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EJ
08-16-10, 07:25 PM
http://www.itulip.com/images2/escape.jpg

Inflation is a process, not an event - Part I: Three inflation fallacies


What have we forgotten the nature of inflation since the 1970s?
Where is the U.S. economy in the transition from low to higher inflation?

Monetary authorities and economists focus on inflation expectations because inflation expectations have a way of becoming reality over time. Inflation expectations, after falling hard in 2008, have been steadily rising since early 2009, and actual inflation has tracked expectations, with a time lag, as usual. Recently, however, inflation and inflation expectations have started to dip again. Is it time for the Fed to hit the deflation spiral panic button?

Expectations of future inflation are informed by the past experience of consumers, both recent and distant. The longer inflation remains tame, the longer consumers extrapolate low inflation into the future even as evidence to the contrary begins to reveal itself. Wage and manufactured goods price inflation has been so low for so long that most of us can’t recognize the shift to a more inflationary environment as it is happening today, but it is, as we’ll show.

Study the relationship between inflation expectations and all-items price indexes over time and you’ll find that consumers form their short-term expectations of all-items price inflation based largely on current energy prices, and for good reason; all-items price inflation tracks energy price inflation closely as a major input cost both to producers and consumers.


http://www.itulip.com/images2/energyvsallvsexpectations1977-2010.gif

For all practical purposes, today’s consumer expectations for inflation a year from now are the same as today’s energy prices. That’s why monetary authorities focus on energy prices to manipulate both consumer and producer inflation expectations. As a deflation-fighting tool, abandoning the strong dollar policy in 2008 and allowing the dollar to depreciate was the most powerful weapon that policy makers had in the arsenal of deflation fighting tools in a zero interest rate environment. Rising oil import prices sent inflation price signals into the economy, pushing up the price of domestically produced oil and spreading price inflation throughout the entire commodity complex.

Historically, after a period of rising energy price inflation and declining unemployment growth, the Fed steps in to lower inflation expectations by talking about raising interest rates, and then, depending on the market’s response to the jaw boning, follows through sometime thereafter.


http://www.itulip.com/images2/energyinflationunemployment990-2010.gif

The Fed Rate Hike Zone formula goes something like this:

If the rate of unemployment growth falls to 10% year over year and stops declining, and energy price inflation rises to a 5% annual rate, then begin a tightening cycle. Of course, there are many other variables in the Fed’s decision formula, such as money growth and the ratio of non-performing loans, and no one but the Fed knows exactly what the formula is, but energy prices and unemployment are certainly key factors.
As high and inflationary as energy prices are today, they have stabilized and over the past few months and the rate of price growth, while still positive, has started to decline. It’s too early to call this a trend; energy prices have been so volatile due both to giant fluctuations in demand during the recession as well as to economic policy measures taken to cope with the recession that it is impossible to say at this time which way energy prices will move over the next six months. That is the crux of the Fed’s dilemma.

As the unemployment growth rate continues to fall, even if the unemployment level doesn’t decline substantially, and if energy prices resume their rise then within a year, the Fed will be back in the hike zone. Even if energy prices don’t rise further and simply remain in the $70s – recall $60 oil was called a “bubble” by Soros and others as recently as 2006 – the kind of inflation that we have experienced for several years now will begin to influence inflation expectations for years to come.

Stealth Inflation

The inflation we have experienced since early 2009 has so far not appeared as rising all-items prices but exhibits itself in ways that are familiar to older Americans who remember the early 1970s in the U.S. Citizens of countries that have experienced a transition from a low to a higher inflation environment due to a weakening currency will also recognize the symptoms.

To the uninitiated, the mix of price and quality changes of various goods and services gives rise to confusion and nonsensical terms like “bi-deflation.” The purchasing power of income and savings is either rising or it is falling. It cannot be doing both at once, although a decline in purchasing power is expressed differently in various goods and services prices depending on many factors. Here we tackle the three common inflation fallacies believed by Americans who have forgotten what inflation is all about.

Fallacy #1: When unemployment rises, inflation falls

We’ve locked horns for years with analysts who can’t imagine how inflation can rise when jobs are scarce. Where is the competition for goods going to come from to drive up prices if consumers are cutting back on their spending to conserve savings, either because they are unemployed or are afraid they will be soon? That is certainly the environment that we see ourselves in today.

This sounds reasonable until you consider the case of India today where both unemployment and inflation are rising together.


http://www.itulip.com/images2/infidainflation2003to2010.gif

How is rising inflation and rising unemployment possible? Because inflation is not only a factor of the supply and demand for goods but also of the supply and demand for the money used to buy the goods. Demand is determined not only by the level of desire of consumers to purchase goods but also their means to do so, the purchasing power of their income and savings. This leads us to the second fallacy of inflation. Also, producers may cut goods supply even more quickly than consumers reduce demand, resulting in a goods supply/demand imbalance albeit at a lower level than before the recession.

Inflation Fallacy #2: Inflation results from too much money chasing too few goods

Four variables determine the way inflation is exhibited in prices:


Supply goods
Demand for goods
Supply of money
Demand for money

The deflationary price impact of falling consumer demand on a fixed quantity of goods supplied by producers is intuitive: prices fall as producers compete for fewer consumers. Likewise, if the demand for money rises faster than the money supply, the value of money rises and the result is deflationary.

Two dynamics trip up most observers.

The first is the interaction of these four variables of inflation with each other as activist economic policy makers interfere with the market that would, if left to its own devices, allow prices to fall to meet the new lower level of demand.


http://www.itulip.com/images2/mzm2006-2010.gif

Money at zero maturity, a measure of the money supply closely watched by the Fed, averaged 10% growth rate during the recession, but has been declining overall since the start of the recession.

This is typical of periods of weakness in the banking system when the ratio of non-performing loans are rising and the effectiveness of monetary policy to increase the money supply through the banking system is limited.


http://www.itulip.com/images2/npl1987-July2010.gif

During recessions when NPL increased, the rate of MZM growth decreased. Recently, the level of NLPs started to decline and the velocity of MZM increased.


http://www.itulip.com/images2/mzmvelocity19590July2010.gif

The view of inflation inevitably arising from weak consumer demand in periods of rising unemployment is muddied by policies designed to stimulate money growth and delays between money growth an the appearance of inflation.

The second dynamic of the four inflation variables that confuses most observers is the ability of producers to quickly withdraw supply in anticipation of declining demand. This not the case in the 1930s when computer analysis tools to forecast future demand were unavailable. This is reflected in the rapid increase in capacity utilization since the official end of the recession in late 2009.


http://www.itulip.com/images2/capacityutilization1966-July2010.gif

If rising inflation can attend rising unemployment, then it should not surprise readers to learn that low unemployment and rising wages can co-exist with consumer price deflation. Consider the case of Japan since 1999.


http://www.itulip.com/images2/japancpi.gif
Consumer price inflation fell...


http://www.itulip.com/images2/japanwages.gif
...while wages grew.

This is why most Japanese will tell you that they have experienced the past 20 years as a period of rising living standards. This leads us to our third inflation fallacy.

Inflation Fallacy #3: Inflation always causes all-items prices rise at the same time

This is the case after inflation expectations have been rising for an extended period, usually several years and expectations of high inflation are deeply imbedded, but not during transitions from low to higher inflation. At first, inflation appears in those industries where producers have regained pricing power. An industry with pricing power is one that has consolidated to a single, dominant player that serves a market. For example, Walmart recently raised prices 6% in one month:
Wal-Mart Quietly Raises Prices (http://www.dailyfinance.com/story/walmart-raises-prices/19587730/)
August 10, 2010

Wal-Mart Stores (WMT), which for years has touted its prowess at lowering prices, has been doing the opposite as it tries to bolster its bottom line amid stagnating sales.

A JPMorgan Chase (JPM) study of a Walmart Supercenter in Virginia found that the world's largest retailer has raised prices by nearly 6% on average over the past six weeks, according to the New York Post. Reuters says it was the biggest sequential increase since JPMorgan started the study in January 2009.

Some Prices Hiked Over 60%

Some of the price hikes were considerably larger. For instance, the price of a 32-ounce bottle of Windex household cleaner jumped 50%, a 12-ounce box of Quaker Oats instant grits climbed 65% and a 50-ounce container of Tide detergent rose by more than 50%.
In Japan, some industries experienced deflation while others have seen relatively high levels of inflation.


http://www.itulip.com/images2/japandeflationbyindustryLG.gif

While Wholesale and Retail, Manufacturing, Transportation industries experienced deflation between 1990 and 1999 ranging from a cumulative -4% to -10% deflation while the Construction, Real Estate, and Services industries experienced a cumulative 11% to 17% inflation. The determinant factor: the ratio of non-performing loans (NPL) relative to assets of banks lending to those industries.

Here in the U.S., early in our debt deflation process, there is a pattern of per-industry deflation and inflation developing. But for reasons of a more dynamic and self-correcting banking sector, the NPL problem for the U.S. will not be as great a deflationary factor here.

For example, Walmart raised prices in response to weak consumer demand. That may strike some readers as backwards, but remember that as input costs rise, the company that can maintain the highest per-unit profit margins and wins the positive cash flow contest in the long run. If input costs remain high, producers and retailers must raise prices eventually, the most efficient producers, wholesalers and retailers the least. We previously documented (http://www.itulip.com/forums/showthread.php?p=169911#post169911) the other strategy of producers and suppliers to increase per-unit profitability, such as by reducing the size of portions in packaged products and the quality of ingredients.

Consumers today are reluctant to make purchase decisions unless they perceive that they are getting a “deal.” At first glance this appears to be classic deflationary consumer behavior: purchase decisions are generally delayed by consumers who expect falling prices, which expectations are met by falling prices as the aggregate impact of the waiting behavior produces the expected result, a lower price as producers rush to meet the consumer’s demand for a bargain because they have fewer dollars to spend, or are consumers trying to stretch a dollar of income that buys increasingly less, or both?

Consumer behavior in an early transition from low to higher inflation varies depending on product. For many big-ticket consumer items, such as autos and major appliances, there is no urgency to go out and buy a product before the price rises.

Take autos, for example. Sales unit volumes collapsed during the recession. As you’d expect, prices fell, too.


http://www.itulip.com/images2/motorvehiclespricevsvolume2007-2010.gif

Note, however, that even thought the Personal Consumption Expenditures price index for autos declined in line with unit volume, import prices did not. The reason is that exporters do not tend to lower prices as much as domestic producers do to meet lower market demand from an export market. They prefer, if they can, to increase sales in other stronger import markets. You can see a similar process with major appliances.


http://www.itulip.com/images2/majorappliancespricevsvolume2007-2010.gif

Prices on a PCE basis fell hard during the recession and have only recently begun to recover, but import prices of major appliances stabilized in the fall of 2009 as exporters adjusted to rising demand elsewhere.

Also, the auto industry’s loss was the auto parts industry’s gain, as car owners and auto repair shops increased their purchases of parts to repair existing cars to keep them on the road longer. In this case, the domestic PCE price index increased faster than the import index.


http://www.itulip.com/images2/motorvehiclepartsprices2006-2010.gif

Import prices are recovering to pre-recession levels.


http://www.itulip.com/images2/importspriceinflation.gif

Any attempt to depict the current environment as deflationary misses the devil in the details. High energy import prices, rising capacity utilization and velocity of money, and a leveling off of NPLs are typical of an inflationary not a deflationary price environment. In Part II we look deeper to find additional reasons for Bernanke to talk up deflation while Keoll dissents with worry that the U.S. economy faces the opposite problem, inflation that may quickly turn into an inflation spiral that will be nearly as hard to manage in an environment of high unemployment as it was in the mid 1970s, but with the additional complication of asset price deflation.


http://www.itulip.com/../images2/escape.jpg

Inflation is a process, not an event - Part II: Why Keoll is worried

• Why is Hoeing worried?
• Will anti-asset price deflation policy trump commodity and wage inflation policy?

The primary stated mission of the central bank is to maintain commodity and wage price stability in the Productive Economy through adjustment to the money supply via interest rates and other means. As we explained to readers during the housing bubble, an unstated mission of the Fed is to promote asset price inflation in the FIRE Economy through interest rate policy and lack of enforcement of existing regulations of lenders, and lack of new regulations of new, destabilizing financial products.

The result of the Fed’s “successful” execution of this dual mission: low commodity and wage inflation and a housing bubble. Some day asset price inflation will be regarded by central bankers as being as detrimental to economic growth as commodity and wage inflation but we’re not there yet. We can look forward to several more years of government price supports of assets, with worries about commodity price inflation kept on the back burner.

The Fed’s asset price inflation mission conflicted with the Fed’s additional role as protector the banking and financial system stability. After the collapse of the housing bubble brought down the private credit markets and nearly collapsed the banking system, without any admission of failure the Fed’s mission abruptly changed.

The Fed’s new mission is first and foremost to prevent asset price deflation in the FIRE Economy from spilling over into the Productive Economy via the credit markets and banking system. Commodity and wage inflation are now secondary concerns, and are believed to “take care of themselves” as long as unemployment remains high. As we have seen in the case of India in Part I, counting on unemployment to tame inflation is a dangerous gamble. As we shall see in our analysis of the transition from low to high inflation in the 1970s period and compare it to the current era, that assumption may be especially perilous today. more... ($ubscription)
(http://www.itulip.com/forums/showthread.php/16593-Inflation-is-a-process-not-an-event-Part-II-Why-Keoll-is-worried?p=171583#post171583)
Tulip Select (http://www.itulip.com/../showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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a warren
08-16-10, 08:53 PM
What have we forgotten the nature of inflation since the 1970s?

Fix this

LargoWinch
08-16-10, 10:39 PM
What have we forgotten the nature of inflation since the 1970s?

Fix this

a warren, do you mean: "I believe there is an error with the said sentence, can you please correct it"?

Better yet, pm FRED with your request and it will be "fix this" in a few hours (I do it all the time).

ThePythonicCow
08-16-10, 11:06 PM
Better yet, pm FREDGood advice.

Though I will confess to almost responding to a warren's post with a terse but supportive "+1" reply, for this particular glitch was rather prominent.

dummass
08-17-10, 10:09 AM
As the unemployment growth rate continues to fall, even if the unemployment level doesn’t decline substantially, and if energy prices resume their rise then within a year, the Fed will be back in the hike zone. Even if energy prices don’t rise further and simply remain in the $70s[/COLOR] – recall $60 oil was called a “bubble” by Soros and others as recently as 2006 – the kind of inflation that we have experienced for several years now will begin to influence inflation expectations for years to come.

EJ appears to be saying that he expects the Fed to start raising interest rates, even without significant changes to unemployment or energy prices. His view of future Fed action has changed coarse, while the economic indicators (we have been told to watch) are stagnant.

The Fed will (of course) raise rates at some point; when rates are at zero, there is only one direction for them to go. But I find EJ's explanation for this happening anytime soon to be lacking. Certainly, it flies in the face of his earlier analysis.

jk
08-17-10, 10:36 AM
EJ appears to be saying that he expects the Fed to start raising interest rates, even without significant changes to unemployment or energy prices. His view of future Fed action has changed coarse, while the economic indicators (we have been told to watch) are stagnant.

The Fed will (of course) raise rates at some point; when rates are at zero, there is only one direction for them to go. But I find EJ's explanation for this happening anytime soon to be lacking. Certainly, it flies in the face of his earlier analysis.

read part ii. it says that although we're entering "the hike zone," it won't happen because of a. political pressure, b. risk to the rickety fire economy [a risk that didn't exist in past cycles].

ThePythonicCow
08-17-10, 10:55 AM
To the uninitiated, the mix of price and quality changes of various goods and services gives rise to confusion and nonsensical terms like “bi-deflation.” The purchasing power of income and savings is either rising or it is falling. It cannot be doing both at once, although a decline in purchasing power is expressed differently in various goods and services prices depending on many factors.I might suggest not painting those holding other views as uninitiated or their terms as nonsensical. That sounds gratuitously ad hominem to my ear.

To the point you're making here, it reads to me (given in particular your dismissal of the term "bi-deflation") almost as if you're saying it's inflation or deflation, not both.

Giordano Bruno, in a post on Neithercorp (http://neithercorp.us/npress/?p=663), linked to from the two recent iTulip posts Dollar's Antemortem (http://www.itulip.com/forums/showthread.php/16580-Dollar-s-Antemortem) and U.S. Dollar Now Ripe For Catastrophic Devaluation (http://www.itulip.com/forums/showthread.php/16599-U.S.-Dollar-Now-Ripe-For-Catastrophic-Devaluation), comments on this about as clearly as anyone I've seen, stating:

The inflation vs. deflation debate has been raging for nearly three years, but I suspect that when all is said and done, we will find that both sides in a sense were correct. The people who consistently miss the mark on what is truly going on in the economy are those who blindly insist that this is an either/or situation. The fact is, we are seeing symptoms of BOTH deflation and inflation simultaneously. Deflation in jobs, stocks, real estate, and wages. Inflation in energy, food, and commodities.

dummass
08-17-10, 10:56 AM
For the past year, the effects of government stimulus have played a large part in iTulip's economic analysis. They had a chart from Goldman that projected the affects of stimulus on GDP tapering off in 2010 and going negative by the second quarter of this year. Is this no longer relevant? Does this no longer account for why we have seen improvement in the economy?

As the affects of stimulus recede (projected for the second half) and its affects on GDP are diminished, won't this also affect the recent improvements to imports and capacity utilization (as sited above)? Strength in imports and capacity utilization would appear to be symptoms, not causes, for increased demand.

If this recent increase in demand has legs, and stimulus was not the primary cause, then what were the contributing factors?

jk
08-17-10, 11:04 AM
For the past year, the effects of government stimulus have played a large part in iTulip's economic analysis. They had a chart from Goldman that projected the affects of stimulus on GDP tapering off in 2010 and going negative by the second quarter of this year. Is this no longer relevant? Does this no longer account for why we have seen improvement in the economy?

As the affects of stimulus recede (projected for the second half) and its affects on GDP are diminished, won't this also affect the recent improvements to imports and capacity utilization (as sited above)? Strength in imports and capacity utilization would appear to be symptoms, not causes, for increased demand.

If this recent increase in demand has legs, and stimulus was not the primary cause, then what were the contributing factors?
i think the next round of stimulus will be purely from the fed, as the fiscal authorities are politically hamstrung. the big question in my mind is timing: how fast the negative swing in the effect of the last round of stimulus unfolds, and whether - if it's soon - the fed feels free to launch qe ii big time right before an election.

dummass
08-17-10, 11:16 AM
read part ii.

Thanks JK, I will read part two, but not now. At the moment I'm still digesting part one. It would be rare for EJ's articles (part one vs part two) to contradict each other. Typically EJ's analyses, in part two, will dive deeper into the specifics or expand the breadth of his analysis, but would not negate the thesis of part one. Otherwise, he runs the risk of leading the non-payed subscribers astray. If this is an unintended circumstance, I'm sure he would want to rectify it.

jk
08-17-10, 12:01 PM
Thanks JK, I will read part two, but not now. At the moment I'm still digesting part one. It would be rare for EJ's articles (part one vs part two) to contradict each other. Typically EJ's analyses, in part two, will dive deeper into the specifics or expand the breadth of his analysis, but would not negate the thesis of part one. Otherwise, he runs the risk of leading the non-payed subscribers astray. If this is an unintended circumstance, I'm sure he would want to rectify it.
i just posted an interesting piece by andy xie, which boils down to
developed world deflation + stimulus leakage => emerging world inflation => global inflation via commodity [and other tradeables] prices
http://www.itulip.com/forums/showthread.php/16602-xie-developed-world-deflation-stimulus-leakage-emerging-world-inflation-global-inflation-via-commodity-prices?p=171645#post171645

Roughneck
08-20-10, 07:46 AM
Excellent analysis. I think too many of the prognosticators focus on either the supply demand factor or the monetary factors of inflation,but not both. Since enegry costs are closely tied to inflation expectations, I would like to get EJ's take on commodity inflation due to increased market speculation. There has been much talk of the amount of dollars rolling forward in futures now that it can actually drive the physical price.

Anyone who grocery shops regularly could tell you that prices have gone up. 100 bucks doesn't go far these days. But how much of that is due to monetary inflation versus price inflation?

sishya
08-20-10, 03:27 PM
How is rising inflation and rising unemployment possible? Because inflation is not only a factor of the supply and demand for goods but also of the supply and demand for the money used to buy the goods. aka money printing. This is what is happening in India. severe Food Inflation in things we need. Though wages have increased 3 times since 2001, food prices have increased a little more than 3 times. My worry is whether food inflation will be greater than wage inflation in India. Then people will feel the pain.

So far I did not feel the pain of food price in USA. But lately, I am starting to take note. Goat meat from my local halal butcher was $3.99/lb a year ago , now $5.99/lb. If it rises further, I may pool with others and buy an whole Goat for $150(approx 60 lbs meat) and divide. Beef creeped from $3.29/lb to $3.90/lb. Egg/Bread has gone up too. The only thing that have not gone up is milk- $2.29/gallon.

Jay
08-21-10, 07:54 AM
i think the next round of stimulus will be purely from the fed, as the fiscal authorities are politically hamstrung. the big question in my mind is timing: how fast the negative swing in the effect of the last round of stimulus unfolds, and whether - if it's soon - the fed feels free to launch qe ii big time right before an election.
My impression is that QE doesn't work as an effective short term stimulus like fiscal measures can. The Fed might be pushing on a string with QE II.

FRED
03-31-11, 05:44 PM
Who could have known?

Wal-Mart CEO Bill Simon expects inflation (http://www.usatoday.com/money/industries/retail/2011-03-30-wal-mart-ceo-expects-inflation_N.htm)

U.S. consumers face "serious" inflation in the months ahead for clothing, food and other products, the head of Wal-Mart's U.S. operations warned Wednesday.

The world's largest retailer is working with suppliers to minimize the effect of cost increases and believes its low-cost business model will position it better than its competitors.

Still, inflation is "going to be serious," Wal-Mart U.S. CEO Bill Simon said during a meeting with USA TODAY's editorial board. "We're seeing cost increases starting to come through at a pretty rapid rate." more... (http://www.usatoday.com/money/industries/retail/2011-03-30-wal-mart-ceo-expects-inflation_N.htm)

WildspitzE
03-31-11, 09:22 PM
more....
http://online.wsj.com/article/SB10001424052748703806304576233093820515056.html

"Hershey Co. increased wholesale prices for most of its products, saying the move will help offset a significant rise in raw material, fuel and other expenses.

The candy maker said a weighted-average price increase of about 9.7% across the company's instant consumable, multipack, packaged candy and grocery lines took effect Wednesday.

..."

metalman
04-01-11, 12:45 AM
more....
http://online.wsj.com/article/SB10001424052748703806304576233093820515056.html

"Hershey Co. increased wholesale prices for most of its products, saying the move will help offset a significant rise in raw material, fuel and other expenses.

The candy maker said a weighted-average price increase of about 9.7% across the company's instant consumable, multipack, packaged candy and grocery lines took effect Wednesday.

..."

where oh where did all the deflation fear mongers go?

what world we live in... where central banks can create $$$ at will but there is a 'case' for deflation.

next... your kids in prison or fodder in war... & a 'case' for imprisoning or drafting them.

we're so fucked.

Chris Coles
04-01-11, 06:00 AM
we're so fucked.

Well now, let us place ourselves at the end of say, one of the major US Civil War Battles and even more so, on the losing side and ask what happened?

What happened is that, when the dust finally settled, everyone got up, dusted themselves down and got on with "it". Not long afterwards, the US was a power house of industrial muscle.

OK, negative thinking has its place; but for heavens sake, get up off the ground, dust yourselves down and get on with it.

jk
04-01-11, 08:12 AM
more....
http://online.wsj.com/article/SB10001424052748703806304576233093820515056.html

"Hershey Co. increased wholesale prices for most of its products, saying the move will help offset a significant rise in raw material, fuel and other expenses.

The candy maker said a weighted-average price increase of about 9.7% across the company's instant consumable, multipack, packaged candy and grocery lines took effect Wednesday.

..."

ej's title piece for this thread is "inflation is a process". that process is inexorable, baked in the cake. we've been documenting it on this website for years now. we can continue to watch and document, but we can't change the process. i don't know whether to laugh or cry.

metalman
04-01-11, 08:40 AM
ej's title piece for this thread is "inflation is a process". that process is inexorable, baked in the cake. we've been documenting it on this website for years now. we can continue to watch and document, but we can't change the process. i don't know whether to laugh or cry.

& ej stuck with the 'inflation is a process' mantra thru thick & thin.

but... hey... ben can stop it in 15 min. by hiking rates...

<iframe title="YouTube video player" src="http://www.youtube.com/embed/n9n2Wo5O9wQ" allowfullscreen="" frameborder="0" height="390" width="640"></iframe>

c1ue
04-01-11, 11:18 AM
ej's title piece for this thread is "inflation is a process". that process is inexorable, baked in the cake. we've been documenting it on this website for years now. we can continue to watch and document, but we can't change the process. i don't know whether to laugh or cry.

My thesis from the very beginning has been much more negative than EJ/iTulip's - and my justification is much as what you wrote in your excellent post in "Guest Commentary": that the so-called leaders both in power now and in a position to be in power do not have either the vision, the will, or the personality to implement necessary painful changes.

As the situation worsens, the pain to fix it increases.

The optimists I know all have placed their faith in some magical 'turning point' where suddenly all the morons, crooks, and charlatans will suddenly change.

I, as a student of history, expect no change except the worst possible outcome due to inaction and ineptitude.

Riding the Titanic down is by far the most common outcome.

This doesn't mean Somalia, but it does mean at least a 30% drop in American standard of living.

And while there has been a cogent point raised that this fall doesn't equate to starvation nor physical pain - thus literal pitchforks and torches are unlikely, at the same time this doesn't prevent the rise of a demagogue. Insert your own example here.

jk
04-01-11, 11:46 AM
My thesis from the very beginning has been much more negative than EJ/iTulip's - and my justification is much as what you wrote in your excellent post in "Guest Commentary": that the so-called leaders both in power now and in a position to be in power do not have either the vision, the will, or the personality to implement necessary painful changes.

As the situation worsens, the pain to fix it increases.

The optimists I know all have placed their faith in some magical 'turning point' where suddenly all the morons, crooks, and charlatans will suddenly change.

I, as a student of history, expect no change except the worst possible outcome due to inaction and ineptitude.

Riding the Titanic down is by far the most common outcome.

This doesn't mean Somalia, but it does mean at least a 30% drop in American standard of living.
any ideas about how to measure this? fwiw i keep following the consumer metrics institute indicator, which has been going down for the past 1.3-1.5 years. this is a measure of discretionary consumer durable expenditures over the internet, and appears to track a very vulnerable population in current circumstances. by virtue of the word "discretionary," it is looking at the icing, not the cake. and the icing is disappearing.



And while there has been a cogent point raised that this fall doesn't equate to starvation nor physical pain - thus literal pitchforks and torches are unlikely, at the same time this doesn't prevent the rise of a demagogue. Insert your own example here.
this is perhaps my worst fear.

c1ue
04-01-11, 02:27 PM
any ideas about how to measure this? fwiw i keep following the consumer metrics institute indicator, which has been going down for the past 1.3-1.5 years. this is a measure of discretionary consumer durable expenditures over the internet, and appears to track a very vulnerable population in current circumstances. by virtue of the word "discretionary," it is looking at the icing, not the cake. and the icing is disappearing.

This is the problem.

As we've all experienced in the past decade plus since the Y2K internet bubble, the definition of suffering is a function of future expectations.

Even as people were paying unprecedented rent for housing in 2000, the overall mood was upbeat because there was at least an outward appearance of present and future prosperity whether stock option IPO or jobs as HTML cowboys.

The same could have been said for all those people who bought too much house in the 2004-2007 housing bubble - the gigantic nut being paid monthly was just fine in the context of 'housing prices always go up' and the Joneses selling their house for twice what they paid 4 years ago.

The challenge now is how to quantify the shift in attitude now that there aren't overt measures of prosperity: stock market has been flat to down for years. Housing ditto. Outside of Apple/Facebook/Twitter, tech as well.

Does this then magnify the increased costs for gasoline, food, taxes, health care?

Is there a tipping point?

I have no reliable and concrete ways to quantify this, but my observation of the public and those around me shows a definite shift towards the 'Dark Side'.

My view from history is that the shift into negativity will in turn magnify extremism - whether in politics or other fields. As time and inflation progresses, this will reinforce this trend.

The question then is when/if it will flip the inherent American faith in equal opportunity, rule of law, the democratic process, and so forth into their 'Dark Side' equivalents: lick up and kick down, do unto others what the law can't do unto you, and 'a pox on both their houses'.

tastymannatees
04-01-11, 02:48 PM
any ideas about how to measure this? fwiw i keep following the consumer metrics institute indicator, which has been going down for the past 1.3-1.5 years. this is a measure of discretionary consumer durable expenditures over the internet, and appears to track a very vulnerable population in current circumstances. by virtue of the word "discretionary," it is looking at the icing, not the cake. and the icing is disappearing.


this is perhaps my worst fear.

Mine also.

I read a year or so ago that the median household had 18 days of operating cash available. 2X food and gas expenditures, oil heat, indirect tax increases, increased insurance costs etc. Margins are getting thinner, more so each day and I wonder how that has changed since

Anecdotally I see the stress in acquaintances and the old people picking up the return bottles for cash near my office and at the supermarket with shopping carts only filled with low cost essentials. It's like watching Night of the Living Dead, disturbing to say the least as a sort of slow motion rotting of people lives.

Seems to me to be one of the key points going forward is when the median icing disappears entirely and eating beans and rice and still not making it is probably the inflection point for the big kahuna. EJ has more faith that things will be managed reasonably down so the dollar is at .040 from the$ current 0.75 as a target. My unsupported intuition is we will overshoot and end up more like $0.25-0.30 as the FED money justs keeps flowing.

In any event just working on EJ's projections and the 18 Days median operating capital is valid the median line goes to a day by day basis and when(if) this happens you may see the "literal pitchforks and torches". I believe this little micro point is overlooked in most economic analysis and provides a major clue for a political tipping point in this crisis.

Chris Coles
04-01-11, 03:01 PM
Seems to me to be one of the key points going forward is when the median icing disappears entirely and eating beans and rice and still not making it is probably the inflection point for the big kahuna. EJ has more faith that things will be managed reasonably down so the dollar is at .040 from the$ current 0.75 as a target. My unsupported intuition is we will overshoot and end up more like $0.25-0.30 as the FED money justs keeps flowing.

In any event just working on EJ's projections and the 18 Days median operating capital is valid the median line goes to a day by day basis and when(if) this happens you may see the "literal pitchforks and torches". I believe this little micro point is overlooked in most economic analysis and provides a major clue for a political tipping point in this crisis.

And this is why I keep to my own mantra; that the only way forward, out of this dilemma, is to address the lack of prosperity at the grass roots of society. Moreover, others have repeatedly tried to do that with all sorts of government expenditure, but no one so far has tried to do it by the capitalisation of new job creation. Watch this space. .....