling error in the graph and also in the text but I can't put my finger on it. The civilian labor force is currently counted at 154,504,000. 18% of that number is clearly not equal to the ~5 million shown on the graph above. I am unsure what the original intention was behind that graph but something will surely have to change to make it correct.

jk
08-17-09, 10:22 PM
2 nits and a big reaction.

nit 1- how can the % of the laborforce unemployed for more than 27 weeks be greater than u6?

nit 2- consumer credit didn't recover after 2001 because j6p used the housing atm via heloc's and refi's- a cheaper and tax-advantaged source of credit.

big reaction- your analysis becomes ever more forceful and incisive, and scary.

metalman
08-17-09, 10:27 PM
2 nits and a big reaction.

nit 1- how can the % of the laborforce unemployed for more than 27 weeks be greater than u6?

nit 2- consumer credit didn't recover after 2001 because j6p used the housing atm via heloc's and refi's- a cheaper and tax-advantaged source of credit.

big reaction- your analysis becomes ever more forceful and incisive, and scary.

i didn't get the 18% thing either. that said, relative to 1980s & 1950s, the trend is hard to miss.

do you have the numbers re helocs/refis and total consumer credit? didn't fleck or someone figure out the total dollars of helocs/refis is a tiny portion of total consumer credit?

the analysis is building on a firm foundation... and reaching to a f&cking scary conclusion. :eek:

also, the picture of larry, benny, timmy & bobby is way cool.

jk
08-17-09, 10:36 PM
the only way to improve the picture is to have them pushing the snowball up a mountain, sysiphus style.

LargoWinch
08-17-09, 10:40 PM
the only way to improve the picture is to have them pushing the snowball up a mountain, sysiphus style.

Actually, there is another guy missing from the picture, but as seen here, he is clearly showing the way - the goldman sux down the hill way that is:


http://tbn1.google.com/images?q=tbn:f__tTP57lM75BM:http://www.bloomberg.com/apps/data?pid=avimage&iid=i0Dn0dBOn3bI
(Head Huncho of the Central Bank of Canada)

bart
08-18-09, 12:03 AM
I already had a chart showing total non farm payroll to total (census) population, so I just cleaned it up a bit and also did one for government employees only.


http://www.nowandfutures.com/images/employment_to_census.png




http://www.nowandfutures.com/images/employment_govt_to_census.png

whitetower
08-18-09, 12:15 AM
Thanks, Bart, for that graph. I've been thinking for some time that the "unemployment" numbers U1-U6 are just all crap anyway -- "unemployment" has been redefined by the government, what, 3 times in 20 years? I suppose it's being redefined right now as well.

What's important is the total workforce relative to the working-age population. It's a far clearer picture of things to simply ask: "What percentage of people are working?"

Chief Tomahawk
08-18-09, 12:25 AM
"student furnishings"

Sounds like a setting ripe for the return of the Datsun 210 Hatchback. Heaven help us.

Chief Tomahawk
08-18-09, 12:42 AM
"Competing stores that sell similar items are charging prices that are noticeably higher than a year ago, and far higher than during the fire sale period from Christmas 2008 until the end of Q2 2009."

I can't argue with EJ's firsthand evidence in Boston, but I think that's pre-mature here in Chicago. If anything, I think the stage here is retailers have experienced a decline in sales and thereby revenue and are attempting to counter that by raising prices. I think many know it won't work yet it's all they can do to try to pay the bills, etc.

Also, two of the supermarket chains made big announcements about price cuts at the start of this summer. I think it was a rollback of the price increases which came through last summer due to $147 oil.

If anything, we're in the disinflationary stage here in Chicago. And in regards to Cambridge and Harvard, didn't Harvard have a derivative investment of $1 billion blow sky high 6 weeks ago? Perhaps are they trying to squeeze every dime out of whereever their investments reach to save their arse? Maybe that explains why local retailers have raised prices: because their landlord jacked up their rent? Just a thought.

FRED
08-18-09, 01:02 AM
"Competing stores that sell similar items are charging prices that are noticeably higher than a year ago, and far higher than during the fire sale period from Christmas 2008 until the end of Q2 2009."

I can't argue with EJ's firsthand evidence in Boston, but I think that's pre-mature here in Chicago. If anything, I think the stage here is retailers have experienced a decline in sales and thereby revenue and are attempting to counter that by raising prices. I think many know it won't work yet it's all they can do to try to pay the bills, etc.

We are hearing this all over the country. That is not the usual response in a recession.

In the 2001-2002 recession, businesses immediately dropped prices as commodity prices fell like a rock. Businesses are not dropping prices this time because their costs remain too high. The Fed, in its infinite wisdom, has made input costs sticky! Their debt deflation reflation policy has been a complete disaster.


http://www.prices-oil.org/wp-content/uploads/2009/08/oil3.jpg

bart
08-18-09, 01:11 AM
Thanks, Bart, for that graph. I've been thinking for some time that the "unemployment" numbers U1-U6 are just all crap anyway -- "unemployment" has been redefined by the government, what, 3 times in 20 years? I suppose it's being redefined right now as well.

I actually don't think they're crap, one just needs to both put them in proper perspective (as in mostly ignore U1-5 except for inevitable U3 spin effects from Wall St., back adjust for the doofus birth death model, etc.) and also pay attention to stats like John Williams estimates and my own U7 reconstruction - as well as folk like EJ who have been talking about "jobless recovery" and similar for years.


They tell close to the same macro story - things are not in good shape to say the very least. The difference between ~16% U6 and ~20% shadowstats.com numbers and my own ~20% reconstructed U7, while very important for that 4% difference who are unemployed, is not terribly consequential in the grand scheme - they both suck hugely.



What's important is the total workforce relative to the working-age population. It's a far clearer picture of things to simply ask: "What percentage of people are working?"

Agreed... and unfortunately I don't track working age population. It would certainly present a better & more complete picture, but those charts beat nuttin'.

Jim Nickerson
08-18-09, 01:45 AM
Since December 2008 we expected the stock market to bounce in response to fiscal stimulus spending. We missed the second leg down in Q1 2009 then noted the start of a First Bounce on March 27, comparing it to the first bounce in the Nikkei in 1993 also driven by government money.
Never keen to try to catch the very top or bottom in any bubble or government driven market--and perhaps the distinction is precious--on June 17 after the S&P had risen 28% off March panic lows, we said the First Bounce was over. The S&P went up another 6% after that before rolling over.


Unless I'm misunderstanding something above (always possible), the SPX had a closing low of 676.53 on March 8, 2009, and on 6/17/09 closed at 910.71, a move of 234.18 points equaling a rise of 34.61%. From there to the closing high so far on 8/13/09, the SPX moved a further 102.02 points or 10.07%. From the 3/8/09 low to the 8/13/09 high the move has been 49.69%.

The link below is an interview with Bob Prechter from CNBC today, discussing in part his call I believe on August 5 to exit long positions which it seems he recommended at some point after exiting short positions near the end of February, which was not a bad call.

Starting at about 4 mins on this video he discussed his assessment of the US$ which he "sees" as strengthening perhaps for several years.

I'm not posting this thinking Prechter is/will be/could be correct, but rather to show an example of the the disparate analyses that exist each and every day in the financial commentary about the future. http://www.cnbc.com/id/15840232?play=1&video=1217397249

metalman
08-18-09, 02:01 AM
Unless I'm misunderstanding something above (always possible), the SPX had a closing low of 676.53 on March 8, 2009, and on 6/17/09 closed at 910.71, a move of 234.18 points equaling a rise of 34.61%. From there to the closing high so far on 8/13/09, the SPX moved a further 102.02 points or 10.07%. From the 3/8/09 low to the 8/13/09 high the move has been 49.69%.

The link below is an interview with Bob Prechter from CNBC today, discussing in part his call I believe on August 5 to exit long positions which it seems he recommended at some point after exiting short positions near the end of February, which was not a bad call.

Starting at about 4 mins on this video he discussed his assessment of the US$ which he "sees" as strengthening perhaps for several years.

I'm not posting this thinking Prechter is/will be/could be correct, but rather to show an example of the the disparate analyses that exist each and every day in the financial commentary about the future. http://www.cnbc.com/id/15840232?play=1&video=1217397249

(http://finance.yahoo.com/tech-ticker/article/298981/Inflation-Not-a-Problem,-%22Deflationary-Depression%22-in-Our-Future,-Prechter-Says)
(http://finance.yahoo.com/tech-ticker/article/298981/Inflation-Not-a-Problem,-%22Deflationary-Depression%22-in-Our-Future,-Prechter-Says)Inflation Not a Problem, "Deflationary Depression" in Our Future, Prechter Says (http://finance.yahoo.com/tech-ticker/article/298981/Inflation-Not-a-Problem,-%22Deflationary-Depression%22-in-Our-Future,-Prechter-Says)

<cite> Posted Aug 11, 2009 08:30am EDT by Peter Gorenstein in Investing, Commodities, Recession, Banking, Housing</cite>


In July, Ben Bernanke told a town hall meeting, "I was not going to be the Federal Reserve chairman who presided over the second Great Depression." According to New York Times columnist Paul Krugman in that regard he's succeeded. Bernanke's rescue of the financial sector in tandem with the Obama Administration's stimulus plan prevented a "full replay" of the Great Depression, the Nobel Prize-winning economist writes.
But like President Bush declaring "Mission Accomplished" in 2003, Elliott Wave International founder, Bob Prechter thinks Krugman and Bernanke are premature in declaring victory over the credit crunch. Prechter, who famously predicted the 1987 stock market crash, tells Tech Ticker "the march towards depression, which is being fueled by deflationary trend, is pretty well intact."
So forget all you've heard about recovery and inflation, "we've only seen the first phase," of the downturn according to Prechter. Next to come, is "a credit implosion" that will once again destroy the value of stocks, commodities and especially real estate. "The biggest area of overvaluation because of credit extension is the real estate area," he says. "And if you'll notice that’s the area that's had the weakest of any kind of attempt at a recovery."


elliot wave is a scam & prechter is a scam artist. give the man his due.... he's good at what he does... separating people from their money.


If you read the book "At The Crest of the Tidal Wave" by Bob Prechter, written in 1996, he shows clearly and unequivocally that we would soon be entering the 4th of the 9th wave i.e. wave FOUR down of GRAND SUPERCYCLE degree.
The book has scientific backing in the area of geometry known as chaos theory, of which fractal waves(which includes ELLIOTT waves)area sub-set. The Great Crash of 1929-32 was of one degree SMALLER(SUPERCYCLE), and it took the DOW down 89%, from about 380 to 41.
What is scary is that since we are seeing now the GC WAVE FOUR portended in that book, fractal theory says that ultimately,(and that means it can take decades, but also means there will be NO new DOW high until long after this), the DOW drop will not stop until it reaches to the depths of the fourth wave of one-lesser degree. Well, that is EXACTLY the Supercycle wave IV where the DOW dropped to 41 in 1932.Since then, we have been in Supercycle WAVE V of GC WAVE THREE.
So, we are looking at an ultimate target for the DOW of between 41 and 380. THAT IS NO SHIT OR MISPRINT. :eek::eek:

-- profit_of_doom (doom@helltopay.ca), October 16, 1999. :D:D:D

Slimprofits
08-18-09, 07:09 AM
This article is a tour de force.

LargoWinch
08-18-09, 08:00 AM
bart is the man! is there a chart you do not have? :cool:

ironlady
08-18-09, 09:36 AM
The inside of our local Target store in Burlington, Massachusetts looks like this. Shelf space has been cut by more about 40%. The isles are wide enough to drive through. The selection of goods is a fraction of what it was six months ago. The same is true of the Super 88 where we shop for Asian groceries. The space is half empty, and the items on the shelves no longer include expensive Japanese imports, only Chinese.



It is refreshing to see a man walking through the isles with his wife...that is why I read your posts and agree so wholeheartedly with what you write. When you raise children on your own , you learn all about the grocery games. Right now in Canada, our packaging has shrunk, but prices are where they have always been. Pricing has also changed, ie, they used to sell cabbage at $0.69 a head and it is now by the pound. Ever wheighed a cabbage? What used to cost $0.69 is now $2.25. The shelves are now lowered in the "newly redesigned Loblaws" Canada's top chain, and the isles are wider and the shelves are half empty. Staff say, "we are just adjusting to our new look". Hogwash! Potatoes that used to feed an out of work hungry family used to be $0.29 lb and are now $0.99 or more per pound. And we grow them here !!!
As always EJ, you are right and you will be right in the future. Just keep holding your wifes hand down those isles!;)

jk
08-18-09, 09:46 AM
from zerohedge. prices paid- up a lot. prices received- not so much.

Empire Manufaturing Index Rises As Margin Pressure Increases (http://www.zerohedge.com/article/empire-manufaturing-index-rises-margin-pressure-increases)

Submitted by Tyler Durden (http://www.zerohedge.com/users/tyler-durden) on 08/17/2009 07:59 -0500



http://www.zerohedge.com/sites/default/files/images/Empire%208.17.09_1.jpg
The Empire Manufacturing Index screamed higher to 12.1, much higher than the estimate of 3, yet the simple reason for this was margin pressure increased. As the chart below demonstrates The Prices Paid - Prices Received delta increased yet again, this time hitting 26.60, indicating manufacturers are losing on margin, which will impact the bottom line. And the future does not look much better: Prices Paid is expected to increase to +31.91 and Received to pick up to +5.32, meaning the margin pressure is here to stay.

jiimbergin
08-18-09, 09:46 AM
Have I missed something? No one has given an answer to the 18% (percent of total civilian population or as in the footnote total civilian labor force) that is unemployed for more than 27 weeks. Does anyone understand this? Since the question was asked almost right after the post was made I thought we would have an answer by now.

jim

goadam1
08-18-09, 12:04 PM
I actually don't think they're crap, one just needs to both put them in proper perspective (as in mostly ignore U1-5 except for inevitable U3 spin effects from Wall St., back adjust for the doofus birth death model, etc.) and also pay attention to stats like John Williams estimates and my own U7 reconstruction - as well as folk like EJ who have been talking about "jobless recovery" and similar for years.


They tell close to the same macro story - things are not in good shape to say the very least. The difference between ~16% U6 and ~20% shadowstats.com numbers and my own ~20% reconstructed U7, while very important for that 4% difference who are unemployed, is not terribly consequential in the grand scheme - they both suck hugely.




Agreed... and unfortunately I don't track working age population. It would certainly present a better & more complete picture, but those charts beat nuttin'.

What matters is that we be consistent on terminology. If u3 at 9.5% means 16% in your terms than it doesn't really matter what means what. But you can't switch between terms. You need to use the same definition of unemployment to have a legitimate conversation.

In a thread I started in January, I asked if 20% was u3 or u6 or some other definition of unemployment. I did not receive a straight answer.

So now we get a kind of, "see I'm right, it's 16% unemployment."

FRED
08-18-09, 12:06 PM
What matters is that we be consistent on terminology. If u3 at 9.5% means 16% in your terms than it doesn't really matter what means what. But you can't switch between terms. You need to use the same definition of unemployment to have a legitimate conversation.

In a thread I started in January, I asked if 20% was u3 or u6 or some other definition of unemployment. I did not receive a straight answer.

So now we get a kind of, "see I'm right, it's 16% unemployment."

What do you recommend?

Chasing the BLS around could turn into a full time job. See: BLS plans to pump up PCE with food and energy prices. (http://www.itulip.com/forums/showthread.php?p=116620#post116620)

Retired Commish
08-18-09, 12:25 PM
No question: One of the finest articles I read this year. EJ, you have that knack of a great teacher to make something understandable and interesting enough for one to continue learning. Until you are better paid, Thanks. This article will go to my select friends!

goadam1
08-18-09, 12:37 PM
What do you recommend?

Chasing the BLS around could turn into a full time job. See: BLS plans to pump up PCE with food and energy prices. (http://www.itulip.com/forums/showthread.php?p=116620#post116620)

You can use the shadowstat definition or Bart's. When I see a number, I need to know it is has the same meaning and the same relationship. Switching around terms and declaring victory is bogus science.

The same goes for "real Dow." If one prediction is nominal, but 6 months later we are talking about the inflation adjusted level, then I don't understand what is being discussed. We had "beware of relief rallies" but then we start talking about "real dow." Both terms matter for different discussions. As Finster has made the point, if dollars shrink but the dow goes up, then not being out of dollars makes me lose. I understand that I didn't make "real dow" gains. But there is no "leave" in the system. Besides, inflation has always been part of stock "gains."

And real dow should be compared to something consistent. I'm not good at math, but I think a 50 or 200 day moving average of the dow to gold or oil would tell us something about real gains.

Great work. Thanks.

we_are_toast
08-18-09, 12:51 PM
What do you recommend?

Chasing the BLS around could turn into a full time job. See: BLS plans to pump up PCE with food and energy prices. (http://www.itulip.com/forums/showthread.php?p=116620#post116620)

Thanks again for another fine job by iTulip and EJ.

I too have been confused in the past as to what measurement you were using for unemployment. I think the 27 week unemployed as a % of total civilian population is a good measure. But how does 6 million unemployed (for more than 27 weeks) in a 150 + million labor force translate to 18% unemployment? :confused:


http://research.stlouisfed.org/fred2/data/CLF16OV_Max_630_378.png

seanm123
08-18-09, 03:17 PM
Seems there is some very credible evidence popping up to suggest that the guy carrying an AR-15 was a plant as he was supposedly seen chanting pro-obama slogans and was with the SEIU crowd of counterdemonstrators.

It may well have been a plant exercise by Law Enforcement than an actual protest, look for more of this including aid provided by informants planted in protest groups.

bart
08-18-09, 03:46 PM
What matters is that we be consistent on terminology. If u3 at 9.5% means 16% in your terms than it doesn't really matter what means what. But you can't switch between terms. You need to use the same definition of unemployment to have a legitimate conversation.

In a thread I started in January, I asked if 20% was u3 or u6 or some other definition of unemployment. I did not receive a straight answer.

So now we get a kind of, "see I'm right, it's 16% unemployment."

I am in no way, shape or form saying that 9.5% U3 is the same as 16%+ U6, but rather expressed an opinion about U1-U6 being "crap". I only watch U6 & my own U7, but also note U3 since Wall St spins & spews about it and it affects markets - whether I like it or agree with it or not.

What we have here is a rock and a hard place, as Fred sort of noted. U6 is not well known at all and U3 is full of holes... and both shadowstats.com and my U7 reconstruction don't exactly have huge following either.

And then we have the whole issue of EJ or iTulip or whomever getting zapped or raked over the coals when they're not 100% perfect and correct, and what a crock that is. I'm a successful trader, and only get 60%+ right.
I don't mean this to be a personal attack on you at all, but think about what it takes to put your butt on the line and make forecasts going out many months or years, and knowing that sometimes you'll be wrong. The real key to me is how honest someone in the forecast business is, and much more - do they learn from those inadvertent goofs. And do their overall calls and views stand the test of time... and iTulip does *way* better than most.

The whole area of economics and finance has been injected with so much outright wrong data and vested interest based spin & crud etc. that its so far beyond ridiculous that I can't even put it into words. And I don't want my blood pressure even higher than it is already.

Whether its intentional or inadvertent or some combination of the two isn't even all that important - the main point is that its well beyond a minefield, and trying to punch through all the crud and bad data that the average person has is extremely difficult.
As just one small example - I started posting about Fed OMOs and POMOs almost 4 years ago, and damn near no one believed what I was saying - and with raw facts directly from the Fed! Its part of the reason I use a tinfoil fat avatar - the real truth about what's really going on is literally alien to most people.


Then in my opinion we have the issue of if iTulip only talked about U6 for example, some/many folk would have hissy fits about why they're avoiding U3. I was confused myself at whether their 20% forecast was U3 or U6, but it was clarified many times as being U3 and a search will confirm that.

I even wrote a post a week or so ago with a best guess that we'll have a "double dip" or worse and that 20% is still not out of line for U3... but its so hugely political that redefinition will cause it to never happen. After all, on a best guess basis per my research, today's shadowstats.com numbers or my U7 reconstruction actually are roughly equivalent to U3 prior to 1970 or so. And that research, as well as the reconstruction, took many dozens of hours to plow through all the BLS BS... and I'm still a bit uncertain on my conclusions.




edit/add:
As far as nominal vs. "real Dow", its another damned if you do and damned if you don't. Some want one and some want the other, and so they do both - much as I do on many of my charts.

People are different and want/need different views, and given that roughly 80% of the Dow or Dow+dividends gain since 1900 are inflation only (per shadowstats.com adjustments with some changes by me), things like "real Dow" go a long way towards exposing that awful truth.

I also don't expect iTulip to use either my or shadowstats numbers on anything either. They're their own folk with their own opinions. I'm happy that they have used some of my charts, since that's one of the main reasons I spend so much time on them - so that raw facts can get wider exposure - but mostly they go their own way. I'm here precisely because I don't always agree and also because they do frequently come up with some quite good and unique work which is head & shoulders above most, while being far from perfect.

talaicito
08-18-09, 07:59 PM
Excellent article, especially with added bonus that there was not one mention of a potential trade that may or may not pay off over the next ten minutes!

I thought this was the weakest EJ piece I've ever read on this site. It actually contradicts his earlier pieces on Depression. I fully appreciate his arguments for Depression, but runaway inflation in a Depression? I need to see more arguments for that. His citing of of a little blip upwards in CPI as a new trend towards runaway inflation is unconvincing. Very un-EJ. He usually criticizes others (rightfully) when they mistake a couple of data points for a trend.

No matter how much Bernanke and Co. try, they can't replace trillions in gone credit, all over the world (remember the status of the dollar, not Argentina's currency).

On one hand he critisizes people who compare current situation to Great Depression, saying this happened only once. But Depression and Inflation together NEVER happened in this country! Comparing other countries to US is much harder due to history and currency considerations, so citing 17 other countries with that experience is hardly an typical EJ good argument.

Is it possible EJ getting dogmatic about his Ka-Poom theory?

He could still be right, but I thought his arguments this time were weaker than his usual stuff.

What do you think?

talaicito
08-18-09, 08:11 PM
[url="http://finance.yahoo.com/tech-ticker/article/298981/Inflation-Not-a-Problem,-%22Deflationary-Depression%22-in-Our-Future,-Prechter-Says"]

elliot wave is a scam & prechter is a scam artist. give the man his due.... he's good at what he does... separating people from their money.


I heard he made 400% in 4 months trading, are you sure this is about money??
If I were him (and i'm all about money:D) i'd be just sitting and trading instead of wasting my time arguing with dumbasses on CNBC or anywhere else.

metalman
08-18-09, 08:20 PM
mega trollish 1st post. i'll score it for ya... from 0 to 5...


I thought this was the weakest EJ piece I've ever read on this site. It actually contradicts his earlier pieces on Depression.

0... it is 100% consistent with previous analysis.


I fully appreciate his arguments for Depression, but runaway inflation in a Depression? 0... where does he say 'runaway inflation'??? he says stagflation...

iTulip Forecast: The U.S. will experience stagflation as the economy drifts in and out of periods of moderate to high inflation while unemployment remains high. The sources of inflation are: 1) high import costs, with energy costs exerting the greatest upward force on the prices of goods, 2) reduced quantity of goods and services, 3) industrial concentration. The challenge for investors and consumers alike will be managing through inflation volatility, high unemployment, and political uncertainly, a new problem for the U.S. that will weigh on the dollar even more than the Fed's and Federal Government's balance sheet. As the U.S. fiscal and external debt position grows increasingly precarious, the U.S. remains vulnerable to a sudden stop event.


I need to see more arguments for that. His citing of of a little blip upwards in CPI as a new trend towards runaway inflation is unconvincing. 0... never says runaway inflation... stagflation.


No matter how much Bernanke and Co. try, they can't replace trillions in gone credit, all over the world (remember the status of the dollar, not Argentina's currency).0... ah, the meat of the deflationista troll... 'they can't hit the zero key enough...'


On one hand he critisizes people who compare current situation to Great Depression, saying this happened only once. But Depression and Inflation together NEVER happened in this country! -5... bullshit. he backs it up with facts...


http://www.itulip.com/forums/../images/japanwages.gif
Japan since 1999: Wages up


wages up during a depression... b...b..b.but how?


Comparing other countries to US is much harder due to history and currency considerations, so citing 17 other countries with that experience is hardly an typical EJ good argument.0... the dollar can't depreciate? really???? like the 40% it lost 2001 - 2008?


Is it possible EJ getting dogmatic about his Ka-Poom theory? 1... you get one point... posed as a question not an unsubstantiated assertion.


He could still be right, but I thought his arguments this time were weaker than his usual stuff.

What do you think?i think you're a troll.

jiimbergin
08-18-09, 08:35 PM
i think you're a troll.

Thanks metalman. I think it is a great piece. But it would be better if someone would please help me understand about the 18%:D

jim

tacito
08-18-09, 08:37 PM
they can't replace trillions in gone credit

Funny think that so many people think that money gets destroyed when a credit is not payed. As I understand it, it's just the opposite:

Normal case (no default):
1) Bank gives credit to liar, creating new money.
2) Liar spends money buying an 80 inch plasma TV.
3) Money circulates: from mall to distributor, from distributor to manufacturer (in China), exchanged for yuan with chineses gov., from chinese gov. buying short term treasuries to american gov., from american gov. to GM, etc.
4) Liar earns back money plus interest from the economy.
5) Liar pays bank. Money gets destroyed. The bank should lend again, or the money supply will shrink.

New normal (default):
1) Bank gives credit to liar, creating new money.
2) Liar spends money buying an 80 inch plasma TV.
3) Money circulates: from mall to distributor, from distributor to manufacturer (in China), exchanged for yuan with chineses gov., from chinese gov. buying short term treasuries to american gov., from american gov. to GM, etc.
4) Liar fails to earn back money and defaults.
5) Bank loses money, that remains still in the economy. No deflation here.
6) Fed creates money to bailout bank. No inflation until the bank lends the money. It will try not to, but if it has enough defaults, it will have to...

metalman
08-18-09, 09:09 PM
Funny think that so many people think that money gets destroyed when a credit is not payed. As I understand it, it's just the opposite:

Normal case (no default):
1) Bank gives credit to liar, creating new money.
2) Liar spends money buying an 80 inch plasma TV.
3) Money circulates: from mall to distributor, from distributor to manufacturer (in China), exchanged for yuan with chineses gov., from chinese gov. buying short term treasuries to american gov., from american gov. to GM, etc.
4) Liar earns back money plus interest from the economy.
5) Liar pays bank. Money gets destroyed. The bank should lend again, or the money supply will shrink.

New normal (default):
1) Bank gives credit to liar, creating new money.
2) Liar spends money buying an 80 inch plasma TV.
3) Money circulates: from mall to distributor, from distributor to manufacturer (in China), exchanged for yuan with chineses gov., from chinese gov. buying short term treasuries to american gov., from american gov. to GM, etc.
4) Liar fails to earn back money and defaults.
5) Bank loses money, that remains still in the economy. No deflation here.
6) Fed creates money to bailout bank. No inflation until the bank lends the money. It will try not to, but if it has enough defaults, it will have to...

very concise. once in circulation, the money goes round and round!

metalman
08-18-09, 09:13 PM
Thanks metalman. I think it is a great piece. But it would be better if someone would please help me understand about the 18%:D

jim

i'm glossing over the number... 1 out of 3239 facts in the piece. does it negate the argument? can get worked up about it.

flintlock
08-18-09, 09:16 PM
Funny think that so many people think that money gets destroyed when a credit is not payed. As I understand it, it's just the opposite:

Normal case (no default):
1) Bank gives credit to liar, creating new money.
2) Liar spends money buying an 80 inch plasma TV.
3) Money circulates: from mall to distributor, from distributor to manufacturer (in China), exchanged for yuan with chineses gov., from chinese gov. buying short term treasuries to american gov., from american gov. to GM, etc.
4) Liar earns back money plus interest from the economy.
5) Liar pays bank. Money gets destroyed. The bank should lend again, or the money supply will shrink.

New normal (default):
1) Bank gives credit to liar, creating new money.
2) Liar spends money buying an 80 inch plasma TV.
3) Money circulates: from mall to distributor, from distributor to manufacturer (in China), exchanged for yuan with chineses gov., from chinese gov. buying short term treasuries to american gov., from american gov. to GM, etc.
4) Liar fails to earn back money and defaults.
5) Bank loses money, that remains still in the economy. No deflation here.
6) Fed creates money to bailout bank. No inflation until the bank lends the money. It will try not to, but if it has enough defaults, it will have to...

Now that's the kind of explanation I need.:D Simple.

jiimbergin
08-18-09, 09:19 PM
i'm glossing over the number... 1 out of 3239 facts in the piece. does it negate the argument? can get worked up about it.

Sorry, I disagree. It is a great piece, but with enough of us not understanding this one item, it should be either corrected or explained. :confused:

jim

FRED
08-18-09, 09:47 PM
Sorry, I disagree. It is a great piece, but with enough of us not understanding this one item, it should be either corrected or explained. :confused:

jim

Data correction:

Civilian Noninstitutional Population: Thousands-----Civilians Unemployed for 27 weeks or over: Thousands----Percent

May-50-----105,014-----400-----0.4%
Jun-83-----174,125-----2,800-----1.6%
Jul-09-----235,870-----5,000-----2.1%


http://www.itulip.com/images/unemp27weeks1947-Aug2009.gif
Don't forget to hit the "Refresh" button on your browser to see the new chart.

snacky
08-18-09, 11:58 PM
Thanks FRED!

The number doesn't look as scary... until you realize it's way worse than it's ever been before.

FRED
08-19-09, 12:05 AM
Thanks FRED!

The number doesn't look as scary... until you realize it's way worse than it's ever been before.

To be precise, the statistic is 24% worse than the worst previous recession, of the 1980s.

talaicito
08-19-09, 12:12 AM
mega trollish 1st post. i'll score it for ya... from 0 to 5...



0... it is 100% consistent with previous analysis.

0... where does he say 'runaway inflation'??? he says stagflation...

iTulip Forecast: The U.S. will experience stagflation as the economy drifts in and out of periods of moderate to high inflation while unemployment remains high. The sources of inflation are: 1) high import costs, with energy costs exerting the greatest upward force on the prices of goods, 2) reduced quantity of goods and services, 3) industrial concentration. The challenge for investors and consumers alike will be managing through inflation volatility, high unemployment, and political uncertainly, a new problem for the U.S. that will weigh on the dollar even more than the Fed's and Federal Government's balance sheet. As the U.S. fiscal and external debt position grows increasingly precarious, the U.S. remains vulnerable to a sudden stop event.

0... never says runaway inflation... stagflation.

0... ah, the meat of the deflationista troll... 'they can't hit the zero key enough...'

-5... bullshit. he backs it up with facts...


http://www.itulip.com/forums/../images/japanwages.gif
Japan since 1999: Wages up


wages up during a depression... b...b..b.but how?

0... the dollar can't depreciate? really???? like the 40% it lost 2001 - 2008?

1... you get one point... posed as a question not an unsubstantiated assertion.

i think you're a troll.

is it possible, you are an idiot??
Another 1 for me?

talaicito
08-19-09, 12:20 AM
Funny think that so many people think that money gets destroyed when a credit is not payed. As I understand it, it's just the opposite:

Normal case (no default):
1) Bank gives credit to liar, creating new money.
2) Liar spends money buying an 80 inch plasma TV.
3) Money circulates: from mall to distributor, from distributor to manufacturer (in China), exchanged for yuan with chineses gov., from chinese gov. buying short term treasuries to american gov., from american gov. to GM, etc.
4) Liar earns back money plus interest from the economy.
5) Liar pays bank. Money gets destroyed. The bank should lend again, or the money supply will shrink.

New normal (default):
1) Bank gives credit to liar, creating new money.
2) Liar spends money buying an 80 inch plasma TV.
3) Money circulates: from mall to distributor, from distributor to manufacturer (in China), exchanged for yuan with chineses gov., from chinese gov. buying short term treasuries to american gov., from american gov. to GM, etc.
4) Liar fails to earn back money and defaults.
5) Bank loses money, that remains still in the economy. No deflation here.
6) Fed creates money to bailout bank. No inflation until the bank lends the money. It will try not to, but if it has enough defaults, it will have to...

Don't you think in the new normal, after 4 the 5 would be that the bank fails (EJ says there will be 1000 of them) or tightens credit?

stumann
08-19-09, 12:22 AM
reflation is only semi-working in regards to the first symptoms of deflation in domestic markets.

but reflation is impossible in reviving the $600 Trillion global hedge fund market

eventually domestic markets will fail to respond, and global deflation will begin on a massive scale. it will be un-historic

metalman
08-19-09, 12:25 AM
is it possible, you are an idiot??
Another 1 for me?

no... not an idiot... tho i never discount that chance that i'm behaving like an idiot at times.

i do require evidence. got any?

can you refute my evidence that you are a troll?

on your first post you serve up 6 criticisms that any idiot without an agenda can see are bogus.

ASH
08-19-09, 12:28 AM
Data correction:

Civilian Noninstitutional Population: Thousands-----Civilians Unemployed for 27 weeks or over: Thousands----Percent

May-50-----105,014-----400-----0.4%
Jun-83-----174,125-----2,800-----1.6%
Jul-09-----235,870-----5,000-----2.1%

Hi FRED. Sorry if I'm being obtuse, but is it the case that the numbers in the graph were corrected, but not the corresponding text in the article? I think the text still reads:


The number of members of the civilian labor force counted as officially unemployed for more than 27 weeks is over 18% of the total civilian population, exceeding the previous peak of 12.3% in 1983.

talaicito
08-19-09, 12:28 AM
reflation is only semi-working in regards to the first symptoms of deflation in domestic markets.

but reflation is impossible in reviving the $600 Trillion global hedge fund market

eventually domestic markets will fail to respond, and global deflation will begin on a massive scale. it will be un-historic

I tend to agree, that's why Bank of England is continuing its QE.
I am just wondering where did you get the 600 trillion figure?

jtabeb
08-19-09, 12:39 AM
from zerohedge. prices paid- up a lot. prices received- not so much.

Empire Manufaturing Index Rises As Margin Pressure Increases (http://www.zerohedge.com/article/empire-manufaturing-index-rises-margin-pressure-increases)

Submitted by Tyler Durden (http://www.zerohedge.com/users/tyler-durden) on 08/17/2009 07:59 -0500



http://www.zerohedge.com/sites/default/files/images/Empire%208.17.09_1.jpg
The Empire Manufacturing Index screamed higher to 12.1, much higher than the estimate of 3, yet the simple reason for this was margin pressure increased. As the chart below demonstrates The Prices Paid - Prices Received delta increased yet again, this time hitting 26.60, indicating manufacturers are losing on margin, which will impact the bottom line. And the future does not look much better: Prices Paid is expected to increase to +31.91 and Received to pick up to +5.32, meaning the margin pressure is here to stay.

Yeah but ZH has a HUGE ideological bias towards deflation. I'm over there a lot and while I appreciate the intel on how the market works and the games that are being played, their macro econ analysis sucks(putting it mildly). The are simplistic (see Energy is oversupplied, demand is down prices will go down - kind of deflation all the time BS.

KA-Poom is the most useful macro construct that I've come across anywhere,

Zerohedge is just KA-KA in comparsion on the macro econ front. (pun intended).

If you don't beleive me, just look for any mention of inflation or impending inflation, YOU WON'T FIND A SINGLE article there that says so.

jtabeb
08-19-09, 12:45 AM
[url="http://finance.yahoo.com/tech-ticker/article/298981/Inflation-Not-a-Problem,-%22Deflationary-Depression%22-in-Our-Future,-Prechter-Says"]

elliot wave is a scam & prechter is a scam artist. give the man his due.... he's good at what he does... separating people from their money.

ONLY ZH quotes Prechter for Macro-Econ positioning.

talaicito
08-19-09, 12:45 AM
no... not an idiot... tho i never discount that chance that i'm behaving like an idiot at times.

i do require evidence. got any?

can you refute my evidence that you are a troll?

on your first post you serve up 6 criticisms that any idiot without an agenda can see are bogus.

Its just funny that you score 1 if i put a question mark in the end of a sentence and 0 if I don't. Should I put question marks in the end of each sentence? How about this as evidence????????? (how many do i have now?)

Actually I read many of your posts and find that you have some common sense. However, you have got your face so far up EJs ass that you sometimes lose your common sense sometimes, and those times are the ones you are acting like an idiot, as you admit. Does he pay you for it? If he does, i withdraw my idiot remark.

EJ is a smart dude, no question about it. But even smart guys can get overconfident and too much into their theories, especially when they have some success, like EJ undoubtfully have had. Many sites like this have their own 'guy' that they think is a genius and everyone just extolls them and create a cult of personality. What happened to critical thinking and making your own judgements?

As for an agenda, I am just trying to figure out what I should prepare for and looking everywhere for good information. I can't do too much research since I have a job (still) but I can still critically evaluate EJs arguments, can't I? Is it still a free country???? Or will you shut me down, idiot metalman??

metalman
08-19-09, 12:46 AM
I heard he made 400% in 4 months trading, are you sure this is about money??

after losing 80%, gaining 40%, losing 20%, gaining 12%, losing 50%, etc, etc.

ah, the life of a gambler... er, trader.


If I were him (and i'm all about money:D) i'd be just sitting and trading instead of wasting my time arguing with dumbasses on CNBC or anywhere else.

advertising & showbiz.

if i were him... was a hack that cnbc puts on the air to make bears look stupid and sleezy... who goes on the air to wow the morons who fall for any asshole in a suit on tv with a good line of shit... then i'd go home and collect the money from a dolts who watched the show... pitch them my elliot wave bullshit.

here's circus act that won't lose you money...

<object width="425" height="344"><param name="movie" value="http://www.youtube.com/v/1GEHdle2UiE&hl=en&fs=1&"></param><param name="allowFullScreen" value="true"></param><param name="allowscriptaccess" value="always"></param><embed src="http://www.youtube.com/v/1GEHdle2UiE&hl=en&fs=1&" type="application/x-shockwave-flash" allowscriptaccess="always" allowfullscreen="true" width="425" height="344"></embed></object>

jtabeb
08-19-09, 12:47 AM
I tend to agree, that's why Bank of England is continuing its QE.
I am just wondering where did you get the 600 trillion figure?

I think he meant Derivatives. (1.1 Quadrillion to 600 Trillion, seems to be the best guess on the size)

talaicito
08-19-09, 12:54 AM
after losing 80%, gaining 40%, losing 20%, gaining 12%, losing 50%, etc, etc.
<object width="425" height="344">


<embed src="http://www.youtube.com/v/1GEHdle2UiE&hl=en&fs=1&" type="application/x-shockwave-flash" allowscriptaccess="always" allowfullscreen="true" width="425" height="344"></object>

I was referring to his winning Trader's Championship sometime in the 80s. Where did you get such accurate record of his trading? Were you a referee at that Championship??

metalman
08-19-09, 01:05 AM
I was referring to his winning Trader's Championship sometime in the 80s. Where did you get such accurate record of his trading? Were you a referee at that Championship??

nah... was making it up, just like he does. repeat a lie 23748 times on tv and in the papers... viola... it true!

ThePythonicCow
08-19-09, 01:07 AM
Funny think that so many people think that money gets destroyed when a credit is not payed. As I understand it, it's just the opposite:Defaults on existing debt avoid the reductions in circulating money that would have come from debt payback, correct.

But what's killing us here is not a sudden collapse in existing circulating money. What's killing us here is the sharp reduction in new debt issuance (outside of the rather unproductive new debt issued by the government, of course.)

We now have debts being paid off (some debts are not in default yet) faster than new debts are issued. The government touts this as an increased "savings" rate. In a debt-based monetary system such as ours, paying down debt faster than new debt is issued is depressing.

ASH
08-19-09, 01:42 AM
I fully appreciate his arguments for Depression, but runaway inflation in a Depression? I need to see more arguments for that. His citing of of a little blip upwards in CPI as a new trend towards runaway inflation is unconvincing. Very un-EJ. He usually criticizes others (rightfully) when they mistake a couple of data points for a trend.

Hi talaicito. I'm just relaying my own understanding of the material posted by EJ on iTulip, but for what it's worth, I believe that iTulip talks about inflation in at least three separate contexts.

Previously, EJ has analyzed the risk of a true hyperinflation, but that has never been his baseline scenario. True hyperinflation would result from a series of policy choices, and the mechanism is rooted in money supply directly. First, the Federal Reserve has to monetize a large enough portion of the federal budget to reduce the purchasing power of the revenue thus provided. Second, in order for hyperinflation to result, the Federal Reserve and government would have to close a positive feedback loop by monetizing even more to cover the drop in purchasing power, as opposed to cutting expenditures. Unless large enough sums are monetized to affect purchasing power, and unless the response to the drop in purchasing power is to print even more money, true hyperinflation won't result. Economic activity does usually fall in a hyperinflation because money ceases to perform its role in the economy efficiently, but EJ clearly isn't talking about hyperinflation and depression in this article.

The second, long-running inflation theme at iTulip has been EJ's KA-POOM theory. He has described it as a "sudden stop" currency event, and related it to capital flight. My understanding is that the inflationary mechanisms include cost-push inflation from dearer imports and also the impact of repatriated dollars upon the money supply. I think the POOM mechanism itself isn't a positive feedback loop (unlike either monetary hyperinflation or a traditional wage-price spiral), so one would expect a large step in prices rather than a continuous "runaway" inflation process. Also, it appears to me that POOM can operate in an economic depression -- especially the cost-push component -- because of our heavy reliance upon imported energy and manufactured goods. However, EJ isn't talking about POOM in this article, either.

The third inflationary theme I've noticed iTulip talk about has to do with the dynamic of supply contracting faster than demand, during this recession/depression. EJ has cited more nimble modern supply chains as a reason why a condition of over-supply won't persist very long in the face of contracting demand. He has also pointed out that as businesses fail in an economic contraction, competition among retailers thins out, ultimately leading to less price competition. This is the category of price inflation discussed in this article. It isn't "runaway", either. Most of EJ's discussion about this type of inflationary pressure has to do with why it would operate in a period of economic contraction.

The classic wage-price spiral is a fourth type of inflationary mechanism which iTulip does not spend much time talking about. I think most would agree that a wage-price spiral is unlikely to occur in a depressed and largely unregulated labor market, with weak unions.

In any case, I didn't read EJ predicting "runaway" inflation coincident with economic depression in this article. I read him predicting stagflation, which is consistent with a weakening dollar for foreign exchange, cost-push inflation, and a faster contraction of supply than demand.

I can see your point about a limited number of data points not proving his case. If you prefer, perhaps you should interpret EJ's citation of the last few CPI readings as a prediction that the trend won't reverse, rather than a critical piece of evidence; there is an awful lot more behind his analysis than those recent CPI data points.


On one hand he critisizes people who compare current situation to Great Depression, saying this happened only once. But Depression and Inflation together NEVER happened in this country! Comparing other countries to US is much harder due to history and currency considerations, so citing 17 other countries with that experience is hardly an typical EJ good argument.

EJ has made very detailed arguments about mechanism elsewhere -- both why a deflationary spiral is unlikely to occur and why an inflationary depression is possible. Theory alone is not very helpful; the only available data is historical. I sympathize that you don't find the available historical evidence applicable, but under the circumstances, what more can EJ do? He has already spelled out the argument elsewhere, and pointing out that the available empirical data lines up with his theory seems valid. My general reaction is that EJ has made as good an argument as is possible, and perhaps the state of our knowledge is unequal to your standards of proof, given what is available in the historical record.


Is it possible EJ getting dogmatic about his Ka-Poom theory?

He could still be right, but I thought his arguments this time were weaker than his usual stuff.

What do you think?

I think that EJ is very sure of his interpretation, and that it is reasonable for him to interpret recent events within the framework of what he expects to happen. I also think that this article had very little if anything to do with KA-POOM theory. Lastly, I didn't interpret the parts of the article which you found to be weak as critical arguments, per se. Rather, I think that EJ has laid out his arguments in detail over many essays and many years, and those core arguments have held up very well. I think the stuff you found weak in this article are a combination of (a) EJ recognizing early signs of what he is expecting, and (b) secondary arguments. I can see why they would be found lacking if viewed in isolation as the entirety of his case, but I think they are reasonable in the context of his body of work, and where we are in the process he predicted.

ASH
08-19-09, 01:51 AM
Defaults on existing debt avoid the reductions in circulating money that would have come from debt payback, correct.

But what's killing us here is not a sudden collapse in existing circulating money. What's killing us here is the sharp reduction in new debt issuance (outside of the rather unproductive new debt issued by the government, of course.)

We now have debts being paid off (some debts are not in default yet) faster than new debts are issued. The government touts this as an increased "savings" rate. In a debt-based monetary system such as ours, paying down debt faster than new debt is issued is depressing.

I agree entirely with your point about the problem being the rate of increase.

I thought I'd add that defaults on existing debt eat into reserves... which is, after all, why banks are failing. Credit with a bank that fails ceases to be part of the money supply if the bank becomes insolvent.

Also, fractional reserve lending works in reverse, too -- meaning that if you wipe out $X of reserves, you also wipe out the possibility of issuing F*$X credit.

ThePythonicCow
08-19-09, 01:55 AM
The sources of inflation are: 1) high import costs, with energy costs exerting the greatest upward force on the prices of goods, 2) reduced quantity of goods and services, 3) industrial concentration.
In some other reply earlier today, I rather crypically labeled this "weak" inflation. This is distinct from the classic monetarist inflation of simply flooding the general economy with excess money as in Zimbabwe or the Wiemar Republic.

EJ is careful to distinguish (1) a temporary decline of prices in the early bubble bursting phase of a debt based monetary system from (2) a chronic spiraling decline seen in earlier gold based systems such as the early 1930's. He applies the term "disinflation" to the temporary variety we just encountered, reserving the more common term "deflation" to refer to the potentially chronically spiraling variety (to the occassional confusion of iTulip newbies.)

Perhaps we should be as careful to distinguish two kinds of inflation, just as we do deflation.

Just as "disinflation" is self-limiting, I suspect that the above "sources of inflation" are self-limiting. The general cause of these sources is not that more money is flowing, nor that it is flowing "faster", but rather than existing money flows are being more concentrated on essential goods and surviving providers, to the detriment of other failing economic parties and the markets for more frivolous goods. Just as classic "deflation" downward spirals can be more persistent, lasting until some force majeure such as major war or general collapse interrupts them, so can classic monetary "inflation" be more persistent, leading to disasters such as we see in Zimbabwe now, again lasting until some force majeure such as war or general collapse interrupts them.

Perhaps to be more consistent, more complete (and more confusing to newbies ;)), we should call the inflation EJ warns of, due to the above sources, "disdeflation" ??

Now it may come to pass that all the debt assumption and monetization of the Fed and its colleagues leaks massively into the general economy leading to a classic spiraling monetarist inflation. I am not denying that possibility in this post (though in other posts I predict such will not happen.) However the good evidence that EJ presents so far for inflation is not for that kind of inflation. Rather EJ is providing evidence for the above sources which I would term here disdeflation.

ASH
08-19-09, 02:10 AM
but reflation is impossible in reviving the $600 Trillion global hedge fund market


Some questions for you: How fast did the $600T global hedge fund market develop, and was this increase in the notional value of the derivatives contracts in question reflected in general price levels? I think the answer is that the use of these derivatives contracts ballooned over a relatively short span of time, yet they didn't have much of an impact upon general price levels because they aren't actually part of the spendable money supply. A second question is, if derivatives armageddon hasn't been triggered by the stresses on the financial system by now, why not -- and why should I expect the problem to crop up in the future? Common sense says that if the derivatives didn't inflate things on the way up (or had an impact very much less than implied by their face value), then their face value probably isn't a good measure of the deflationary danger they represent on the way down. Do I have this wrong?

ThePythonicCow
08-19-09, 02:18 AM
Common sense says that if the derivatives didn't inflate things on the way up (or had an impact very much less than implied by their face value), then their face value probably isn't a good measure of the deflationary danger they represent on the way down. Do I have this wrong?Good questions.

One possibility is that this humongous pile of derivatives has allowed the balance sheets of a few big banks to become terribly out of whack, in a manner resembling the misallocation of resources away from productive capacity that the Austrians over at Mises.org bemoan regularly.

If that be the case, it may further be that this misallocation has not yet been corrected. Correcting it might require the demise of JPMorgan, Goldman, BofA, Citi, WF, HSBC, Deutsche, and a few other "too big to fail" banks, give or take a few.

Such a demise would be a wondrous terrifying event.

cobben
08-19-09, 06:18 AM
"Such a demise would be a wondrous terrifying event."

be careful what you wish for . . .

(from Armstrong's latest)

"

Once the Investment Banks crossed that
line into the "big" market, mortgages, they
created a time bomb that could undo the very
structure of western civilization. They had
as usual assumed that this was a riskless
trade for the government would back up the
debt just as the IMF was backing up the
Russian bonds back in 1998 that went bust
creating the Long-Term Capital Management
collapse and contagion.


Because debt involves every aspect of
society unlike commodities or stocks when they
manipulate those markets, they put at risk the
entire way of life. The day may come when
Goldman is sitting there in their vaults with
tears in their eyes while counting their billion;
and lamenting that a 3 min telephone call may-
$1,000 and their war chest is really worthless."

mimbulus
08-19-09, 06:53 AM
Some questions for you: How fast did the $600T global hedge fund market develop, and was this increase in the notional value of the derivatives contracts in question reflected in general price levels? I think the answer is that the use of these derivatives contracts ballooned over a relatively short span of time, yet they didn't have much of an impact upon general price levels because they aren't actually part of the spendable money supply. A second question is, if derivatives armageddon hasn't been triggered by the stresses on the financial system by now, why not -- and why should I expect the problem to crop up in the future? Common sense says that if the derivatives didn't inflate things on the way up (or had an impact very much less than implied by their face value), then their face value probably isn't a good measure of the deflationary danger they represent on the way down. Do I have this wrong?

Isn’t it true that those derivatives did cause asset price inflation? Isn’t it also true that we didn’t experience derivatives armageddon (e.g. financial meltdown, bank failures, massive social disruption) because the policy approach was to leave the financial mail unopened, shove it in a desk drawer, lock the drawer and hum loudly?

Those 600T derivatives are still there, the general idea appears to be that the world will stabilise, there will be a recovery and so at some point in the future it will be safe to ‘open the mail’.

I think (could be way off base here) that Stumann’s question is where does that ‘reflation’ come from? It aligns with the question of how does price inflation which is not matched by wage inflation create an inflationary recovery (or to put it another way facilitate debt destruction)? If we are looking at stagflation, where those able to increase their income do so but others are left unemployed or with falling wages, will stability alone be sufficient to unwind the derivatives position, aka debt bubble, safely?

I think from reading the subscription only part of iTulip’s analysis the answer is a big fat no.

In the short term the reflation comes from public debt, a position which is unsustainable. This failure is where Stumann appears to anticipate global deflation.

I have to constantly remind myself that ka POOM pertains to the USA and the almighty dollar and not the rest of the world. The reserve currency status seems to imply that it will be different in the States.

After that it all becomes political and not simply a matter of macro economics. So colour me clueless!

Regards
mimbulus

goadam1
08-19-09, 08:14 AM
I am in no way, shape or form saying that 9.5% U3 is the same as 16%+ U6, but rather expressed an opinion about U1-U6 being "crap". I only watch U6 & my own U7, but also note U3 since Wall St spins & spews about it and it affects markets - whether I like it or agree with it or not.

What we have here is a rock and a hard place, as Fred sort of noted. U6 is not well known at all and U3 is full of holes... and both shadowstats.com and my U7 reconstruction don't exactly have huge following either.

And then we have the whole issue of EJ or iTulip or whomever getting zapped or raked over the coals when they're not 100% perfect and correct, and what a crock that is. I'm a successful trader, and only get 60%+ right.
I don't mean this to be a personal attack on you at all, but think about what it takes to put your butt on the line and make forecasts going out many months or years, and knowing that sometimes you'll be wrong. The real key to me is how honest someone in the forecast business is, and much more - do they learn from those inadvertent goofs. And do their overall calls and views stand the test of time... and iTulip does *way* better than most.

The whole area of economics and finance has been injected with so much outright wrong data and vested interest based spin & crud etc. that its so far beyond ridiculous that I can't even put it into words. And I don't want my blood pressure even higher than it is already.

Whether its intentional or inadvertent or some combination of the two isn't even all that important - the main point is that its well beyond a minefield, and trying to punch through all the crud and bad data that the average person has is extremely difficult.
As just one small example - I started posting about Fed OMOs and POMOs almost 4 years ago, and damn near no one believed what I was saying - and with raw facts directly from the Fed! Its part of the reason I use a tinfoil fat avatar - the real truth about what's really going on is literally alien to most people.


Then in my opinion we have the issue of if iTulip only talked about U6 for example, some/many folk would have hissy fits about why they're avoiding U3. I was confused myself at whether their 20% forecast was U3 or U6, but it was clarified many times as being U3 and a search will confirm that.

I even wrote a post a week or so ago with a best guess that we'll have a "double dip" or worse and that 20% is still not out of line for U3... but its so hugely political that redefinition will cause it to never happen. After all, on a best guess basis per my research, today's shadowstats.com numbers or my U7 reconstruction actually are roughly equivalent to U3 prior to 1970 or so. And that research, as well as the reconstruction, took many dozens of hours to plow through all the BLS BS... and I'm still a bit uncertain on my conclusions.




edit/add:
As far as nominal vs. "real Dow", its another damned if you do and damned if you don't. Some want one and some want the other, and so they do both - much as I do on many of my charts.

People are different and want/need different views, and given that roughly 80% of the Dow or Dow+dividends gain since 1900 are inflation only (per shadowstats.com adjustments with some changes by me), things like "real Dow" go a long way towards exposing that awful truth.

I also don't expect iTulip to use either my or shadowstats numbers on anything either. They're their own folk with their own opinions. I'm happy that they have used some of my charts, since that's one of the main reasons I spend so much time on them - so that raw facts can get wider exposure - but mostly they go their own way. I'm here precisely because I don't always agree and also because they do frequently come up with some quite good and unique work which is head & shoulders above most, while being far from perfect.

I'm not being critical about you or itulip's accuracy in predictions or in trying to give a more truthful view of things. You and they both do great jobs. I rely on this site to give me a clear view of the economy. I'm saying I am confused on those two issues because there seem to be different terms being used at different times. So either there is some issue of clarity or I am dumb. I won't answer that one.

Here is the conversation from my viewpoint.

I think unemployment will peak around 20%

Wow. 20%. Do you mean u3, u6 or some other more realistic measure of the economic measure of the economic and social impact of unemployment in this depression?

Yes.

dbarberic
08-19-09, 08:21 AM
I believe the most startling part of the article is the fact that EJ actually shops at Target.

goadam1
08-19-09, 08:24 AM
traders, like gamblers, talk about their wins but never their losses. As long as they have more to stake (liquidity) the game is one. It's like having a central bank that gives out no questions asked 0% loans on the casino floor.


after losing 80%, gaining 40%, losing 20%, gaining 12%, losing 50%, etc, etc.

ah, the life of a gambler... er, trader.


advertising & showbiz.

if i were him... was a hack that cnbc puts on the air to make bears look stupid and sleezy... who goes on the air to wow the morons who fall for any asshole in a suit on tv with a good line of shit... then i'd go home and collect the money from a dolts who watched the show... pitch them my elliot wave bullshit.

here's circus act that won't lose you money...

<object width="425" height="344"><param name="movie" value="http://www.youtube.com/v/1GEHdle2UiE&hl=en&fs=1&"></param><param name="allowFullScreen" value="true"></param><param name="allowscriptaccess" value="always"></param><embed src="http://www.youtube.com/v/1GEHdle2UiE&hl=en&fs=1&" type="application/x-shockwave-flash" allowscriptaccess="always" allowfullscreen="true" width="425" height="344"></embed></object>

we_are_toast
08-19-09, 08:59 AM
To be precise, the statistic is 24% worse than the worst previous recession, of the 1980s.

Thanks for the clarification FRED! I think this measure of unemployment will be much more meaningful and realistic than a U3 or U6 measure where the calculation is highly questionable.


goadam1
I'm not being critical about you or itulip's accuracy in predictions or in trying to give a more truthful view of things.Yes, it's perfectly acceptable to promote your successes and downplay your mistakes, but to deny or reinterpret a forecast that isn't working would be a terrible mistake for such a respected site as iTulip. I'm confident and hopeful we'll never see an attempt to mislead the readers on iTulip. And I agree with Bart, forecasting the economy is kind of like baseball, if you win 60% of the time you're doing terrific!


I believe the most startling part of the article is the fact that EJ actually shops at Target. :p:p:p

bart
08-19-09, 08:59 AM
I'm not being critical about you or itulip's accuracy in predictions or in trying to give a more truthful view of things. You and they both do great jobs. I rely on this site to give me a clear view of the economy. I'm saying I am confused on those two issues because there seem to be different terms being used at different times. So either there is some issue of clarity or I am dumb. I won't answer that one.

Here is the conversation from my viewpoint.

I think unemployment will peak around 20%

Wow. 20%. Do you mean u3, u6 or some other more realistic measure of the economic measure of the economic and social impact of unemployment in this depression?

Yes.


Cool - no worries.

I thought they were clear on it being U3 in subsequent posts but could be mistaken. I still think we have not set the real high yet.
And for the helluvit, here's my own most recent take, which shows I may have blown it in timing the current peak... we'll see.



http://www.nowandfutures.com/images/unemployment_u3_cpi_phillips.png

bart
08-19-09, 09:14 AM
Some questions for you: How fast did the $600T global hedge fund market develop, and was this increase in the notional value of the derivatives contracts in question reflected in general price levels? I think the answer is that the use of these derivatives contracts ballooned over a relatively short span of time, yet they didn't have much of an impact upon general price levels because they aren't actually part of the spendable money supply. A second question is, if derivatives armageddon hasn't been triggered by the stresses on the financial system by now, why not -- and why should I expect the problem to crop up in the future? Common sense says that if the derivatives didn't inflate things on the way up (or had an impact very much less than implied by their face value), then their face value probably isn't a good measure of the deflationary danger they represent on the way down. Do I have this wrong?

In my opinion, this gets back to the overall accounting area, FASB, etc. If mark to market were enforced consistently and were not "politically enhanced", it's my belief that the deflationary danger and other dangerous elements would be much clearer and larger.

I also submit that the FASB decision on August 13th to consider expanding mark to market again was almost date coincident with recent stock market peaks. And then there's the various banking index peaks in mid 2007 when mark to market initially came in, and the trillions of Level II and Level II toxic crud that are still alive & well on many balance sheets.

Lastly, I urge caution on not considering derivatives in general as part of the spendable money supply. One valid definition of money is a medium of exchange, and the instruments themselves are exchanged in large volume every day - just not by most folk.

GRG55
08-19-09, 11:26 AM
In some other reply earlier today, I rather crypically labeled this "weak" inflation. This is distinct from the classic monetarist inflation of simply flooding the general economy with excess money as in Zimbabwe or the Wiemar Republic.

EJ is careful to distinguish (1) a temporary decline of prices in the early bubble bursting phase of a debt based monetary system from (2) a chronic spiraling decline seen in earlier gold based systems such as the early 1930's. He applies the term "disinflation" to the temporary variety we just encountered, reserving the more common term "deflation" to refer to the potentially chronically spiraling variety (to the occassional confusion of iTulip newbies.)

Perhaps we should be as careful to distinguish two kinds of inflation, just as we do deflation.

Just as "disinflation" is self-limiting, I suspect that the above "sources of inflation" are self-limiting...

Why don't we call the "self-limiting" form of inflation...ah...inflation.

And maybe we can call that other form of inflation...the "non-self-limiting" variety...um...hyperinflation? :)

[and if you are Canadian like Largo and Fiat Currency, it's "inflation, eh".]


The general cause of these sources is not that more money is flowing, nor that it is flowing "faster", but rather than existing money flows are being more concentrated on essential goods and surviving providers, to the detriment of other failing economic parties and the markets for more frivolous goods...

Makes sense, except that I cannot understand why there would be an increase in the demand for essential goods in a recession [or depression]. Demand for essential goods may not fall, or may not fall as much as demand for frivolous goods, but surely there has not been some magical increase in absolute aggregate demand for food, energy, shelter, etc. at the onset of recession. If these goods are experiencing the effects of inflation would that not be because the recession/depression has reduced the number of suppliers and quantity of supply, while demand has not fallen, or fallen as much? Money might be more concentrated on purchases of essentials, but I can't get my mind around the idea that there's more absolute money going into purchases of essentials.



Just as classic "deflation" downward spirals can be more persistent, lasting until some force majeure such as major war or general collapse interrupts them, so can classic monetary "inflation" be more persistent, leading to disasters such as we see in Zimbabwe now, again lasting until some force majeure such as war or general collapse interrupts them...

The persistence of inflation in North America seems to be a "genetically ingrained" reaction within the population and political system to avoid a repeat of the 1930s experience...no matter what. We've become extraordinarily tolerant of persistent [albeit, low level] inflation, while Germany, having experienced a severe hyperinflationary episode in its past, abhors inflation.

touhy
08-19-09, 11:30 AM
Soooo.......in light of EJ's analysis, what should one do to protect/grow assets?

Step 1: Buy useful durable goods now.

Step 2: (oops, I just done ran out of steps. What says the itulip community? I'm too concrete a thinker. Lets have steps 2 through five. Commodities?,.... be a technical trader for the next 10 years?,...move to Singapore?)

Step 3 ?

Step 4 ??

Step 5 ??

[Give 'um lead boys!]

bart
08-19-09, 11:43 AM
Funny think that so many people think that money gets destroyed when a credit is not payed. As I understand it, it's just the opposite:

Normal case (no default):
1) Bank gives credit to liar, creating new money.
2) Liar spends money buying an 80 inch plasma TV.
3) Money circulates: from mall to distributor, from distributor to manufacturer (in China), exchanged for yuan with chineses gov., from chinese gov. buying short term treasuries to american gov., from american gov. to GM, etc.
4) Liar earns back money plus interest from the economy.
5) Liar pays bank. Money gets destroyed. The bank should lend again, or the money supply will shrink.

New normal (default):
1) Bank gives credit to liar, creating new money.
2) Liar spends money buying an 80 inch plasma TV.
3) Money circulates: from mall to distributor, from distributor to manufacturer (in China), exchanged for yuan with chineses gov., from chinese gov. buying short term treasuries to american gov., from american gov. to GM, etc.
4) Liar fails to earn back money and defaults.
5) Bank loses money, that remains still in the economy. No deflation here.
6) Fed creates money to bailout bank. No inflation until the bank lends the money. It will try not to, but if it has enough defaults, it will have to...

Unfortunately, there's a significant logic error here.

The bank is the loser, and the only way that the "logic" works is if one does not consider banks or credit/debt balances as part of the economy or total money supply... or of course if one does not consider that credit is money - per one valid definition of money being a medium of exchange (credit cards being a specific example).

Money is actually "destroyed".

gwynedd1
08-19-09, 11:45 AM
I guess I still see the current trend to be monetary deflation. That is not the same thing as price deflation. This article does reflect what that really means. In many cases the cut in supply and loss of scale will cause prices to stay quite high. Some people will really get pinched because if you were already buying beans and spam a sharp rise in demand for those goods will cause prices to rise. In any quick shift in demand it causes a shortage in capital for what people actually want. Some capital goes dormant while the other is overworked.
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However on the flip side housing and transportation are big expenses. Those with a job and buying a house taking say a 100k off the mortgage will certainly show a gain from this when correctly considering housing is an expense, not an investment. The biggest expense just got cheaper. However not everything will. Those industries that can react quickly by cutting supply will be among them.

tacito
08-19-09, 12:04 PM
Unfortunately, there's a significant logic error here.

The bank is the loser, and the only way that the "logic" works is if one does not consider banks or credit/debt balances as part of the economy or total money supply... or of course if one does not consider that credit is money - per one valid definition of money being a medium of exchange (credit cards being a specific example).

Money is actually "destroyed".
Well, that is how I understand this:

The bank credit is an asset for the bank that is a claim on some money. It's not the money itself, so I don't consider it part of the money supply. In that case the bank loses that money, and someone, in some place earns it. It's not money destruction but a money transfer.

But I understand that there are different definitions of the money supply, and I'm not an expert.

bart
08-19-09, 12:45 PM
Well, that is how I understand this:

The bank credit is an asset for the bank that is a claim on some money. It's not the money itself, so I don't consider it part of the money supply. In that case the bank loses that money, and someone, in some place earns it. It's not money destruction but a money transfer.

But I understand that there are different definitions of the money supply, and I'm not an expert.

Fair enough, and I'm not sure that I consider myself an expert either.

As it seems that you gathered from my comment, its my strong belief that not treating credit as actual money (per the medium of exchange definition and others) is a large part of the problem with truly understanding what's going on today and what will be happening. The raw basics and truths are more important today than at any other previous period in the last 50+ years.

Even stocks themselves have a small component of money, since they're occasionally used in buyouts, etc. - just as another example.

ThePythonicCow
08-19-09, 01:09 PM
And maybe we can call that other form of inflation...the "non-self-limiting" variety...um...hyperinflation? :)My impression is that we call this form, the one caused by excess money printing (or debt extension, actually), inflation in the case it's just a modest excess of printing, and hyperinflation if it's a horrible excess of printing.

This results in the word inflation having two uses, one for the concentration of limited funds on more essential goods in a challenged economy, and one for the general rise of prices caused by a modest increase in the circulating money.

ThePythonicCow
08-19-09, 01:18 PM
Makes sense, except that I cannot understand why there would be an increase in the demand for essential goods in a recession [or depression].
There is not an increase in demand for such essentials, but rather such price increases (or the decreases in quality and quantity noted by EJ) are forced as the seller otherwise would go bankrupt.

For example a grocery store might have been making much of its profit in earlier times on the sales of more frivolous products, while being more price competitive on things such as bread and milk. Now the frivolous sales are way down, and they have no good choice but to take the profits where they can, on what is still selling.

The buyers don't like this,needless to say, but have little choice but to pay the higher grocery store bill for essential foodstuffs, and skip some other less essential purchase instead.

tacito
08-19-09, 02:24 PM
Fair enough, and I'm not sure that I consider myself an expert either.

As it seems that you gathered from my comment, its my strong belief that not treating credit as actual money (per the medium of exchange definition and others) is a large part of the problem with truly understanding what's going on today and what will be happening. The raw basics and truths are more important today than at any other previous period in the last 50+ years.

Even stocks themselves have a small component of money, since they're occasionally used in buyouts, etc. - just as another example.
So, what's the definition of the money supply that you think is better? I've been trying to educate myself on those matters for a few months, and I think that most of what I've assimilated comes from Austrian economists (and I'm not sure that I've got right everything). Still wanting to learn, so if you have a link to material to read, I'd would apreciate.

Fiat Currency
08-19-09, 02:33 PM
[and if you are Canadian like Largo and Fiat Currency, it's "inflation, eh".]



Funny one. :)

Personally - I tell everybody to call it devaluation, eh. Afterall, that's what it really is. :rolleyes: xxFLATION is a ruse.

bart
08-19-09, 02:38 PM
So, what's the definition of the money supply that you think is better? I've been trying to educate myself on those matters for a few months, and I think that most of what I've assimilated comes from Austrian economists (and I'm not sure that I've got right everything). Still wanting to learn, so if you have a link to material to read, I'd would apreciate.


Basically, M3 (or equivalent) plus all credit plus all gov't debt - and I don't have a problem with adding in the face value of most derivatives.

As far as Austrians, most folk who study or are aware of them ignore this (and similar quotes):


"There can be no doubt that besides the regular types of the circulating medium, such as coin, notes and bank deposits, which are generally recognised to be money or currency, and the quantity of which is regulated by some central authority or can at least be imagined to be so regulated, there exist still other forms of media of exchange which occasionally or permanently do the service of money. Now while for certain practical purposes we are accustomed to distinguish these forms of media of exchange from money proper as being mere substitutes for money, it is clear that, other things equal, any increase or decrease of these money substitutes will have exactly the same effects as an increase or decrease of the quantity of money proper, and should therefore, for the purposes of theoretical analysis, be counted as money".
-- Friedrich Hayek, Prices and Production, 1935, p. 96



As far as reading material, EJ's work is quite good and you can also check out Bart's Comments (http://www.itulip.com/forums/forumdisplay.php?f=43) here, and also familiarize yourself with Finster's FDI - it's unique and quite useful in how it helps move one's focus away from judging success in fiat currencies or making the error of judging it in gold etc. too. I'm also somewhat biased about my own web site but can recommend my own glossary to help orientation.

ASH
08-19-09, 03:21 PM
Isn’t it true that those derivatives did cause asset price inflation?

Thanks for the response and discussion. I started out highly concerned about the deflationary potential of all those derivatives, and have become less so over time. It's nice to have others with whom to hash this over.

The derivatives must have caused asset price inflation, but not $600T worth. On the one hand, people marvel at the notional face value of all those derivatives contracts, noting that it dwarfs the total capitalization of all asset classes combined (the quickest reference I could find (http://en.wikipedia.org/wiki/Real_estate) quotes the Economist as estimating the value of all property, equities, and bonds in developed countries to be $115T as of 2002). On the other hand, if the face value of those contracts dwarf the valuation of all other assets, then obviously writing and trading $600T of derivatives contracts hasn't impacted asset and consumer prices the same way that a $600T bump to M3+credit would. That's why I think the $600T face value doesn't correctly capture the order of magnitude of the problem. No one has to print $600T to prevent a deflationary spiral. At worst, the Fed only has to print enough to cover the deposits held by -- and credit lines issued by -- institutions which go under as the result of bad derivatives bets. More likely, the Fed only has to print enough to stop default on the various loans upon which the inverted derivatives pyramid balances. As far as I can tell, the asset class that was most inflated by derivatives is derivatives.


Isn’t it also true that we didn’t experience derivatives armageddon (e.g. financial meltdown, bank failures, massive social disruption) because the policy approach was to leave the financial mail unopened, shove it in a desk drawer, lock the drawer and hum loudly?


In my opinion, this gets back to the overall accounting area, FASB, etc. If mark to market were enforced consistently and were not "politically enhanced", it's my belief that the deflationary danger and other dangerous elements would be much clearer and larger.

I do get the impression that some combination of mark-to-myth and back room accommodation among the big financial institutions are the reason why bad derivatives bets haven't wiped out more banks, and that this did curb some of the deflationary impact. That said, I don't think the destructive potential of those derivatives is measured by their notional face value, for the reasons stated above. (And I fully expect the financial institutions and government to continue colluding to avoid a day of reckoning, because it seems to me that all parties who have control over the trading and valuation of derivatives have a common interest in avoiding a blow-up. Why would they stop? Why would they have to stop?)


Those 600T derivatives are still there, the general idea appears to be that the world will stabilise, there will be a recovery and so at some point in the future it will be safe to ‘open the mail’.

I had assumed that these contracts have expiration dates, but I could be misinformed. A recovery might not be necessary to unburden those who hold bad positions.


I think (could be way off base here) that Stumann’s question is where does that ‘reflation’ come from? It aligns with the question of how does price inflation which is not matched by wage inflation create an inflationary recovery (or to put it another way facilitate debt destruction)? If we are looking at stagflation, where those able to increase their income do so but others are left unemployed or with falling wages, will stability alone be sufficient to unwind the derivatives position, aka debt bubble, safely?

As far as I know, the only portion of this problem which relates to recovery is the underlying loans. That notional $600T is teetering on top of a much smaller value of mortgage loans and the like. I agree that a lot more loans will default, and that those who have written insurance against default (or against default on the default insurance) could be in a tough spot. But, again, I return to the point that this isn't a $600T problem. There is no need to monetize the $600T face value of the derivatives -- only the $10T (wild-ass guess) of actual mortgage contracts and whatnot that everything is leveraged off of. That's highly doable, and doesn't require a recovery that allows debtors to pay their loans out of income.


Lastly, I urge caution on not considering derivatives in general as part of the spendable money supply. One valid definition of money is a medium of exchange, and the instruments themselves are exchanged in large volume every day - just not by most folk.

I agree. Perhaps I should have clearly said "not a part of the money supply which, dollar for dollar, affects consumer and asset prices with as much weight as M1 or even bank credit."

ASH
08-19-09, 03:33 PM
So, what's the definition of the money supply that you think is better?

Tacito, for what it's worth, I'd recommend a functional approach to decide what it makes sense to include in the money supply. I'd say that if you can pay for something by drawing upon credit, then the supply of credit clearly affects pricing.

bart
08-19-09, 03:50 PM
The derivatives must have caused asset price inflation, but not $600T worth. On the one hand, people marvel at the notional face value of all those derivatives contracts, noting that it dwarfs the total capitalization of all asset classes combined (the quickest reference I could find (http://en.wikipedia.org/wiki/Real_estate) quotes the Economist as estimating the value of all property, equities, and bonds in developed countries to be $115T as of 2002).
...


The most current BIS world derivatives total is $592T, having peaked at $684T in 2H 2008.

I wasn't able to find a world total bond + stock + real estate value, so put a best guess together a while back. For what its worth, I'm unaware of anyone else having anything even vaguely similar that's publicly & freely available.
The most recent data as of 2/2009 shows a best guess value total of $177T, so the real "leverage" is less than 5:1 - allowing for "Kentucky windage".


http://www.nowandfutures.com/images/world_assets_bond_stock_re.png





I do get the impression that some combination of mark-to-myth and back room accommodation among the big financial institutions are the reason why bad derivatives bets haven't wiped out more banks, and that this did curb some of the deflationary impact. That said, I don't think the destructive potential of those derivatives is measured by their notional face value, for the reasons stated above. (And I fully expect the financial institutions and government to continue colluding to avoid a day of reckoning, because it seems to me that all parties who have control over the trading and valuation of derivatives have a common interest in avoiding a blow-up. Why would they stop? Why would they have to stop?)

I agree that's its dicey at best to judge monetary destruction or deflationary impact only from the face or nominal value, since real profits & losses are based on the value that includes the leverage... which currently averages about 18:1, with a peak in 2H 2007 of over 46:1.

As far as why they would stop or have to stop, your point is good... except for black swans or us living more & more in "Extreme-istan" or "WTF-istan"... and also a panoply of historical quotes I could insert about both negative and positive surprises.




I had assumed that these contracts have expiration dates, but I could be misinformed. A recovery might not be necessary to unburden those who hold bad positions.

Most do have expiration dates... and thereby much of the mess in L2 or L3 derivatives.
Plus, about 70% of the grand total are interest rate based derivatives - not CDSs which are "only" about 10% of the total (and classified as interest rate derivatives).




I agree. Perhaps I should have clearly said "not a part of the money supply which, dollar for dollar, affects consumer and asset prices with as much weight as M1 or even bank credit."

We're cool. I was 99% sure that you understand and was more urging that caution for newbies or less well educated & informed folk.

LargoWinch
08-19-09, 04:12 PM
is it possible, you are an idiot??
Another 1 for me?

I keep re-reading this sentence, but for some reason I do not see any counter-argument.

It is essentially, just a pointless and unecessary personal attack demonstrating the lack of intellect of the author.

Question: Have you met Bouncer yet?

ASH
08-19-09, 04:46 PM
The most current BIS world derivatives total is $592T, having peaked at $684T in 2H 2008.

I wasn't able to find a world total bond + stock + real estate value, so put a best guess together a while back. For what its worth, I'm unaware of anyone else having anything even vaguely similar that's publicly & freely available.

Dang, I wish I was as useful as you. Thanks, as always, for the numbers.

bart
08-19-09, 05:01 PM
Dang, I wish I was as useful as you. Thanks, as always, for the numbers.

Thanks Ash, your sentiments are much appreciated - my pleasure.

And I frankly believe that you're more useful to most than I am. Try as I might, I don't have the "touch" like you & Finster and a few others have to make the stuff much more easily understandable - although my chart design ability & chart clarity sure have improved over the years, thanks to others including Fred.



By the way, here's stock & bond market values:

http://www.nowandfutures.com/images/world_stock_index_cap.png




http://www.nowandfutures.com/images/world_bond_market_cap.png

0tr
08-19-09, 05:20 PM
.... Still wanting to learn, so if you have a link to material to read, I'd would apreciate.

Check out Michael Hudson's website. iTulip has interview with, and is v. good

And Fred Harrison's Renegade Economist. videos

Also, aside, somewhere above was a question about types of inflation.

I've heard of monetary inflation, wage inflation, price inflation, profit inflation, and a few others. Along these lines great confusion mushrooms. Including, from Sherman Maisel, a governor at the Fed, who said in his book, 'Managing the Dollar' that increased interest rates result in cost push inflation, in rents, a component of CPI, I believe. Context always needs to be clarified. Lag times vary.

0tr
08-19-09, 05:43 PM
....
shoppers, blissfully unaware of the economic calamity that awaits them, will wish they’d understood the perversely low prices as a warning of economic trouble ahead and saved their money for later.

The holiday retailer strategy: those left with the least inventory after Christmas live to fight another day.

The first half of 2009 goes like this:

1. After Christmas sales: 20% to 50% off
2. Liquidation sales: 50% to 80% off
3. Then 30% to 40% of retailers go out of business

Advice to readers: take advantage of the early 2009 Great American Fire Sale and go out and buy all the generators, chain saws, washing machines, fine linens, cars, and other durable goods you’re going to need for the next few years because by the end of 2009 most of the inventory may be sold through, many retailers will be shut down, and replenishment of stocks of the survivors will likely be meager; our models say that the goods import supply will decline more precipitously than the supply of money available to pay for them. That spells severe stagflation.[/COLOR]
[/INDENT]How well has this forecast held up? Sadly, all too well.


Promise me you'll not pay mark-up. I mean it. You have to get it without markup or you're not really getting it.

GRG55
08-19-09, 10:57 PM
...For example a grocery store might have been making much of its profit in earlier times on the sales of more frivolous products, while being more price competitive on things such as bread and milk. Now the frivolous sales are way down, and they have no good choice but to take the profits where they can, on what is still selling.

The buyers don't like this,needless to say, but have little choice but to pay the higher grocery store bill for essential foodstuffs, and skip some other less essential purchase instead.

Excellent point & example!
Thanks for the clarification.

Slimprofits
08-20-09, 11:46 AM
EJ make deflationistas angry...


As for the inflation-phobes, gold demand hit a six-year low in 2Q, according to the World Gold Council (-8.6% YoY)...

[..]

We have said often that just as society couldn't spell ‘inflation’ in 1937, it has no clue what causes deflation now. That's beginning to change in the aftermath of the housing and credit collapse, but try to explain the deflationary forces contained in debt liquidation or global manufacturing over capacity or a socio-economic trend towards savings, and the notion of ‘deflation’ gets fuzzy for most thinkers (even Warren Buffet). That doesn't change the fact that the deflationary forces are enormous (and current) and the policy-induced reflationary forces are a partial antidote.

[..]

To be sure, if the government fails to mop it up once the private sector debt liquidation ends, it does mean that an inflationary mistake lurks down the road. But as we have seen in other post-bubble credit collapse episodes, the initial period of deflation can last for years, during which the fundamental trend in bond yields will likely remain in one direction and that is down, to the surprise and dismay of the litany of bond bears that currently populate the capital market. The fact that a year ago, when the inflation rate was over 5% but core inflation was less than half that pace, the market mantra was that we should be focused on headline only — that the core would follow the headline. There was a plethora of Street research published on the topic; we recall that all too well. Today, the year-over-year headline price trend is running at a 60-year low of -2.0%, and now we are being told by the economics community to focus on “core” (which, by the way, has slowed to 1½%) because this is all an “energy story”.

So you see, most strategists and economists and market pundits claim that they are concerned about inflation, but in reality, everyone seems to want to see it. As long as we have a lack of pricing pressure, we will see bond yields trend lower, and as long as that happens, there will be a continued lack of confirmation over the growth rate in the economy that is embedded in equity market valuation. Energy prices may, for a short time, give a kick to the headline CPI numbers but rents are almost four times more important and comprise 30% of the index (and 40% of the core). To repeat — three variables: rents, wages and credit — will ultimately determine the trend in inflation. Down, in other words.

Breakfast with Dave, August 20, 2009

steveaustin2006
08-20-09, 12:17 PM
EJ make deflationistas angry...
Breakfast with Dave, August 20, 2009

Rosenberg exhibits symptoms of a condition Jim Rogers has often remarked to the wealthy "Well, you don't do your own shopping - your housekeeper does it"

In effect, I do believe a lot of wealthy pundits take little notice when for instance:
- food sellers reduce volume sold and increase package size to try to off set perception or generally are
- or their own healthcare costs rise
- or any array of things we notice daily

He and many are simply ... insulated from the everyday experience of most Americans.

cjppjc
08-20-09, 12:33 PM
I had held my tongue regarding this retail and food inflation talk. I see no pricing power at retailers. They are slashing prices like crazy. I had no trouble at the supermarket either. Today however, Dr. Browns Black Cherry soda went from .99 to $1.19, a pound of coffee is now being sold in a 10.5 ounce can. Ouch. If you're shopping for yourself, you can always find cheaper alternatives. But I have to have my Dr. Browns and off course lots of coffee.

Kadriana
08-20-09, 12:36 PM
Are there two parts to the Poom? One where you have stagflation and energy prices are going up but where things like restaurants and furniture stores are still going out of business. The second part where inventories are so low that furniture stores and restaurants get to start naming their price where they're the only ones still in business and stagflation ends and inflation begins.

jpatter666
08-20-09, 12:40 PM
I had held my tongue regarding this retail and food inflation talk. I see no pricing power at retailers. They are slashing prices like crazy. I had no trouble at the supermarket either. Today however, Dr. Browns Black Cherry soda went from .99 to $1.19, a pound of coffee is now being sold in a 10.5 ounce can. Ouch. If you're shopping for yourself, you can always find cheaper alternatives. But I have to have my Dr. Browns and off course lots of coffee.

DC inner suburbs had been holding well, but yesterday at my favorite sushi buffet place (don't laugh, it's pretty good for a buffet!) I noticed the sushi pieces were smaller (with more rice) and several of my favorite (and I'm sure expensive) veggie dishes were missing.

Been having several discussions with friends. They agree with what I'm saying but can't bring themselves to change that radically. They are deer in the headlights, hoping the car swerves at the last minute.

bart
08-20-09, 12:49 PM
EJ make deflationistas angry...


As for the inflation-phobes, gold demand hit a six-year low in 2Q, according to the World Gold Council (-8.6% YoY)...


As long as one believes the "massaged" data coming out of the vested interest based World Gold Council, and ignores that those stats don't count central bank activities... and who knows what all else.

When central bank net sales and purchases are added back in, gold demand is up at least 2% YoY.




I also note that [blogger whose name shall not be mentioned] quoted someone recently who mentioned the FIRE economy without attributing it to EJ & iTulip - again.

Slimprofits
08-20-09, 01:16 PM
Rosenberg exhibits symptoms of a condition Jim Rogers has often remarked to the wealthy "Well, you don't do your own shopping - your housekeeper does it"

In effect, I do believe a lot of wealthy pundits take little notice when for instance:
- food sellers reduce volume sold and increase package size to try to off set perception or generally are
- or their own healthcare costs rise
- or any array of things we notice daily

He and many are simply ... insulated from the everyday experience of most Americans.

You can probably add "fill their own tanks" to that list.

The dry, packaged food that I buy the most often are boxes of pasta. For as long as I can remember, the normal volume was 16 oz. / box and this was true around the country. Starting last summer it bumped down to 12 or 13.5 oz. / box.

http://www.economagic.com/chartg/blscu/cuur0000sefa03.gif

Massive deflation!!!!!!

Slimprofits
08-20-09, 01:21 PM
When central bank net sales and purchases are added back in, gold demand is up at least 2% YoY.

Thanks Bart!

goadam1
08-20-09, 02:45 PM
Are there two parts to the Poom? One where you have stagflation and energy prices are going up but where things like restaurants and furniture stores are still going out of business. The second part where inventories are so low that furniture stores and restaurants get to start naming their price where they're the only ones still in business and stagflation ends and inflation begins.

Companies that are choked off by rising input cost that can't be passed along to costumers or who have to service a debt stream that exceeds profit margins that are squeezed by rising input costs will go out of business. The remaining companies can then raise prices. In theory.

rdrees
08-20-09, 05:52 PM
I'm new here, but I have to say I don't really get this post. "EJ" seems to be using some anecdotal evidence about local Target stores in his area to say that we're experiencing inflation? First, local anecdote is pretty thin evidence to rely on. Especially when it flies in the face of actual statistics. Here's the last eight months of the PPI on a year on year basis:

Finished Goods Intermediate Goods Crude Goods
Dec.: -.9% -2.3% -24.6%
Jan.: -1.0% -3.5% -29.1%
Feb.: -1.4% -5.2% -34.5%
Mar.: -3.5% -8.9% -39.0%
Apr.: -3.7% -10.5% -40.0%
May: -5.0% -12.5% -41.1%
June: -4.6% -12.5% -40.0%
July: -6.8% -15.1% -44.8%


Eight months of accelerating deflation in the PPI is overwhelming empiric evidence of deflation, not inflation. Why would producers raise consumer prices any time soon if their costs and dropping like a stone? True, some of this is reflective of the huge run up in oil prices in 2008, but lower prices are lower prices--and these are quite a bit lower. Also consider that oil didn't get down to $70/bbl until well into the Fourth Quarter of 2008, so even if much of this is attributable to the crash in oil prices, the trend will continue for at least a few more months, even assuming oil prices stick around $70/bbl for the next quarter or so--not a given as the summer season ends.

What's more, there's a disconnect between "EJ's" post and classic supply and demand theory. He looks at his local Target store and sees a reduction in supply which he says is an indicator of higher prices. Well, in a vacuum, maybe. Maybe if demand were constant--but it's not. As he points out, demand is falling in historic proportion, and lower demand means lower prices under the classic x-shaped supply demand graph everyone's familiar with. True, when demand falls, there will be some price volatility until the new supply/demand equilibrium is met at the new lower price, but a lower price--not a higher one--is where the new price will settle.

Isn't the lowered supply "EJ" sees at his local Target more likely an indicator of a retailer scrambling to meet lower demand than a retailer who is in the act of stealthily raising prices? Particularly in light of Target's absolutely crashing input costs as seen in the PPI? And consider employment costs, too, which--as we can see from "EJ's" graphs--are crashing, too, which we see as soaring unemployment.

"EJ" seems to assume that lower purchasing power equals inflation, but that's not right. It's entirely possible to have deflation/flat prices while purchasing power declines. For example, if your boss cuts your hours from 40/wk to 20/wk, and prices fall 1%, you've got both deflation and a decline in your purchasing power. That's what I see happening around me in America---stagnant wages, reduced hours, and crushing debt payments are the reasons I see people buying poorer quality products, and it only makes sense that retailers would rush to meet the new demand for more inexpensive goods. But that is clearly not "inflation" under any accepted definition of the term. The PPI numbers, at least, scream deflation, at least for the near future.

bart
08-20-09, 06:08 PM
Your PPI data is biased by using annual change rates. At turn points, its always best to either use actual numbers or an annualized change rate.

Here's actual Finished Good PPI numbers for the last 5 months:
<table x:str="" style="border-collapse: collapse; width: 48pt;" border="0" cellpadding="0" cellspacing="0" width="64"><col style="width: 48pt;" width="64"> <tbody><tr style="height: 13.2pt;" height="18" valign="bottom"> <td class="xl29" style="height: 13.2pt; width: 48pt;" x:num="" align="right" height="18" width="64">169.5</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td class="xl29" style="height: 13.2pt;" x:num="" align="right" height="18">169.8</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td class="xl29" style="height: 13.2pt;" x:num="" align="right" height="18">170.2</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td class="xl28" style="height: 13.2pt;" x:num="" align="right" height="18">173.2</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td class="xl29" style="height: 13.2pt;" x:num="" align="right" height="18">171.7</td> </tr> </tbody></table>
Same for PPI, all commnodities:
<table x:str="" style="border-collapse: collapse; width: 61pt;" border="0" cellpadding="0" cellspacing="0" width="82"><col style="width: 61pt;" width="82"> <tbody><tr style="height: 13.2pt;" height="18" valign="bottom"> <td class="xl29" style="height: 13.2pt; width: 61pt;" x:num="" align="right" height="18" width="82">168.1</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td class="xl29" style="height: 13.2pt;" x:num="" align="right" height="18">168.7</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td class="xl29" style="height: 13.2pt;" x:num="" align="right" height="18">170.2</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td class="xl28" style="height: 13.2pt;" x:num="" align="right" height="18">174.1</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td class="xl28" style="height: 13.2pt;" x:num="" align="right" height="18">172.7</td> </tr> </tbody></table>



EJ is obviously really bothering the deflationistas, with first post folk tearing into his analysis with either trollish posts or with biased presentations. At least this one tried to use actual statistics, but failed.
Funny how all the rest of the facts and charts that EJ noted were ignored too, and the poster concentrated on the Target visit.




edit/add:
Although it's likely unrelated, someone linked a few of my M3+credit+gov't debt charts on [deflationista blogger's] site and [deflationista blogger] posted:

M3 charts are useless (but likely reasonably accurate)

Adding M3 to Credit is ridiculous. It contains elements of double counting as well as adding apples to oranges.

to which I responded almost two hours ago, and to which there is not only no response but the post is still stuck "awaiting moderator approval"... while dozens of other posts have appeared.

Oh please Mish.

Assertions about M3 as being useless are just that - assertions.

M3 contains no credit measures, per the actual definition.

If you read what I actually say about those charts, you'd see I address the very minimal double counting.

rdrees
08-20-09, 06:29 PM
I think it's interesting that you cite the figures I posted as biased.

Year on year percent change is what "EJ" posted for figures relevant to demand for producers' products, such as PCE, retail sales, and consumer credit. It would seem that year on year percent change, then, would be the appropriate metric for cost figures relevant to the supply of producer's products.

And do you really think it's more indicative of inflation that the PPI rose modestly into the summer month to month--a time of traditionally higher demand--when producers are paying nearly half for crude goods today than what they paid a year ago? That's like screaming inflation when you pay $1.50 for a soda today that was $1.45 last month, but $3.00 a year ago.

Perhaps you are biased to see only inflation in any figures presented to you.

Also, if you read my post, you'll see that I actually relied on many of "EJ's" graphs to demonstrate that demand was crashing, which, all other things being equal, means crashing prices under classical economic theory.

bart
08-20-09, 06:31 PM
Nice job avoiding the facts I posted and trying to divert away from them. :rolleyes:

Here's the same 5 months of CPI, a notoriously lagging stat:
<table x:str="" style="border-collapse: collapse; width: 48pt;" border="0" cellpadding="0" cellspacing="0" width="64"><col style="width: 48pt;" width="64"> <tbody><tr style="height: 13.2pt;" height="18" valign="bottom"> <td class="xl28" style="height: 13.2pt; width: 48pt;" x:num="212.709" align="right" height="18" width="64">212.709</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td class="xl28" style="height: 13.2pt;" x:num="" align="right" height="18">213.240</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td class="xl28" style="height: 13.2pt;" x:num="213.85599999999999" align="right" height="18">213.856</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td class="xl28" style="height: 13.2pt;" x:num="215.69300000000001" align="right" height="18">215.693</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td class="xl28" style="height: 13.2pt;" x:num="215.351" align="right" height="18">215.351</td> </tr> </tbody></table>

No extra points for the ad hominem attack (" Perhaps you are biased to see only inflation in any figures presented to you.") either - you're busted. It's almost always easy to know someone knows they're wrong on the internets - they go into ad hominems or other disinformation tricks, etc..


Sorry, you lose again..

rdrees
08-20-09, 06:35 PM
My goodness this is a hostile crowd. And I'm not here to win or lose or try to make a particular argument. I'm here because I'm curious about what the facts are and where they might lead us.

And the fact is, your figures show falling PPI month-to-month for the latest month. Isn't that called deflation, if month-to-month is what you wish to examine?

You also seem to selectively choose your all-commodity PPI number. Here's everything since Jan. 2008:

<TABLE cellSpacing=0 cellPadding=2 border=1><TBODY><TR bgColor=#dae9fc><TH class=OutputHead scope=row>2008</TH><TD class=OutputCell>181.0</TD><TD class=OutputCell>182.7</TD><TD class=OutputCell>187.9</TD><TD class=OutputCell>190.9</TD><TD class=OutputCell>196.6</TD><TD class=OutputCell>200.5</TD><TD class=OutputCell>205.5</TD><TD class=OutputCell>199.0</TD><TD class=OutputCell>196.9</TD><TD class=OutputCell>186.4</TD><TD class=OutputCell>176.8</TD><TD class=OutputCell>170.9</TD><TD class=OutputCell>189.6</TD></TR><TR bgColor=#ffffff><TH class=OutputHead scope=row>2009</TH><TD class=OutputCell>171.2</TD><TD class=OutputCell>169.3</TD><TD class=OutputCell>168.1</TD><TD class=OutputCell>168.7(P)</TD><TD class=OutputCell>170.2(P)</TD><TD class=OutputCell>174.1(P)</TD><TD class=OutputCell>172.7(P)</TD></TR></TBODY></TABLE>

This month's index, at 172.7, is lower than 12 of the past 19 months, including last month. This does not look like an inflationary environment to me.

bart
08-20-09, 06:45 PM
Feel free to ignore the answers and facts and proof that I posted (and try to stir things up) as long as you like.

rdrees
08-20-09, 06:59 PM
You seem to be wholly unwilling to engage in any intellectual discussion of the figures both you and I posted. That is disappointing.

It is also surprising that you would turn to the CPI for your arguments, as I understood that metric to be heavily disfavored here. At least in 2006, "EJ" said "Likewise, the Producer Price Index (PPI) is the only remaining reliable published measure of prices. The Consumer Price Index (CPI) is continuously re-composed and fiddled with for political and other reasons. The PPI is imperfect because it is heavily skewed by energy prices, but the inflationary impact of energy prices on the economy is more or less proportionately skewed, and the Bureau of Labored Statistics messes less with the PPI than with the political football, the CPI, to which many government liabilities, such as TIPS and Social Security payments, are tied."

And the PPI numbers very clearly show depressed producer prices since the economic crisis hit full bore in Dec. 2008.

Would anyone else care to have a discussion about these figures?

bart
08-20-09, 07:14 PM
If anyone wants to respond, be my guest... but be aware of the ad hominem attack, the aggressive and highly critical tone of his very first post, the attempt to spin my views ("if month-to-month is what you wish to examine"), the failure to do any homework about me and the CPI and John Williams, the continual attempts to change the subject while being critical, etc., etc.

I'm done with the poster.

rdrees
08-20-09, 07:29 PM
I truly hope this is not an echo-chamber site where any dissenting view is warned against, seen as "aggressive," and immediately dismissed.

How is it spinning your view to say you want to look at month-to-month change when that's the figures you cited--the PPI each month for the last five months?

In any event, I did do my homework! The CPI is a disfavored statistic around here, Bart is the oldest spawn of Homer Simpson, and John Williams can compose a heck of a film score.

Anyone care to engage?

MarkL
08-20-09, 08:07 PM
Finished Goods Intermediate Goods Crude Goods
Dec.: -.9% -2.3% -24.6%
Jan.: -1.0% -3.5% -29.1%
Feb.: -1.4% -5.2% -34.5%
Mar.: -3.5% -8.9% -39.0%
Apr.: -3.7% -10.5% -40.0%
May: -5.0% -12.5% -41.1%
June: -4.6% -12.5% -40.0%
July: -6.8% -15.1% -44.8%


True, some of this is reflective of the huge run up in oil prices in 2008, but lower prices are lower prices--and these are quite a bit lower. Also consider that oil didn't get down to $70/bbl until well into the Fourth Quarter of 2008, so even if much of this is attributable to the crash in oil prices, the trend will continue for at least a few more months, even assuming oil prices stick around $70/bbl for the next quarter or so--not a given as the summer season ends.

First your characterization of this being attributable to a "crash" in oil prices is a bit incomplete. We didn't just have a crash, last year we had a bubble. For the first 3 quarters of 2007 (and for a significant period before) the USO fluctuated between $45 and $55. Then in Q407-Q208 it climbed to almost 120 ($145/barrel). THEN it crashed.

Eric did say awhile ago that the PPI was the only reliable indicator of inflation... but he also said it was energy overweighted. That last part of the sentence becomes more heavily weighted in an oil-bubble-statistically-skewed environment as we have today and for the next 3 months.

So, if "much of this is attributable to oil prices" how much of it? Perhaps all of it? What will the PPI settle back to as a true indicator as the statistical anomally of this oil bubble passes? Does the PPI reflect inflation or deflation or a neutral bias with the Oil bubble removed?

And by the way I'm not ignoring the rest of your post, just focusing in on the portion of it that could lead to a faulty conclusion.

MarkL
08-20-09, 08:13 PM
EJ is obviously really bothering the deflationistas, with first post folk tearing into his analysis with either trollish posts or with biased presentations. At least this one tried to use actual statistics, but failed.
Funny how all the rest of the facts and charts that EJ noted were ignored too, and the poster concentrated on the Target visit.


Bart: Jeesh, talk about an unwarranted attack!? In case you were unclear on this, pretty much everybody in a forum has an opinion and thus it's all a "biased presentation." Duh! And the "trollish posts" comment was unwarranted. You started the flame war here...

Rob: Welcome to the forum. I appreciate a dissenting opinion and apologize for those who throw out "trollish" comments that don't contribute to the discussion.

ASH
08-20-09, 08:21 PM
Anyone care to engage?

Hi rdrees. In the context of EJ's body of work prior to this post, I would interpret what EJ wrote anecdotally about his local Target as a demonstration of an effect that he was expecting to see, rather than "proof" of something. See my response to talaicito (http://www.itulip.com/forums/showthread.php?p=116856#poststop) in this thread:


I can see your point about a limited number of data points not proving his case. If you prefer, perhaps you should interpret EJ's citation of the last few CPI readings as a prediction that the trend won't reverse, rather than a critical piece of evidence; there is an awful lot more behind his analysis than those recent CPI data points.


In my view, some of the observations in this essay are not meant to stand on their own merit. They are weak arguments when viewed in isolation. Readers who have followed EJ's analysis for a long period of time, and who have read the "meatier" arguments in other threads, aren't bothered by this. I think readers who haven't read the earlier work are apt to feel that EJ is drawing too elaborate a conclusion from scant evidence. iTulip recently announced an editorial policy change in which they will not attempt to recap their core arguments in every post, and I believe your objections, and those of talaicito, are the inevitable result. iTulip is no longer repeating their best arguments in every post, but rather pointing out how data fits their thesis as it comes in.

That said, I agree with bart that at a turning point in inflation trends, it is better to track the monthly change in the index rather than the year-on-year change. The plots of various inflation measures which I have seen recently show something that looks like a "zig-zag". I agree that a few data points don't prove anything, but I think you should realize that EJ isn't attempting to "prove" anything with those data points -- he's just pointing out what he thinks he recognizes as an early marker in a process that he predicted.

rdrees
08-20-09, 08:32 PM
I did concede that the oil bubble was a factor in these figures. And you're right year on year numbers of this magnitude are unlikely to persist.

But why might the PPI not stay consistently down year on year (or at least flat) if/when oil prices stabilize? The data certainly appears to support that. As "EJ" pointed out, the energy price bias of the PPI flows throughout the economy, so the PPI is not so much biased by energy relative to other price metrics as it is affected by energy prices, just as pretty much everything else is.

From what I've understood in reading up on this site's "Ka-Poom" theory, the idea is not that Poom results from a spike in oil prices because oil demand is exceeding oil supply (though that could certainly add to it, presumably, and I think what is called "Peak Cheap Oil" here). Rather, Poom is posited as a distinct phenomenon arising from the Fed essentially overprinting money and devaluing the dollar. We're just not seeing that at this point.

So yes, we may certainly see energy-related inflation. But ask whether these PPI numbers suggest that the Fed is anywhere near devaluing the dollar to any significant extent. If they were, not only should this acceleration in the rate of decline in the PPI slow at some point over 8 months--especially since oil is not flat but has been rising since the beginning of the year--but you should see at least some rise in the PPI month to month, too. But as bart's figures showed, they actually fell in the most recent month. A summer month at that--one that is typically associated with higher demand, which should lead to higher prices.

So to answer your last question, it would seem to me that the PPI still shows a deflation bias that is overstated by, but not entirely caused by, the oil bubble.

rdrees
08-20-09, 08:40 PM
I appreciate the engaged response, Ash.

My understanding of the iTulip thesis, the "Ka-Poom" theory is based on wandering around and reading past posts. And the one that sticks out to me is the 2006 post entitled, "No deflation, just disinflation" or something to that effect. It would seem to me that the PPI numbers I posted would tend to refute that, as they sure seem to reflect deflation to me.

Now I know there's a definitional subtlety that has been interlaid over that post suggesting that what "EJ" means by deflation is not some small amounts of deflation here and there, but actually a deflationary spiral. But it's hard not to look at 8 straight months of accelerating and large declines in the PPI as stronger evidence even of a deflationary spiral than some small deflation here and there.

And sorry to have seized so much on the Target anecdote, but it does seem to be demonstrative of a larger issue about a near-term inflation call. Why would retailers be raising their prices any time soon when both demand is down and supply costs are down? Any retailer worth his salt would undercut the person who raised prices and could do so without hurting their bottom line given sharply reduced input costs. That would seem to hold true for at least some time to come given how much cheaper they can make things now than just one year ago.

I'm not sure I see as much value in monthly trends over a small time period as it's very easy to get lost in noise that way. But even still, doesn't it seem significant that both PPI and CPI have taken a turn downwards from June to July? And this after nearly $300 billion in quantitative easing and months and months of 0% Fed funds rate. Maybe the Fed is not as powerful as Ka-Poom posited, or at least not in the face of as severe a recession as we've got.

jk
08-20-09, 08:47 PM
recent bloomberg article on the empire manufacturing index showed prices paid up a lot, prices received up a little, thus margins squeezed.

rdrees, as ash said, each post these days sits atop a rather large, multi-year stack of previous analyses, and we've been around the inflation-deflation block a gazillion times. it was hot and heavy at least back as far as whenever it was i came to the site [i forget when, but it's in the upper right]. i think that's part of why you meet with impatience.

i think it would be useful for itulip to post a faq's, including e.g. "inflation-deflation debate", with links to the relevant articles. then a new member could be directed there, and expected to have read the key earlier pieces before weighing in with something new, if there's ever something new.

fwiw, i will forward a copy of this post to fred.

MarkL
08-20-09, 08:58 PM
And the one that sticks out to me is the 2006 post entitled, "No deflation, just disinflation"
I originally interpreted "Disinflation" as the slowing of inflation, and that the inflation rate wouldn't go below 0. However it does seem we have gone below zero.


And sorry to have seized so much on the Target anecdote
The Target anecdotal evidence is just weak. Weak to start and weak to reference.

Have "input costs" reduced? The "root" input costs of commodities and energy seem to have gone up... unless you're only tracking against the 2008 summer energy bubble.

bart
08-20-09, 09:05 PM
Bart: Jeesh, talk about an unwarranted attack!? In case you were unclear on this, pretty much everybody in a forum has an opinion and thus it's all a "biased presentation." Duh! And the "trollish posts" comment was unwarranted. You started the flame war here...


I call them as I see them, and don't tolerate people well who have few to no manners and attack EJ and the article in their very first post. Perhaps you don't see comments in his very first post like "flies in the face of actual statistics" or "overwhelming empiric evidence of deflation, not inflation." or " "EJ" seems to assume that lower purchasing power equals inflation, but that's not right. " as accusatory or quite excessive, but I do - especially when the poster apparently doesn't have *any* background to speak of in KaPoom or the general iTulip story.

It's well beyond tacky (at best) in my opinion to post like he did.



Also if you don't see the difference between the annual change rate and the data I posted about the last 5 months, and how using an annual change rate masks and biases a conclusion near turning points, then that's your opinion and option... but if you're going to try and attack me with an "unwarranted attack" accusation, then do it with actual facts and look at what I actually wrote and what he actually posted - especially in the first post.

And I also recommend that more folk read and understand things like the 25 rules of disinformation or the area of cognitive biases. They do exist, as do trolls etc. and the use of them are not getting less.

jk
08-20-09, 09:09 PM
Why would retailers be raising their prices any time soon when both demand is down and supply costs are down?
1. see note re empire manufacturing index 2 posts up. if "supply costs are down" why is the prices paid index up sharply?
2. posted elsewhere [can't give you a link, ask metalman] - you want something from inventory, it's cheap to get cashflow. you want something that has to be ordered, it's expensive, not cheap.

MarkL
08-20-09, 09:09 PM
recent bloomberg article on the empire manufacturing index showed prices paid up a lot, prices received up a little, thus margins squeezed.

rdrees, as ash said, each post these days sits atop a rather large, multi-year stack of previous analyses, and we've been around the inflation-deflation block a gazillion times. it was hot and heavy at least back as far as whenever it was i came to the site [i forget when, but it's in the upper right]. i think that's part of why you meet with impatience.

i think it would be useful for itulip to post a faq's, including e.g. "inflation-deflation debate", with links to the relevant articles. then a new member could be directed there, and expected to have read the key earlier pieces before weighing in with something new, if there's ever something new.

fwiw, i will forward a copy of this post to fred.

The rdrees/bart/Ash discussion is based on the latest PPI and CPI numbers. And I haven't seen the PPI numbers presented as a strong argument for deflation like this on here before. Whether this latest evidence indicates inflation or deflation is of perpetual interest to me.

jk
08-20-09, 09:12 PM
Whether this latest evidence indicates inflation or deflation is of perpetual interest to me.
it's like trying to discern the trend in a market. what's the signal? what's the noise? yes, we want all the evidence, up to the minute, but it's only by stepping back and seeing that evidence within a larger context that we can come to reasoned judgments. and still be wrong.

MarkL
08-20-09, 09:20 PM
I call them as I see them, and don't tolerate people well who have few to no manners and attack EJ and the article in their very first post.

If you don't see the difference between the annual change rate and the data I posted about the last 5 months, and how using an annual change rate masks and biases a conclusion near turning points, then that's your opinion and option... but if you're going to try and attack me with an "unwarranted attack" accusation, then do it with actual facts and look at what I actually wrote - especially in the first post.

And I also recommend that more folk read and understand things like the 25 rules of disinformation or the area of cognitive biases. They do exist, as do trolls etc.

"Attack EJ"... is that what we call a dissenting opinion nowadays?

I do comprehend your claim that an annual change rate may mask a turning point. I also see rdrees's point that the short term (month to month) also indicates deflation. Maybe we're not in a turning point... and your assumption is incorrect. Both the one year and the month-month are interesting arguments.

I've never visited your website before just now... and I find it fascinating that you used the CPI to defend your position, but your second article on your website is "The Consumer Price Index Is a Lie." Hypocrisy? Using stats when they are convenient?

I'm actually a devout inflationista like most of us here on iTulip. But I like a good dissenting opinion as it tunes my thinking and I think that we should encourage dissenters to visit and challenge us here. Not call them names and then walk away with our tail between our legs.

MarkL
08-20-09, 09:23 PM
it's like trying to discern the trend in a market. what's the signal? what's the noise? yes, we want all the evidence, up to the minute, but it's only by stepping back and seeing that evidence within a larger context that we can come to reasoned judgments. and still be wrong.

ROFLMAO. Tips hat to JK.

MarkL
08-20-09, 09:25 PM
1. see note re empire manufacturing index 2 posts up. if "supply costs are down" why is the prices paid index up sharply?
2. posted elsewhere [can't give you a link, ask metalman] - you want something from inventory, it's cheap to get cashflow. you want something that has to be ordered, it's expensive, not cheap.

I remember an article about DOW chemical's prices jumping for a second time too this year. Their price increases will probably cause prices (ultimately after inventory burns off) to go up in a variety of end-products.

jk
08-20-09, 09:28 PM
i think the issue is in the socialization of new members to the community's shared history of extensive discussion and debate. a newcomer arrives all charged up, ready to debate vigorously something that's been beaten to death in literally dozens of threads and hundreds or even thousands of posts over a period of years. so the newcomer's energetic exposition of another p.o.v. is greeted with irritability and labeled as trollish behavior.

i just realized i put the issue in my own frame as a [relative] old-timer around here. alternately, i might have said the issue is the openness of long-time community members to the eagerness for debate among newcomers.

bart
08-20-09, 09:35 PM
"Attack EJ"... is that what we call a dissenting opinion nowadays?

I do comprehend your claim that an annual change rate may mask a turning point. I also see that the short term (month to month) also indicates deflation. So maybe we're not in a turning point... and the facts indicate disinflation.

I've never visited your website before just now... and I find it fascinating that you used the CPI to defend your position, but your second article on your website is "The Consumer Price Index Is a Lie." Hypocrisy? Using stats when they are convenient?

I'm actually a devout inflationista like most of us here on iTulip. But I like a good dissenting opinion as it tunes my thinking and I think that we should encourage dissenters to visit and challenge us here. Not call them names and then walk away with our tail between our legs.


I see you didn't comment about manners or how tacky it is to post a first post like that, and without even having studied KaPoom, etc. but rather chose to focus on dissent, which is not and never has been the issue - but is a red herring. And I note that you eliminated some of my key points and facts from my post when quoting it.

Call it however you like, the PPI and CPI being up in the last 5 months since the stock bottom in March are the actual facts.

If you also choose to get into straw man type "arguments" about how I used the CPI, then how about commenting on the huge amount of coverage of John Williams and shadowstats.com CPI corrections on my site, and perhaps post one of my charts that shows the "real" inflation - which is over 6% higher than current CPI, and shows yet more facts and data about what is really going on with real inflation (or disinflation if you prefer)? Did you even read my "The Consumer Price Index Is a Lie."?

Did you get the point about who is the one truly being disingenuous and hypocritical and practicing logical fallacies like straw man attacks, etc. yet?


Feel free to ignore all my specific points in prior posts about disinformation, initial critical posts, etc. too. Feel free to attack me again about having strong opinions in the area too.


I see he at least is doing his research now and seeing a fuller picture, so he's probably not a troll... but as I said, that kind of initial post combined with unfamiliarity with KaPoom, etc. is well beyond tacky in my book - and I'll always call someone on it.

bart
08-20-09, 09:47 PM
i think the issue is in the socialization of new members to the community's shared history of extensive discussion and debate. a newcomer arrives all charged up, ready to debate vigorously something that's been beaten to death in literally dozens of threads and hundreds or even thousands of posts over a period of years. so the newcomer's energetic exposition of another p.o.v. is greeted with irritability and labeled as trollish behavior.

i just realized i put the issue in my own frame as a [relative] old-timer around here. alternately, i might have said the issue is the openness of long-time community members to the eagerness for debate among newcomers.


If the newcomers truly do their homework, and then want to debate or discuss - more power to them.

One of the best things about iTulip to me is the class, general respect and manners shown, along with the mild moderation. I will always strenuously object when someone comes in with some big chip on their shoulders or whatever, and is accusatory.

MarkL
08-20-09, 10:17 PM
I see you didn't comment about manners or how tacky it is to post a first post like that, and without even having studied KaPoom, etc. but rather chose to focus on dissent, which is not and never has been the issue - but is a red herring. As he indicated in a later post he had studied Kapoom and read the 2006 article. You made an incorrect assumption, flamed him on it and called him a troll. Frankly you were the one without manners... and to a newcomer even.

And I note that you eliminated some of my key points and facts from my post when quoting it. I don't feel it necessary to redress points that have already been addressed or I agree with.

Call it however you like, the PPI and CPI being up in the last 5 months since the stock bottom in March are the actual facts. Yes and it's down over the last year AND the last month. You still don't show an ability to recognize the other side of the argument... this sentence of yours completely ignores it.

If you also choose to get into straw man type "arguments" about how I used the CPI, then how about commenting on the huge amount of coverage of John Williams and shadowstats.com CPI corrections on my site, and perhaps post one of my charts that shows the "real" inflation - which is over 6% higher than current CPI, and shows yet more facts and data about what is really going on with real inflation (or disinflation if you prefer)? Did you even read my "The Consumer Price Index Is a Lie."? Because I was pointing out your hypocrisy of you using the CPI as a reasonable stat on one hand and then denigrating in your website as another. I wasn't making all the other points that are, in fact, now being entered into the argument as straw men. I actually agree with you that the CPI is a bad stat! This is why I can't understand why you used it as an argument!!!

Did you get the point about who is the one truly being disingenuous and hypocritical and practicing logical fallacies like straw man attacks, etc. yet? Nope...sorry. It appears to me, it's you.


Feel free to ignore all my specific points in prior posts about disinformation, initial critical posts, etc. too. Feel free to attack me again about having strong opinions in the area too. I have no problems with strong opinions and never have. Don't put words in my mouth. I had a problem with you calling a newbie a troll, accusing him of doing no research, calling his dissenting opinion an "attack" and then walking away like a coward. ASK him next time about what he's read. SUGGEST he do research if you think he hasn't.. I'd like to see reasonable discussions here that are encouraging to newbies as opposed to troll calling, assumptively dismissive posts like yours.

I see he at least is doing his research now and seeing a fuller picture, so he's probably not a troll... but as I said, that kind of initial post combined with unfamiliarity with KaPoom, etc. is well beyond tacky in my book - and I'll always call someone on it.

Nice of you to finally acknowledge in your last paragraph that he's probably not a troll. Perhaps an apology is in order and a renegagement of the discussion without the flames? Naw...probably too much to expect.

a warren
08-20-09, 10:33 PM
Nice of you to finally acknowledge in your last paragraph that he's probably not a troll. Perhaps an apology is in order and a renegagement of the discussion without the flames? Naw...probably too much to expect.

Attacking Bart here is outrageous. If he thought 'stuff it' I'm not going to post on the tulip anymore, we would all be worse off. And we don't need a reengagement of the stale old arguments. Been there, done that, boring.

jiimbergin
08-20-09, 10:38 PM
Attacking Bart here is outrageous. If he thought 'stuff it' I'm not going to post on the tulip anymore, we would all be worse off. And we don't need a reengagement of the stale old arguments. Been there, done that, boring.

AMEN!

jim

ASH
08-20-09, 10:42 PM
I'm not sure I see as much value in monthly trends over a small time period as it's very easy to get lost in noise that way.

That's actually sort of the point. EJ's renown as a forecaster is based upon making accurate long-range predictions and calling turning points, before the new trend is obvious or "proveable" by the data. The long-range predictions are based upon detailed macroeconomic, political, and historical analysis (not the type of short-term evidence that some have found off-putting in this post), and the turning points are called based upon recognizing expected "markers" in the short-term data that were predicted based upon the detailed analysis. One recent memorable example was when EJ called the start of the recession. It took NBER many quarters to identify the start of the recession looking at long-term data in hindsight. From my perspective, the whole point of iTulip is that EJ's analytical framework permits him to make timely and actionable calls before trend changes are obvious to all in the data.

So stick around. Check back in a year to see what happened with inflation. iTulip has been very explicit that inflation will be recognizable to all no later than 1st quarter 2010. This post seems to be an early call about a turning point. The iTulip management very explicitly announced that they are done arguing inflation vs. deflation, so I'm afraid they've stopped presenting their "big picture" case in every post. But, if you interpret this post in that context -- as a turning point call rather than an exposition of grand theory -- you'll better understand why the data that was presented was selected for the post.

ThePythonicCow
08-20-09, 10:45 PM
AMEN!

jim

Double, quadruple AMEN!

Bart - we love you :).

bart
08-20-09, 10:52 PM
Originally Posted by bart http://www.itulip.com/forums/images/buttons/viewpost.gif (http://www.itulip.com/forums/showthread.php?p=117410#post117410)
I see you didn't comment about manners or how tacky it is to post a first post like that, and without even having studied KaPoom, etc. but rather chose to focus on dissent, which is not and never has been the issue - but is a red herring. As he indicated in a later post he had studied Kapoom and read the 2006 article. You made an incorrect assumption, flamed him on it and called him a troll. Frankly you were the one without manners... and to a newcomer even.



My assumption was correct, but I wouldn't have expected you to read and fully understand the whole thread - given your insistence on beating a dead horse, etc.


And I note that you eliminated some of my key points and facts from my post when quoting it. I don't feel it necessary to redress points that have already been addressed or I agree with.



Feel free to ignore convention and also not answer or comment on questions or comments that clarify or enhance another's position - and leave yourself open to valid criticisms about practicing logical fallacies.


Call it however you like, the PPI and CPI being up in the last 5 months since the stock bottom in March are the actual facts. Yes and it's down over the last year AND the last month. You still don't show an ability to recognize the other side of the argument... this sentence of yours completely ignores it.



And yet again, you actually ignore the main and primary point of my initial post... nor do you show an ability to just give it up.


If you also choose to get into straw man type "arguments" about how I used the CPI, then how about commenting on the huge amount of coverage of John Williams and shadowstats.com CPI corrections on my site, and perhaps post one of my charts that shows the "real" inflation - which is over 6% higher than current CPI, and shows yet more facts and data about what is really going on with real inflation (or disinflation if you prefer)? Did you even read my "The Consumer Price Index Is a Lie."? Because I was pointing out your hypocrisy of you using the CPI as a reasonable stat on one hand and then denigrating in your website as another. I wasn't making all the other points that are, in fact, now being entered into the argument as straw men. I actually agree with you that the CPI is a bad stat! This is why I can't understand why you used it as an argument!!!



A straight question I can actually answer - because the CPI has been generally going up for the last 5 months, just like PPI - and CPI without lies too.


Did you get the point about who is the one truly being disingenuous and hypocritical and practicing logical fallacies like straw man attacks, etc. yet? Nope...sorry. It appears to me, it's you.



Give it up, unless you have to continue for some odd reason


Feel free to ignore all my specific points in prior posts about disinformation, initial critical posts, etc. too. Feel free to attack me again about having strong opinions in the area too. I have no problems with strong opinions and never have. Don't put words in my mouth. I had a problem with you calling a newbie a troll, accusing him of doing no research, calling his dissenting opinion an "attack" and then walking away like a coward. ASK him next time about what he's read. SUGGEST he do research if you think he hasn't.. I'd like to see reasonable discussions here that are encouraging to newbies as opposed to troll calling, assumptively dismissive posts like yours.



When you don't comment on others points, that's not called debate - whether you do it or he does it (note that he *never* directly addressed that set of recent PPI data)... and that you not only can't just drop it, but also show by this comment that you have little no no clue what I objected strenuously to.

And now you're calling me a coward - too bad we're not in person.

I think you've now gone well beyond propriety, manners and the rules of iTulip itself.

ASH
08-20-09, 11:00 PM
This is not a response to Cow's post... I just hit "post reply" by accident when I wanted to make a general post to no one in particular.

I ain't the expert, but it bears mentioning that for the most part, the problems with CPI have to do with changes in methodology over time that tend to attenuate the measured inflation. So, over a long span of time, the apparent price rise will be smaller than the man on the street encounters. However, it's not like the methodology used to compute CPI changes every season. So, if you are just trying to answer the question "are prices rising or falling?", the CPI is probably useable to get the direction. I personally think it is a bit inconsistent (for instance) to use the official CPI-U to adjust the DJIA for the "real DOW" while claiming that an alternate price index such as calculated by John Williams is the more accurate measurement of price levels. (A little inconsistent, but not a mortal sin.) However, it is not so bad to be skeptical of the long-term quantitative accuracy and consistency of the official CPI, yet use it to measure the direction the wind is blowing.

jk
08-20-09, 11:04 PM
I ain't the expert, but it bears mentioning that for the most part, the problems with CPI have to do with changes in methodology over time that tend to attenuate the measured inflation. So, over a long span of time, the apparent price rise will be smaller than the man on the street encounters. However, it's not like the methodology used to compute CPI changes every season. So, if you are just trying to answer the question "are prices rising or falling?", the CPI is probably useable to get the direction. So, it is a bit inconsistent (for instance) to use the official CPI-U to adjust the DJIA for the "real DOW" while claiming that an alternate price index such as calculated by John Williams is the more accurate measurement of price levels. However, it is not so bad to be skeptical of the long-term quantitative accuracy and consistency of the official CPI, yet use it to measure the direction the wind is blowing.
unfortunately i don't think the cpi is even that good. its manipulation goes back to arthur burns coming up with the "core inflation" concept at nixon's behest. [not too long before those photos of alan greenspan wearing his WIN - whip inflation now- button]. my impression is that hedonics are added to more categories on a regular basis, and the substitution adjustments are of course an ongoing process. i.e. the substitution methodology may not change, but with every price rise there's a new substitution effect. and i've never heard of a revision or modification that resulted in a higher, instead of a lower, value. as for which way the wind is blowing, basically, looking at the fdi, the wind is always - with rare exception - blowing in the same direction anyway.

bart
08-20-09, 11:09 PM
Double, quadruple AMEN!

Bart - we love you :).

*hug*... ;) ... to you and the others, and thanks.

I can get my dander up in a hurry when what I love about iTulip and the general environment is challenged by a newbie who hasn't done his or her homework - perhaps a character fault of mine, but I've been someone that says what's on his mind when a clear line has been crossed for many decades.

And that last bit of being called a coward by MarkL... well, I think now is the time to practice discretion being the better part of valor.


edit/add:
Just in case - I don't want anyone to back off if they think I've gone over an edge or over reacted, etc. I'm not going to leave if someone disagrees. Some may remember when I got really aggravated and went slightly ballistic with a poster who criticized both my ESF dollar intervention posts and facts, and also "questioned" my ECB evidence of gold price manipulation or control with bogus facts that he pretended came from the ECB... and Fred reminded me of the rules about insults, etc.

rdrees
08-20-09, 11:09 PM
Wow, bart. You really do not like people who present points against your own.

Of course you should still post.

Of course, you should take pure empirical evidence of 8 straight months of falling PPI index--supposedly the gold standard around here--as something more than the "stale" old argument that "EJ" may be right on a lot of investment calls, but perhaps wrong on his underlying theory. At least Ka-Poom theory as originally stated in 2006.

You accuse and accuse and accuse others of ignoring your points, being rude, etc.

Let's move beyond the personal, bart, and look at the numbers.

Not arguments. Not "stale" points.

Numbers. Numbers that show significant deflation despite overwhelming efforts by the Fed against it.

Let's elevate this thing, bart.

ThePythonicCow
08-20-09, 11:13 PM
Wow, bart. ..I'm going to request that this post be removed. rdrees doesn't get it.

bart
08-20-09, 11:15 PM
This is not a response to Cow's post... I just hit "post reply" by accident when I wanted to make a general post to no one in particular.

I ain't the expert, but it bears mentioning that for the most part, the problems with CPI have to do with changes in methodology over time that tend to attenuate the measured inflation. So, over a long span of time, the apparent price rise will be smaller than the man on the street encounters. However, it's not like the methodology used to compute CPI changes every season. So, if you are just trying to answer the question "are prices rising or falling?", the CPI is probably useable to get the direction. I personally think it is a bit inconsistent (for instance) to use the official CPI-U to adjust the DJIA for the "real DOW" while claiming that an alternate price index such as calculated by John Williams is the more accurate measurement of price levels. (A little inconsistent, but not a mortal sin.) However, it is not so bad to be skeptical of the long-term quantitative accuracy and consistency of the official CPI, yet use it to measure the direction the wind is blowing.


Personally, I just take the "real Dow" chart in the context of the 5000 target - especially knowing how tough and time consuming it is to keep up with charts as things change.

My current take on how EJ and iTulip view shadowstats.com corrections is that they're given credence, within the limits of long term CPI accuracy itself. It looks like they come close to splitting the difference... and as Finster and I and many others have observed, its damn tough to get a real and accurate picture of inflation.
I'll also note that I fade the shadowstats.com numbers - John Williams shows about 25-30% more inflation since 1982 than I do. I should change my charts to say "based on...", and its on my ever growing list of things to do.


And there's always my charts which show both. ;)



http://www.nowandfutures.com/images/dow_cpi_lies1900-current.png





Same chart, but with dividends added:

http://www.nowandfutures.com/images/dow_plus_divid_cpi_lies1900on.png

rdrees
08-20-09, 11:18 PM
Seriously? I've been asked to have a post removed because I've got a different viewpoint? This truly is an echo-chamber!

I had truly hoped this was a forum where "the contrary view" stated in a reasonably cogent fashion might be at least entertained instead of banished like heretical thought.

FRED
08-20-09, 11:30 PM
Hi, rdrees. Jumping in late here. Do you mind restating briefly your objection to the argument that the U.S. economy is heading into neither a deflation spiral nor a period of stag-deflation as Japan has experienced since 1993, so that I may address it? Thanks.

I'll respond to you other comments, below.


I appreciate the engaged response, Ash.

My understanding of the iTulip thesis, the "Ka-Poom" theory is based on wandering around and reading past posts. And the one that sticks out to me is the 2006 post entitled, "No deflation, just disinflation" or something to that effect. It would seem to me that the PPI numbers I posted would tend to refute that, as they sure seem to reflect deflation to me.

Ka-Poom Theory makes two arguments. The first: with respect to the cycle of asset bubbles and crashes since iTulip was founded in 1998. It asserts that no self-reinforcing cycle of debt defaults, collapsing money supply, and falling prices will occur in the U.S. following any asset market crash as occurred in the U.S. from 1930 to 1934, whether the crash be in equities as in the 2000 to 2002 period or in mortgage and other credit markets in the 2007 to today. Events have confirmed the theory not once but twice: there was not self-reinforcing deflation spiral following either the 2000 stock market crash nor the 2007-8 credit market collapse. As forecast, government credit was substituted for private credit. In the latest instance, only four rather than 48 months of contraction in the CPI resulted:


http://www.itulip.com/forums/../images/cpi2000-Aug2009.gif

The U.S. experienced a short bout of deflation we call disinflation before
the long-term inflation trend resumed



http://www.itulip.com/forums/../images/cpi192801935.gif

This is what a deflation spiral looks like, from 1930 to 1934





Doesn’t take a rocket scientist to see the difference between 48 continuous months of CPI decline and four months of CPI decline.
The second argument that Ka-Poom Theory makes is that, eventually, without a specific time frame, the U.S. is on track to experience the same difficulties of any country with a large net external debt that cannot finance the monthly payments on that debt with either tax revenue or money borrowed from domestic or foreign sources. The U.S. is vulnerable to a balance of payments crisis.

Not sure of your background, but most iTulip members are business people and think in business terms. Assuming you are such, one way to think of the U.S. predicament is to think of the U.S. as a corporation with a high cash flow to debt service payment ratio, and a diminishing internal rate of return.


Now I know there's a definitional subtlety that has been interlaid over that post suggesting that what "EJ" means by deflation is not some small amounts of deflation here and there, but actually a deflationary spiral. But it's hard not to look at 8 straight months of accelerating and large declines in the PPI as stronger evidence even of a deflationary spiral than some small deflation here and there.You make an excellent point here.

As noted above, the CPI declined for four months in 2008 then recovered in early 2009 and continued on trend.

But what is the relationship among key components of the PPI and the CPI?


http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=800&height=480&bgcolor=%2399FF99&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&id=PPICEM,PPIIFF,PPIFGS,CPIAUCNS,&transformation=lin,lin,lin,lin,&scale=Right,Left,Left,Left,&range=Custom,Custom,Custom,Custom,&cosd=1990-01-01,1990-01-01,1990-01-01,1990-01-01,&coed=2009-07-01,2009-07-01,2009-07-01,2009-07-01,&line_color=%230000FF,%23FF0000,%23006600,%23FF6600 ,&link_values=,,,,&mark_type=NONE,NONE,NONE,NONE,&line_style=Solid,Solid,Solid,Solid,&vintage_date=2009-08-20,2009-08-20,2009-08-20,2009-08-20,&revision_date=2009-08-20,2009-08-20,2009-08-20,2009-08-20,&mma=0,0,0,0,&nd=,,,,&ost=,,,,&oet=,,,,


Interestingly, the lag between changes in the prices of energy inputs, intermediate goods, finished goods, and CPI are no more than a few months. We put energy on the right hand scale because it is so volatile is flattens the other components.

As predicted, these did not continue on a downward path for years on end, uninterrupted as those on the other side of the agument for the past ten years asserted: no deflation spiral, measured as CPI or any component of the PPI one chooses.

By the way, this tight relationship between energy costs and CPI is not a new phenomenon.


http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=800&height=480&bgcolor=%2399FF99&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&id=PPIENG,CPIAUCNS,&transformation=lin,lin,&scale=Left,Right,&range=Custom,Custom,&cosd=1926-01-01,1926-01-01,&coed=1945-01-01,1945-01-01,&line_color=%230000FF,%23FF0000,&link_values=,,&mark_type=NONE,NONE,&line_style=Solid,Solid,&vintage_date=2009-08-20,2009-08-20,&revision_date=2009-08-20,2009-08-20,&mma=0,0,&nd=,,&ost=,,&oet=,,



And sorry to have seized so much on the Target anecdote, but it does seem to be demonstrative of a larger issue about a near-term inflation call. Why would retailers be raising their prices any time soon when both demand is down and supply costs are down? We have think like retailers rather than like economists! :)

They cannot lower any line item price below a price that produces a per unit profit net of input costs, that is, everything on the bill of materials, wages, interest, and so on. If input costs were falling as in 2001 they'd lower prices and still make a profit. But input costs are not falling this time, so a retailer cannot price cut the competition for long, unless they have enough cash and credit to cover the negative cash flow until the competition, that does not have as much credit or cash to finance negative cash flow, goes out of business.


Any retailer worth his salt would undercut the person who raised prices and could do so without hurting their bottom line given sharply reduced input costs. That would seem to hold true for at least some time to come given how much cheaper they can make things now than just one year ago.But input costs did not drop dramatically! The Fed put a floor on them with quantitative easing and other measures. Oil is $69 not $16 as in 2001.

They did cut prices as long as they could, during the Great American Fire Sale in the first half of 2009, as we forecast. But remember: no retailer worth his salt kept any cash around going into this mess. What's a cash account earn in the high central bank liquidity, low interest rate era? It was irresponsible to hold cash, from a shareholder perspective. Instead, they funded inventory with credit lines. When those dried up, so did their ability to undercut competitors for more than a quarter or two, thus the timing of our forecast and the theory behind it: in our era of low interest rates, a credit crunch hurts suppliers even more than comsumers. Supply falls faster than demand.


I'm not sure I see as much value in monthly trends over a small time period as it's very easy to get lost in noise that way. But even still, doesn't it seem significant that both PPI and CPI have taken a turn downwards from June to July? And this after nearly $300 billion in quantitative easing and months and months of 0% Fed funds rate. Maybe the Fed is not as powerful as Ka-Poom posited, or at least not in the face of as severe a recession as we've got.That's the bet, isn't it? That the CPI decline over the last month is an indication of a return to the deflation we saw for four months until early 2009 or not?

Remember, we learned all of this the hard way. We once under-estimated the Fed. We learned from our mistake. Never again.

Two recent iTulip articles you will find most helpful to understand our position:
Everyone is wrong, again – 1981 in Reverse Part I: The Great Divide – Eric Janszen (http://www.itulip.com/forums/showthread.php?p=95409#post95409)
Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen (http://www.itulip.com/forums/showthread.php?p=97954#post97954)

rdrees
08-20-09, 11:32 PM
I like this post!

I would never pretend to know what the trends are. I would also acknowledge the ability of "EJ" to have seen at least one important trend--this severe recession--sooner than almost anyone.

But orthodoxy can be problematic. And predicting market trends is different from proposing a theory about how markets react in every case that a bubble is burst, which is really what Ka-Poom claims to do.

In this case, the evidence to me is tending not to support inflation for some time, and is in fact indicative of deflation from a traditional economic standpoint.

And yet, the PPI data may "still be wrong," in the words of jk.

And I'm glad we're talking now!

ASH
08-20-09, 11:38 PM
I ain't the expert...

I love it that my "bat signal" works so well!


as for which way the wind is blowing, basically, looking at the fdi, the wind is always - with rare exception - blowing in the same direction anyway.

Do you think the last few CPI reads that were cited in this post is one of those times when the wind switched direction for a bit?


And there's always my charts which show both. ;)


I love the Bart signal!

bart
08-20-09, 11:46 PM
Wow, bart. You really do not like people who present points against your own.

Of course you should still post.

Of course, you should take pure empirical evidence of 8 straight months of falling PPI index--supposedly the gold standard around here--as something more than the "stale" old argument that "EJ" may be right on a lot of investment calls, but perhaps wrong on his underlying theory. At least Ka-Poom theory as originally stated in 2006.

You accuse and accuse and accuse others of ignoring your points, being rude, etc.

Let's move beyond the personal, bart, and look at the numbers.

Not arguments. Not "stale" points.

Numbers. Numbers that show significant deflation despite overwhelming efforts by the Fed against it.

Let's elevate this thing, bart.


Oh good grief.


I'll repeat it for you one more time.


I call them as I see them, and don't tolerate people well who have few to no manners and attack EJ and the article in their very first post. Perhaps you don't see comments in his very first post like "flies in the face of actual statistics" or "overwhelming empiric evidence of deflation, not inflation." or " "EJ" seems to assume that lower purchasing power equals inflation, but that's not right. " as accusatory or quite excessive, but I do - especially when the poster apparently doesn't have *any* background to speak of in KaPoom or the general iTulip story.

It's well beyond tacky (at best) in my opinion to post like he did.
...


I see he at least is doing his research now and seeing a fuller picture, so he's probably not a troll... but as I said, that kind of initial post combined with unfamiliarity with KaPoom, etc. is well beyond tacky in my book - and I'll always call someone on it.
...


If the newcomers truly do their homework, and then want to debate or discuss - more power to them.
....



Can you give it up now, or do you have to keep up with the worship of logical fallacies like straw men - and trying to characterize me as something you actually are (one of the 25 rules of disinformation too, I might add), etc?

Fiat Currency
08-21-09, 12:10 AM
I love it that my "bat signal" works so well!


I love the Bart signal!

Indeed!!

2027 2028

rdrees
08-21-09, 12:16 AM
That's the best you can do, bart?

I may not be the most gracious poster. But between you and me, I think neither are you. That goes to your first point.

As to your second, that's nice of you to retract your accusation that I'm a troll. I really do appreciate that. But let's talk about the facts. What say you--and anyone here--about these numbers. Because I respect real debate--and "EJ's" forcasting. But I can't stand orthodoxy. So how about it? Let's look at those numbers this month that show both year on year and month on month deflation?!

And, once again, I think I've done enough homework to know that John Williams is an amazing composer...

MarkL
08-21-09, 12:20 AM
My assumption was correct, but I wouldn't have expected you to read and fully understand the whole thread - given your insistence on beating a dead horse, etc.

Feel free to ignore convention and also not answer or comment on questions or comments that clarify or enhance another's position - and leave yourself open to valid criticisms about practicing logical fallacies.

And yet again, you actually ignore the main and primary point of my initial post... nor do you show an ability to just give it up.

straight question I can actually answer - because the CPI has been generally going up for the last 5 months, just like PPI - and CPI without lies too.
Give it up, unless you have to continue for some odd reason
When you don't comment on others points, that's not called debate - whether you do it or he does it (note that he *never* directly addressed that set of recent PPI data)... and that you not only can't just drop it, but also show by this comment that you have little no no clue what I objected strenuously to.
And now you're calling me a coward - too bad we're not in person.
I think you've now gone well beyond propriety, manners and the rules of iTulip itself.


Bart I will agree with some of the posters here that in the past you've given us some good stuff.

But this is just... Blah blah blah. Almost no facts. All name calling. talk about disinformation. Instead of discuss, attack!

SO... anybody care to get back to a discussion of deflation vs inflation and the facts that the PPI is down both YOY, for 8 months, and MOM and the fact that its up for 5 months and what this indicates/means?

bart
08-21-09, 12:29 AM
Fred or EJ, are the most recent posts from rdrees and MarkL with the continuing attacks and crap something that you want to continue?

Its well beyond ridiculous and does not strike me as what iTulip rules and decorum are all about.

FRED
08-21-09, 12:29 AM
I like this post!

I would never pretend to know what the trends are. I would also acknowledge the ability of "EJ" to have seen at least one important trend--this severe recession--sooner than almost anyone.

But orthodoxy can be problematic. And predicting market trends is different from proposing a theory about how markets react in every case that a bubble is burst, which is really what Ka-Poom claims to do.

In this case, the evidence to me is tending not to support inflation for some time, and is in fact indicative of deflation from a traditional economic standpoint.

And yet, the PPI data may "still be wrong," in the words of jk.

And I'm glad we're talking now!

See my response here. (http://www.itulip.com/forums/showthread.php?p=117451#poststop)

rdrees
08-21-09, 12:30 AM
I'll do a quick bite:

The PPI is down month on month.

It's way down year on year.

So what does it really mean, when you get down to it in an inflation/deflation debate, that the PPI is up 0.01% in the past five months. Especially when it's down 19% over the past year?

Does that 0.01% spell anything important vis a vis longer term economic data? Does that 0.01% over 5 months mean anything in the grand scheme of things? Especially when the PPI is DOWN 0.1% in the last month alone?

bart
08-21-09, 12:40 AM
Horrors!!!

The PPI is down for one month!!!

Call out the deflationistas and party hearty!


Too bad you can't just deal directly with the facts as presented, including how you "ever so cleverly" avoided the annual vs. annualized growth rate issue in both CPI and PPI... let alone the shadowstats.com facts about how the CPI has been "changed" over the years... or the actual stats from the last 5 months.

You must have one of those new fangled magic Wall St. calculators to get that 0.01% over 5 months - well done!

Don't make me post any charts - bart charts can be poisonous to those who don't like the full facts and nothing but the facts...

ThePythonicCow
08-21-09, 12:42 AM
... the most recent posts from rdrees and MarkL ...

Its well beyond ridiculous and does not strike me as what iTulip rules and decorum are all about.

Agreed. .

bart
08-21-09, 12:52 AM
And, once again, I think I've done enough homework to know that John Williams is an amazing composer...

Rad man!
I'm like so totally and fer shure blown away by your knowledge of how to play a tune.

Do you know "The hills are alive with the sound of... spin about one month's data"?

metalman
08-21-09, 01:02 AM
I like this post!

I would never pretend to know what the trends are. I would also acknowledge the ability of "EJ" to have seen at least one important trend--this severe recession--sooner than almost anyone.

But orthodoxy can be problematic. And predicting market trends is different from proposing a theory about how markets react in every case that a bubble is burst, which is really what Ka-Poom claims to do.

In this case, the evidence to me is tending not to support inflation for some time, and is in fact indicative of deflation from a traditional economic standpoint.

And yet, the PPI data may "still be wrong," in the words of jk.

And I'm glad we're talking now!

MarkL & rdrees... sniff, sniff, sniff...

i smell lawyers. :D

argue away, boys! but be nice to my man bart.

(i'm a tech writer. in my free time i do not write manuals)

bart
08-21-09, 01:06 AM
MarkL & rdrees... sniff, sniff, sniff...

i smell lawyers. :D

argue away, boys! but be nice to my man bart.

(i'm a tech writer. in my free time i do not write manuals)

Did rdrees give it away by the "I may not be the most gracious poster" or was it just all the noise with so very little signal from them both? ;)

Or had you just read my new thread Unconscious Conspiracies (http://www.itulip.com/forums/showthread.php?t=11430) ? :eek: ;)

metalman
08-21-09, 01:31 AM
Did rdrees give it away by the "I may not be the most gracious poster" or was it just all the noise with so very little signal from them both? ;)

a product manual these days is 1/2 'how to operate the doo dah' and 1/2 'how to keep the manufacturer out of court'. that puts me in frequent contact with lawyers.

the way they look at the world... 'what can go wrong for my client'?

for example... in a manual to make a table (just an example... not that i've every done such) the manual draft submitted to the corp. lawyer...

'using the screw driver, use screw a to attach part f to part g'.

lawyer's note... 'no, say ''use screw a to attach part f to part g'' do not say screw driver.

me... how come?

lawyer... ok, what if the customer's wife from hell says, 'you f&cking moron. you'll never put that f&cking table together. what a joke. it'll be like every other 1/2 finished project around here. you'll screw it up. pieces laying around all over the place. how many times do i have to tell you... you goddam dummy...'' so he jams the screwdriver into her face. then she sues us for instructing her husband to use a weapon to make a table.'

me... oh, ok.

lawyer cost to project... $24,034.64

savings? no one knows... more than $24,034.64 if one customer has a wife from hell!

bart
08-21-09, 01:51 AM
a product manual these days is 1/2 'how to operate the doo dah' and 1/2 'how to keep the manufacturer out of court'. that puts me in frequent contact with lawyers.

the way they look at the world... 'what can go wrong for my client'?

for example... in a manual to make a table (just an example... not that i've every done such) the manual draft submitted to the corp. lawyer...

'using the screw driver, use screw a to attach part f to part g'.

lawyer's note... 'no, say ''use screw a to attach part f to part g'' do not say screw driver.

me... how come?

lawyer... ok, what if the customer's wife from hell says, 'you f&cking moron. you'll never put that f&cking table together. what a joke. it'll be like every other 1/2 finished project around here. you'll screw it up. pieces laying around all over the place. how many times do i have to tell you... you goddam dummy...'' so he jams the screwdriver into her face. then she sues us for instructing her husband to use a weapon to make a table.'

me... oh, ok.

lawyer cost to project... $24,034.64

savings? no one knows... more than $24,034.64 if one customer has a wife from hell!


Oh wow... my heart goes out to you... and I know the tune, both from my time in Fortune 100 land and in my own business.

I recall one of my first exposures to the law and lawyers in the '70s when OSHA came out with some new & voluminous workplace regulations. Every bathroom door had to have an automatic closer on it.

I asked our lawyers during a break in an unrelated meeting why we had to install them... and the basic answer was "it's a $500 fine for every one that's missing if they do an inspection". I never could figure out truly why they were needed (even in my nightmares), but installed them anyhow.

MarkL
08-21-09, 01:51 AM
MarkL & rdrees... sniff, sniff, sniff...

i smell lawyers. :D

argue away, boys! but be nice to my man bart.

As mentioned in other posts, I'm in high tech, starting an outsourcing company in Costa Rica, and have history in tech sales and tech sales management. I'm clearly MUCH better than a lawyer! :p

Perhaps they've rubbed off on me.. I've been dealing with them in government bureaucracies a lot lately. We just got our Foreign Corporation Filing through the EIN and State of California process. What a fightmare!

I'll be nice if Bart is!

MarkL
08-21-09, 02:37 AM
So what does it really mean, when you get down to it in an inflation/deflation debate, that the PPI is up 0.01% in the past five months.

Where DO you get that the PPI is up .01% over the last 5 months?

These are the original figures you posted:

Finished Goods Intermediate Goods Crude Goods
Dec.: -.9% -2.3% -24.6%
Jan.: -1.0% -3.5% -29.1%
Feb.: -1.4% -5.2% -34.5%
Mar.: -3.5% -8.9% -39.0%
Apr.: -3.7% -10.5% -40.0%
May: -5.0% -12.5% -41.1%
June: -4.6% -12.5% -40.0%
July: -6.8% -15.1% -44.8%

bart
08-21-09, 10:35 AM
Here's some PPI (all commodities) charts. I'd use PPI finished goods, but the all commodities version tends to leads the finished goods version.


The very long term picture:

http://www.nowandfutures.com/images/ppi_long.png





The short term picture, showing the basic underlying trend and with an annual change rate:

http://www.nowandfutures.com/images/ppi_short1.png





Same shorter term period, but this time with annualized change rate with its own recent trend line.

http://www.nowandfutures.com/images/ppi_short2.png

vinoveri
08-21-09, 11:10 AM
Here's some PPI (all commodities) charts. I'd use PPI finished goods, but the all commodities version tends to leads the finished goods version.


The very long term picture:

http://www.nowandfutures.com/images/ppi_long.png





The short term picture, showing the basic underlying trend and with an annual change rate:

http://www.nowandfutures.com/images/ppi_short1.png





Same shorter term period, but this time with annualized change rate with its own recent trend line.

http://www.nowandfutures.com/images/ppi_short2.png

thanks Bart. Do you know if and to what extent the slope of the black line in the middle chart correlates to say the inverse of FDI or $USD?

metalman
08-21-09, 11:30 AM
solid response... does rdrees's silence mean 'ok, you win'?

bart
08-21-09, 12:01 PM
thanks Bart. Do you know if and to what extent the slope of the black line in the middle chart correlates to say the inverse of FDI or $USD?

Sorry, I don't know. Maybe Finster will see this and respond.

The raw gain in PPI all commodities from early 2002 to the recent bottom is 31%, while the CCI shows about an 88% gain during the same period.

rdrees
08-21-09, 12:07 PM
Bart wanted me to use his figures, so I did.

Here's the first set of 5-month figures he posted:

Here's actual Finished Good PPI numbers for the last 5 months:
<TABLE style="WIDTH: 48pt; BORDER-COLLAPSE: collapse" border=0 cellSpacing=0 cellPadding=0 width=64 x:str=""><TBODY><TR style="HEIGHT: 13.2pt" height=18 vAlign=bottom><TD style="WIDTH: 48pt; HEIGHT: 13.2pt" class=xl29 height=18 width=64 align=right x:num="">169.5</TD></TR><TR style="HEIGHT: 13.2pt" height=18 vAlign=bottom><TD style="HEIGHT: 13.2pt" class=xl29 height=18 align=right x:num="">169.8</TD></TR><TR style="HEIGHT: 13.2pt" height=18 vAlign=bottom><TD style="HEIGHT: 13.2pt" class=xl29 height=18 align=right x:num="">170.2</TD></TR><TR style="HEIGHT: 13.2pt" height=18 vAlign=bottom><TD style="HEIGHT: 13.2pt" class=xl28 height=18 align=right x:num="">173.2</TD></TR><TR style="HEIGHT: 13.2pt" height=18 vAlign=bottom><TD style="HEIGHT: 13.2pt" class=xl29 height=18 align=right x:num="">171.7</TD></TR></TBODY></TABLE>

So I took 171.7 (most recent month) - 169.5 (five months ago) = 2.2

Then I divided 2.2 by 171.7 (most recent month) and got 0.012%

So, PPI in finished goods up 0.01% over five months.

The original figures I posted are year on year figures, which shows PPI in finished goods down 6.8% from a year ago. Either way you slice it, it doesn't seem like significantly higher prices are on the immediate horizon.

There's no disputing Bart's first graph that we've had inflation since the '70s in this country. The second graph shows the 2008 spike in the PPI, but also that PPI is back where it was about two years ago, and that the annual change rate is heading straight down now.

I think the third graph with the blue line is somewhat misleading. Yes, the annualized change rate is getting smaller (going up), but it's been below zero for nearly all of this year.

As I conceded before, it's next to impossible for us to sustain such large year on year drops in the PPI. But flat to somewhat negative PPI for some time to come certainly looks at least as likely from these graphs as another large increase like the oil driven increase in 2008.

bart
08-21-09, 12:13 PM
solid response... does rdrees's silence mean 'ok, you win'?

:D

As you might imagine, I do have a few more charts "in reserve" to amaze & delight him if he shows up again. ;)

One additional item about those trend lines that he should address regarding PPI is Newton's law of inertia:
"An object in motion continues in motion with the same speed and in the same direction unless acted upon by an unbalanced force."


... especially given charts like this one:

http://www.nowandfutures.com/images/fed_all_short_stacked2.png




And just to be as clear as possible, there are no guarantees. Trends do change... but the weight of all of the evidence to date very much points towards inflation.


One final note - [deflationista blogger] has still not answered my post on his blog about M3 or my charts combing M3, credit & gov't debt... can you say ostrich in run & hide mode and worse?.. although to be fair it appears that his comment system is down this morning. But it was up last night and he had plenty of time to respond yesterday.

MarkL
08-21-09, 12:22 PM
Great Info Bart! Thanks!

I'm personally with EJ on this and believe that the Fed will outspend the downturn. At the moment the political will is waning, but with another leg down the Political impetus will return. This doesn't mean I've completely drank the koolaid however and I can definitely see the counter argument.

To start with, I don't see these charts as definitive at all. Yes, they can be interpreted the way you have. They also can be interpreted the way rdrees has. It's all dependent on which time frame you choose! One year... rdrees wins. 5 months you win. 1 month rdrees wins. Your point that commodities typically lead the rest of the PPI makes a lot of sense however.

When I look at EJ's chart of the 1930's 4 year crash, right around midyear 1930 there is an upward blip. That upward turn of the CPI could be perceived as analogous to the upturn we're in at the moment. It doesn't mean it is! It doesn't mean it's not! It could also be something different like 1 year of upwards movement followed by 4 years of deflation!

Moving away from the micro, on one hand, obviously we have the fact that the Fed is responding in a very different way than they did in 1930! Helicopter Ben appears to be personally willing to do what it takes. On the other hand, while the stock market is up, he may bow to the Congressional pressures he's recently been under and slow down the press.

The one item that throws doubt on EJ's inflation prediction for me is the magnitude of the CDS/CDR debacle and overall debt that needs to be deleveraged. It may be radically bigger than what the Fed is generating.

Some posts here at iTulip claim it to be in the 600T range!! Is the Fed's 1-2T of quantitative easing, outspending the deflationary pressures of that much velocity loss? It's often said that for every dollar the Fed pumps, 6x-9x (I've heard figures in this range) enters the economy. So if the Fed has spent a Trill or Two, that means (assuming the banks are lending and they're really not yet) 6T-18T is entering the economy. Is even this amount enough to counter the figures I've heard of a 60T-600T CDS/CDR debacle?

I've heard the argument that since the banks all owe the CDS/CDRs to each other it doesn't count as money. I've heard others say any paper that is used as a medium of value exchange is money. My conclusion... clearly the CDS/CDR debacle is affecting our economy... which implies it's certainly being treated as real money to some degree!

So we have short term evidence that is inconclusive. We have macro evidence that is largely based on the statement "don't bet against the fed"... but the world may now be larger or Congress may be stronger than the Fed. Deflation/Inflation is still a valid discussion in my book. Personally I come down on the inflation side. But my "confidence level" isn't anywhere near 100%. Perhaps 1 year of continued deflation/"disinflation" is in order before 5 years of sideways movement as demand regen's and THEN inflation? Inflation this next quarter or so as EJ postulated 6 months ago may happen too... it's hard to say.

jk
08-21-09, 12:34 PM
I'll do a quick bite:

The PPI is down month on month.

It's way down year on year.

So what does it really mean, when you get down to it in an inflation/deflation debate, that the PPI is up 0.01% in the past five months. Especially when it's down 19% over the past year?

Does that 0.01% spell anything important vis a vis longer term economic data? Does that 0.01% over 5 months mean anything in the grand scheme of things? Especially when the PPI is DOWN 0.1% in the last month alone?
i think fred's and bart's charts make the answer clear, especially fred's note that energy products needed a separate scale since their volatility flattened everything else if using the same scale: the movements you point to are all about crude oil. the recent pullback in ppi is secondary to the drop in oil prices from its high a year ago. looking at the longer term, however, it is clear that crude oil at $70 [and IN THE MIDST OF THE WORST RECESSION IN 2 GENERATIONS!] is historically still very, VERY high. and the longer term trend of energy prices has not been broken by the spike and pullback over '08-'09.

bart
08-21-09, 12:35 PM
...
So I took 171.7 (most recent month) - 169.5 (five months ago) = 2.2

Then I divided 2.2 by 171.7 (most recent month) and got 0.012%

So, PPI in finished goods up 0.01% over five months.


You were using annual rates before, and 1.2% (note that it's a positive number) over 5 months annualized is 2.88%

And "PPI - all commodities", which almost always leads PPI finished goods, was up 2.7% during the same period - an annual rate of 6.55%.

I also note in passing that expressing 1.2% as .012% and also not converting to annual change rates is quite misleading and appears to be a spin attempt in my opinion - thereby my prior comment about "Wall St. calculators".

Additionally, I find it fascinating that you continue to avoid both quite similar data in CPI, and the entire area of CPI corrections from shadowstats.com per the fine work of John Williams (what I call CPI without lies) which shows current CPI in the +6% range.

bart
08-21-09, 12:46 PM
...
Some posts here at iTulip claim it to be in the 600T range!!
...


That's the factual world derivatives total, per the BIS - $591.963T to be precise.

US total derivatives, per the Treasury, is about $170T.

bart
08-21-09, 12:50 PM
i think fred's and bart's charts make the answer clear, especially fred's note that energy products needed a separate scale since their volatility flattened everything else if using the same scale: the movements you point to are all about crude oil. the recent pullback in ppi is secondary to the drop in oil prices from its high a year ago. looking at the longer term, however, it is clear that crude oil at $70 [and IN THE MIDST OF THE WORST RECESSION IN 2 GENERATIONS!] is historically still very, VERY high. and the longer term trend of energy prices has not been broken by the spike and pullback over '08-'09.


As another example of the spin, the CRB commodity index definition was changed back in 2005 to be much more heavily energy weighted. So any comparisons to past CRB numbers that do not use current CCI (the old index) are just plain wrong and very misleading.


And here's the factual evidence of how huge the change was and the spin is.

http://www.nowandfutures.com/images/cci_crb_ratio.png

metalman
08-21-09, 12:55 PM
Great Info Bart! Thanks!

I'm personally with EJ on this and believe that the Fed will outspend the downturn. At the moment the political will is waning, but with another leg down the Political impetus will return.

I don't see the charts as definitive at all. Yes, they can be interpreted the way you have. They also can be interpreted the way rdrees has.

When I look at EJ's chart of the 1930's 4 year crash, right around midyear 1930 there is an upward blip. That upward turn of the CPI could be perceived as analogous to the upturn we're in at the moment. It doesn't mean it is! It doesn't mean it's not! It could also be something different like 1 year of sideways movement followed by... either inflation or deflation!

On one hand, obviously we have the fact that the Fed is responding in a very different way than they did in 1930! Helicopter Ben appears to be personally willing to do what it takes. On the other hand, while the stock market is up, he may bow to the Congressional pressures he's recently been under and slow down the press.

However, the magnitude of the CDS/CDR debacle and overall debt that needs to be deleveraged may be radically bigger than what the Fed is generating.

Some posts here at iTulip claim it to be in the 600T range!! Is the Fed's 1-2T of quantitative easing, outspending the deflationary pressures of that much velocity loss? It's often said that for every dollar the Fed pumps, 6x-9x (I've heard figures in this range) enters the economy. So if the Fed has spent a Trill or Two, that means (assuming the banks are lending and they're really not yet) 6T-18T is entering the economy. Is this enough to counter the figures I've heard of a 60T-600T CDS/CDR debacle?

I've heard the argument that since the banks all owe the CDS/CDRs to each other it doesn't count as money. I've heard others say any paper that is used as a medium of value exchange is money. My conclusion... clearly the CDS/CDR debacle is affecting our economy... which implies it's certainly being treated as real money to some degree!

So we have short term evidence that is inconclusive. We have macro evidence that is largely based on the statement "don't bet against the fed"... but the world may now be larger or Congress may be stronger than the fed. Deflation/Inflation is still a valid discussion in my book. Personally I come down on the inflation side. But I my "confidence level" isn't anywhere near 100%. Perhaps 1 year of continued deflation/"disinflation" is in order before 5 years of sideways movement as demand regen's and THEN inflation? Inflation this next quarter or so as EJ postulated 6 months ago may happen too... it's hard to say.

my observation after 10 yrs around here...

when ej gets into a contest with a deflationista they never concede. they either fade away, change the subject or lie about the position they took before. karl is a good example of this.

i cannot think of one instance where one of them ever said, 'oh, yeh. you were right. they arrested the deflation after a few months like you said. they printed money and reclassified assets and bought crap debt like you said. they depreciated the dollar like you said. the fed exploded its balance sheet like you said...'

no way! they keep moving the goal line over and over again.

deflationistas were ...
- wrong about qe... said the red's never do it
- wrong about the fed buying all the crap mortgage debt
- wrong about the amount that the fed expanded its balance sheet... by over $1 trillion!
- wrong about congress... won't run a > 10% gdp deficit to stimulate the economy
- wrong about ppi/cpi spiralling down and down ala 1930s

wrong, wrong, wrong, wrong, wrong.

how many times do these guys have to be wrong before they take a serious look at the argument?

can't balme ej for calling it game over.

as for the result of all of this reflation bafoonery, this chart is definitive...

http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=800&height=480&bgcolor=%2399FF99&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&id=PPICEM,PPIIFF,PPIFGS,CPIAUCNS,&transformation=lin,lin,lin,lin,&scale=Right,Left,Left,Left,&range=Custom,Custom,Custom,Custom,&cosd=1990-01-01,1990-01-01,1990-01-01,1990-01-01,&coed=2009-07-01,2009-07-01,2009-07-01,2009-07-01,&line_color=%230000FF,%23FF0000,%23006600,%23FF6600 ,&link_values=,,,,&mark_type=NONE,NONE,NONE,NONE,&line_style=Solid,Solid,Solid,Solid,&vintage_date=2009-08-20,2009-08-20,2009-08-20,2009-08-20,&revision_date=2009-08-20,2009-08-20,2009-08-20,2009-08-20,&mma=0,0,0,0,&nd=,,,,&ost=,,,,&oet=,,,,


the deflation/disinflation that itulip forecast ended in march 2009. itulip noted this in mid may. (http://www.itulip.com/forums/showthread.php?p=97954#post97954) the smart money listened. the deflationistas kept arguing and nit picking.

as for the idea the recovery in the ppi is a blip ala mid 1930?

compare this...

http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=800&height=480&bgcolor=%2399FF99&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&id=PPIENG,CPIAUCNS,&transformation=lin,lin,&scale=Left,Right,&range=Custom,Custom,&cosd=1930-01-01,1930-01-01,&coed=1931-07-01,1931-07-01,&line_color=%230000FF,%23FF0000,&link_values=,,&mark_type=NONE,NONE,&line_style=Solid,Solid,&vintage_date=2009-08-20,2009-08-20,&revision_date=2009-08-21,2009-08-21,&mma=0,0,&nd=,,&ost=,,&oet=,,

to this...

http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=800&height=480&bgcolor=%2399FF99&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&id=PPIENG,CPIAUCNS,&transformation=lin,lin,&scale=Left,Right,&range=Custom,Custom,&cosd=2008-01-01,2008-01-01,&coed=2009-07-01,2009-07-01,&line_color=%230000FF,%23FF0000,&link_values=,,&mark_type=NONE,NONE,&line_style=Solid,Solid,&vintage_date=2009-08-20,2009-08-20,&revision_date=2009-08-21,2009-08-21,&mma=0,0,&nd=,,&ost=,,&oet=,,

maybe the deflationistas can keep the argument alive for a few more months with that one. but what's the point of arguing with them about it? once that test of the deflationist theory fails the deflationistas will invent a new test keep the deflation dream alive.

that reminds me... debt nations dream of deflation... from 2005 (http://www.google.com/search?hl=en&safe=off&client=firefox-a&channel=s&rls=org.mozilla%3Aen-US%3Aofficial&hs=L0C&q=debt+nations+dream+of+deflation&btnG=Search&aq=f&oq=&aqi=) :D

MarkL
08-21-09, 12:56 PM
...the fine work of John Williams (what I call CPI without lies) which shows current CPI in the +6% range.

I Google'd "John Williams CPI" and was directed to this site. The "Alternative CPI Measures" chart on the home page don't (to me) reflect a 6% cpi... it shows 3 different CPIs, two at -2% and a Clinton era one at 1%. http://www.shadowstats.com/ Am I on the wrong site? Am I reading this incorrectly? Thanks for introducing me to him.

Wait! I think I see now. This chart on the home page labeled "Alternative CPI Measures" aren't John William's Alternative CPI Measures. They are different goverment measures. Badly labeled. I found the 6% figure deeper in the site. The guy should put his work on his home page! Anyway, please ignore the above!

Can someone tell me where you put charts/graphs/pictures so I can post them here? This site doesn't allow me to simply upload them....

Oh, and Bart, to counter in advance one of your std claims... I'm not responding to every single point in your post, because I either agree with them, didn't come up with something interesting to say on them, or think that the person to who they were directed should address them... not because I'm trying to use one of the 25 rules of disinformation! I thought the rest of your post was valuable. However, this point is the one that drew my attention and on which I had something of value to contribute!

Jim Nickerson
08-21-09, 01:18 PM
I Google'd "John Williams CPI" and was directed to this site. The "Alternative CPI Measures" chart on the home page don't (to me) reflect a 6% cpi... it shows 3 different CPIs, two at -2% and a Clinton era one at 1%. http://www.shadowstats.com/ Am I on the wrong site? Am I reading this incorrectly? Thanks for introducing me to him.

Wait! I think I see now. This chart on the home page labeled "Alternative CPI Measures" aren't John William's Alternative CPI Measures. They are different goverment measures. Badly labeled. I found the 6% figure deeper in the site. The guy should put his work on his home page! Anyway, please ignore the above!

Can someone tell me where you put charts/graphs/pictures so I can post them here? This site doesn't allow me to simply upload them....

Oh, and Bart, to counter in advance one of your std claims... I'm not responding to every single point in your post, because I either agree with them, didn't come up with something interesting to say on them, or think that the person to who they were directed should address them... not because I'm trying to use one of the 25 rules of disinformation! I thought the rest of your post was valuable. However, this point is the one that drew my attention and on which I had something of value to contribute!

Here's an answer, though FRED has one he prefers: Copy whatever picture you're interest in and put it into your computer. Opened a post window here and look down beneath it to manage attachments. There you'll have the option to upload your picture to iTulip. Once it is uploaded click on it. I believe it will be in a list of current attachments in that same window. Click the "mountain" icon = "insert image" (at the top of your Reply to Thread message window and copy the URL from the window that shows your picture, which is now on iTulips server, and paste it into the "insert image" box, and don't duplicate the "http://" If I have succeeded in describing that, then it should work.

Slimprofits
08-21-09, 01:29 PM
tinypic is useful too

http://tinypic.com/

MarkL
08-21-09, 01:43 PM
Thanks Jim, Thanks babbittd!

rdrees
08-21-09, 02:35 PM
I appreciate the reasoned and thorough response, Fred.

I have actually been lurking around here for a while, reading "EJ's" posts with great interest. The charts and data are extremely interesting, and there do not seem to be many other places on the Internet where you see such intelligent discussion of economic trends.

And while I've been very impressed with "EJ's" predictions and high-level discussion, I've become more skeptical of Ka-Poom theory, at least insofar as it predicts we'll have very high inflation in the near to medium term (I believe "EJ's" latest call is for significant inflation in this quarter or next).

I'll try to go point by point and discuss my areas of agreement vs. areas of concern.

First, on the issue of CPI. Yes, it has drifted upward slightly over the past couple months, but it is still well below its peak and volitile, too, as there have also been some dips in the circled portion of your first graph. And you can see from the Great Depression graph that there were some instances of rising CPI during that four-year era as well.

I appreciate that things are not looking like the four-year CPI fall during the 1930s. The again, you're comparing this time period to the ultimate deflation spiral any big economy has ever seen. I, too, would doubt we'd see something approaching Depression-level deflation. But is that really the best/only comparison to make--at least as a direct comparison? It seems to me that's a bit like saying "look, we're not really in a severe recession because GDP is unlikely to fall as far and for as long as it did in the Great Depression." I think you'd agree that something doesn't have to be a historically severe phenomenon in order for it to qualify as a phenomenon nonetheless.

To me, looking at those PPI figures showing 8 months of year on year price declines seems like we've qualified for at least some definition of deflation, and maybe even a deflationary spiral, though less severe than the one in the 1930s. Remember that even the deflationary spiral of the great depression came to an end.

That brings me to the next couple graphs regarding PPI and CPI and CPI vs. energy costs. First, I would never dispute the tight relationship between energy and costs, but what I take from your two-part definition of Ka-Poom is that it posits an inflationary force indepedent from energy costs. So while I completely agree that higher energy costs mean higher prices for goods, that's a distinct inflationary phenomenon from fiscal and monetary actions from the federal government, which I understand Ka-Poom to concern.

But I do see that PPI/CPI graph shows that all components of PPI along with CPI are on the downtrend now and have been for several months, albeit with some volatility. And all of that downtrend has happened in the face of 0% fed funds rate and $300 billion (at least) in quantitative easing. That should mean something, right? To me, it suggests that high inflation may be further off than we think.

Consider also that the Fed's primary means of "printing money" is through the fed funds rate which does not directly enter the economy but instead goes through the intermediary of the banks. If a bank's balance sheet is alright, that money gets spun out into the economy through debt, which leads to inflation if too much money is "printed." I think that's what we saw after the 2001 recession with the housing bubble, etc.

But what if, like Japan in the 1990s, the banks' balance sheets are in so much tatters that they effectively hoard the fed's money? It seems to me that it becomes far more likely that you'll see something different--something that looks like deflation or like Japan. Something, perhaps, that looks like what we're seeing today with falling PPI and CPI.

Another thing about that CPI and PPI chart that jumps out at me: at no time since 1990 have prices fallen for any significant time period--at least at no time before now. We're seeing the CPI at a level we last saw in early 2008, a year and a half ago. The graph shows no deflation event even close to approaching this one for nearly 20 years. It seems to me that should carry some significance and suggest that maybe this recession might be different from others vis a vis inflation.

And I have to say, I still don't get your response to the Target example. You say retailers can't sell a good less than it costs. True, but retailers' costs themselves are not fixed. Just like Target can lower the price for me, Target's suppliers can lower the costs for them, and Target has many suppliers who compete to provide goods to Target. Why wouldn't Target's suppliers likewise lower their prices? That's certainly what classic supply and demand would suggest: that for ANY market, including the wholesale market, lower demand equals lower prices all other things being equal. That should be true for Target's costs, too. And since PPI is flat to falling for all classes of goods, Target's suppliers should be able to lower their prices to compete for Target's business.

And it's not just the price of goods that are falling. Labor costs for Target and everyone else are plummetting because businesses are laying people off and cutting their hours, so that, too, should aid in both retailers and wholesalers being able to cut costs.

You say costs have not been cut dramatically by comparing oil today to oil in 2001. True, oil is a lot more expensive than a decade ago. But I don't think you have to have prices that look a decade old to qualify as deflation. Prices just have to be going lower, and there's no dispute that producers are paying quite a lot less for everything than they were a year ago. That would suggest that they have some significant room to keep prices flat to lower vs the prices we're paying today, and that they should be able to for some time to come, not just in the first half of this year.

As to Bart's graph about the money supply increasing so much since September 2008, I actually find that to be one of the biggest reasons I'm skeptical of looming high inflation. As bart's chart shows, the Fed cranked the presses big time for the last ten months. But it didn't work! You'd think, if the Fed's printing press were as powerful as it has been in past recessions, we'd have an explosion of inflation. Instead, both CPI and PPI are significantly lower today than they were when they turned the presses to overtime.

That suggests to me that this time may well and truly be different, and that the fed's ability to create inflation has been severely hampered by zombie banks that are gobbling up the money to feed their distressed balance sheets and to replace all the money that burned when the financial crisis hit.

Will it be different forever? Of course not. Everything changes over time. The deflation of the Great Depression came to an end, as did the inflation of the 70s. But at least for now, it looks like the banks' excesses, and their excessive losses, are seriously styming the fed's effort to reflate.

As for the fact that we're a debtor nation, I've been thinking about that, and what long-term effect that might have. This post is getting long, so I'll save that for another day, but I will at least point out the following: several Western European nations have higher debt to GDP ratios than we do. And yet, they haven't seen rampant inflation and defaults. Doesn't that suggest that we may have more wiggle room than we think with our debts? Not that I think it's a healthy long-term position to be in, mind you, but it's an interesting comparison, I think.

rdrees
08-21-09, 02:50 PM
You are right, bart. I meant 0.012 OR 1.2%. My mistake.

I don't, however, think it adds much to then turn that to an annualized rate. Yes, PPI is up 1.2% over five months. But it's also down 0.9% from last month. Why not annualize that -.9% number? I'm sure each of us could find some stretch of time that helps our cause, be it year on year and month on month for me, or for a five month period for you.

As for John Williams and shadowstats, the graphs on the home page show a precipitous fall in the rate of inflation for all three measures, and deflation for two of them. That seems generally to support what I've been saying, which is that the numbers do not seem to suggest serious inflation from today's prices any time soon.

In any event, I'm generally sticking with PPI because it's readily available, known by all, and has been more or less approved as a decent measuring stick for prices by "EJ," as I noted in a prior post.

I still think it odd that you deem any dissenting opinion to yours to be "misinformation" and use of any other metric than your preferred metrics misleading or not worthy of consideration. I do sincerely hope that we can raise our level of dialogue and that you will, at some point, come to the realization that someone with a different opinion than yours does not automatically qualify as an enemy.

rdrees
08-21-09, 02:58 PM
I agree that oil is historically high, and that if it gets higher, prices go higher. And, of course, if energy spikes again, we'll certainly have inflation.

But I'm focusing my comments on the Ka-Poom theory, which is focused not on inflation arising purely from higher energy costs, but essentially from fiscal and monetary actions by the federal government.

And actually, a big part of my skepticism about non-energy-related inflation is that we are in the worst recession in two generations. That means demand is way way down, and lower demand means lower prices, all other things equal.

I know "Peak Cheap Oil" has been discussed on this site, so I don't mean to suggest energy inflation has been ignored by iTulip. And I think probably all of us would agree that's a potential source of serious inflation in the long run. I also know that a debauched dollar would lead to higher oil prices, but that would show up in the relative cost of oil in dollars vs. other currencies (actually, it would most likely show up in a greatly weakened dollar vs. other currencies given that most oil is purchased in dollars). But we haven't seen that yet, as the dollar index is flat to higher today vs. a year ago.

Hopefully that gives some context to some of my comments.

MarkL
08-21-09, 03:32 PM
As for the fact that we're a debtor nation, I've been thinking about that, and what long-term effect that might have. This post is getting long, so I'll save that for another day, but I will at least point out the following: several Western European nations have higher debt to GDP ratios than we do. And yet, they haven't seen rampant inflation and defaults. Doesn't that suggest that we may have more wiggle room than we think with our debts? Not that I think it's a healthy long-term position to be in, mind you, but it's an interesting comparison, I think.

When you state "several Western European nations have higher debt to GDP ratios than we do", that may be true for governmental debt to GDP ratios. But what if you add in consumer debt, financial debt, corporate debt, and (if it wasn't already included) state, county, and city debt?

In addition our "official" Federal debt doesn't include what's owed by the government to the people like SS and Medicare as these are labeled "entitlements", doesn't include the high-risk-of-of-default mortgages that Fannie and Freddie are likely to go bankrupt on, and doesn't include some of the high-risk CDRs/CDSs that the Federal Reserve is taking on.

Are you sure that "several Western European nations have higher debt to GDP ratios than we do" when all debt is summed and compared to GDP?

rdrees
08-21-09, 04:02 PM
I doubt I'll be able to provide you with a statistic that could encompass all of those concerns at once, but among the broadest, perhaps, is external debt to GDP, with external debt defined as "the total public and private debt owed to nonresidents repayable in foreign currency, goods, or services."

http://en.wikipedia.org/wiki/List_of_countries_by_external_debt

We are at 95%. That's much higher than most countries, as we have the 24th highest ratio out of 202 countries. However, Switzerland, the UK, the Netherlands, France, Germany, Denmark, Norway, Finland, and Australia all have higher ratios than us. Some are way higher--France, for example, is at 212%

Another metric focuses on total public, i.e. government debt, to GDP.

http://en.wikipedia.org/wiki/List_of_countries_by_public_debt

We're at 61%, which is 28th highest in the world. Then again, Japan, Norway, Germany, Italy, Canada, and France are all above us. France, for example, is at 64%.

So by either metric, a decent number of Westernized economies exceed our debt positions vs. GDP. Yet none of them has had defaults or out of control inflation.

You also asked about entitlements--well, I'm not sure how to add that up to compare to other countries, but I would be shocked if our level of entitlements were anything close to Western Europe's.

So if France hasn't defaulted and the Euro hasn't tanked, why should we expect those results out of the dollar when it would appear that our debt position is relatively better?

Not good, mind you. I don't like our fiscal position at all in the long term. But we should start to see where the breaking point comes in other big Western economies before we see it in ours, it would seem.

bart
08-21-09, 04:13 PM
http://www.nowandfutures.com/images/credit_multipliers.png



http://www.nowandfutures.com/images/credit_multipliers2.png



http://www.nowandfutures.com/images/credit_multipliers3.png

FRED
08-21-09, 04:21 PM
I appreciate the reasoned and thorough response, Fred.

I have actually been lurking around here for a while, reading "EJ's" posts with great interest. The charts and data are extremely interesting, and there do not seem to be many other places on the Internet where you see such intelligent discussion of economic trends.

And while I've been very impressed with "EJ's" predictions and high-level discussion, I've become more skeptical of Ka-Poom theory, at least insofar as it predicts we'll have very high inflation in the near to medium term (I believe "EJ's" latest call is for significant inflation in this quarter or next).

I'll try to go point by point and discuss my areas of agreement vs. areas of concern.

First, on the issue of CPI. Yes, it has drifted upward slightly over the past couple months, but it is still well below its peak and volitile, too, as there have also been some dips in the circled portion of your first graph. And you can see from the Great Depression graph that there were some instances of rising CPI during that four-year era as well.

Actually, no. During the entire 48 month decline in CPI from 1930 to 1934 there was never more than one month when CPI increased month over month and never year over year.


http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=800&height=480&bgcolor=%2399FF99&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&id=PPIENG,CPIAUCNS,&transformation=lin,lin,&scale=Left,Right,&range=Custom,Custom,&cosd=1930-01-01,1930-01-01,&coed=1931-07-01,1931-07-01,&line_color=%230000FF,%23FF0000,&link_values=,,&mark_type=NONE,NONE,&line_style=Solid,Solid,&vintage_date=2009-08-20,2009-08-20,&revision_date=2009-08-21,2009-08-21,&mma=0,0,&nd=,,&ost=,,&oet=,,


This time around, CPI and energy have been rising continuously for several quarters.


http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=800&height=480&bgcolor=%2399FF99&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&id=PPIENG,CPIAUCNS,&transformation=lin,lin,&scale=Left,Right,&range=Custom,Custom,&cosd=2008-01-01,2008-01-01,&coed=2009-07-01,2009-07-01,&line_color=%230000FF,%23FF0000,&link_values=,,&mark_type=NONE,NONE,&line_style=Solid,Solid,&vintage_date=2009-08-20,2009-08-20,&revision_date=2009-08-21,2009-08-21,&mma=0,0,&nd=,,&ost=,,&oet=,,


It's case closed on the deflation spiral. Why? Because double entry bookkeeping works better when you don't have to balance entries on one side of the balance sheet with physical gold on the other. The determination to do that in the early 1930s is the reason the U.S. and only the U.S. experienced a deflation spiral. No other country did. See The truth about deflation. (http://www.itulip.com/forums/showthread.php?p=57193#post57193) Deflationists such as Mike Shedlock don't want to talk about this for fear of alienating the goldbug readership that's attracted to the banker bashing rhetoric. But facts are facts. Sans gold standard, a central bank can, in the famous words of Alan Greenspan in 2003, "Theoretically expand its balance sheet infinitely." We never forgot that line. It turned out to be prophetic.

Even if prices did begin to fall again, we trust the Fed to expand its balance sheet even more. The principle of buying assets with government money has extended beyond the FIRE Economy. The government is willing to print money and buy cars, and now print money to buy appliances. Why not buy commercial real estate? Houses? Whatever it takes to support prices. Why not? Who a year ago would have imagined "Cash for Clunkers"? Sometimes I think the difficultly with the deflationist mindset is a lack of imagination. Betting against this principle of government using its balance sheet to substitute public for private credit and money has been a losing proposition for over 10 years.



I appreciate that things are not looking like the four-year CPI fall during the 1930s. The again, you're comparing this time period to the ultimate deflation spiral any big economy has ever seen. I, too, would doubt we'd see something approaching Depression-level deflation. But is that really the best/only comparison to make--at least as a direct comparison? It seems to me that's a bit like saying "look, we're not really in a severe recession because GDP is unlikely to fall as far and for as long as it did in the Great Depression." I think you'd agree that something doesn't have to be a historically severe phenomenon in order for it to qualify as a phenomenon nonetheless.

To me, looking at those PPI figures showing 8 months of year on year price declines seems like we've qualified for at least some definition of deflation, and maybe even a deflationary spiral, though less severe than the one in the 1930s. Remember that even the deflationary spiral of the great depression came to an end.We have over the years had to address both scenarios, the deflation spiral case and the Japan since 1993 stag-deflation case. The deflation spiral case is closed. Anyone who brings it up again will be directed to various articles here that explain why.

That still leaves the Japan case. The deflation there is clearly not a self-reinforcing spiral. From 1999 to 2008, the Japan CPI drifted down 2.3%.


http://www.itulip.com/images/japancpi.gif


That kind of deflation is more like the kind the GavKal talks about, the good kind that increases the purchasing power of income. In fact, whie consumer prices 2.3% fell in Japan, wages went up by nearly 8%!


http://www.itulip.com/images/japanwages.gif


Now, neoclassical models tell us that's not possible. The whole matter of a generation of brainwashed economists is too big in scope to go into here, but suffice it to say when we see employment in the IT field in Silicon Valley fall 26% from 2001 to 2008 while wages increased 69%, the theory of NAIRU has problems. When we crack open NAIRU we find the thick, gooey, ideological filling: the relationship between prices and wages has been oversimplified for political convenience.

But I digress. If the U.S. were able to manage a "deflation" as Japan has experienced since 1993, that would not be such a bad thing. For that we'd first need to generate a current account surplus to offset a capital account deficit. Since our economy is structured around a current account deficit and depends on a capital account surplus to finance employment, such restructuring will require a major transformation in labor markets and investment that will take ten years or more. In the mean time, the value of the dollar drifts down and down, as it has since 2001 except for the period of deleveraging when the world ran for dollars to unwind leveraged bets.


That brings me to the next couple graphs regarding PPI and CPI and CPI vs. energy costs. First, I would never dispute the tight relationship between energy and costs, but what I take from your two-part definition of Ka-Poom is that it posits an inflationary force indepedent from energy costs. You misunderstand the theory. There are two major sources of inflation and many minor ones that lead to our theory that we will experience a rising in inflation no later than Q1 2010. These are detailed in Everyone is wrong, again – 1981 in Reverse Part II: Nine Signs of Inflation (http://www.itulip.com/forums/showthread.php?t=9704). The two major sources are cost push from energy imports and a reduction in price competition among producers due to bankruptcies and consolidation. Rising energy costs are inflationary.


So while I completely agree that higher energy costs mean higher prices for goods, that's a distinct inflationary phenomenon from fiscal and monetary actions from the federal government, which I understand Ka-Poom to concern.Disagree. A weak dollar is the primary reason for high energy costs. Monetary and fiscal policy are the primary reasons for dollar weakness. Thus high energy costs are a result of monetary and fiscal policy.


But I do see that PPI/CPI graph shows that all components of PPI along with CPI are on the downtrend now and have been for several months, albeit with some volatility. And all of that downtrend has happened in the face of 0% fed funds rate and $300 billion (at least) in quantitative easing. That should mean something, right? To me, it suggests that high inflation may be further off than we think.Are we both looking at the same graph? Both the PPI and CPI have risen for six months straight until July. The volatility is there, but in the other direction from the one you see. The trend is clearly inflation with an occasional one month dip, not deflation with an occasional one month rise. In fact, we expect the sharp rise in inflation in June was due to seasonal factors. June and July summed average to the trend that started in early 2009.


http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=800&height=480&bgcolor=%2399FF99&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&id=PPIENG,CPIAUCNS,&transformation=lin,lin,&scale=Left,Right,&range=Custom,Custom,&cosd=2008-01-08,2008-01-08,&coed=2009-07-01,2009-07-01,&line_color=%230000FF,%23FF0000,&link_values=,,&mark_type=NONE,NONE,&line_style=Solid,Solid,&vintage_date=2009-08-20,2009-08-20,&revision_date=2009-08-21,2009-08-21,&mma=0,0,&nd=,,&ost=,,&oet=,,


If you take the year over year view, you can create a graph that looks like deflation.


http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=800&height=480&bgcolor=%2399FF99&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&id=PPIENG,CPIAUCNS,&transformation=pc1,pc1,&scale=Left,Right,&range=Custom,Custom,&cosd=2008-01-08,2008-01-08,&coed=2009-07-01,2009-07-01,&line_color=%230000FF,%23FF0000,&link_values=,,&mark_type=NONE,NONE,&line_style=Solid,Solid,&vintage_date=2009-08-20,2009-08-20,&revision_date=2009-08-21,2009-08-21,&mma=0,0,&nd=,,&ost=,,&oet=,,


But if you look carefully you can see that PPI and CPI have gone from 45% year over year to -40% year over year over the course of one year. +45% + -40% = +5%, an increase not a decline. Any way you cut it, PPI and CPI are rising.


Consider also that the Fed's primary means of "printing money" is through the fed funds rate which does not directly enter the economy but instead goes through the intermediary of the banks. If a bank's balance sheet is alright, that money gets spun out into the economy through debt, which leads to inflation if too much money is "printed." I think that's what we saw after the 2001 recession with the housing bubble, etc.That is not how money is created to finance cash flows in a modern hybrid fiat and endogenous money system. Money is lent into being by the act of borrowing. If households and businesses aren't doing it, the government will do it for them, and has. This is a philosophical point that deflationists disagree with.


But what if, like Japan in the 1990s, the banks' balance sheets are in so much tatters that they effectively hoard the fed's money? It seems to me that it becomes far more likely that you'll see something different--something that looks like deflation or like Japan. Something, perhaps, that looks like what we're seeing today with falling PPI and CPI.The CPI and the PPI are clearly rising as you can see in the charts above.

The U.S. cannot experience deflation ala Japan unless the U.S. can export 20% of the world's capital flows instead of importing 40% of them. Who shall we export to? From what industries? With what workers?


Another thing about that CPI and PPI chart that jumps out at me: at no time since 1990 have prices fallen for any significant time period--at least at no time before now. We're seeing the CPI at a level we last saw in early 2008, a year and a half ago. The graph shows no deflation event even close to approaching this one for nearly 20 years. It seems to me that should carry some significance and suggest that maybe this recession might be different from others vis a vis inflation.No doubt this one is different! Here's the chart we show to spell it out.


http://www.itulip.com/images/1980vs2009.gif


This depression was not created on purpose by the Fed off a CPI at 15%. The Fed is busy building a foundation for inflation, not destroying an old one. They think they are stopping a second Great Depression. When the history books are written, it will be noted that the Fed did not understand the unique risk that the U.S. as a net debtor faces in 2009 that it did not face in 1930 when the U.S. was a net creditor and devalued the dollar by 70%. Devaluation by fiscal deficit spending is a dangerous policy.


And I have to say, I still don't get your response to the Target example.
You say retailers can't sell a good less than it costs. True, but retailers' costs themselves are not fixed. Just like Target can lower the price for me, Target's suppliers can lower the costs for them, and Target has many suppliers who compete to provide goods to Target. Why wouldn't Target's suppliers likewise lower their prices? That's precisely the point: they can't. Where are they going to get oil for less than $70 a barrel? Look at the PPI again.


That's certainly what classic supply and demand would suggest: that for ANY market, including the wholesale market, lower demand equals lower prices all other things being equal. But all other things aren't equal. The dollar has been devalued. Oil is $72 not $16 as in 2001.


That should be true for Target's costs, too. And since PPI is flat to falling for all classes of goods, Target's suppliers should be able to lower their prices to compete for Target's business.The PPI is rising for all classes of goods.


And it's not just the price of goods that are falling. Labor costs for Target and everyone else are plummetting because businesses are laying people off and cutting their hours, so that, too, should aid in both retailers and wholesalers being able to cut costs.Oh, really? We've been trying to tell you: we're not in Kansas anymore.


http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=800&height=480&bgcolor=%2399FF99&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&id=ULCMFG,&transformation=lin,&scale=Left,&range=Max,&cosd=1987-01-01,&coed=2009-04-01,&line_color=%230000FF,&link_values=,&mark_type=NONE,&line_style=Solid,&vintage_date=2009-08-21,&revision_date=2009-08-21,&mma=0,&nd=,&ost=,&oet=,
What? Unit labor costs shot up during the FIRE Economy Depression?



You say costs have not been cut dramatically by comparing oil today to oil in 2001. True, oil is a lot more expensive than a decade ago. But I don't think you have to have prices that look a decade old to qualify as deflation. Prices just have to be going lower, and there's no dispute that producers are paying quite a lot less for everything than they were a year ago. That would suggest that they have some significant room to keep prices flat to lower vs the prices we're paying today, and that they should be able to for some time to come, not just in the first half of this year.No, prices just have to go higher, and they have.


As to Bart's graph about the money supply increasing so much since September 2008, I actually find that to be one of the biggest reasons I'm skeptical of looming high inflation. As bart's chart shows, the Fed cranked the presses big time for the last ten months. But it didn't work! You'd think, if the Fed's printing press were as powerful as it has been in past recessions, we'd have an explosion of inflation. Instead, both CPI and PPI are significantly lower today than they were when they turned the presses to overtime.Again, PPI and CPI are higher, not lower.

The relationship between the money supply and inflation, with time lags, hard to dispute.



http://www.itulip.com/images/longtermcorrelationmoneyprices.gif


That suggests to me that this time may well and truly be different, and that the fed's ability to create inflation has been severely hampered by zombie banks that are gobbling up the money to feed their distressed balance sheets and to replace all the money that burned when the financial crisis hit.take the extreme case, Argentina. In 2002, virtually no credit. A cash economy. Banking system? Dead. Inflation? Over 20%.


Will it be different forever? Of course not. Everything changes over time. The deflation of the Great Depression came to an end, as did the inflation of the 70s. But at least for now, it looks like the banks' excesses, and their excessive losses, are seriously styming the fed's effort to reflate.Yes, but why did the Depression era deflation end? The Fed took the U.S. off the gold standard and devalued the dollar 70%. Why did the 1970s inflation end? The Fed raised short term interest rates to 18%. What will result from QE, massive money growth, zero interst rates, a depreciating dollar and a 12.3% FY2009 fiscal deficit? Not deflation.


As for the fact that we're a debtor nation, I've been thinking about that, and what long-term effect that might have. This post is getting long, so I'll save that for another day, but I will at least point out the following: several Western European nations have higher debt to GDP ratios than we do. And yet, they haven't seen rampant inflation and defaults. Doesn't that suggest that we may have more wiggle room than we think with our debts? Not that I think it's a healthy long-term position to be in, mind you, but it's an interesting comparison, I think.They have no external debt. They owe the money "to themselves." Foreigners not only hold our debt but we have to keep borrowing from them to repay the debt we owe them and also finance the operations of our government.

Good discussion.

bart
08-21-09, 04:56 PM
And another view on Japan and its experiences (and one with which deflationists like Mike Shedlock can't deal).


http://www.nowandfutures.com/images/boj_money_key_stats1990on3.png





http://www.nowandfutures.com/images/boj_money_key_stats1990on4.png









And here's yet another set with which inflationists can't deal.


http://www.nowandfutures.com/images/m2m3_cpi_money_supply.png





http://www.nowandfutures.com/images/m3_plus_credit_and_debt_bkx.png

rdrees
08-21-09, 05:14 PM
Thank you for the charts, bart.

I think these would indeed suggest that we are around the middle of the pack compared with other countries on a number of debt/GDP ratios. While we look a bit worse off when it comes to our government debt ratio, note from my prior post that Europe's three largest economies, France, Germany, and Italy, are all worse than us, although it would appear that the rest of the European countries' houses are in good order on that account, pushing the EU average down below ours.

MarkL
08-21-09, 05:18 PM
The root of the PPI/CPI portion of this discussion is simply timing. Both trendlines can be extrapolated from the data. I've heard it said that technical analysis (charts) shows which way the wind is blowing... but not whether a storm is coming in.



http://www.itulip.com/forums/attachment.php?attachmentid=2034&stc=1&d=1250889202

I personally am invested for inflation as per EJ's recommendation. I hope the blue trendline holds up!

:) This is the first time I've uploaded an image! Thanks to the Jim and babbittd who taught me how.

rdrees
08-21-09, 05:29 PM
Very interesting thoughts. MarkL's graph probably shows one of Fred and my biggest disconnects, as we're looking at the same numbers but with different timelines for different conclusions.

But first, can someone teach me how to do that sort of embedded/quote reply thing? I think that would make a response easier to read and follow.

Oh, and I may not be able to respond until over the weekend, but I will get to it.

MarkL
08-21-09, 05:36 PM
Is it just me or does it look like this chart, after years of tight correlation, is coming unraveled over the last decade? I wonder why and what it means.

http://www.nowandfutures.com/images/m2m3_cpi_money_supply.png

ASH
08-21-09, 05:41 PM
Is it just me or does it look like this chart, after years of tight correlation, is coming unraveled over the last decade? I wonder why and what it means.

http://www.nowandfutures.com/images/m2m3_cpi_money_supply.png

I believe this is the basis for complaining about changes to BLS methodology. Using their original methodology (CPI + corrections), the correlation is preserved. Using their "improved" methodology, the correlation weakens. It means the new methodology systematically understates inflation.

ASH
08-21-09, 05:44 PM
But first, can someone teach me how to do that sort of embedded/quote reply thing? I think that would make a response easier to read and follow.

Thus (http://www.itulip.com/forums/showthread.php?p=117590#poststop) spake Jim Nickerson.

Edit: Whups. I assumed you were asking about images. All you need to do to embed is click on "Quote" in lower-right, following a post. You can get the HTML tag format from that.

Edit: Other helpful observation -- have you noticed that the "table of contents" type index at the top of the thread is color-coded to track new vs. old posts, since the last time you pointed a browser at the thread? Orange is a new post. This is helpful, because new posts get inserted below the posts they quote, rather than at the end of the thread, in most cases. So, new posts keep appearing in the middle of the thread.

cobben
08-21-09, 05:44 PM
"we're looking at the same numbers but with different timelines for different conclusions."

Exactly, during major trend changes looking at different time frames will produce different results as there are various conflicting countertrend movements going on.

Predicting the outcome during the confused period when everything seems to be in flux can be more of an art than a science.

No prestige, or don't assume you can know everything, as I believe Harry Brown put it.

FRED
08-21-09, 05:45 PM
The root of the PPI/CPI portion of this discussion is simply timing. Both trendlines can be extrapolated from the data. I've heard it said that technical analysis (charts) shows which way the wind is blowing... but not whether a storm is coming in.



http://www.itulip.com/forums/attachment.php?attachmentid=2034&stc=1&d=1250889202

I personally am invested for inflation as per EJ's recommendation. I hope the blue trendline holds up!

Unlike the 1930s, the U.S. didn't wait until the money supply shrank 40% and the economy shrank 25% before going off the gold standard and re-inflating in 2008. Yet even though they waited four years from 1930 to 1934 until nearly half the banks had failed, costing millions of depositors their savings, they were still able to create inflation in 1934. Look at the red line starting in 1934.



http://www.itulip.com/forums/../images/USdeflation.png

The Japanese can't pull a USA maneuver and screw the world by devaluing the yen. They have to do it the hard way.



http://www.itulip.com/forums/../images/Japandeflation.png

Just as we told everyone way back in 2006 (http://www.itulip.com/forums/showthread.php?p=2905#post2905), we "pumped it up!" and got this:

http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23000000&graph_bgcolor=%23FFFFFF&txtcolor=%23FFFFFF&preserve_ratio=true&id=IPFINAL,DGS10,CPIAUCNS,&transformation=chg,lin,chg,&scale=Left,Right,Left,&range=Custom,Custom,Custom,&cosd=2007-01-01,2007-01-01,2007-01-01,&coed=2009-07-01,2009-07-01,2009-07-01,&line_color=%23FFFF33,%2300FFFF,%23CC0000,&link_values=,,,&mark_type=NONE,NONE,NONE,&line_style=Solid,Solid,Solid,&vintage_date=2009-08-21,2009-08-21,2009-08-21,&revision_date=2009-08-21,2009-08-21,2009-08-21,&mma=0,0,0,&nd=,,,&ost=,,,&oet=,,,

bart
08-21-09, 06:06 PM
Thank you for the charts, bart.

I think these would indeed suggest that we are around the middle of the pack compared with other countries on a number of debt/GDP ratios. While we look a bit worse off when it comes to our government debt ratio, note from my prior post that Europe's three largest economies, France, Germany, and Italy, are all worse than us, although it would appear that the rest of the European countries' houses are in good order on that account, pushing the EU average down below ours.


You're welcome.

And I submit that the US is far weaker than those charts show, mostly due to the outrageously sized deficits being proposed and implemented by the current administration, and of course all the "foreign financing" - which applies to none of the other countries you mentioned.

I'd also hardly call the EU's picture in good shape, although at least Maasatricht provides a hint or vague possibility of restriant.


I also note that the US public budget deficit being admitted to is far from the real and total budget deficit due to the gigantic quantity of off budget items... just more horse puckey and slimy lies from Foggy Bottom.

bart
08-21-09, 06:08 PM
I believe this is the basis for complaining about changes to BLS methodology. Using their original methodology (CPI + corrections), the correlation is preserved. Using their "improved" methodology, the correlation weakens. It means the new methodology systematically understates inflation.

Agreed, and thanks for covering my back Ash, much appreciated.

rdrees
08-21-09, 06:36 PM
Quick comment on the final graph here: is there anyway to make both left and right axes have 0 as the midpoint, like in the previous two graphs? It's a little hard to sort out, but it looks like the graphs using the left axis have been flat to negative during the course of the recession, while the graph using the right has been positive the whole time. I'm having trouble seeing the comparison you're suggesting with the axes "off" like that. Also, do the other two graphs use as "nominal interest rate" the 10 year government bond, like the final graph? Or are they using the Fed Funds rate, which would seem like the more obvious metric?

rdrees
08-21-09, 06:41 PM
Could you explain more what you mean by "foreign financing" and how that would not apply to other countries? Are you talking about our current account deficit?

As for whether our deficit numbers are being toyed with, perhaps they are. But I would assume that if our government is playing with numbers, other governments are, too. Washington, D.C. may push a lot of horse puckey and slimy lies, but I don't think they have the monopoly on it compared with other countries' capitols.

MarkL
08-21-09, 06:55 PM
Just as we told everyone way back in 2006 (http://www.itulip.com/forums/showthread.php?p=2905#post2905), we "pumped it up!" and got this:


http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23000000&graph_bgcolor=%23FFFFFF&txtcolor=%23FFFFFF&preserve_ratio=true&id=IPFINAL,DGS10,CPIAUCNS,&transformation=chg,lin,chg,&scale=Left,Right,Left,&range=Custom,Custom,Custom,&cosd=2007-01-01,2007-01-01,2007-01-01,&coed=2009-07-01,2009-07-01,2009-07-01,&line_color=%23FFFF33,%2300FFFF,%23CC0000,&link_values=,,,&mark_type=NONE,NONE,NONE,&line_style=Solid,Solid,Solid,&vintage_date=2009-08-21,2009-08-21,2009-08-21,&revision_date=2009-08-21,2009-08-21,2009-08-21,&mma=0,0,0,&nd=,,,&ost=,,,&oet=,,,


We pumped it up indeed!

But I'm concerned that the CDS/CDR debacle may not be behind us, and as another poster here on iTulip put it (roughly), "we've shoved all of the CDR/CDS 'mail' in the drawer and hummed loudly."

At some point the banks of the world will open up that mail.

Won't that have a significantly deflationary effect upon the economy, just as the "first wave" of these revelations did last year? Some here on iTulip have said that despite the fact that a lot of these CDS/CDRs are "owed to each other" they should still be considered "money" because they are a medium of exchange, and we've already seen that they can definitely affect the "real" economy. I've seen figures here on iTulip that claim between $60T to $600T are floating around out there! If this is true, the Fed's 2T or the Fed+Gov's 8T looks puny... particularly as the banks won't be able to easily relend while this occurs and achieve the normal 6x-9x velocity of money multiplier affect.

Finally, the CDS/CDR ponzi scheme appears to continue to delever at the individual mortgage level. I've read that 25% of all mortages may go into default. This is certainly enough to cause a second wave banking crisis which could potentially cause a return of the deflationary forces that have just alleviated. Oh, and there's the commercial (http://www.itulip.com/forums/showthread.php?t=11442) crisis....

I do believe that EJ is right and the Fed will ultimately outspend this problem and inflation will go nuts. But perhaps there's another deflationary leg to come first and while the spending done to-date is sufficient to meet the crisis-to-date, it may be insufficient for the magnitude of a potential second wave to come.

Thus if we were to revisit the cycle we've just completed, we could see another crash, another deflationary cycle, another bailout, and THEN Crazflation....

(Hey... I like that word. "Crazflation." :) )

jk
08-21-09, 06:57 PM
We pumped it up indeed!

But I'm concerned that the CDS/CDR debacle may not be behind us, and as another poster here on iTulip put it (roughly), "we've shoved all of the CDR/CDS 'mail' in the drawer and hummed loudly."

At some point the banks of the world will open up that mail.

Won't that have a significantly deflationary effect upon the economy, just as the "first wave" of these revelations did last year? Some here on iTulip have said that despite the fact that a lot of these CDS/CDRs are "owed to each other" they should still be considered "money" because they are a medium of exchange, and we've already seen that they can definitely affect the "real" economy. I've seen figures here on iTulip that claim between $60T to $600T are floating around out there! If this is true, the Fed's 2T or the Fed+Gov's 8T looks puny... particularly as the banks won't be able to easily relend while this occurs and achieve the normal 6x-9x velocity of money multiplier affect.

Finally, the CDS/CDR ponzi scheme appears to continue to delever at the individual mortgage level. I've read that 25% of all mortages may go into default. This is certainly enough to cause a second wave banking crisis which could potentially cause a return of the deflationary forces that have just alleviated.

I do believe that EJ is right and the Fed will ultimately outspend this problem and inflation will go nuts. But perhaps there's another deflationary leg to come first and while the spending done to-date is sufficient to meet the crisis-to-date, it may be insufficient for the magnitude of a potential second wave to come.

Thus if we were to revisit the cycle we've just completed, we could see another crash, another deflationary cycle, another bailout, and THEN Crazflation....

(Hey... I like that word. "Crazflation." :) )
we're all waiting for the markets to see that 2nd leg come over the horizon, so we can sell our tbonds and buy more gold and oil.

MarkL
08-21-09, 06:57 PM
Makes sense to me.

MarkL
08-21-09, 07:04 PM
You may be waiting for the other shoe to drop!

So far, I'm investing on EJ/Fred's predictions of inflation to come soon. This is why I'm posting the question!!! If you're right Heisenberg, and I'm wrong, I'm going to lose a bucket of bucks.

For a 12 month horizon, these are opposing theories.

jk
08-21-09, 07:08 PM
You may be waiting for the other shoe to drop!

So far, I'm investing on EJ/Fred's predictions of inflation to come soon. This is why I'm posting the question!!! If you're right Heisenberg, and I'm wrong, I'm going to lose a bucket of bucks.

For a 12 month horizon, these are opposing theories.
i'm a probabilist, and thus think it's foolish to invest on only one scenario.

ASH
08-21-09, 07:19 PM
i'm a probabilist, and thus think it's foolish to invest on only one scenario.

jk invests by the "Feynman path integral" method. Money travels by every possible path to reach his pocket, but the superposition of the losses and gains is such that only the path that "minimizes action" results in any appreciable change in net worth.

jk
08-21-09, 07:30 PM
jk invests by the "Feynman path integral" method. Money travels by every possible path to reach his pocket, but the superposition of the losses and gains is such that only the path that "minimizes action" results in any appreciable change in net worth.
exactly!;):D

MarkL
08-21-09, 07:31 PM
i'm a probabilist, and thus think it's foolish to invest on only one scenario.

I would agree. But inflation and deflation over the next 12 months would require investing in opposing directions. If inflation is coming shortly, long commodities, shorting the dollar, shorting the long end of treasuries is the thing to do. If deflation has another leg down, then you either do the opposite of those things... or simply wait to only catch the upside.

jk
08-21-09, 07:39 PM
I would agree. But inflation and deflation over the next 12 months would require investing in opposing directions. If inflation is coming shortly, long commodities, shorting the dollar, shorting the long end of treasuries is the thing to do. If deflation has another leg down, then you either do the opposite of those things... or simply wait to only catch the upside.

yep, opposite directions but with different assets.

fwiw, here are my current allocations [approximately, it's been a while since i bothered pricing everything precisely.]
34% precious metals [8-9% ag, 25% au: in the form of cef, gtu, some gld]
26% tbills
25% tbonds [in the form of tlt]
7% energy [mostly canadian energy trusts, a little dbo]
-7% shorts [mostly spy, a bit of qqqq and iwm]
and then some odds and ends like: 2% in gim; 2.5% in miscellaneous longs; 1% in puts on fxi and eem; and so on.

so you can figure out as well as i how these assets might react under various scenarios.

jtabeb
08-21-09, 09:11 PM
Is a house a "durable good" too?

metalman
08-21-09, 10:00 PM
Quick comment on the final graph here: is there anyway to make both left and right axes have 0 as the midpoint, like in the previous two graphs? It's a little hard to sort out, but it looks like the graphs using the left axis have been flat to negative during the course of the recession, while the graph using the right has been positive the whole time. I'm having trouble seeing the comparison you're suggesting with the axes "off" like that. Also, do the other two graphs use as "nominal interest rate" the 10 year government bond, like the final graph? Or are they using the Fed Funds rate, which would seem like the more obvious metric?

key point of the fed's charts re usa 1930s & japan early 1990s... real interest rates... the hallmark of reflation success!

usa 1931... +15%... fail!!!

japan 1990... +5%... fail!!!

has the fed pulled off negative real interest rates? all else is bullshit.

drum roll, pls....

http://imgur.com/HgxeJ.gif

bart
08-21-09, 11:12 PM
Could you explain more what you mean by "foreign financing" and how that would not apply to other countries? Are you talking about our current account deficit?

Yes, the current account deficit or external debt or even Treasury International Capital figures or the BOPI data series from the Fed/BEA. Lots of ways to view the same issue.

http://www.nowandfutures.com/images/tic_major_holders.png


No other country in your list comes close.





As for whether our deficit numbers are being toyed with, perhaps they are. But I would assume that if our government is playing with numbers, other governments are, too. Washington, D.C. may push a lot of horse puckey and slimy lies, but I don't think they have the monopoly on it compared with other countries' capitols.

There's no perhaps about it on budget deficits. Comparing either the White House budget deficit or the budget deficit figures from the Treasury against increases in the national debt shows a heinous growth rate difference roughly since the Reagan administration - especially the current and last administration.


The monthly budget deficit per the Treasury:

http://www.nowandfutures.com/images/budget_monthly.png




The differences between the reported deficit and change in the national debt.

http://www.nowandfutures.com/images/debt_budget_deficit_inconsistencies.png




And just because other governments do it doesn't make it even vaguely close to right. I'm not accusing you, but that's also the Nuremberg defense.
Plus, a number of figures that I have that remain uncharted as yet show that the US is near, if not at, the top of the list.

"Just say no" applies to financial profligacy, seriously questionable ethical behavior, "bankster" bailouts etc. etc. almost ad nauseum much more than to drug problems. That article/link I posted yesterday - Unconscious Conspiracies (http://www.itulip.com/forums/showthread.php?t=11430) - also strongly applies.

bart
08-21-09, 11:18 PM
key point of the fed's charts re usa 1930s & japan early 1990s... real interest rates... the hallmark of reflation success!

usa 1931... +15%... fail!!!

japan 1990... +5%... fail!!!

has the fed pulled off negative real interest rates? all else is bullshit.

drum roll, pls....

http://imgur.com/HgxeJ.gif




Another view on negative interest rates, with a bonus of it perhaps being tradeable.


http://www.nowandfutures.com/images/activity_indicator_gold_long.png

ThePythonicCow
08-21-09, 11:27 PM
"Just say no" applies to financial profligacy, seriously questionable ethical behavior, "bankster" bailouts etc. etc. almost ad nauseum much more than to drug problems. We have a long way to go, I'm afraid.

MarkL
08-22-09, 12:12 AM
I doubt I'll be able to provide you with a statistic that could encompass all of those concerns at once, but among the broadest, perhaps, is external debt to GDP, with external debt defined as "the total public and private debt owed to nonresidents repayable in foreign currency, goods, or services."

http://en.wikipedia.org/wiki/List_of_countries_by_external_debt

We are at 95%. That's much higher than most countries, as we have the 24th highest ratio out of 202 countries. However, Switzerland, the UK, the Netherlands, France, Germany, Denmark, Norway, Finland, and Australia all have higher ratios than us. Some are way higher--France, for example, is at 212%

Another metric focuses on total public, i.e. government debt, to GDP.

http://en.wikipedia.org/wiki/List_of_countries_by_public_debt

We're at 61%, which is 28th highest in the world. Then again, Japan, Norway, Germany, Italy, Canada, and France are all above us. France, for example, is at 64%.

So by either metric, a decent number of Westernized economies exceed our debt positions vs. GDP. Yet none of them has had defaults or out of control inflation.

You also asked about entitlements--well, I'm not sure how to add that up to compare to other countries, but I would be shocked if our level of entitlements were anything close to Western Europe's.

So if France hasn't defaulted and the Euro hasn't tanked, why should we expect those results out of the dollar when it would appear that our debt position is relatively better?

Not good, mind you. I don't like our fiscal position at all in the long term. But we should start to see where the breaking point comes in other big Western economies before we see it in ours, it would seem.

So the bottom line is, we're bad off, but before we see significant inflation or a currency collapse, these other countries that are worse should see it first. Perhaps Iceland and UK are canaries in the coal mine?

I suppose also that similar to the "rush to safety" that in Q1-Q2 of this year pushed the DXY to 80+, if those countries worse than us default or start to see signifcant inflation, we may actually see a repeat of Q1-Q2 and a strengthening of the dollar for a period of time. This could be a deflationary force... for a limited period of time, just like the start of this year.

jk
08-22-09, 11:22 AM
So the bottom line is, we're bad off, but before we see significant inflation or a currency collapse, these other countries that are worse should see it first. Perhaps Iceland and UK are canaries in the coal mine?

I suppose also that similar to the "rush to safety" that in Q1-Q2 of this year pushed the DXY to 80+, if those countries worse than us default or start to see signifcant inflation, we may actually see a repeat of Q1-Q2 and a strengthening of the dollar for a period of time. This could be a deflationary force... for a limited period of time, just like the start of this year.
iceland would have played out differently if they could have printed the money they owed. uk will be a little more relevant.

bart
08-22-09, 11:29 AM
We have a long way to go, I'm afraid.

I submit that to the understatement of the decade award.

bart
08-22-09, 12:09 PM
You are right, bart. I meant 0.012 OR 1.2%. My mistake.

Cool, and thanks.


I don't, however, think it adds much to then turn that to an annualized rate. Yes, PPI is up 1.2% over five months. But it's also down 0.9% from last month. Why not annualize that -.9% number? I'm sure each of us could find some stretch of time that helps our cause, be it year on year and month on month for me, or for a five month period for you.

I find it diffcult at best to believe that you're serious about creating conclusions by annualizing one month's data... but at least we can agree that some of this discussion is about valid differences of opinion. I just don't believe that you're looking at all of the facts.


As for John Williams and shadowstats, the graphs on the home page show a precipitous fall in the rate of inflation for all three measures, and deflation for two of them. That seems generally to support what I've been saying, which is that the numbers do not seem to suggest serious inflation from today's prices any time soon.

Fair enough... but my real and main point about the shadowstats.com corrections is how much inflation it is showing *now*, and how badly understated CPI-U really is due to all the machinations over the decades.

And if you do the exact same 5 month annualized change rate exercise on SGS-CPI, it shows a reversal recently - just like PPI.

Of course two of the stats show deflation too - they're the BLS BS numbers.



In any event, I'm generally sticking with PPI because it's readily available, known by all, and has been more or less approved as a decent measuring stick for prices by "EJ," as I noted in a prior post.

I note that EJ also uses many other stats, and has also commented on the lies in CPI-U.

I also note that there's a truly huge disconnect in growth between the "PPI - all commodities" and both the CRB and CCI commodity indexes, and I personally don't believe it fairly represents reality.



I still think it odd that you deem any dissenting opinion to yours to be "misinformation" and use of any other metric than your preferred metrics misleading or not worthy of consideration. I do sincerely hope that we can raise our level of dialogue and that you will, at some point, come to the realization that someone with a different opinion than yours does not automatically qualify as an enemy.

There you go again. Read my lips - "Manners and propriety and straight shooting make a difference to me".
Please read my recap in post #138 (especially) as many times as needed to see at least partially what I'm talking about.

I have posted chart after chart and cited large amounts of data and facts, and you are still trying to spin/characterize me as an "enemy"... and you are keeping it going with paragraphs like the above or even thinking that my new thread on Unconscious Conspiracies was about you. Look at all the topics in my comments section about "behind the scenes" factors, my various articles and even my tinfoil hat avatar - and please demonstrate some perspective.

I don't know who you are, but would guess a high level lawyer or corporate exec, and I completely and totally refuse to believe that you don't know what I'm talking about in the areas of cognitive biases, logical fallacies, and disinformation (not "misinformation" as you stated, in a probable additional attempted spin) games.

I will virtually always call it the way I see it and meet what I perceive as spin or disinformation or whatever with the facts as I see them to the best of my ability, and that includes submitting data about various disinformation tricks that can be and are used by many.

bart
08-22-09, 12:42 PM
To me, looking at those PPI figures showing 8 months of year on year price declines seems like we've qualified for at least some definition of deflation, and maybe even a deflationary spiral, though less severe than the one in the 1930s. Remember that even the deflationary spiral of the great depression came to an end.


You might find it useful or educational to review the charts in the The Great Depression tight parallels... busted (v 2.0) (http://www.itulip.com/forums/showthread.php?t=10575) thread, which show a broad selection of stats comparing the Great Depression to both the period since October 2007 and March 2000.

They might provide additional perspective.



That brings me to the next couple graphs regarding PPI and CPI and CPI vs. energy costs. First, I would never dispute the tight relationship between energy and costs, but what I take from your two-part definition of Ka-Poom is that it posits an inflationary force indepedent from energy costs. So while I completely agree that higher energy costs mean higher prices for goods, that's a distinct inflationary phenomenon from fiscal and monetary actions from the federal government, which I understand Ka-Poom to concern.

If you look at long term charts comparing U.S. M3 for example to oil prices, the strong correlation is unmistakeable.

And yes, I know that correlation does not prove causation... but causation always includes correlation.




Consider also that the Fed's primary means of "printing money" is through the fed funds rate which does not directly enter the economy but instead goes through the intermediary of the banks. If a bank's balance sheet is alright, that money gets spun out into the economy through debt, which leads to inflation if too much money is "printed." I think that's what we saw after the 2001 recession with the housing bubble, etc.

Admittedly the Fed Funds rate is significant, but I would hardly call it primary. I submit that OMOs and SOMA growth via monetizing of debt is a larger factor.

And then there's this from Bernanke:
"Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services."
-- Ben Bernanke, the current (2008) Chairman of the Board of Governors of the Federal Reserve Bank of the United States, in a speech he made on November 21, 2002 before the National Economists Club in Washington, D.C.





And this too:
"...the Federal Reserve has the capacity to operate in domestic money markets to maintain interest rates at a level consistent with our economic goals”
-- Ben Bernanke, Fed Chairman, March 26th 2007 to the Senate Banking Committee.

(he's not talking about Fed Funds there)




Or perhaps this, about the Fed and how they supposedly can't see or control bubbles (emphasis mine):

"When we moved on February 4th, I think our expectation was that we would prick the bubble in the equity markets. What in fact occurred is that, as evidence of the dramatic shift in the economic outlook began to emerge after we moved and long-term rates began to move up, we were also clearly getting a major upward increase in expectations of corporate earnings. While the stock market went down after our actions on February 4th, it has gone down really quite marginally on net over this period. So what has occurred is that while this capital gains bubble in all financial assets had to come down, instead of the decline being concentrated in the stock area, it shifted over into the bond area. But the effects are the same. These are major capital losses, which have required very dramatic changes in the actions and activities on the part of individuals and institutions.

So the question is, having very consciously and purposely tried to break the bubble and upset the markets in order to sort of break the cocoon of capital gains speculation, we are now in a position—having done that and in a sense succeeded perhaps more than we had intended—to try to restore some degree of confidence in the System." (emphasis ours)
-- Alan Greenspan, Chairman of the Federal Reserve

Source: (http://www.federalreserve.gov/monetarypolicy/files/FOMC19940322meeting.pdf) Federal Open Market Committee (FOMC) meeting minutes from March 22, 1994






And one last one, about behind the scenes market control (emphasis mine):

“Owing to persistent advances in information and computing technologies, the structure of our financial institutions is continuously changing, I trust for the better. But that evolution in financial structure has also meant that supervision and regulation must be continually changing in order to respond adequately to these developments. In today's markets, for example, there is an increased reliance on private counterparty surveillance as the primary means of financial control. Governments supplement private surveillance when they judge that market imperfections could lead to sub-optimal economic performance.”
Source (http://www.federalreserve.gov/boarddocs/speeches/2002/200209252/default.htm), Alan Greenspan speech in 2002






But what if, like Japan in the 1990s, the banks' balance sheets are in so much tatters that they effectively hoard the fed's money? It seems to me that it becomes far more likely that you'll see something different--something that looks like deflation or like Japan. Something, perhaps, that looks like what we're seeing today with falling PPI and CPI.


Reviewing the charts about Japan that I posted earlier may help your perspective.



As to Bart's graph about the money supply increasing so much since September 2008, I actually find that to be one of the biggest reasons I'm skeptical of looming high inflation. As bart's chart shows, the Fed cranked the presses big time for the last ten months. But it didn't work! You'd think, if the Fed's printing press were as powerful as it has been in past recessions, we'd have an explosion of inflation. Instead, both CPI and PPI are significantly lower today than they were when they turned the presses to overtime.

You might want to consider both Milton Friedman's work on monetary lags (12-18 months lag being his average if memory serves), plus velocity issues that I and other have covered elsewhere... as well as what appears to me to be obvious efforts by the Fed and administration to downplay or counter inflationary expectation issues.

And there's also my chart attempts at measuring debt deflation in the total money supply, as well as Finster's fine work with his "FDI" and what they shows about inflation.

http://www.nowandfutures.com/images/m3_plus_credit_and_debt_bkx.png






As for the fact that we're a debtor nation, I've been thinking about that, and what long-term effect that might have. This post is getting long, so I'll save that for another day, but I will at least point out the following: several Western European nations have higher debt to GDP ratios than we do. And yet, they haven't seen rampant inflation and defaults. Doesn't that suggest that we may have more wiggle room than we think with our debts? Not that I think it's a healthy long-term position to be in, mind you, but it's an interesting comparison, I think.

We may indeed have more "wiggle room" -- especially if some real action occurs on dealing with the heinous bailouts & corruption and greed and payoff issues & the ridiculous budget deficits ahead, etc.

I also commented via 3 charts showing various credit & debt vs. GDP ratios of the US vs. other countries and areas in a prior post.

MarkL
08-22-09, 04:45 PM
We pumped it up indeed!

But I'm concerned that the CDS/CDR debacle may not be behind us, and as another poster here on iTulip put it (roughly), "we've shoved all of the CDR/CDS 'mail' in the drawer and hummed loudly."

At some point the banks of the world will open up that mail.

Won't that have a significantly deflationary effect upon the economy, just as the "first wave" of these revelations did last year? Some here on iTulip have said that despite the fact that a lot of these CDS/CDRs are "owed to each other" they should still be considered "money" because they are a medium of exchange, and we've already seen that they can definitely affect the "real" economy. I've seen figures here on iTulip that claim between $60T to $600T are floating around out there! If this is true, the Fed's 2T or the Fed+Gov's 8T looks puny... particularly as the banks won't be able to easily relend while this occurs and achieve the normal 6x-9x velocity of money multiplier affect.

Finally, the CDS/CDR ponzi scheme appears to continue to delever at the individual mortgage level. I've read that 25% of all mortages may go into default. This is certainly enough to cause a second wave banking crisis which could potentially cause a return of the deflationary forces that have just alleviated. Oh, and there's the commercial (http://www.itulip.com/forums/showthread.php?t=11442) crisis....

I do believe that EJ is right and the Fed will ultimately outspend this problem and inflation will go nuts. But perhaps there's another deflationary leg to come first and while the spending done to-date is sufficient to meet the crisis-to-date, it may be insufficient for the magnitude of a potential second wave to come.

Thus if we were to revisit the cycle we've just completed, we could see another crash, another deflationary cycle, another bailout, and THEN Crazflation....

(Hey... I like that word. "Crazflation." :) )

No deep responses to this, eh? Fred any thoughts? A second wave of deflation seems to be a reasonable argument to me. But most here seem to think inflation asap. But nobody discusses or counters the second wave of deflation theory as a viable possibility....

jk
08-22-09, 05:02 PM
No deep responses to this, eh? Fred any thoughts? A second wave of deflation seems to be a reasonable argument to me. But most here seem to think inflation asap. But nobody discusses or counters the second wave of deflation theory as a viable possibility....
if ej's prediction of 500-600 spx comes true, what do you think will trigger it? i.e. i think this question has already been discussed at length.

metalman
08-22-09, 06:26 PM
Another view on negative interest rates, with a bonus of it perhaps being tradeable.


http://www.nowandfutures.com/images/activity_indicator_gold_long.png

not alone. neg rates + falling dollar moves gold up... 2001 - 2008

metalman
08-22-09, 06:31 PM
as rdrees has decided to ignore your response, i'll jump in with a question...

http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=800&height=480&bgcolor=%2399FF99&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&id=ULCMFG,&transformation=lin,&scale=Left,&range=Max,&cosd=1987-01-01,&coed=2009-04-01,&line_color=%230000FF,&link_values=,&mark_type=NONE,&line_style=Solid,&vintage_date=2009-08-21,&revision_date=2009-08-21,&mma=0,&nd=,&ost=,&oet=,

what the hell is going on here? i see unit labor costs fall like a rock after the dot com cash... can't forget that! but they go up in this recession? why?

ThePythonicCow
08-22-09, 07:40 PM
what the hell is going on here? i see unit labor costs fall like a rock after the dot com cash... can't forget that! but they go up in this recession? why?Perhaps the cheaper labor (less senior) is being laid off first?

Or perhaps the labor that is more easily exported to lower cost countries is being laid off first?

MarkL
08-22-09, 07:42 PM
if ej's prediction of 500-600 spx comes true, what do you think will trigger it? i.e. i think this question has already been discussed at length.

The last two times the stock market bottomed (Nov 20th, March 9th) the DXY peaked within a day or so. The first time it hit 87 and the second 90.

So a 500-600 spx as you suggest would likely again, cause a flight to the dollar. A crash like that also removes a lot of money from the world which is a deflationary force.

Second a 500-600 spx would certainly result in stock market crashes around the world also triggering a drive to the dollar. Some of this would be due to flight to safety. But some of it is because many of these assets are denominated in dollars!

I'm just worried about another round of demand destruction caused by the 60T-600T of CDS/CDRs in the world coming home to roost! It's a big world, there's lot's of inventory warehouses to move through, and the consumer is clearly DONE.

If this happens, we might see another year of disinflation before EJ's Poom kick's in.

lol... my name for this theory (pretend like you're about to sneeze) Ka...a... Poom! (with all respect to EJ!).

jk
08-22-09, 07:48 PM
as rdrees has decided to ignore your response, i'll jump in with a question...

http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=800&height=480&bgcolor=%2399FF99&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&id=ULCMFG,&transformation=lin,&scale=Left,&range=Max,&cosd=1987-01-01,&coed=2009-04-01,&line_color=%230000FF,&link_values=,&mark_type=NONE,&line_style=Solid,&vintage_date=2009-08-21,&revision_date=2009-08-21,&mma=0,&nd=,&ost=,&oet=,

what the hell is going on here? i see unit labor costs fall like a rock after the dot com cash... can't forget that! but they go up in this recession? why?
a similar thought to pythoniccow's: the production of cheap goods in china has ground to a halt, along with low skilled construction etc here in the u.s. the cheap labor is out of work. but it's not happening within corporations, where surely the more expensive [of the hoi polloi] are the ones laid off, but between industries. the mix of goods and services produced has shifted.

metalman
08-22-09, 08:20 PM
a similar thought to pythoniccow's: the production of cheap goods in china has ground to a halt, along with low skilled construction etc here in the u.s. the cheap labor is out of work. but it's not happening within corporations, where surely the more expensive [of the hoi polloi] are the ones laid off, but between industries. the mix of goods and services produced has shifted.

ah... so inflation 'is not always and ever a monetary phenomenon'. :D

now the usa is truly 3rd world...

wage inflation is political.

we are all learning.

ThePythonicCow
08-22-09, 08:25 PM
ah... so inflation 'is not always and ever a monetary phenomenon'. :DIn reality, perhaps. But does the claim work in monetarist theory? :rolleyes:

jk
08-22-09, 08:58 PM
In reality, perhaps. But does the claim work in monetarist theory? :rolleyes:
sure, the auto worker's laid off, the banker's getting a big bonus. and the money supply is WAAAY up. [banker's work, that.]

Diarmuid
08-22-09, 11:10 PM
Ka-Poom Theory makes two arguments. The first: with respect to the cycle of asset bubbles and crashes since iTulip was founded in 1998. It asserts that no self-reinforcing cycle of debt defaults, collapsing money supply, and falling prices will occur in the U.S. following any asset market crash as occurred in the U.S. from 1930 to 1934, whether the crash be in equities as in the 2000 to 2002 period or in mortgage and other credit markets in the 2007 to today.

Just like to express my gratitude to EJ for a very enlightening article again.
Thank you Fred, Bart, MM, Rdrees et al. for a most riveting and educational of web conversations.

It may pee some people off to have to rehash the same arguments over and over again (understandably) but it is most enlightening for those of us relatively new to the Kapoom theory to see some of the theory discussed along with links to older articles from Itulip, in a detailed conversation like this, as it helps contextulize the theory with the hindsight of what has passed - again thank you.:)

Yaowarat
08-22-09, 11:42 PM
It was several months ago I first noticed Wal-Mart had reduced its 1 pound bag ( 16 OZ) of Jumbo shrimp to 14 OZ. Similarly for cereal. The prices did not fall proportionately.

WildspitzE
08-23-09, 12:58 AM
Eight months of accelerating deflation in the PPI is overwhelming empiric evidence of deflation, not inflation. Why would producers raise consumer prices any time soon if their costs and dropping like a stone?

Producer prices are the result of a competitive bidding process between and by producers that ultimately believe that they can convert the inputs/goods into consumer goods. It is their expectation of future consumer demand (and what they will be able to charge consumers) that raises or lowers producer price. For many raw inputs it's basically the futures market, so it is useful to think about the futures market when thinking of how PPI works. Thus, I tend to look at PPI as a gauge of what specialized market participants think about the future of consumer prices. They can be wrong, even mislead. If a producer overpays for the input costs and doesn't manage to offload to consumers he loses money. Meaning, in aggregate, if producers over pay for inputs, it doesn't mean that they will manage to pass that along to consumers.

Given my statements above, I may be the only one who doesn't believe in cost-of-production theory of price. It's "empirical" evidence if you believe that CPI is a causality of PPI per cost-of-production theory of price. I don't. That said, when it comes to energy -- e.g. oil -- because of how it affects everything, the relationship is a little different... and why many of us look at oil (the input) as a proxy for consumer price inflation.

santafe2
08-23-09, 02:17 AM
Off on vacation for 10 days and just now catching up with this excellent thread. Long before reading iTulip I was a convert to the idea that deflation was impossible in a world where printing money was a choice and all other items of human need, family, food, land, energy, etc. were limited. Currency is the sea in which all our requirements float. It is a sea of unlimited bounds and in that sea needs rise.

That said, I still see disinflation, (iTulip term), everywhere. In my industry, it's still rampant. We don't expect a bottom for six months. This isn't deflation it's just a stuff gets cheaper story and it drives out the less well funded or less adept at inventory management. But that's just our quirky little industry so I thought it might just be us.

But we just returned from vacation in Hawaii and there is definitely no upturn there. Flight...cheap, under $400 per round trip and the employees of the airline could not have been nicer. Really, I'm not making this up and I've been a frequent flyer for 20 years. Hotel...let me say, I made the reservation three months ago with Hilton because my long time associates at Marriott had not gotten the message that there was a price war going on. By the time I made some last minute stop over reservations in LA, the full service Marriott had dropped from $229 to $87 a night. Their staff had still not gotten the message about being nice but it was cheap.

Rentals from surf boards to cars were very reasonable and again, everyone was very accomodating and nice. This is our forth trip to Hawaii and overall it was the best. Maybe we've slowed down and learned to enjoy our time there. But there is also a change in aloha-land. Maybe it's people wanting to earn your trust and your business. It's a special place and I was quite moved that we were able to arrive at a time of balance when outsiders were providing an equal value to insiders.

There were no crowds at the beaches, it was open and fantastic for the kids. Everyone working at the resorts were, well, working.

And back to work...we've been growing some and hiring a few of our friends so we have to move. There's a glut of commercial space locally and again everyone is nice. Prices are down 30% we're trying to match our requirements to a local space.

I'm sure EJ'd post is correct long term and inflation is coming but it's not here yet. I don't see it anywhere. Disinflation is rampant and nice is everywhere a new value. Let's enjoy the transition.

MarkL
08-23-09, 02:31 AM
I believe this is the basis for complaining about changes to BLS methodology. Using their original methodology (CPI + corrections), the correlation is preserved. Using their "improved" methodology, the correlation weakens. It means the new methodology systematically understates inflation.

But with CPI+corrections the correlation is not preserved. Up until 1995 CPI+corrections was below the M lines consistently. Suddenly in 1995 CPI w corrections (black) jumps compared to money.

http://www.nowandfutures.com/images/m2m3_cpi_money_supply.png

It does looks like CPI without corrections (purple) is, comparatively, breaking to the downside, indicating the changed BLS methodology.

Prior to 1995 both CPIs stayed 1/2" to 1.5" below M2/M3. Suddenly in 1995 They BOTH break to the upside compared to M3. "With corrrections" continues to break to the upside...

CPI with corrections(black) looks to have broken upwards disproportionately, starting at 1995. I wonder if this is:
- a: Too many corrections applied. --or--
- b: A change in the relationship between the supply of money and inflation that we should discuss/investigate.

jiimbergin
08-23-09, 07:24 AM
Just like to express my gratitude to EJ for a very enlightening article again.
Thank you Fred, Bart, MM, Rdress et al. for a most riveting and educational of web conversations.

It may pee some people off to have to rehash the same arguments over and over again (understandably) but it is most enlightening for those of us relatively new to the Kapoom theory to see some of the theory discussed along with links to older articles from Itulip, in a detailed conversation like this, as it helps contextulize the theory with the hindsight of what has passed - again thank you.:)

I too want to thank all of you. I have been here since last fall, but this has been an extremely enlightening discussion for me also. :):):)

jim

jiimbergin
08-23-09, 07:35 AM
I'm sure EJ'd post is correct long term and inflation is coming but it's not here yet. I don't see it anywhere. Disinflation is rampant and nice is everywhere a new value. Let's enjoy the transition.

I also still see disinflation everywhere. We have a trip to Delaware in 2 weeks. I have a Staybridge Suite there for $49 a night using hotwire. I go there several times a year and hotwire always gives me either a Ramada or the Staybridge. The $49 rate is about 40% less than I have ever gotten. In October we are going to Florida. The same thing there. The rate at the same suite hotel we always stay in at The Villages is about half of the regular rate. The cruise we are taking in October has a balcony room for a 7 day cruise at $529. We are getting fantastic rates on fruits and vegtables and milk. Far better than we have seen in years. :)

That said, we are buying ahead and doing some work on the house expecting inflation to rear its ugly head soon:eek:

jim

jk
08-23-09, 09:43 AM
CPI with corrections(black) looks to have broken upwards disproportionately, starting at 1995. I wonder if this is:
- a: Too many corrections applied. --or--
- b: A change in the relationship between the supply of money and inflation that we should discuss/investigate.
it is tautological to say this means a shift in velocity, but maybe that's where we need to look. the system has been swishing the money around faster.

on another matter:

The second argument that Ka-Poom Theory makes is that, eventually, without a specific time frame, the U.S. is on track to experience the same difficulties of any country with a large net external debt that cannot finance the monthly payments on that debt with either tax revenue or money borrowed from domestic or foreign sources. The U.S. is vulnerable to a balance of payments crisis.
because the discussion was mostly about inflation/deflation at the time fred put up his big post re-explaining kapoom theory, i think the above quote wasn't discussed. just a reminder to those learning about the current model here, the balance of payments crisis is associated with a mobilization of what i call "frozen" dollar assets CURRENTLY in the accounts of foreign holders. NO NEW MONEY IS REQUIRED. if enough foreign holders get antsy enough about the dollar, that's the game, it's over.

bart
08-23-09, 10:21 AM
not alone. neg rates + falling dollar moves gold up... 2001 - 2008

The shorter term or daily chart show an example or two of how it can be a trading aid, in both directions, but its far from 100% workable alone... as are most tools.

bart
08-23-09, 10:31 AM
as rdrees has decided to ignore your response, i'll jump in with a question...

It appears that he's not a weekend forum person.





http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=800&height=480&bgcolor=%2399FF99&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&id=ULCMFG,&transformation=lin,&scale=Left,&range=Max,&cosd=1987-01-01,&coed=2009-04-01,&line_color=%230000FF,&link_values=,&mark_type=NONE,&line_style=Solid,&vintage_date=2009-08-21,&revision_date=2009-08-21,&mma=0,&nd=,&ost=,&oet=,

what the hell is going on here? i see unit labor costs fall like a rock after the dot com cash... can't forget that! but they go up in this recession? why?


It can't possibly be a leading sign of inflation? ;)

bart
08-23-09, 10:35 AM
ah... so inflation 'is not always and ever a monetary phenomenon'. :D

now the usa is truly 3rd world...

wage inflation is political.

we are all learning.


Take a few rimshots from stock, you deserve them... :D



But do recall that artificial control and suppression of the yuan value is also a monetary phenomena... ;)


And all hail edookashun... http://www.nowandfutures.com/grins/smiley_tinfoilhat.gif

MarkL
08-23-09, 12:50 PM
it is tautological to say this means a shift in velocity, but maybe that's where we need to look. the system has been swishing the money around faster.

I must confess that I don't get it. As you say, M2/M3 are partially measures of the speed of money, but more importantly, with all the banks not lending and the "credit crisit" upon us, most would say money is swishing around slower! I still don't get why the black line goes up disproportionately.


...the balance of payments crisis is associated with a mobilization of what i call "frozen" dollar assets CURRENTLY in the accounts of foreign holders. NO NEW MONEY IS REQUIRED. if enough foreign holders get antsy enough about the dollar, that's the game, it's over.

I agree with the overall theme... "if enough foreign holders get antsy..." but remember that they have to get antsy in comparison to other currencies. This is why the DXY touched 90 during Q1Q2.

In the China thread, somebody said something like "Good luck getting your money out if everything goes to hell." Because China is an autocracy I don't the Yuan being a replacement currency to the dollar. The Euro govs are in similar state to the USA... many worse. What becomes the medium of exchange that people switch to to start the dollar collapse?

Again, the proposed future I'm discussing here is not the final-collapse phase, but the period leading up to it where people move out of the dollar... to something! What do they move to? Stocks? Lots of fear there. Treasuries? Bonds? A fair amount of $$ is moving to bonds... but that seems a difficult medium to do transactions in.

People aren't moving in droves to Gold yet, although I personally believe that will come... but there's not enough of that to supplant the dollar on a worldwide basis. Perhaps 10% can move to commodities and gold, which would result in a wild increase in those prices with gold hitting 10k/oz. But still 90% of the dollars in the world would move where? (Or even another 10%!).

Also, as mentioned (with a graph) in a previous post, the balance of payments of many other countries, is worse than ours. We're like... 24th if memory serves. So if the balance of payments issue were to trigger inflation or a dollar collapse, wouldn't we see evidence in these other European countries where the situation is much worse first and where they don't have the huge benefit of being the reserve currency of the world? As discussed in the other post... Iceland and England might be canaries in the coal mine... but there are many other countries with worse situations than ourselves.

MarkL
08-23-09, 02:17 PM
I too want to thank all of you. I have been here since last fall, but this has been an extremely enlightening discussion for me also. :):):) jim

Count me in on this appreciation... I'm no newbie. Been doing some posting for over a year and been re-watching ever since iTulip came back to life. A couple of years ago I traded a few emails directly with Eric on some issues. I owe him for not losing a big chunk of my change.

However, there are a number of questions that have been rolling around in my head for years. They aren't resolved yet, but they are starting to see some light of day here... Fred, GRG55, rdrees, jk have all had insightful and fact based commentary that I've appreciated, without being dismissive or using the "addressed it before" comment that gets old quick.

For the last 3 years, I've read 100% of EJ's writings, and close to 100% of the commentary on his articles. I haven't read all of the non-Eric posts, but I've read a lot of them.

Despite the claims of some, I haven't seen some specific issues addressed to my satisfaction. They haven't concerned me prior to now because "KA" was in place and the first part of the theory was happening. But now with iTulip indicating that "KA" is over, yet deflation turned down again this month and also on a 12 month cycle I think bringing them up and addressing them makes good sense.

And some still are not addressed, at least, IMHO. I think we should discuss the possibility that KA is not over... and that maybe the Fed hasn't yet spent enough to overcome the 60T-600T in CDR/CDSs that haven't fully hit the fan.

So I appreciate the efforts despite not being a newbie! -Mark

jk
08-23-09, 02:48 PM
I must confess that I don't get it. As you say, M2/M3 are partially measures of the speed of money, but more importantly, with all the banks not lending and the "credit crisit" upon us, most would say money is swishing around slower! I still don't get why the black line goes up disproportionately.
m2/m3 do NOT partially measure the speed of money. they are QUANTITIES. when multiplied by the relevant velocity measures, the product is GDP.
m * v = p *q = gdp
m=money supply
v=velocity
p= price level
q=quantity of production



I agree with the overall theme... "if enough foreign holders get antsy..." but remember that they have to get antsy in comparison to other currencies. This is why the DXY touched 90 during Q1Q2.

In the China thread, somebody said something like "Good luck getting your money out if everything goes to hell." Because China is an autocracy I don't the Yuan being a replacement currency to the dollar. The Euro govs are in similar state to the USA... many worse. What becomes the medium of exchange that people switch to to start the dollar collapse?

Again, the proposed future I'm discussing here is not the final-collapse phase, but the period leading up to it where people move out of the dollar... to something! What do they move to? Stocks? Lots of fear there. Treasuries? Bonds? A fair amount of $$ is moving to bonds... but that seems a difficult medium to do transactions in.

People aren't moving in droves to Gold yet, although I personally believe that will come... but there's not enough of that to supplant the dollar on a worldwide basis. Perhaps 10% can move to commodities and gold, which would result in a wild increase in those prices with gold hitting 10k/oz. But still 90% of the dollars in the world would move where? (Or even another 10%!).

Also, as mentioned (with a graph) in a previous post, the balance of payments of many other countries, is worse than ours. We're like... 24th if memory serves. So if the balance of payments issue were to trigger inflation or a dollar collapse, wouldn't we see evidence in these other European countries where the situation is much worse first and where they don't have the huge benefit of being the reserve currency of the world? As discussed in the other post... Iceland and England might be canaries in the coal mine... but there are many other countries with worse situations than ourselves.

all paper currencies are first and foremost, always and everywhere, paper. in the gentle. bearable, not-too-violent scenario, they will all drop gently against real goods, with minor movements against one another. then there are other scenarios....

MarkL
08-23-09, 07:24 PM
m2/m3 do NOT partially measure the speed of money. they are QUANTITIES. when multiplied by the relevant velocity measures, (what is a relevant velocity measure?) the product is GDP.
m * v = p *q = gdp
m=money supply
v=velocity
p= price level
q=quantity of production

My understanding is quite different.

M0=currency plus commercial and CB reserves. That's a quantity.

M1=currency, plus checking accounts & other demand deposits. M1 is typically 6X-9X each dollar of M0 due to the velocity of money as it is loaned and reloaned by banks. A current deflationary pressure (that the Fed is countering by printing) is that the banks aren't loaning money which puts downard presure on M1.

M2=M1+short term time deposits. M2 contains additional velocity factors because banks reloan against short term time deposits. Velocity here add to the velocity in M1, and is why M2 is bigger than M1 despite being based on the same amount of original currency+reserves(M0).

M3=M2+long term time deposits. M3 contains more velocity factors still because banks also can reloan against long term time deposits. Same as M2 but more so. I've simplified (removed) a bit of what's in the various M#s to clarify. But those things are just things banks loan against too!

To give an example of M1:

Let's say the Fed prints up $10,000 and gives it to Laura. This is M0.

Laura deposits the money in her checking account, which enables the bank to lend out $9000 to Joe (keeping a 10% reserve). Joe spends all of his money, but the store he spends it at promptly deposits it, and THAT bank lends out $8100 dollars to a guy who deposits it, but hasn't gotten around to spending it yet.

At this moment M0=$10,000. But M1 is $27,100 (Laura's 10k+Joe's Store's $9.1k+the next guy's deposit at 8.1k)

This happens multiple times (typically 6X-9X) and the speed with which it happens is the first measure of the velocity of money. Consumer spenders like Joe make it happen faster. It can happen multiple times in a single day!! Savers like Laura make it happen more slowly. If it happens slowly, 6X might be an appropriate multiplier for M0. If it happens faster 9X might be an appropriate multiplier.

In the example I gave, if the velocity of money had been twice as fast and two more loans/purchases/deposits had been made in the same time frame, M1 might be closer to $40,000 as two new people would have gotten $7290 & $6500 to spend respectively.

M2 is the same thing as M1, but with the loans against short term time deposits (and the cycle of money/loans/velocity surrounding them) calculated in, it's another measure of the multiplier effect of the velocity of money. M3 is more still.

M1, M2, & M3 (and the ratio's between them) are our best direct indicators of the velocity of money.

Let's take one more Example of M1
The Fed pushes a button and gives Citibank 10k. (How it's typically done these days). M0=10,000
Citibank desperately needs this money for reserves and so doesn't loan it.
M1=10k.

This is what's happening right now. The normal velocity factors are not kicking in, so the Fed/Gov is trying to print more and trying end-runs around the banks like cash for clunkers. The result... eventually, should be inflation. The question is whether the CDS/CDR amounts on the books of the banks will cause them to not lend for a short period longer and inflation will start soon, or whether they can absorb all the Fed has printed and more... resulting in potentially another disinflationary leg first (Ka...a.... Poom).

jk
08-23-09, 08:13 PM
My understanding is quite different.

M0=currency plus commercial and CB reserves. That's a quantity.

M1=currency, plus checking accounts & other demand deposits. M1 is typically 6X-9X each dollar of M0 due to the velocity of money as it is loaned and reloaned by banks. A current deflationary pressure (that the Fed is countering by printing) is that the banks aren't loaning money which puts downard presure on M1.

M2=M1+short term time deposits. M2 contains additional velocity factors because banks reloan against short term time deposits. Velocity here add to the velocity in M1, and is why M2 is bigger than M1 despite being based on the same amount of original currency+reserves(M0).

M3=M2+long term time deposits. M3 contains more velocity factors still because banks also can reloan against long term time deposits. Same as M2 but more so. I've simplified (removed) a bit of what's in the various M#s to clarify. But those things are just things banks loan against too!

To give an example of M1:

Let's say the Fed prints up $10,000 and gives it to Laura. This is M0.

Laura deposits the money in her checking account, which enables the bank to lend out $9000 to Joe (keeping a 10% reserve). Joe spends all of his money, but the store he spends it at promptly deposits it, and THAT bank lends out $8100 dollars to a guy who deposits it, but hasn't gotten around to spending it yet.

At this moment M0=$10,000. But M1 is $27,100 (Laura's 10k+Joe's Store's $9.1k+the next guy's deposit at 8.1k)

This happens multiple times (typically 6X-9X) and the speed with which it happens is the first measure of the velocity of money. Consumer spenders like Joe make it happen faster. It can happen multiple times in a single day!! Savers like Laura make it happen more slowly. If it happens slowly, 6X might be an appropriate multiplier for M0. If it happens faster 9X might be an appropriate multiplier.

In the example I gave, if the velocity of money had been twice as fast and two more loans/purchases/deposits had been made in the same time frame, M1 might be closer to $40,000 as two new people would have gotten $7290 & $6500 to spend respectively.

M2 is the same thing as M1, but with the loans against short term time deposits (and the cycle of money/loans/velocity surrounding them) calculated in, it's another measure of the multiplier effect of the velocity of money. M3 is more still.

M1, M2, & M3 (and the ratio's between them) are our best direct indicators of the velocity of money.

Let's take one more Example of M1
The Fed pushes a button and gives Citibank 10k. (How it's typically done these days). M0=10,000
Citibank desperately needs this money for reserves and so doesn't loan it.
M1=10k.

This is what's happening right now. The normal velocity factors are not kicking in, so the Fed/Gov is trying to print more and trying end-runs around the banks like cash for clunkers. The result... eventually, should be inflation. The question is whether the CDS/CDR amounts on the books of the banks will cause them to not lend for a short period longer and inflation will start soon, or whether they can absorb all the Fed has printed and more... resulting in potentially another disinflationary leg first (Ka...a.... Poom).
sorry, mark. the m's are quantities. the relationship between the m's may vary with velocity, if you wish to try to predict m[sub-n] from m[sub-x], but they are, nonetheless, quantities.
look up m*v = p*q =gdp. econ 101. as to your question "what is a 'relevant velocity measure'?", obviously if m*v= gdp, then if gdp is fixed, m0 will be associated with a v0, m1 with a v1, and so on, to make the multiplication work. that is, each measure m[sub n] will be associated with a corresponding measure of velocity, v[sub n]. otherwise the math doesn't work.

ThePythonicCow
08-23-09, 10:45 PM
In my view, it is a tad unfortunate that the "velocity of money" term ever entered into our money equations in the first place.

A financially sound small business with a good bookkeeper doesn't have this problem. They can take inventory of the goods and service capabilities they have in stock and of their bank accounts and turn out a proper balance sheet.

But large dynamic economies have no practical means to turn out a proper balance sheet, so have to estimate it from the transaction flow.

Unfortunately, it is not easy, sitting in a government cubicle, to know whether a set of ten transactions represent the same one item being bought and sold ten times, or ten different items. We can only measure the quantity of goods and services available by measuring the monetary transaction flow. So to get our goods and services to balance with our money supply, we have to use a "money velocity" factor. If we could take a static snapshot of a large economy's goods and services available for sale, rather than be constrained to only detecting the transactions on them, then we could drop this troublesome velocity factor on the other side of the equation.

MarkL
08-23-09, 11:37 PM
sorry, mark. the m's are quantities. the relationship between the m's may vary with velocity, if you wish to try to predict m[sub-n] from m[sub-x], but they are, nonetheless, quantities.
look up m*v = p*q =gdp. econ 101. as to your question "what is a 'relevant velocity measure'?", obviously if m*v= gdp, then if gdp is fixed, m0 will be associated with a v0, m1 with a v1, and so on, to make the multiplication work. that is, each measure m[sub n] will be associated with a corresponding measure of velocity, v[sub n]. otherwise the math doesn't work.

I'm not sure we disagree... and if we do it's not by much.

So, I did re-research the formula. It's been 25 years since Macroecon 101 and it was a good refresher. FYI these are the first 2 links that Google brought up... gosh knows if they're "best". I reviewed the first five links and also did a search on the equation you gave me plus M2 and M3.
http://www.ses.wsu.edu/People/faculty/rosenman/econ102/newppt/pdfs/week9_2.pdf
http://iws.ccccd.edu/jspina/_private/Arnold%208e%20Ch%2013.pdf

Interestingly, none of the first 5 links mention M2 or M3. I agreed with all of the PPT/PDF/class materials... for a generic "M." Took me back to university Macro Econ... and a hypothetical "M" is great in theory. But perhaps less usable in complex society... which is why we have M2, M3, revised CPI, etc.

So back to real life.
First, I agree with you that M0-M3 are quantities.

However...
M0*V1=M1
M1*V2=M2
and so on.

M1 doesn't exist without velocity. It is a direct function of M0*velocity. For all practical purposes, it is no different from M0... until you multiply it times velocity. Thus, M1 is no different from M0, except for velocity. One could eeevvvveeen say then... that M1 is a measure of of the velocity of M0.

Sounds like I'm backtracking on you? Not really. I think the direct measurement of amounts in banks that results in M1 and M2 is a quantity. I agree with you. I just think that that measurement, properly interpreted and if accurate, is effectively the same as M0 except for the differential of velocity. Thus M1 is a measurement of quantity... that properly interpreted is the indicator of the velocity of M0.

Note the new word. I'm backing off of calling M1 a measure of velocity and agreeing it's a measure of the quantities of amounts in banks. I also believe M1 is an indicator (not a measure) of the velocity of M0

There is a fudge factor you could claim. I'm sure there is some "misreporting" of M1 that causes it to differ from M0*"true" velocity (like we could ever know that!). Nevertheless, it's the best indicator of velocity that we have... and it is a quantity.

The one missing elephant in the room regarding the above, is bank reserves and lending laws. All of the above is only true if reserves and lending laws are considered a constant. With the repeal of the Glass-Steagall act, they were not!! As reserves were allowed to shrink dramatically and lending laws and policies were loosened, velocity increased rapidly increasing M3 (and M3+CDRs+CDSs (not measured in M3)) to a degree never before seen by man.

Summary
M(x) should be able to be thought of as (M(x-1) * velocity) as I do. In any given year and when Mx is compared to another Mx this makes excellent sense and many economists do think of it as our best (only!?) indicator of velocity. But when Mx is compared to itself over time, factors such as reserves and laws must be factored in. In that scenario (which is common) at it's core Mx is most accurately a measurement of amounts in banks as you state.

Whatchathink?

a warren
08-24-09, 05:21 AM
Off on vacation for 10 days and just now catching up with this excellent thread. Long before reading iTulip I was a convert to the idea that deflation was impossible in a world where printing money was a choice and all other items of human need, family, food, land, energy, etc. were limited. Currency is the sea in which all our requirements float. It is a sea of unlimited bounds and in that sea needs rise.

That said, I still see disinflation, (iTulip term), everywhere. In my industry, it's still rampant. We don't expect a bottom for six months. This isn't deflation it's just a stuff gets cheaper story and it drives out the less well funded or less adept at inventory management. But that's just our quirky little industry so I thought it might just be us.

But we just returned from vacation in Hawaii and there is definitely no upturn there. Flight...cheap, under $400 per round trip and the employees of the airline could not have been nicer. Really, I'm not making this up and I've been a frequent flyer for 20 years. Hotel...let me say, I made the reservation three months ago with Hilton because my long time associates at Marriott had not gotten the message that there was a price war going on. By the time I made some last minute stop over reservations in LA, the full service Marriott had dropped from $229 to $87 a night. Their staff had still not gotten the message about being nice but it was cheap.

Rentals from surf boards to cars were very reasonable and again, everyone was very accomodating and nice. This is our forth trip to Hawaii and overall it was the best. Maybe we've slowed down and learned to enjoy our time there. But there is also a change in aloha-land. Maybe it's people wanting to earn your trust and your business. It's a special place and I was quite moved that we were able to arrive at a time of balance when outsiders were providing an equal value to insiders.

There were no crowds at the beaches, it was open and fantastic for the kids. Everyone working at the resorts were, well, working.

And back to work...we've been growing some and hiring a few of our friends so we have to move. There's a glut of commercial space locally and again everyone is nice. Prices are down 30% we're trying to match our requirements to a local space.

I'm sure EJ'd post is correct long term and inflation is coming but it's not here yet. I don't see it anywhere. Disinflation is rampant and nice is everywhere a new value. Let's enjoy the transition.

The disinflation you speak of relates to suppliers who have very high fixed costs but relatively low variable costs. Airlines and hotels and even surfboard hirers cost change very little irrespective of the number of customers they have. Even commercial property owners have similar circumstances. So the disinflation you are experiencing is only part of the story. You are part compensating your suppliers sunk costs. Its the new costs for replacement inventory that some of us are yet to experience.

MarkL
08-24-09, 10:54 AM
I submit that to the understatement of the decade award.

And I'm not sure we're going to get there for a good long while. Studies have shown that as populations have increased the distance between a criminal and his victim effectively increases. Thus we are in for a continuation of crime waves, not a slowing of tehm.

I have no "real" idea what the creators of CDS/CDRs expected from their efforts, but there are several possibilities:

1: They bought into the "housing will always go up" philosophy as almost everybody else did and honestly believed their instruments as good as they claimed.
2: They felt their instruments might crash someday, but felt that crash would only hurt impersonal banks... plus many of those banks had insurance(!) ...and thus they couldn't conceive that it might crash the entire world.
3: They honestly knew they were creating a ponzi scheme that might set back capitalism and the world.

Of all of these options, I consider #3 the least likely. Thus, Bart, one vote from me for your Unconcious Conspiracy theory.

I'll bet you to this day, that few if any individuals consider themselves personally responsible for this crime against humanity.

metalman
08-24-09, 09:56 PM
However, even branded chains have been quietly closing outlets, shedding staff and "re-engineering" meals with smaller portions or cheaper ingredients, according to the British Hospitality Association. Industry experts said the restaurant business was experiencing its toughest time since the 1980s.
http://www.independent.co.uk/life-st...e-1776485.html (http://www.independent.co.uk/life-style/food-and-drink/news/crisis-hits-restaurants-as-diners-decide-to-stay-home-1776485.html)

from mooncliff... (http://www.itulip.com/forums/showthread.php?p=118221#post118221)

Casual Observer
08-25-09, 12:17 PM
I have a very well made and kept house that's selling for about 100k less than what is owed on it. Aside from that I have no debt and have two years worth of expenses in cash.

Should I buy whatever durable goods I think I'll need, invest to hedge against inflation, and then allow inflation to erase the mistake I made purchasing the house?

cjppjc
08-25-09, 11:23 PM
And I'm not sure we're going to get there for a good long while. Studies have shown that as populations have increased the distance between a criminal and his victim effectively increases. Thus we are in for a continuation of crime waves, not a slowing of tehm.

I have no "real" idea what the creators of CDS/CDRs expected from their efforts, but there are several possibilities:

1: They bought into the "housing will always go up" philosophy as almost everybody else did and honestly believed their instruments as good as they claimed.
2: They felt their instruments might crash someday, but felt that crash would only hurt impersonal banks... plus many of those banks had insurance(!) ...and thus they couldn't conceive that it might crash the entire world.
3: They honestly knew they were creating a ponzi scheme that might set back capitalism and the world.

Of all of these options, I consider #3 the least likely. Thus, Bart, one vote from me for your Unconcious Conspiracy theory.

I'll bet you to this day, that few if any individuals consider themselves personally responsible for this crime against humanity.


Most will admit to 1 or 2. I think in their heart of hearts some version of 3 is the truth. If a person doesn't spend much time thinking about something it does not mean they don't have thoughts. IMO I don't think they spent much time thinking about it.

metalman
08-26-09, 12:46 AM
Most will admit to 1 or 2. I think in their heart of hearts some version of 3 is the truth. If a person doesn't spend much time thinking about something it does not mean they don't have thoughts. IMO I don't think they spent much time thinking about it.

doubt any of them thought about it any longer than a used car salesman wonders about the last asshhole he sold a car to.

Ghent12
08-26-09, 02:19 PM
doubt any of them thought about it any longer than a used car salesman wonders about the last asshhole he sold a car to.
Bingo. "This unit gets sold today!"

rdrees
08-26-09, 09:19 PM
Well, I never could quite figure out the multiple quote thing, so my responses are in bold inside your responses. Sorry.


Actually, no. During the entire 48 month decline in CPI from 1930 to 1934 there was never more than one month when CPI increased month over month and never year over year.


http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=800&height=480&bgcolor=%2399FF99&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&id=PPIENG,CPIAUCNS,&transformation=lin,lin,&scale=Left,Right,&range=Custom,Custom,&cosd=1930-01-01,1930-01-01,&coed=1931-07-01,1931-07-01,&line_color=%230000FF,%23FF0000,&link_values=,,&mark_type=NONE,NONE,&line_style=Solid,Solid,&vintage_date=2009-08-20,2009-08-20,&revision_date=2009-08-21,2009-08-21,&mma=0,0,&nd=,,&ost=,,&oet=,,



This time around, CPI and energy have been rising continuously for several quarters.





http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=800&height=480&bgcolor=%2399FF99&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&id=PPIENG,CPIAUCNS,&transformation=lin,lin,&scale=Left,Right,&range=Custom,Custom,&cosd=2008-01-01,2008-01-01,&coed=2009-07-01,2009-07-01,&line_color=%230000FF,%23FF0000,&link_values=,,&mark_type=NONE,NONE,&line_style=Solid,Solid,&vintage_date=2009-08-20,2009-08-20,&revision_date=2009-08-21,2009-08-21,&mma=0,0,&nd=,,&ost=,,&oet=,,


I'm not sure it makes sense to include the portion of this recession prior to the economic crisis in late 2008, which is when the deflation began. Although those quarters certainly qualify as part of the same recession, it was the huge obliteration of dollar wealth from the financial crisis (and the fall in oil prices from their peak) that sparked the deflation that began in July 2008. If you start from there, and you use PPI (which is "EJ's" preferred metric since it's less of a political football) you get:


7/08: 205.5
8/08: 199.0
9/08: 196.9
Falling prices each month and for the entire Q2 2008 quarter.


10/08: 186.4
11/08: 176.8
12/08: 170.9
Again-falling prices each month and for the entire Q4 2008 quarter. The end of this quarter is when the Fed really turned on the taps are set rates at 0% and engaged in quantitative easing. What happened?


01/09: 171.2
02/09: 169.3
03/09: 168.1
Mostly more of the same--aside from a tiny upward blip from December to January, there's month to month and a quarterly fall in prices. Despite 0% fed funds rate the whole Q1 2009 quarter.


04/09: 168.7
05/09: 170.2
06/09: 174.1
Now we get our first quarter of month to month increases and a quarterly increase to boot. No doubt about that, and that would be different than the Great Depression. However, the total rise in prices over the quarter was only 3%, which is certainly not out of the realm of the "normal" type inflation we've seen most of the rest of the past 20 years. But then we get this:


07/09: 172.7
Now the PPI is going back down again! Granted, it's down less than a percent from the last month, but down it goes again. So you've got three straight quarters of consistent month on month deflation, a quarter of modest increases, then a downward path again. Again, I'm not claiming that we're going to see anything like the mother of all deflations -- the Great Depression, but something is clearly happening here, and it's not generally inflation. And don't you think it's remarkable that we would see a fall in the PPI in July 2009 more than seven months after the fed dropped interest rates to zero? And we had something like $300 billion in quantitative easing? That demonstrates pretty clearly to me that there are very, very strong deflationary pressures at work here.




It's case closed on the deflation spiral. Why? Because double entry bookkeeping works better when you don't have to balance entries on one side of the balance sheet with physical gold on the other. The determination to do that in the early 1930s is the reason the U.S. and only the U.S. experienced a deflation spiral. No other country did. See The truth about deflation. (http://www.itulip.com/forums/showthread.php?p=57193#post57193) Deflationists such as Mike Shedlock don't want to talk about this for fear of alienating the goldbug readership that's attracted to the banker bashing rhetoric. But facts are facts. Sans gold standard, a central bank can, in the famous words of Alan Greenspan in 2003, "Theoretically expand its balance sheet infinitely." We never forgot that line. It turned out to be prophetic.




Even if prices did begin to fall again, we trust the Fed to expand its balance sheet even more. The principle of buying assets with government money has extended beyond the FIRE Economy. The government is willing to print money and buy cars, and now print money to buy appliances. Why not buy commercial real estate? Houses? Whatever it takes to support prices. Why not? Who a year ago would have imagined "Cash for Clunkers"? Sometimes I think the difficultly with the deflationist mindset is a lack of imagination. Betting against this principle of government using its balance sheet to substitute public for private credit and money has been a losing proposition for over 10 years.

We have over the years had to address both scenarios, the deflation spiral case and the Japan since 1993 stag-deflation case. The deflation spiral case is closed. Anyone who brings it up again will be directed to various articles here that explain why.


I've seen the word "deflationista" quite a bit around this website, and I don't know precisely what it means. But I'm probably not exactly what you would define as a deflationista. First, I agree with you that any person who thinks that we could see anything like the price declines that occurred when we were on the gold standard is a fool. The economics are so different as to be almost an irrelevant point of comparison. I also agree that in a fiat currency regime such as ours, there is no theoretical limit to the amount of money the fed can print and that we can always have inflation, eventually, if we want it. We're definitely of the same mind there.


But just because it's infinitely easier to have inflation these days doesn't mean that deflationary pressures have gone away. From a money demand side, the immense destruction of wealth in late 2008 has created a environment where money is incredibly dearer, and I think it's easy to underestimate how strong that deflationary pressure can be. I don't care if you call it a deflationary spiral or a deflationary event or a deflationary environment or what, but just because we're off the gold standard does not mean that there can't be long-term situations putting serious downward pressure on prices. I see such a situation now.


Then there's the money supply-side problem. As I've noted before, newly printed fed money has to go through the banks before it gets out into the wider economy, and if the banks are soaking up a bunch of that money, the fed's efforts are blunted. Consider an analogy: the fed is the fire hydrant hooked up to the city water mains and is essentially an infinite supply of water. The banks are the fire hoses delivering the water to the fire. Ka-Poom theory seems to focus very heavily on the resources of the fire hydrant (the fed), but hasn't paid too much attention to the fire hose (the banks). If the hose is clogged up and leaky, the size of the city water reservoirs becomes a whole heck of a lot less important. I think that's what we're seeing here. Yes, the Fed's balance sheet is balooning, but a decidedly smaller portion of that money is making it out into the economy. In other words, I do not believe that we will see price increases that come close to matching the increase in the Fed balance sheet even when consistent inflation does return.


With respect to underestimating the fed's ability to inject inflation into the economy in all sorts of unpredictable ways, you're right. They can do a lot to create inflation. But will they? They've already backed off quantitative easing, cash for clunkers is over, and the mood of the country it seems to me has gone decidedly sour on the levels of our debts. While the fed has the ability to do many things, the political winds may prevent them from actually carrying them out.


But all this brings me to another point of skepticism I have with Ka-Poom. When we do get back to consistent inflation, which I believe we will, why must it be large? The deflationary pressures still hang very heavily around our economy with crashing consumer demand and still all too poor bank balance sheets. When the fed gets us back to inflation, these deflationary pressures should temper high levels of inflation for some time to come. And if you have so much faith in the fed to have the willpower to make inflation come back, why do you lose faith in the ability of the fed to tame it once it's here, especially given that they will have assistance from slumping consumer demand? I think it more likely that we we get consistent inflation back, it will return to the moderate levels we've seen for most of the last 20 years.


That still leaves the Japan case. The deflation there is clearly not a self-reinforcing spiral. From 1999 to 2008, the Japan CPI drifted down 2.3%.


http://www.itulip.com/forums/../images/japancpi.gif


That kind of deflation is more like the kind the GavKal talks about, the good kind that increases the purchasing power of income. In fact, whie consumer prices 2.3% fell in Japan, wages went up by nearly 8%!


http://www.itulip.com/forums/../images/japanwages.gif


Now, neoclassical models tell us that's not possible. The whole matter of a generation of brainwashed economists is too big in scope to go into here, but suffice it to say when we see employment in the IT field in Silicon Valley fall 26% from 2001 to 2008 while wages increased 69%, the theory of NAIRU has problems. When we crack open NAIRU we find the thick, gooey, ideological filling: the relationship between prices and wages has been oversimplified for political convenience.

But I digress. If the U.S. were able to manage a "deflation" as Japan has experienced since 1993, that would not be such a bad thing. For that we'd first need to generate a current account surplus to offset a capital account deficit. Since our economy is structured around a current account deficit and depends on a capital account surplus to finance employment, such restructuring will require a major transformation in labor markets and investment that will take ten years or more. In the mean time, the value of the dollar drifts down and down, as it has since 2001 except for the period of deleveraging when the world ran for dollars to unwind leveraged bets.

I'm not sure if I agree with your assessment of Japan here. I went to the OECD site and pulled up these annual numbers that go back a little further than yours (since Japan's problems really began in 1993, not 1999), and go through the most up to date year they have, 2008. Also, instead of using manufacturing wages, I went with all private sector wages, which gives a much better cross section of the Japanese experience. Here are the numbers:

Prices; Wages
1993: 100.1; 99.6
1994: 100.8; 101.4
1995: 100.7; 103.2
1996: 100.8; 104.9
1997: 102.6; 107.0
1998: 103.3; 105.6
1999: 102.9; 104.1
2000: 102.2; 103.8
2001: 101.4; 102.9
2002: 100.5; 99.9
2003: 100.3; 99.8
2004: 100.3; 98.9
2005: 100.0; 100.0
2006: 100.2; 101.0
2007: 100.3; 100.1
2008: 101.7; 99.5

This data demonstrates that Japanese workers were paid less in 2008 than they were all the way back in 1993, while the prices they are paying are higher. These were not particularly good years for Japan, as prices rose more than 1.5% while wages fell a bit.

Moreover, the 1999-2006 time frame you originally used tells a very different story when you use the broader, all private sector wage metric: From 1999 to 2006, prices did indeed fall by more than 2%, but wages actually fell over 3%--again, not good years for Japan. Unless, apparently, you happened to work in manufacturing. But in hindsight, the wage increases over that time period for Japanese factory workers was most likely related to the export boom to the U.S. fuelled by cheap credit, and was not sustainable.

So I'm going to have to disagree with you when it comes to Japan's deflation being "good" for them. I don't think it was--at least it wasn't for most Japanese people. Consider that, over the same time period 1993-2008 when Japanese wages fell slightly, American wages rocketed up almost 40%! So the pain Japan underwent through that same time period relative to us was actually quite astonishing. And by the way, American prices over that longer 1993-2008 time period rose less than 33%, which means American workers not only came out ahead relative to Japan over that time period, but actually came out substantially ahead in absolute terms. America doesn't look too bad after all, eh?

In any event, I'm still not entirely clear why you think that kind of thing couldn't happen here, whether you call it a deflationary spiral or "stag-deflation." I know you emphasize that Japan had a current account surplus while we have a current account deficit, but I'm not sure that really answers the question. I mean, Japanese public debt skyrocketed over that time period as the Japanese government borrowed and borrowed and borrowed in efforts to stimulate their economy, and it would seem to me that would provide sufficient counterweight to the fact that, more narrowly, they exported more than they imported.


You misunderstand the theory. There are two major sources of inflation and many minor ones that lead to our theory that we will experience a rising in inflation no later than Q1 2010. These are detailed in Everyone is wrong, again – 1981 in Reverse Part II: Nine Signs of Inflation (http://www.itulip.com/forums/showthread.php?t=9704). The two major sources are cost push from energy imports and a reduction in price competition among producers due to bankruptcies and consolidation. Rising energy costs are inflationary.

Disagree. A weak dollar is the primary reason for high energy costs. Monetary and fiscal policy are the primary reasons for dollar weakness. Thus high energy costs are a result of monetary and fiscal policy.

I would certainly not dispute that higher energy prices lead to higher prices, and if we have indeed reached peak cheap oil, the whole world will see rising costs for everything. But your prediction is about the United States specifically. That means that you are predicting the dollar to fall RELATIVE to other currencies making us experience MORE cost-push inflation than other countries because of the declining dollar. But that's just not happening at this point. Since 2006, the dollar index has never gone higher than 91 and never lower than 71. Today, we're around 78, which is just a bit lower than the middle of that range, and a point HIGHER than where we were a year ago. In other words, you can't blame energy inflation on a weak dollar at this point in time because the dollar is not particularly weak. What's more, the dollar has soom room to fall and still stay within that range.

Now don't get me wrong: I recognize that the dollar is substantially lower today than in 2001, for example, which means oil is more costly for us relatively than back then. But in the context of the post-2006 more recent dollar climate, we haven't been paying much more for oil than anyone else in the world has.

The second part of the theory is the one I just don't get -- "A reduction in price competition among producers due to bankruptcies and consolidation." As I've noted before, that is just squarely contradictory to the classical supply-demand graphs we all learned in grade school. Absent a true monopoly, producers have no pricing power in a capitalist economy. Only supply and demand set the price, and when demand is lower, price is lower, all other things being equal. And this second part of the theory just does not jibe with that. Yes, there will be price volatility when excess inventory is burned off after demand drops. But the new equilibrium price will be lower than it was before because less people want the product. Rising energy costs, of course, can make prices higher independent of this phenomenon, but as you acknowledge that's a different phenomenon.

Let's say that a town has four hardware stores, and three go out of business because of collapsing demand. In other words, there's only enough demand now to support a single store. You seem to be saying that once the dust settles, the single hardware store will start gouging consumers because they've got no competition. But that won't work because a competitor will start up and undercut the price gouging with the price the market can support. And since there's demand for only one store, the price gouging hardward store will go bankrupt because everyone will shop across the street at the new, cheaper hardware store. And if the new one gets cocky when they're the only hardware store left standing and tries itself to gouge, they'll be driven out of business by yet another new start up. So I just cannot understand how Ka-Poom would posit that the "reduction in competition among suppliers" will result in higher prices for consumers.


Are we both looking at the same graph? Both the PPI and CPI have risen for six months straight until July. The volatility is there, but in the other direction from the one you see. The trend is clearly inflation with an occasional one month dip, not deflation with an occasional one month rise. In fact, we expect the sharp rise in inflation in June was due to seasonal factors. June and July summed average to the trend that started in early 2009.


http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=800&height=480&bgcolor=%2399FF99&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&id=PPIENG,CPIAUCNS,&transformation=lin,lin,&scale=Left,Right,&range=Custom,Custom,&cosd=2008-01-08,2008-01-08,&coed=2009-07-01,2009-07-01,&line_color=%230000FF,%23FF0000,&link_values=,,&mark_type=NONE,NONE,&line_style=Solid,Solid,&vintage_date=2009-08-20,2009-08-20,&revision_date=2009-08-21,2009-08-21,&mma=0,0,&nd=,,&ost=,,&oet=,,


If you take the year over year view, you can create a graph that looks like deflation.


http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=800&height=480&bgcolor=%2399FF99&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&id=PPIENG,CPIAUCNS,&transformation=pc1,pc1,&scale=Left,Right,&range=Custom,Custom,&cosd=2008-01-08,2008-01-08,&coed=2009-07-01,2009-07-01,&line_color=%230000FF,%23FF0000,&link_values=,,&mark_type=NONE,NONE,&line_style=Solid,Solid,&vintage_date=2009-08-20,2009-08-20,&revision_date=2009-08-21,2009-08-21,&mma=0,0,&nd=,,&ost=,,&oet=,,


But if you look carefully you can see that PPI and CPI have gone from 45% year over year to -40% year over year over the course of one year. +45% + -40% = +5%, an increase not a decline. Any way you cut it, PPI and CPI are rising.

We are not looking at the same graph. Your graph has CPI, which "EJ" says is unreliable and toyed with by our government, and it has PPI, but only for energy. Take a look at my figures up above which show the most simple, broad based, least "fooled with" metric, which is simply PPI for all commodities. Since July 2008, PPI has risen only four times: 12/08-1/09, 3/09-4/09, 4/09-5/09, and 5/09-6/09. Every other month to month figure is a decline--including the most recent figure: 7/08-8/08, 8/08-9/08, 9/08-10/08, 10/08-11/08, 11/08-12/08, 1/09-2/09, 2/09-3/09, and 6/09-7/09. Is that a deflationary spiral? I don't know, maybe, maybe not. But no matter what you call it, it's been a generally deflationary year, with monthly decreases outnumbering monthly increases 2:1.

True, for the last four months, increases outnumbered decreases 3:1. But the increases were pretty modest and the last figure is a decrease. So while we may disagree on what we think will happen next, I don't think it's fair to say that the numbers speak for themselves.


That is not how money is created to finance cash flows in a modern hybrid fiat and endogenous money system. Money is lent into being by the act of borrowing. If households and businesses aren't doing it, the government will do it for them, and has. This is a philosophical point that deflationists disagree with.

I guess I would agree with you to a certain extent: yes, governments can step in and borrow to create demand in an economy. But can they replace it? I think the Japan example shows pretty strongly that a government can borrow through the teeth and still not be able to fully replace lost consumer demand--their public debt increased mightily while prices stayed mostly stagnant. It would seem to me--and I think you would agree--that consumer demand in America is going to be signficantly down from its peak for some time to come. I seriously doubt that the federal government can more than make up for that lost demand, especially since we're already starting in a pretty signficant hole.


The CPI and the PPI are clearly rising as you can see in the charts above.

See my above comments. The numbers are not nearly as "clear" as you would suggest, I think, as there are a number of ways to look at them. And if you want to be super-technical about it, it is most accurate to sat that CPI and PPI is currently "falling" as in we are presently experiencing a drop, not a rise.


The U.S. cannot experience deflation ala Japan unless the U.S. can export 20% of the world's capital flows instead of importing 40% of them. Who shall we export to? From what industries? With what workers?

No doubt this one is different! Here's the chart we show to spell it out.


http://www.itulip.com/forums/../images/1980vs2009.gif


This depression was not created on purpose by the Fed off a CPI at 15%. The Fed is busy building a foundation for inflation, not destroying an old one. They think they are stopping a second Great Depression. When the history books are written, it will be noted that the Fed did not understand the unique risk that the U.S. as a net debtor faces in 2009 that it did not face in 1930 when the U.S. was a net creditor and devalued the dollar by 70%. Devaluation by fiscal deficit spending is a dangerous policy.

I'm not sure if I'm following you on this one. At least from the narrow perspective of net creditor vs. net debtor, why does the latter create special risks for inflation? I see how it creates special incentives for inflation, but not necesarily special risks that might result in uncontrollable inflation. And just to be clear, I'm not particularly skeptical on this point, I just don't know if I get it.


That's precisely the point: they can't. Where are they going to get oil for less than $70 a barrel? Look at the PPI again.

But all other things aren't equal. The dollar has been devalued. Oil is $72 not $16 as in 2001.

Well, the PPI says that producers are paying nearly 20% less for all commodities today than they were last July. Why, then, would they feel compelled to raise their prices if their input costs are so much lower? Yes, they may be higher than a couple years ago, and way higher than 10 years ago. But we're talking about prices that we're paying right now at Target, for example. If Target is charging $5 for a notebook today, why would they suddenly start charging $6--a 20% increase--when they pay 20% LESS for the components than just last year?


The PPI is rising for all classes of goods.

See above. I don't think that's technically accurate, and at the very least, the issue is not nearly as simple as you suggest, I think.


Oh, really? We've been trying to tell you: we're not in Kansas anymore.


http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=800&height=480&bgcolor=%2399FF99&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&id=ULCMFG,&transformation=lin,&scale=Left,&range=Max,&cosd=1987-01-01,&coed=2009-04-01,&line_color=%230000FF,&link_values=,&mark_type=NONE,&line_style=Solid,&vintage_date=2009-08-21,&revision_date=2009-08-21,&mma=0,&nd=,&ost=,&oet=,
What? Unit labor costs shot up during the FIRE Economy Depression?


But wait--unit production costs are only half the story, right? Your graph shows that each unit of labor costs about 7% more than it did at the start of the recession. But unemployment is up nearly 100% over the same time period, essentially doubling from 5% to 10%! That's a lot fewer employees to pay, despite their somewhat higher unit costs. So I think my point stands: overall labor costs are down sharply for producers mostly because they are employing far less people.

Your graph seems to suggest that unit labor costs often tend to increase in recessions, and that makes a certain amount of sense. Oftentimes, laid off workers are given severance packages where they are paid for a while after they leave. That presumably pushes the unit production cost higher because businesses are paying salaries for people who don't work for them anymore, pushing up the average per-actual-worker pay. Also, a lot of businesses cut hours instead of laying off workers. But because certain labor costs like health insurance are fixed, the same worker at the same hourly pay will cost more per unit if they work fewer hours, right? But they'll still cost the employer less money overall!

In any case, I think the facts are on my side that labor costs are falling for employers overall, even if per unit cost is rising, given the huge numbers of people being laid off and given fewer hours being worked. This, in combination with slumping consumer demand, suggests that inflationary pressures on producers are not currently imminent, and that the current pressures are deflationary.


No, prices just have to go higher, and they have.

Again, PPI and CPI are higher, not lower.

I think that oversimplifies the issue. PPI and CPI are lower both month on month and year on year, I think you would have to acknowledge. So this is more of a prediction of trend than fact. And on that prediction, we have some disagreement.


The relationship between the money supply and inflation, with time lags, hard to dispute.



http://www.itulip.com/forums/../images/longtermcorrelationmoneyprices.gif

take the extreme case, Argentina. In 2002, virtually no credit. A cash economy. Banking system? Dead. Inflation? Over 20%.

I'm with you to a point. As I acknowledged before, we're in a very different monetary world than the gold standard of the early 1930s, and I would never dispute that money supply is intimately related to inflation. But as I pointed out before, it's unclear to me that we'll end up seeing as great an increase in money supply as the fed's balance sheet would suggest.

Actually, this brings me to a related point. I've seen on this site that Ka-Poom makes a real effort to distinguish asset price inflation from consumer good inflation. True, they are distinct, but aren't they more closely related than that would suggest? I mean, wasn't one of the major criticisms of Greenspan that he failed to acknowledge the close correlation between asset prices and consumer prices by keeping interest rates low in the face of huge stock market and housing bubbles because price inflation was relatively stable? In other words, Greenspan kept interest rates too low for too long because he failed to understand that loose monetary policy was producing an asset bubble.

Well, the same should be true on the way down, right? A huge collapse in asset prices should be just as much an indication of a collapse in money supply as an asset bubble would be an indication of too much money supply. And the amount of destruction of wealth from the collapse in asset prices over the last several months has been astonishing. To me, that must also be taken into account at least to some extent when determining whether we'll see high consumer prices going forward. Significantly lower asset prices combined with significantly lower producer prices from this same point last year seem to suggest a deflationary environment. Perhaps it can be overcome, but the brakes are on and it should take a lot more engine than normal to get over them.


Yes, but why did the Depression era deflation end? The Fed took the U.S. off the gold standard and devalued the dollar 70%. Why did the 1970s inflation end? The Fed raised short term interest rates to 18%. What will result from QE, massive money growth, zero interst rates, a depreciating dollar and a 12.3% FY2009 fiscal deficit? Not deflation.

No, probably not long term significant deflation, and almost certainly nothing like the Great Depression. As I said above, I think the fed will get us back to an inflationary environment. But at the same time, consider that we've had all those policies you mentioned for several months and we still saw prices fall from June 2009 to July 2009. You say there might be something seasonal to that most recent dip, but consider this: between 1999 and 2009, the PPI fell from June to July in only three years, while rising in seven. Over the same time period, PPI fell from July to August in three years, but rose in only six (one year was flat). So whatever seasonal factors might be at play, the data doesn't seem to suggest that they're any different from what should happen next month.

So while I don't think we'll have lots of deflation for too long, what you've pointed out does not necessarily mean soaring inflation for a long time either. We just might have flat to moderate inflation.


They have no external debt. They owe the money "to themselves." Foreigners not only hold our debt but we have to keep borrowing from them to repay the debt we owe them and also finance the operations of our government.

Now that's just not accurate. Consider external debt to GDP, with external debt defined as "the total public and private debt owed to nonresidents repayable in foreign currency, goods, or services."

http://en.wikipedia.org/wiki/List_of..._external_debt (http://en.wikipedia.org/wiki/List_of_countries_by_external_debt)

We are at 95%. That's much higher than most countries, as we have the 24th highest ratio out of 202 countries. However, Switzerland, the UK, the Netherlands, France, Germany, Denmark, Norway, Finland, and Australia all have higher ratios than us. Some are way higher--France, for example, is at 212%



Good discussion.

Agreed and hope it can continue. My work can sometimes take me out of action for a bit, but if you respond, I'll promise to get back to it as soon as I can.

FRED
08-26-09, 10:39 PM
Well, I never could quite figure out the multiple quote thing, so my responses are in bold inside your responses. Sorry.

Fixed it for you.


I'm not sure it makes sense to include the portion of this recession prior to the economic crisis in late 2008, which is when the deflation began.

All of the graphs that the Fed's web site spits out show periods of recession in gray. The reason the background of both graphs is entirely gray is that both graphs show only the first six quarters of each period when the economy was in recession.


http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=800&height=480&bgcolor=%2399FF99&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&id=PPIENG,CPIAUCNS,&transformation=lin,lin,&scale=Left,Right,&range=Custom,Custom,&cosd=1930-01-01,1930-01-01,&coed=1931-07-01,1931-07-01,&line_color=%230000FF,%23FF0000,&link_values=,,&mark_type=NONE,NONE,&line_style=Solid,Solid,&vintage_date=2009-08-20,2009-08-20,&revision_date=2009-08-21,2009-08-21,&mma=0,0,&nd=,,&ost=,,&oet=,,



http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=800&height=480&bgcolor=%2399FF99&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&id=PPIENG,CPIAUCNS,&transformation=lin,lin,&scale=Left,Right,&range=Custom,Custom,&cosd=2008-01-01,2008-01-01,&coed=2009-07-01,2009-07-01,&line_color=%230000FF,%23FF0000,&link_values=,,&mark_type=NONE,NONE,&line_style=Solid,Solid,&vintage_date=2009-08-20,2009-08-20,&revision_date=2009-08-21,2009-08-21,&mma=0,0,&nd=,,&ost=,,&oet=,,

Although those quarters certainly qualify as part of the same recession, it was the huge obliteration of dollar wealth from the financial crisis (and the fall in oil prices from their peak) that sparked the deflation that began in July 2008. If you start from there, and you use PPI (which is "EJ's" preferred metric since it's less of a political football) you get:


7/08: 205.5
8/08: 199.0
9/08: 196.9
Falling prices each month and for the entire Q2 2008 quarter.


10/08: 186.4
11/08: 176.8
12/08: 170.9
Again-falling prices each month and for the entire Q4 2008 quarter. The end of this quarter is when the Fed really turned on the taps are set rates at 0% and engaged in quantitative easing. What happened?


01/09: 171.2
02/09: 169.3
03/09: 168.1
Mostly more of the same--aside from a tiny upward blip from December to January, there's month to month and a quarterly fall in prices. Despite 0% fed funds rate the whole Q1 2009 quarter.


04/09: 168.7
05/09: 170.2
06/09: 174.1
Now we get our first quarter of month to month increases and a quarterly increase to boot. No doubt about that, and that would be different than the Great Depression. However, the total rise in prices over the quarter was only 3%, which is certainly not out of the realm of the "normal" type inflation we've seen most of the rest of the past 20 years. But then we get this:


07/09: 172.7
Now the PPI is going back down again! Granted, it's down less than a percent from the last month, but down it goes again. So you've got three straight quarters of consistent month on month deflation, a quarter of modest increases, then a downward path again. Again, I'm not claiming that we're going to see anything like the mother of all deflations -- the Great Depression, but something is clearly happening here, and it's not generally inflation. And don't you think it's remarkable that we would see a fall in the PPI in July 2009 more than seven months after the fed dropped interest rates to zero? And we had something like $300 billion in quantitative easing? That demonstrates pretty clearly to me that there are very, very strong deflationary pressures at work here.
This entire section follows from the false premise that the recession did not begin in the 4th quarter of 2007. The PPI clearly climbs through the end of 2007 and for the first seven months of 2008, until July. Compare this the The Great Depression when the PPI fell nearly continuously from Jan. 1930 to Dec. 1934, although fo the purposes of comparing the two recessions we only show the first six quarters.



I've seen the word "deflationista" quite a bit around this website, and I don't know precisely what it means. But I'm probably not exactly what you would define as a deflationista. First, I agree with you that any person who thinks that we could see anything like the price declines that occurred when we were on the gold standard is a fool. The economics are so different as to be almost an irrelevant point of comparison. I also agree that in a fiat currency regime such as ours, there is no theoretical limit to the amount of money the fed can print and that we can always have inflation, eventually, if we want it. We're definitely of the same mind there.A point of agreement. No 1930s deflation spiral.




But just because it's infinitely easier to have inflation these days doesn't mean that deflationary pressures have gone away. From a money demand side, the immense destruction of wealth in late 2008 has created a environment where money is incredibly dearer, and I think it's easy to underestimate how strong that deflationary pressure can be. I don't care if you call it a deflationary spiral or a deflationary event or a deflationary environment or what, but just because we're off the gold standard does not mean that there can't be long-term situations putting serious downward pressure on prices. I see such a situation now.Think of it this way. Who has pricing power? During the Great Depression, just about no one. Today energy and commodity producers have pricing power. Oddly, and we don't entirely understand why, wage earners have pricing power, even with very high unemployment! It's not supposed to work that way, but this chart is typical of data we are seeing.


http://www.itulip.com/images/layoffs.jpg





Then there's the money supply-side problem. As I've noted before, newly printed fed money has to go through the banks before it gets out into the wider economy, and if the banks are soaking up a bunch of that money, the fed's efforts are blunted. Consider an analogy: the fed is the fire hydrant hooked up to the city water mains and is essentially an infinite supply of water. The banks are the fire hoses delivering the water to the fire. Ka-Poom theory seems to focus very heavily on the resources of the fire hydrant (the fed), but hasn't paid too much attention to the fire hose (the banks). If the hose is clogged up and leaky, the size of the city water reservoirs becomes a whole heck of a lot less important. I think that's what we're seeing here. Yes, the Fed's balance sheet is balooning, but a decidedly smaller portion of that money is making it out into the economy. In other words, I do not believe that we will see price increases that come close to matching the increase in the Fed balance sheet even when consistent inflation does return.
This is not how money is created in our hybrid private-public money system. Money is borrowed-lent into existance, the the Fed's balance sheet has little to do with it. As J.K Galbraith said, "The process by which banks create money is so simple that the mind is repelled." $20,000 comes into being when a consumer buys a car, in the process adding $20,000 to his liabilities and a bank adds $20,000 to its assets. From there the money goes round and round the economy. Deflationits don't understand double entry bookkeeping. Their minds are too repelled to get it.

By buying all the bad debts, the Fed is keeping the banks in business, not adding to the money supply. The banks, since they are functioning are able to participate in the process of money getting borrowed-lent into existence.



With respect to underestimating the fed's ability to inject inflation into the economy in all sorts of unpredictable ways, you're right. They can do a lot to create inflation. But will they? They've already backed off quantitative easing, cash for clunkers is over, and the mood of the country it seems to me has gone decidedly sour on the levels of our debts. While the fed has the ability to do many things, the political winds may prevent them from actually carrying them out.That assumes they are in control. The conceit of all central bankers is that they are, that the terrible inflations of the past were due to bad decisions. Our observation is that inflations happened when the central bank was faced with two unacceptable decisions, either do not print money to meet the current quarter's debt interest payment cash flow requirements, possibly resulting in a Sudden Stop run on the bank or do print and raise inflation fears, resulting in a similar reaction from credit markets.




But all this brings me to another point of skepticism I have with Ka-Poom. When we do get back to consistent inflation, which I believe we will, why must it be large? The deflationary pressures still hang very heavily around our economy with crashing consumer demand and still all too poor bank balance sheets. When the fed gets us back to inflation, these deflationary pressures should temper high levels of inflation for some time to come. And if you have so much faith in the fed to have the willpower to make inflation come back, why do you lose faith in the ability of the fed to tame it once it's here, especially given that they will have assistance from slumping consumer demand? I think it more likely that we we get consistent inflation back, it will return to the moderate levels we've seen for most of the last 20 years.

The conculsion of the article os stagflation with a growing risk of a Ka-Poom Sudden Stop.


I'm not sure if I agree with your assessment of Japan here. I went to the OECD site and pulled up these annual numbers that go back a little further than yours (since Japan's problems really began in 1993, not 1999), and go through the most up to date year they have, 2008. Also, instead of using manufacturing wages, I went with all private sector wages, which gives a much better cross section of the Japanese experience. Here are the numbers:

Prices; Wages
1993: 100.1; 99.6
1994: 100.8; 101.4
1995: 100.7; 103.2
1996: 100.8; 104.9
1997: 102.6; 107.0
1998: 103.3; 105.6
1999: 102.9; 104.1
2000: 102.2; 103.8
2001: 101.4; 102.9
2002: 100.5; 99.9
2003: 100.3; 99.8
2004: 100.3; 98.9
2005: 100.0; 100.0
2006: 100.2; 101.0
2007: 100.3; 100.1
2008: 101.7; 99.5

This data demonstrates that Japanese workers were paid less in 2008 than they were all the way back in 1993, while the prices they are paying are higher. These were not particularly good years for Japan, as prices rose more than 1.5% while wages fell a bit.

Moreover, the 1999-2006 time frame you originally used tells a very different story when you use the broader, all private sector wage metric: From 1999 to 2006, prices did indeed fall by more than 2%, but wages actually fell over 3%--again, not good years for Japan. Unless, apparently, you happened to work in manufacturing. But in hindsight, the wage increases over that time period for Japanese factory workers was most likely related to the export boom to the U.S. fuelled by cheap credit, and was not sustainable.

So I'm going to have to disagree with you when it comes to Japan's deflation being "good" for them. I don't think it was--at least it wasn't for most Japanese people. Consider that, over the same time period 1993-2008 when Japanese wages fell slightly, American wages rocketed up almost 40%! So the pain Japan underwent through that same time period relative to us was actually quite astonishing. And by the way, American prices over that longer 1993-2008 time period rose less than 33%, which means American workers not only came out ahead relative to Japan over that time period, but actually came out substantially ahead in absolute terms. America doesn't look too bad after all, eh?

In any event, I'm still not entirely clear why you think that kind of thing couldn't happen here, whether you call it a deflationary spiral or "stag-deflation." I know you emphasize that Japan had a current account surplus while we have a current account deficit, but I'm not sure that really answers the question. I mean, Japanese public debt skyrocketed over that time period as the Japanese government borrowed and borrowed and borrowed in efforts to stimulate their economy, and it would seem to me that would provide sufficient counterweight to the fact that, more narrowly, they exported more than they imported. Because the U.S. will run out of foreign credit long before its domestic public debt reaches close to 195% of GDP.


I would certainly not dispute that higher energy prices lead to higher prices, and if we have indeed reached peak cheap oil, the whole world will see rising costs for everything. But your prediction is about the United States specifically. That means that you are predicting the dollar to fall RELATIVE to other currencies making us experience MORE cost-push inflation than other countries because of the declining dollar. But that's just not happening at this point. Since 2006, the dollar index has never gone higher than 91 and never lower than 71. Today, we're around 78, which is just a bit lower than the middle of that range, and a point HIGHER than where we were a year ago. In other words, you can't blame energy inflation on a weak dollar at this point in time because the dollar is not particularly weak. What's more, the dollar has soom room to fall and still stay within that range.The dollar has depreciated 12% since March 2009. Over that time period prices of commodities and stocks are up between 20% and 50%. The U.S. needs the dollar to fall to halt deflation. The U.S. devauing the dollar against oil much as it did against gold in 1934, and for silmilar reasons.


Now don't get me wrong: I recognize that the dollar is substantially lower today than in 2001, for example, which means oil is more costly for us relatively than back then. But in the context of the post-2006 more recent dollar climate, we haven't been paying much more for oil than anyone else in the world has.

The second part of the theory is the one I just don't get -- "A reduction in price competition among producers due to bankruptcies and consolidation." As I've noted before, that is just squarely contradictory to the classical supply-demand graphs we all learned in grade school. Absent a true monopoly, producers have no pricing power in a capitalist economy. Only supply and demand set the price, and when demand is lower, price is lower, all other things being equal. And this second part of the theory just does not jibe with that. Yes, there will be price volatility when excess inventory is burned off after demand drops. But the new equilibrium price will be lower than it was before because less people want the product. Rising energy costs, of course, can make prices higher independent of this phenomenon, but as you acknowledge that's a different phenomenon.I recommend a visit to About.com (http://economics.about.com/od/helpforeconomicsstudents/f/inflation.htm). Iinflation is caused by a combination of four factors:

The supply of money goes up.
The supply of other goods goes down.
Demand for money goes down.
Demand for other goods goes up.


Let's say that a town has four hardware stores, and three go out of business because of collapsing demand. In other words, there's only enough demand now to support a single store. You seem to be saying that once the dust settles, the single hardware store will start gouging consumers because they've got no competition. But that won't work because a competitor will start up and undercut the price gouging with the price the market can support. And since there's demand for only one store, the price gouging hardward store will go bankrupt because everyone will shop across the street at the new, cheaper hardware store. And if the new one gets cocky when they're the only hardware store left standing and tries itself to gouge, they'll be driven out of business by yet another new start up. So I just cannot understand how Ka-Poom would posit that the "reduction in competition among suppliers" will result in higher prices for consumers.Think of it this way. Before the recession. there are four Home Depot stores serving a population of 10,000. After the recession there are two. If demand falls 25% but local supply falls 50%, does the surviving store have pricing power? Might a low end store start up to meet the needs of the population that cannot afford the prices at the remaining store? Maybe, if credit were avaiable to do so, which it is not. That's the point.


We are not looking at the same graph. Your graph has CPI, which "EJ" says is unreliable and toyed with by our government, and it has PPI, but only for energy. Take a look at my figures up above which show the most simple, broad based, least "fooled with" metric, which is simply PPI for all commodities. Since July 2008, PPI has risen only four times: 12/08-1/09, 3/09-4/09, 4/09-5/09, and 5/09-6/09. Every other month to month figure is a decline--including the most recent figure: 7/08-8/08, 8/08-9/08, 9/08-10/08, 10/08-11/08, 11/08-12/08, 1/09-2/09, 2/09-3/09, and 6/09-7/09. Is that a deflationary spiral? I don't know, maybe, maybe not. But no matter what you call it, it's been a generally deflationary year, with monthly decreases outnumbering monthly increases 2:1.You are cherry picking data. Start with the start of each recesion.


True, for the last four months, increases outnumbered decreases 3:1. But the increases were pretty modest and the last figure is a decrease. So while we may disagree on what we think will happen next, I don't think it's fair to say that the numbers speak for themselves.One of us will be right and one of us will be wrong. We will see if the overall trend in PPI remains upward.


I guess I would agree with you to a certain extent: yes, governments can step in and borrow to create demand in an economy. But can they replace it? I think the Japan example shows pretty strongly that a government can borrow through the teeth and still not be able to fully replace lost consumer demand--their public debt increased mightily while prices stayed mostly stagnant. It would seem to me--and I think you would agree--that consumer demand in America is going to be signficantly down from its peak for some time to come. I seriously doubt that the federal government can more than make up for that lost demand, especially since we're already starting in a pretty signficant hole.Government can print money and use the money to finance projects that hire workers and pay them. If ti runs defiicits to finnce this spending, it does not have to tax other sectors of the economy. However, if the deficits get too large, the credit markets begin to raise interest rates, which slows the economy. Then the deficit spending becomes a zero sum game.

See my above comments. The numbers are not nearly as "clear" as you would suggest, I think, as there are a number of ways to look at them. And if you want to be super-technical about it, it is most accurate to sat that CPI and PPI is currently "falling" as in we are presently experiencing a drop, not a rise.

One of us will be right and one wil be wrong. You argue a return to a falling PPI. When? How far?


I'm not sure if I'm following you on this one. At least from the narrow perspective of net creditor vs. net debtor, why does the latter create special risks for inflation? I see how it creates special incentives for inflation, but not necesarily special risks that might result in uncontrollable inflation. And just to be clear, I'm not particularly skeptical on this point, I just don't know if I get it.Because a foreign creditor asks questions that are not asked if a nation does not have foreign debt but only domesticl debt, as in the case of Japan. The foreign creditor asks, "If the debtor country runs out of earned income, will it print money to repay me? Might it pay back its domestic creditors before me?"


Well, the PPI says that producers are paying nearly 20% less for all commodities today than they were last July. Why, then, would they feel compelled to raise their prices if their input costs are so much lower? Yes, they may be higher than a couple years ago, and way higher than 10 years ago. But we're talking about prices that we're paying right now at Target, for example. If Target is charging $5 for a notebook today, why would they suddenly start charging $6--a 20% increase--when they pay 20% LESS for the components than just last year?But their input costs are higher, not lower. See charts above.


See above. I don't think that's technically accurate, and at the very least, the issue is not nearly as simple as you suggest, I think. Ok.


But wait--unit production costs are only half the story, right? Your graph shows that each unit of labor costs about 7% more than it did at the start of the recession. But unemployment is up nearly 100% over the same time period, essentially doubling from 5% to 10%! That's a lot fewer employees to pay, despite their somewhat higher unit costs. So I think my point stands: overall labor costs are down sharply for producers mostly because they are employing far less people.See data in the graph above. Wages are rising acoss all industries as unemployment rises.


Your graph seems to suggest that unit labor costs often tend to increase in recessions, and that makes a certain amount of sense. Oftentimes, laid off workers are given severance packages where they are paid for a while after they leave. That presumably pushes the unit production cost higher because businesses are paying salaries for people who don't work for them anymore, pushing up the average per-actual-worker pay. Also, a lot of businesses cut hours instead of laying off workers. But because certain labor costs like health insurance are fixed, the same worker at the same hourly pay will cost more per unit if they work fewer hours, right? But they'll still cost the employer less money overall!That's a good point. Maybe that explains why wages are rising.


In any case, I think the facts are on my side that labor costs are falling for employers overall, even if per unit cost is rising, given the huge numbers of people being laid off and given fewer hours being worked. This, in combination with slumping consumer demand, suggests that inflationary pressures on producers are not currently imminent, and that the current pressures are deflationary.No, the data contradict this assertion.


I think that oversimplifies the issue. PPI and CPI are lower both month on month and year on year, I think you would have to acknowledge. So this is more of a prediction of trend than fact. And on that prediction, we have some disagreement. You lost me. The chart shows both PPI and CPI rising since late 2008.


Actually, this brings me to a related point. I've seen on this site that Ka-Poom makes a real effort to distinguish asset price inflation from consumer good inflation. True, they are distinct, but aren't they more closely related than that would suggest? I mean, wasn't one of the major criticisms of Greenspan that he failed to acknowledge the close correlation between asset prices and consumer prices by keeping interest rates low in the face of huge stock market and housing bubbles because price inflation was relatively stable? In other words, Greenspan kept interest rates too low for too long because he failed to understand that loose monetary policy was producing an asset bubble.There are many article here on that topic. The influence each other in complex ways.


Well, the same should be true on the way down, right? A huge collapse in asset prices should be just as much an indication of a collapse in money supply as an asset bubble would be an indication of too much money supply. The housing bubble came from too much mortgage credit chasing not enough assets. Different money supply, different inflation.


And the amount of destruction of wealth from the collapse in asset prices over the last several months has been astonishing. To me, that must also be taken into account at least to some extent when determining whether we'll see high consumer prices going forward. Significantly lower asset prices combined with significantly lower producer prices from this same point last year seem to suggest a deflationary environment. Perhaps it can be overcome, but the brakes are on and it should take a lot more engine than normal to get over them.Negative weallth effects are a real factor of demand. But the Fed has increased the supply of money relative to demand, creating inflation.


No, probably not long term significant deflation, and almost certainly nothing like the Great Depression. As I said above, I think the fed will get us back to an inflationary environment. But at the same time, consider that we've had all those policies you mentioned for several months and we still saw prices fall from June 2009 to July 2009. You say there might be something seasonal to that most recent dip, but consider this: between 1999 and 2009, the PPI fell from June to July in only three years, while rising in seven. Over the same time period, PPI fell from July to August in three years, but rose in only six (one year was flat). So whatever seasonal factors might be at play, the data doesn't seem to suggest that they're any different from what should happen next month.

So while I don't think we'll have lots of deflation for too long, what you've pointed out does not necessarily mean soaring inflation for a long time either. We just might have flat to moderate inflation. We don't predict soaring inflation. Read the article again.


Now that's just not accurate. Consider external debt to GDP, with external debt defined as "the total public and private debt owed to nonresidents repayable in foreign currency, goods, or services."

http://en.wikipedia.org/wiki/List_of..._external_debt (http://en.wikipedia.org/wiki/List_of_countries_by_external_debt)

We are at 95%. That's much higher than most countries, as we have the 24th highest ratio out of 202 countries. However, Switzerland, the UK, the Netherlands, France, Germany, Denmark, Norway, Finland, and Australia all have higher ratios than us. Some are way higher--France, for example, is at 212%We don't owe any money in a foreign currency. That is our blessing. The question is the cash flows relative to foreign debt.


Agreed and hope it can continue. My work can sometimes take me out of action for a bit, but if you respond, I'll promise to get back to it as soon as I can.Ok.

goadam1
08-26-09, 11:47 PM
Quote:
Your graph seems to suggest that unit labor costs often tend to increase in recessions, and that makes a certain amount of sense. Oftentimes, laid off workers are given severance packages where they are paid for a while after they leave. That presumably pushes the unit production cost higher because businesses are paying salaries for people who don't work for them anymore, pushing up the average per-actual-worker pay. Also, a lot of businesses cut hours instead of laying off workers. But because certain labor costs like health insurance are fixed, the same worker at the same hourly pay will cost more per unit if they work fewer hours, right? But they'll still cost the employer less money overall!
That's a good point. Maybe that explains why wages are rising.


As a small business owner, I'll say this is the reason wages are up with high unemployment abounding. It is much cheaper to pay an employee 10% more for being a great multi-tasker than it is to take on a whole person and all the costs that come with an employee.

But I have taken on extra free-lance lately. I'll ask again: aren't people seeing improving business conditions? I'm busier. I see new stores opening. I was at a packed baseball game and people have money for $10 yankee beer. I won't claim it is self sustaining, but to say that reflation hasn't worked seems silly.

metalman
08-27-09, 04:01 PM
thank grg55 for this one...


Brace yourself: Beer prices are going up (http://money.cnn.com/2009/08/25/news/companies/anheuser_busch/index.htm)

Brewers say rising commodity costs and lower volumes are forcing them to raise its price tags.

NEW YORK (CNNMoney.com) -- Beer drinkers beware: The cost of a cold one is going up.

Brewers across the globe are hiking prices to compensate for lower sales volumes and higher commodity costs.

Anheuser-Busch InBev, the world's largest brewer and maker of Budweiser, announced plans to raise prices Tuesday.

"We plan on taking price increases on a majority of volume and in a majority of markets this fall," Anheuser-Busch InBev said in a statement. "The increase helps cover some input costs."

The U.S.-Belgian brewer said prices will go up "across different price tiers," including its high and low-end brands.

MillerCoors - the maker of popular beers Miller Lite, Coors Lite and Blue Moon -- is also raising prices in some markets...

...Heineken, best known for its Heineken and Amstel brands, said Tuesday that its global price increases have helped it turn profits despite sagging volumes...

Morgasbord
08-27-09, 04:22 PM
thank grg55 for this one...

Brace yourself: Beer prices are going up (http://money.cnn.com/2009/08/25/news/companies/anheuser_busch/index.htm)

Brewers say rising commodity costs and lower volumes are forcing them to raise its price tags.

NEW YORK (CNNMoney.com) -- Beer drinkers beware: The cost of a cold one is going up.

...
And yet, my future industry is still keeping it together:


Boulder, CO • August 17, 2009 – The Brewers Association, the trade association representing the majority of U.S. brewing companies, reports America's small and independent craft brewers¹ are still growing (see Craft Brewing Statistics (http://www.beertown.org/craftbrewing/statistics.html)) despite many challenges and are continuing to provide jobs to the U.S. economy. Dollar growth from craft brewers during the first half of 2009 increased 9%, down from 11% growth during the same period in 2008. Volume of craft brewed beer sold grew 5% for the first six months in 2009, compared to 6.5% growth in the first half of 2008. Barrels sold by craft brewers for the first half of the year is an estimated 4.2 million, compared to 4 million barrels sold in the first half of 2008.
"At a time when many of the giant beer brands are declining, small and independent craft brewers are organically growing their share and slowly gaining shelf and restaurant menu space one glass of craft beer at a time," said Paul Gatza, Director of the Brewers Association.

http://www.beertown.org/ba/media_2009/midyear2009.html
Woot.

steveaustin2006
08-27-09, 06:52 PM
Quote:

But I have taken on extra free-lance lately. I'll ask again: aren't people seeing improving business conditions? I'm busier. I see new stores opening. I was at a packed baseball game and people have money for $10 yankee beer. I won't claim it is self sustaining, but to say that reflation hasn't worked seems silly.

I'm guessing you are in the same business as my wife - tv production, but back to the point - I think what you are seeing is the increase in consumer confidence level which I'm guessing spills over to business owners as well. It is a lagging indicator to the stock market so as the stock market rises people feel like things are getting better.

I've no idea how people can think things are better if they actually look at the data - things have fallen off a cliff here. And now we hear news like the CNW poll stating that 1 in 4 people regret taking advantage of cash for clunkers because they now realize they can't afford the debt on an avg. car of $16k. Voila - the gov't just gave the household sector incentive to take on $11 billion of new debt.

Frankly, I am so sickened by financial oligarchy, consumer stupidity and gov't largesse that I will likely leave the country within a year or two. So when people take on venture risk and open a business in this climate or go back to spending more when they clearly can't afford to do so for their unsuspecting spouse & kids, I'm tempted to think - same ole stupid.

metalman
08-27-09, 06:57 PM
And yet, my future industry is still keeping it together:
Woot.

you are in the perfect industry for our times!

- maintain sense of self worth by buying an affordable premium product... check
- socialize with other upper middle class types more cheaply than a country club membership... check
- engage in socially acceptable self med.. check

win, win, win!

substitution rules.