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EJ
10-05-08, 12:47 PM
http://www.itulip.com/images/debtdefkation.jpgStill no deflation: Disinflation then lots of inflation

As we explained years ago, the Fed has a bottomless bag of tricks to use to fight deflation. When deflation inevitably threatens, the Fed planned to continuously change the rules of the game to fight it, and so they have.

You did not need genius of foresight to make this call. All you needed was a browser and Adobe Acrobat on your PC, and a strong stomach to read the Fed's deflation play book (pdf) (http://www.itulip.com/Select/feddeflationplaybook.pdf) published by the Fed in 2003.

It was not the only such publication that the Fed issued to try to jawbone inflation expectations up back then, before explicitly carrying out the policy ideas the play book lays out. All of the several dozen papers issued either by the Fed or by the man who now heads it, Ben Bernanke – some as many as 25 years previous – have a common theme: do not, under any circumstances, allow your economy to fall into a liquidity trap. Avoid the zero bound of inflation and interest rates as if the nation's economic life depends on it – because it does.

Printing money is front and center in all of the anti-deflation policy recommendations in these policy papers issued in accordance with economic policy group-think that is soon to be relegated to the ash heap of history; the economic orthodoxy of any era is a reflection of the political interests of those in charge.

And here we are, facing down deflation and printing money like there's no tomorrow, because if the Fed does not – or so the Fed believes – there won't be.

Print, Ben, print!

Banks borrowed $368 billion per day last week, up from $188 billion per day the week before.


http://www.itulip.com/images/totalborrowingsfed1984-2008.gif

One question we get frequently is: Where the heck is all of this money going?

As we forecast February this year, the Fed stopped targeting the price of money but instead the quantity of money in Q2 2008. Since then the money supply has increased more than at any time since the anti-deflation era of 2001.


http://www.itulip.com/images/m2growth1980-2008.gif

The chart above understates the total growth in money aggregates because most of the growth is in commercial banks, although not institutional money market accounts. Growth in money aggregates there is no longer reported by the Fed as they were in M3 which the Fed discontinued in 2006.

Evidence is that at least some of this money is expanding the credit of commercial banks but you can see from the expansion of bank credit that some of those hundreds of billions are working their way into the banks.


http://www.itulip.com/images/bankcreditcommercia2006-2008.gif


Less successful is the effort to expand institutional money market accounts.


http://www.itulip.com/images/imm2000-2008.gif


If you are curious to know what actual deflation, as opposed to disinflation, looks like, it looks like this. Note the declines in M2 plus CDs and broad liquidity in Japan in the first two years of Japan's debt deflation, from 1990 to 1993.


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


Keep that up for a few years and deflation results. After several years of declines in broad money, deflation appeared in 1993.


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



In contrast we offer further evidence that the Fed is succeeding in its targeting of money aggregates. We call this chart from the Fed's recent data release on the monetary base (http://research.stlouisfed.org/publications/usfd/page3.pdf): "Showing the Bank of Japan how it's done."


http://www.itulip.com/images/monetarybaseOct2008.gif


(Hat tip to iTulip's Lukester)


Further reading of the Fed literature tells us that the current period of disinflation, should it continue to develop into actual deflation, will be attacked by the "foolproof means" as Bernanke wrote back in the early 2000s: currency depreciation:

Even if the nominal interest rate is zero, a depreciation of the currency provides a powerful way to stimulate the economy out of the liquidity trap (for instance, Bernanke (2000); McCallum (2000); Meltzer (2001); Orphanides and Wieland (2000)). A currency depreciation will stimulate an economy directly by giving a boost to export and import-competing sectors. More importantly, as noted in Svensson (2001), a currency depreciation and a peg of the currency rate at a depreciated rate serves as a conspicuous commitment to a higher price level in the future, in line with the optimal way to escape from a liquidity trap discussed above. An exchange-rate peg can induce private-sector expectations of a higher future price level and create the desirable long-term inflation expectations that are a crucial element of the optimal way to escape from the liquidity trap.


In order to understand how manipulation of the exchange rate can affect expectations of the future price level, it is useful to first review the exchange-rate consequences of the optimal policy to escape from a liquidity trap outlined above. That policy involves a commitment to a higher future price level and consequently current expectations of a higher future price level. A higher future price level would imply a correspondingly higher future exchange rate (when the exchange rate is measured as units of domestic currency per unit foreign currency, so a rise in the exchange rate is a depreciation, a fall in the value, of the domestic currency).5 Thus, current expectations of a higher future price level imply current expectations of a higher future exchange rate. But those expectations of a higher future exchange rate would imply a higher current exchange rate, a current depreciation of the currency. The reason is that, at a zero domestic interest rate, the exchange rate must be expected to fall (that is, the domestic currency must be expected to appreciate) over time approximately at the rate of the foreign interest rate.

Journal of Economic Perspectives
Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others
Lars E.O. Svensson
First draft: January 2003
This version: December 2003
This explains the pig pile into gold by the well-heeled (see Wealthy investors drain supplies of gold by hoarding bullion bars (http://www.ft.com/cms/s/0/692c787e-8f50-11dd-946c-0000779fd18c.html)). If not only the US but economies worldwide face deflationary forces, and currency depreciation is the final "foolproof way out" as espoused by the current economics orthodoxy, then competitive currency depreciation is the logical end game as governments pull out the stops to prevent deflation.

I remind readers that our comments and forecasts on central bank policy should not be construed as approval. We cannot help our readers prepare for the future if we try to impose our own theories on how the economy, financial system, and monetary systems should work. We are interested in what the Fed and other central banks are thinking, not how they should be thinking. We'll have time for that later. So far careful observation of that has yielded, unfortunately, accurate forecasts.

I leave you with the following history of inflations and deflations since 1800. Note that since every central bank abandoned the gold standard globally there have been two slight periods of deflation. These occurred before 1930. Since the international gold standard was abrogated by the US in 1971, ushering in the second era of floating exchange rates in 100 years – the last one ended badly as well – no deflation has occurred. Japan's experience with "deflation" would not show up on this graph because in no year since 1990 has deflation in Japan exceeded 2%.

We continue to expect that the actions of central banks to halt deflation will, as usual, in the long run work too well.


http://www.itulip.com/images/indlationhistory1801to2000.gif

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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we_are_toast
10-05-08, 01:25 PM
From Paul Krugman;

The obvious answer to sustained deflationary pressures, then, is the now-notorious proposal for "managed inflation": since deflation is the result of an economy "trying" to get the expected inflation it needs, to avoid deflation one must provide that expected inflation by credibly promising that future price levels will be sufficiently high compared with the present.
And this is where I get nervous. This nervousness is not because the idea of fighting deflation by promising inflation is crazy: it is in fact a straightforward conclusion from quite standard models. Indeed, once one admits that deflationary pressures come from the persistence of a savings-investment gap even at a zero interest rate, it is hard to see how this conclusion can be avoided. But the idea sounds crazy, and that is a problem. How can we get finance ministers and central bankers, who have spent their whole careers preaching the evils of inflation and the virtues of price stability, to accept the idea that price stability may not be an available option?
If Krugman and Bernanke are thinking on the same lines, it sounds pretty plausible, or maybe scary!

I've been riding the inflation/deflation roller coaster and switching my opinion on hourly basis. Your input EJ is very much appreciated.

doharra
10-05-08, 03:00 PM
To clarify: Are we, then, entering the moment of KA?

If so, it seems to put us right on the schedule outlined in the Original Ka-Poom theory (http://www.itulip.com/kapoomtheory.htm).

And C1ue, also, just took a stab at describing possible POOMs here (http://www.itulip.com/forums/showthread.php?p=52255#post52255). Yes?

Am I connecting the dots?

don
10-05-08, 03:58 PM
Disinflation Anecdote (Snail's Eye View) :

My wife and I did our weekly shopping yesterday at a local, comfortable middle class supermarket we frequent. Practically everything was on sale. Not a few cents off but a significant, practically across the board discount. Our ticket showed a 14% savings on a $145 buy.

By the amount of bags filled (sorry for the loose analysis here) this didn't appear to be a large price increase/temporary sale gambit, a commonplace here and I assume everywhere in grocery retail.

Motive? Critical cash flow for the chain? They have around 12 stores in the surrounding burgs. Time will tell.

FRED
10-05-08, 04:57 PM
Disinflation Anecdote (Snail's Eye View) :

My wife and I did our weekly shopping yesterday at a local, comfortable middle class supermarket we frequent. Practically everything was on sale. Not a few cents off but a significant, practically across the board discount. Our ticket showed a 14% savings on a $145 buy.

By the amount of bags filled (sorry for the loose analysis here) this didn't appear to be a large price increase/temporary sale gambit, a commonplace here and I assume everywhere in grocery retail.

Motive? Critical cash flow for the chain? They have around 12 stores in the surrounding burgs. Time will tell.

Cutting prices to burn off inventory is certainly deflationary. Across the entire retail sector you will see it happen as the recession deepens. The question is, what is the new equilibrium price that your grocer pays for goods and can charge for it? Clearly he cannot stay in business for long if the input costs for his goods stay higher than what he can charge his customers. Input costs must fall as well to match the new discounted sale prices that are meeting demand or he will not be able to restock the next cycle of inventory and sell it at a profit.


http://www.itulip.com/images/foodppi2000-2008.gif

Uh, oh. Not looking so good. Hope he's got a lot of cash on hand to float expenses. Better not be counting on the credit line.

What happens if half of the grocers in your area wind up going out of business? Then the ones that survive get to charge what they need to in order to stay in business. That may be more than they charge today. As a result your grocer's customers' buying behavior will change. They will buy less and they will substitute lower quality products.

That's how it is in countries where the standard of living has declined because the nation had lost purchasing power.

JoeSixpack
10-05-08, 04:59 PM
Lukester put up this lenghty piece The Fed is Dead. Long Live The US Treasury. (http://itulip.com/forums/showthread.php?t=5700) today.

The key take-away for me was that it argues the Fed had only started to "print money" on Sep 17., when it implemented the "Supplementary Financing Program", where the Treasury issues into the Fed, and all the TAFs and whatnot had not increased the monetary base so far.

This is the most intruiging chart on the Monetary base from the article. http://research.stlouisfed.org/publications/usfd/page3.pdf (http://research.stlouisfed.org/publications/usfd/page3.pdf)

If you look up your gold charts from Sep 17., you will find that was the day when Gold futures went from a low of 777 to the high of 869, the largest one-day increas ever if i recall correctly.

phirang
10-05-08, 05:00 PM
China has been tackling inflation by shutting down inefficient steel mills and retrenching other unproductive yet resource-intensive activities and focusing on using methods and technology with higher yields.

raja
10-05-08, 05:39 PM
Clearly he cannot stay in business for long if the input costs for his goods stay higher than what he can charge his customers. Input costs must fall as well to match the new discounted sale prices that are meeting demand or he will not be able to restock the next cycle of inventory and sell it at a profit.
Why would input costs stay high?
If the grocer is having to tighten his belt by lower prices, why wouldn't those selling what he's re-selling have to do the same? Wouldn't demand destruction affect everyone down the line?

don
10-05-08, 06:39 PM
Cutting prices to burn off inventory is certainly deflationary. Across the entire retail sector you will see it happen as the recession deepens. The question is, what is the new equilibrium price that your grocer pays for goods and can charge for it? Clearly he cannot stay in business for long if the input costs for his goods stay higher than what he can charge his customers. Input costs must fall as well to match the new discounted sale prices that are meeting demand or he will not be able to restock the next cycle of inventory and sell it at a profit.


http://www.itulip.com/images/foodppi2000-2008.gif

Uh, oh. Not looking so good. Hope he's got a lot of cash on hand to float expenses. Better not be counting on the credit line.

What happens if half of the grocers in your area wind up going out of business? Then the ones that survive get to charge what they need to in order to stay in business. That may be more than they charge today. As a result your grocer's customers' buying behavior will change. They will buy less and they will substitute lower quality products.

That's how it is in countries where the standard of living has declined because the nation had lost purchasing power.

I'll tell my wife! Good stuff, Fred.

sn1p3r
10-05-08, 10:02 PM
Cutting prices to burn off inventory is certainly deflationary. Across the entire retail sector you will see it happen as the recession deepens. The question is, what is the new equilibrium price that your grocer pays for goods and can charge for it? Clearly he cannot stay in business for long if the input costs for his goods stay higher than what he can charge his customers. Input costs must fall as well to match the new discounted sale prices that are meeting demand or he will not be able to restock the next cycle of inventory and sell it at a profit.


http://www.itulip.com/images/foodppi2000-2008.gif

Uh, oh. Not looking so good. Hope he's got a lot of cash on hand to float expenses. Better not be counting on the credit line.

What happens if half of the grocers in your area wind up going out of business? Then the ones that survive get to charge what they need to in order to stay in business. That may be more than they charge today. As a result your grocer's customers' buying behavior will change. They will buy less and they will substitute lower quality products.

That's how it is in countries where the standard of living has declined because the nation had lost purchasing power.

....better make friends with someone in the LDS church now while you can still get some food :eek:

Chief Tomahawk
10-05-08, 10:22 PM
Sadly, this bout of "disinflation" has whacked my precious metal mining stocks in a manner I'm sure Tony Soprano would be proud of. Ugh.:mad:

FRED
10-05-08, 10:52 PM
Sadly, this bout of "disinflation" has whacked my precious metal mining stocks in a manner I'm sure Tony Soprano would be proud of. Ugh.:mad:

We have been 100% consistently against PM stocks forever. Why?

1. No one ever guesses which companies do not have stupid management.
2. Dollar weakness from falling dollar demand will drive up input costs faster than declining dollar value will drive up finished goods prices.
3. Now as PM demand falls, finished goods demand will fall faster than input costs; producers will cut production faster than recession will cut demand.

The paper gold market will obscure this, although rising spreads between spot and physical are indicative.

Hat tip to metalman: watch this site for gold prices (http://www.pcgs.com/prices/PriceGuideDetail.aspx?c=66&title=Liberty+Head+%2420). The secondary market will be more reliable indicator of demand for a while.

GRG55
10-05-08, 11:18 PM
Why would input costs stay high?
If the grocer is having to tighten his belt by lower prices, why wouldn't those selling what he's re-selling have to do the same? Wouldn't demand destruction affect everyone down the line?

Supply destruction, raja. Supply destruction...:eek:

Input costs are influencing everyone, everywhere. It's more acute in the US$ zone, but it's hitting China and others too.

metalman
10-05-08, 11:26 PM
Supply destruction, raja. Supply destruction...:eek:

Input costs are influencing everyone, everywhere. It's more acute in the US$ zone, but it's hitting China and others too.

you and fred talk about this, no one else i've come across.

what's with the blind spot on the supply side of the price level equation? i don't get it. have the deflationists all received a supplobotomy?

tombat1913
10-06-08, 12:57 AM
Will somebody tell me what I'm missing here? :confused:




I leave you with the following history of inflations and deflations since 1900. Note that since every central bank abandoned the gold standard globally there have been two slight periods of deflation. These occurred before 1930. Since the international gold standard was abrogated by the US in 1971, ushering in the second era of floating exchange rates in 100 years – the last one ended badly as well – no deflation has occurred. Japan's on and off "deflation" does not even show up because in no year has deflation in Japan exceeded 2%.

We continue to expect that the actions of central banks to halt deflation will, as usual, in the long run work too well.


http://www.itulip.com/images/indlationhistory1801to2000.gif




BLS data confirm deflation in Aug. 2008.


http://www.itulip.com/images/deflationAug2008.gif

A month of negative inflation at annual rates occurred in Aug.

There have been 15 months of deflation since 2000.

2000 01 3.613
2000 02 5.076
2000 03 7.292
2000 04 -0.700
2000 05 2.127
2000 06 7.239
2000 07 3.541
2000 08 0.000
2000 09 6.436
2000 10 2.094
2000 11 2.090
2000 12 2.791
2001 01 7.094
2001 02 2.768
2001 03 0.684
2001 04 2.064
2001 05 6.297
2001 06 2.741
2001 07 -2.007
2001 08 0.000
2001 09 4.839
2001 10 -3.317
2001 11 -0.674
2001 12 -0.674
2002 01 2.048
2002 02 2.045
2002 03 3.423
2002 04 5.513
2002 05 1.347
2002 06 0.671
2002 07 2.706
2002 08 3.385
2002 09 2.013
2002 10 2.687
2002 11 2.005
2002 12 2.002
2003 01 5.410
2003 02 6.773
2003 03 1.979
2003 04 -4.473
2003 05 -1.947
2003 06 1.320
2003 07 4.004
2003 08 5.353
2003 09 3.973
2003 10 -1.289
2003 11 0.651
2003 12 3.292
2004 01 4.623
2004 02 3.270
2004 03 2.601
2004 04 1.941
2004 05 5.245
2004 06 4.556
2004 07 1.278
2004 08 1.920
2004 09 2.564
2004 10 6.509
2004 11 5.149
2004 12 0.628
2005 01 0.000
2005 02 3.821
2005 03 3.809
2005 04 5.745
2005 05 -1.842
2005 06 0.622
2005 07 8.362
2005 08 8.304
2005 09 17.114
2005 10 2.441
2005 11 -5.289
2005 12 -0.603
2006 01 7.512
2006 02 -0.600
2006 03 1.821
2006 04 6.180
2006 05 4.269
2006 06 3.636
2006 07 6.108
2006 08 5.455
2006 09 -5.172
2006 10 -5.757
2006 11 1.195
2006 12 7.363
2007 01 1.486
2007 02 3.656
2007 03 5.667
2007 04 3.870
2007 05 5.684
2007 06 3.240
2007 07 2.696
2007 08 0.231
2007 09 4.479
2007 10 3.212
2007 11 11.278
2007 12 4.351
2008 01 4.867
2008 02 0.283
2008 03 4.200
2008 04 2.504
2008 05 8.089
2008 06 13.423
2008 07 10.280

2008 08 -1.630
</PRE>
Before 2000 you have to go all the way back to 1986 to find a month of deflation. In fact, three in a row.

1986 02 -2.162
1986 03 -6.369

1986 04 -4.312
</PRE>

friendly_jacek
10-06-08, 01:34 AM
This is one of the idiosyncrasies of Itulip. Some posters are browbeat for using the term deflation, yet EJ or Fred show plenty of evidence of deflation, especially in the context of Ka-Poom.

GRG55
10-06-08, 01:58 AM
Will somebody tell me what I'm missing here? :confused:

You appear to be missing the fact that one chart shows 200 years of broad trend history, and the other chart shows "a brief history of time", namely the period from 2000 where the current FIRE economy [version 2.0] has entered its death throes and month-to-month CPI [as measured by the notoriously reliable and honest BLS remember] swings back and forth as the Fed and the Administration desperately try to keep the game going.

You think Greenspan timed his retirement so he could spend more time with his family? Or write his book? :rolleyes:

Contemptuous
10-06-08, 02:28 AM
Moved to another thread.

*T*
10-06-08, 05:29 AM
First bit of market timing Greenspan did right, in that case.

FRED
10-06-08, 09:00 AM
Will somebody tell me what I'm missing here? :confused:

If we zoom in on various periods show on the chart you will see what appears to be entry into a deflationary period, for example in 2001. AS the article points out, dollar depreciation is the "foolproof way" out of deflation, and as the zero bound tends to cause a reversal of capital inflows to the US, the US economy has a built-in anti-deflation mechanism: foreign debt.


http://www.itulip.com/images/inflationhistory1801to2008.gif

raja
10-06-08, 09:11 AM
Supply destruction, raja. Supply destruction...:eek:

Input costs are influencing everyone, everywhere. It's more acute in the US$ zone, but it's hitting China and others too.
I have very little experience in economics, so could you elaborate on this for me?

Say you are growing cotton, for example.
The clothes manufacturer is ordering less cotton because consumers are buying fewer clothes. You cut back on your production of cotton, but you're also cutting back on your input costs, because you need less labor, fuel, fertilizer to produce a smaller amount of cotton. Plus, basic material inputs, such as fuel and fertilizer are dropping in cost, so you can actually sell your cotton for less than before, which is a perfect match for consumers who have less money.

I agree, supply would be destroyed, because there is less demand . . . but wouldn't the reduced supply be matched to the now reduced demand level. So I don't understand how supply destruction would increase prices?

Chief Tomahawk
10-06-08, 10:27 AM
Thanks, Fred.

I have a subscription to Agora Financial's "Outstanding Investments", edited by Byron King. Over the past few weeks he has sent out several e-mails touting "6 Screaming Buys" with most being precious metal miners. I finally gave in and bought. Ouch.

mikedev10
10-06-08, 10:57 AM
Thanks, Fred.

I have a subscription to Agora Financial's "Outstanding Investments", edited by Byron King. Over the past few weeks he has sent out several e-mails touting "6 Screaming Buys" with most being precious metal miners. I finally gave in and bought. Ouch.

right there with ya brother.

we_are_toast
10-06-08, 11:02 AM
Thanks, Fred.

I have a subscription to Agora Financial's "Outstanding Investments", edited by Byron King. Over the past few weeks he has sent out several e-mails touting "6 Screaming Buys" with most being precious metal miners. I finally gave in and bought. Ouch.

I've been hurt by the miners also, but with oil dropping and gold prices high, the profit margin on gold production has to be rising. I expect the minors to be able to report an increase in profits which will be one of the few sectors in the market to do so. Hopefully this will cause a rush of money to the sector. This will be the opportunity to bail. In the long run I think Fred is right.

phirang
10-06-08, 11:15 AM
If I buy gold stocks, I have two types: barrick, which tracks the index(sorta), and really, really high-grade juniors with tons of cash and a BFS.

I've been getting burned hard, too, and having dealt with the mgmt, for the most part, they ARE IDIOTS.

I'm frankly done with equities: I'm going to undust my engineering books and crank up matlab.

akrowne
10-06-08, 12:44 PM
I don't get where the supposed "genius" on behalf of Bernanke is in this (not that Eric was claiming it).

Isn't Bernanke basically just saying he wants to create a "dollar carry trade"? If so, has he been paying attention to Japan at all the last 15 years?

While such a operation might indeed lower the exchange-rate value of the currency, it doesn't do much for domestic liquidity, as the results have shown.

It helps exporters, but more than compensates by starving the financial economy of capital. That's why Japan has never emerged from its malaise -- what kind of idiot would invest there, with no interest-rate winds at their back, and little chance of capital appreciation?

In the case of the US, rampant fraud and market bubble collapse will likely make the situation even worse if a cheaper dollar is forcibly induced. The situation isn't neutral; everyone "in" is looking for a way out, and no one else wants in.

There seems to be a lack of a full understanding of international capital flows in the academic literature by Bernanke et al.

Further, if a cheaper dollar is induced, arguably it will hurt the overall economy disproportionately, given how much consumer spending is dependent on cheap imports.

There is not a lot of evidence that Bernanke appreciates that fact.

godraz
10-06-08, 01:18 PM
I don't get where the supposed "genius" on behalf of Bernanke is in this (not that Eric was claiming it).

snip

There is not a lot of evidence that Bernanke appreciates that fact.

:D:D:D

It appears that Bernanke and all the other highly educated brainy folks trying to manage this mess are getting a real world lesson in how well their economic response theories are holding up in the real world.

It's hard enough managing a household economy, never mind one that spans the globe and consists of a few billion households who have begun to sense that the geniuses don't know what they are doing! :eek:

ocelotl
10-06-08, 01:34 PM
Cutting prices to burn off inventory is certainly deflationary. Across the entire retail sector you will see it happen as the recession deepens. The question is, what is the new equilibrium price that your grocer pays for goods and can charge for it? Clearly he cannot stay in business for long if the input costs for his goods stay higher than what he can charge his customers. Input costs must fall as well to match the new discounted sale prices that are meeting demand or he will not be able to restock the next cycle of inventory and sell it at a profit.


http://www.itulip.com/images/foodppi2000-2008.gif

Uh, oh. Not looking so good. Hope he's got a lot of cash on hand to float expenses. Better not be counting on the credit line.

What happens if half of the grocers in your area wind up going out of business? Then the ones that survive get to charge what they need to in order to stay in business. That may be more than they charge today. As a result your grocer's customers' buying behavior will change. They will buy less and they will substitute lower quality products.

That's how it is in countries where the standard of living has declined because the nation had lost purchasing power.

Been there, seen that, got the T-shirt.

This is working the way it did during the rampant inflation period here in Mexico. As posted here (http://www.itulip.com/forums/showthread.php?p=33035#post33035), the main problem is not the lack of inventory, is inventory that doesn't sell at current prices. It is part of a process where stores have to fulfill obligations, and since creditors don't use to accept payments in species, the stores have to liquidate inventories to cover them, or to avoid them getting rotten.

People on similar process tend to form a network where they constantly check prices of groceries, so to share best prices among the neighborhood. That's the way the INCO (Instituto Nacional del Consumidor), first and then the PROFECO (Procuradiría Federal del Consumidor) were born.

We will have to see how this process evolves, and how it will be handled.

Slimprofits
10-06-08, 02:20 PM
FRED said: Cutting prices to burn off inventory is certainly deflationary. Across the entire retail sector you will see it happen as the recession deepens.

Prices in the area food markets have continued to rise and I haven't been shopping for crap lately, but did find this in the WSJ:

Big Discounts Fail to Lure Shoppers (http://online.wsj.com/article/SB122324439998005859.html?mod=googlenews_wsj)



AnnTaylor Stores Corp. began touting an "unprecedented" sale with discounts of up to 60%, which a spokeswoman attributed to this year's "significantly different retail environment."

Gap Inc.'s namesake chain and its Banana Republic stores advertised discounts of up to 40%. A spokeswoman called the markdowns "incremental promotions versus last year."

By the end of the month, some retailers resorted to citing the crisis directly. Posters at Steven Madden Ltd. footwear stores, for example, depicted a declining stock chart and implored shoppers to "Sell Stocks, Buy Shoes." To sweeten the offer, the company knocked 20% off all products. A spokeswoman declined to comment.

Restoration Hardware Inc., meanwhile, sent out a blast email on Thursday saying it "unanimously approves bailout bill" and offering $100 off purchases of $400 or more at the home furnishings chain.
Wal-Mart is already cutting prices for Christmas, saying last week it had cut prices to $10 on 10 popular toys.

Target Corp., Minneapolis, also is emphasizing value more than in the past. "Since 1994, we've had the brand promise 'Expect more. Pay less,"' said a spokeswoman. "Now we are focusing more on the 'Pay less' side of that promise."

Prices may have to go even lower to get consumers interested again. At Costco, where sales of non-discretionary items such as food and gasoline have increased and consumers have cut back on discretionary purchases of furniture, apparel and electronics, Chief Financial Officer Richard A. Galanti said last week, "If [a purchase] can be put off, it will be put off."

phirang
10-06-08, 02:24 PM
No one will buy anything until savings are worthless or there's a new bubble to hide in.

mcgurme
10-06-08, 03:38 PM
Say you are growing cotton, for example.
The clothes manufacturer is ordering less cotton because consumers are buying fewer clothes. You cut back on your production of cotton, but you're also cutting back on your input costs, because you need less labor, fuel, fertilizer to produce a smaller amount of cotton. Plus, basic material inputs, such as fuel and fertilizer are dropping in cost, so you can actually sell your cotton for less than before, which is a perfect match for consumers who have less money.

I agree, supply would be destroyed, because there is less demand . . . but wouldn't the reduced supply be matched to the now reduced demand level. So I don't understand how supply destruction would increase prices?

I have yet to see any good response to Raja's question. I posted another piece (http://itulip.com/forums/showthread.php?t=5722) about my view of looming deflation.

So the crux is this: will input costs rise, or not?

I have yet to see clear evidence that they must rise in the short term, while the dollar is strengthening (cash being king). Oil is down. Metals are down. Those are substantial input costs to food and goods we use. If people stop buying most things (only bare essentials), I think there is further room for downward price movement on the input side (not permanently, but for a while).

I think the key lies, not in what the banks and government does, but in how the populace responds to those actions. It seems that here we have mixed policy decisions, such as printing more money, with human responses, which are much less predictable. It is clear that the policy decision is to create more money supply. But, is that guaranteed to affect the mass psyche in ways that will prevent deflation in the short run?

I like that EJ has done so much historical research, and I have great respect for him for that. But AFAIK, this situation of massive globalism, instant electronic communication, intertwined economies, money supplies divorced from anything of underlying value - is unique in history. Can we really use history to predict how people will respond to Helicopter Ben's ploys?

Morgan

LargoWinch
10-06-08, 03:50 PM
I had a chance to speak with Jim Rogers at a convention in Toronto last Thursday (and obtain my signed copy of a "Bull in China"). Pretty nice guy. No bodyguard nothing, which is quite surprising given the size of the event (500+ attendees).

Anyway, when asked about the discrepancy between the price of gold on COMEX vs physical bullion, he said "physical dealers have it, but don't want to sell it at a loss", hence creating a shortage of the physical stuff. I find this puzzling; but hey, he "is" the man and I am just Largo.

He further told me that crude oil is a much better investment than gold due to the supply/demand squeeze and the fact that the Saudis have been lying for the past 30 years about their reserves. In fact, he believes that crude oil is the asset of the future, hands down.

Jim is also very bullish on China, a lot less on India due to severe infrastructure problems among other things. Jim also loves anything agricultural-related. He told the audience that he bought some agriculture recently (and that the market wanted to sell him a lot more...).

So the question is: sell gold and overweight crude now that we are under $90/barrel? I am quite affraid of the downside of crude in a slowing economy (I got wacked pretty hard buying natural gas with 2x leverage earlier this summer).

Oh, I also told him jokingly to go easy on the poor female Bloomberg anchors (this was as per my wife's request).

PS: Sorry to $#!, but I could not ask him about El Erian comments regarding "dark matter". I guess I can ask Alan Greenspan when he will be visiting us on Nov. 7... (although I don't care much for Alan).

PPS: EJ: when are you visiting Toronto for a conference?

phirang
10-06-08, 03:55 PM
I had a chance to speak with Jim Rogers at a convention in Toronto last Thursday (and obtain my signed copy of a "Bull in China"). Pretty nice guy. No bodyguard nothing, which is quite surprising given the size of the event (500+ attendees).

Anyway, when asked about the discrepancy between the price of gold on COMEX vs physical bullion, he said "physical dealers have it, but don't want to sell it at a loss", hence creating a shortage of the physical stuff. I find this puzzling; but hey, he "is" the man and I am just Largo.

He further told me that crude oil is a much better investment than gold due to the supply/demand squeeze and the fact that the Saudis have been lying for the past 30 years about their reserves. In fact, he believes that crude oil is the asset of the future, hands down.

Jim is also very bullish on China, a lot less on India due to severe infrastructure problems among other things. Jim also loves anything agricultural-related. He told the audience that he bought some agriculture recently (and that the market wanted to sell him a lot more...).

So the question is: sell gold and overweight crude now that we are under $90/barrel? I am quite affraid of the downside of crude in a slowing economy (I got wacked pretty hard buying natural gas with 2x leverage earlier this summer).

Oh, I also told him jokingly to go easy on the poor female Bloomberg anchors (this was as per my wife's request).

PS: Sorry to $#!, but I could not ask him about El Erian comments regarding "dark matter". I guess I can ask Alan Greenspan when he will be visiting us on Nov. 7... (although I don't care much for Alan).

PPS: EJ: when are you visiting Toronto for a conference?

There are tankers in the GCC full of oil, sitting there, with no buyers.

No rush...

I'm staying in gold/yen/usd until it clears, and then move into a short 1mth/long 10yr.

edit: I am curious if rogers would have ever gotten anywhere without soros... he has been SO wrong about so much, especially this, "printing money" stuff from the Fed. The fed has been very careful in its operations, and the impact of inflation has been... oh, right!

Old Mathew
10-06-08, 05:35 PM
Phirang,

Could you explain how you are in yen? Is it FXY? And can you explain why the yen will appreciate vs the dollar?

I'm in Gold and cash, short some equities, and have been watching the FXY and FXE etc. But I confess not to understand why the yen will improve, though I understand why the euro might decline in value. Aren't all fiat monies more or less in the same inflationary boat?

Supercilious
10-06-08, 05:52 PM
PS: Sorry to $#!, but I could not ask him about El Erian comments regarding "dark matter". I guess I can ask Alan Greenspan when he will be visiting us on Nov. 7... (although I don't care much for Alan).

No problem LargoWinch, I believe I found out (from one of my sources) what the "dark matter" is. It would have been nice to to get a confirmation from Jim Rogers, but not essential. Still, I appreciate you did not forget about me. Don't bother asking this question when you meet Mr. Greasepan. I doubt he will be able to give a straight answer.

Miamicondoforum
10-07-08, 01:47 AM
Well, even if supply/demand remains in perfect balance(adjusting to lower supply/demand) you have the govt increasing money supply. The most effective means of doing that is with stimulus packages. These act as FORCED loans. So even if the banks won't lend, the government will. Unlike Japan with its 30% savings rate, Americans have 0% or negative savings, so they will not save this stimulus. They will spend it. They will buy food, gas, NASCAR memorabilia, beer, speculate on housing or the market (bubble psychology still intact in my opinion). The govt will likely lend 50-100 billion to the public with the next stimulus package. Well FoMoCo or ConAgra or ADM won't increase hiring or production. Even if they did, it is unlikely they would create so much supply as to keep up with the new money (demand) in the system. So you get more money chasing the previously in balance supply of goods. So demand (money-wise) is up, but supply stays low. You get inflation. Rinse and repeat. By about stimulus package 3 we'll see things like govt guarantees of small business loans so the banks will start lending on top of the stimulus packages. You'll then get insane inflation.

Slimprofits
10-07-08, 01:58 AM
The freshest Research headline on Barclays Capital website:

Fed considers further unprecedented measures to provide liquidity, lower Libor (http://ecommerce.barcap.com/research/user/article/summary?id=221335)

07 Oct 2008 Julia Coronado - Economics:Global:Analyst Desktop...

Client login required. I am not a client.

any guesses?

FRED
10-07-08, 02:35 AM
The freshest Research headline on Barclays Capital website:

Fed considers further unprecedented measures to provide liquidity, lower Libor (http://ecommerce.barcap.com/research/user/article/summary?id=221335)

07 Oct 2008 Julia Coronado - Economics:Global:Analyst Desktop...

Client login required. I am not a client.

any guesses?

Only this:

Fed pumps billions more into banks (http://mutual-funds.biz/2008/10/06/news/economy/fed_loans/index.htm?postversion=2008100608)

Central bank doubles to $300 billion the amount it will loan banks. Loans could reach $900 billion by end of year.

Last Updated: October 6, 2008: 11:55 AM ET

NEW YORK (CNNMoney.com) -- The Federal Reserve announced Monday that it will increase by hundreds of billions of dollars the money it makes available to the nation's banks.

The central bank said that its so-called term auction facility, which accepts financial instruments such as mortgage-backed securities as collateral, will be doubled immediately to $300 billion. The total amount available to banks will rise to $600 billion under the moves announced Monday.

In addition, the Fed signaled it could increase the amount available through those loans to $900 billion by the end of the year, increasing the amount the Fed will loan through the program by $750 billion above its previous limit.

The moves come in the wake of the passage on Friday of a $700 billion bailout bill that will allow Treasury to buy damaged assets directly from banks and Wall Street firms.

Experts said the moves by the Fed were an acknowledgement that many of the nation's leading financial institutions may not be able to wait until Treasury sets up its program. It may take weeks or perhaps even months before the Treasury can pump billions into the system itself by buying the damaged assets held on their balance sheets.

"The crisis in credit markets has become very acute, not just here but in Europe as well," said Lyle Gramley, a former Fed governor who is now an economist with the Stanford Group. "In a situation like this, you have to provide all the liquidity that is needed so that illiquid institutions don't become insolvent institutions." more... (http://mutual-funds.biz/2008/10/06/news/economy/fed_loans/index.htm?postversion=2008100608)


We do have the latest Barclays (ex-Lehman) reports but can only post them to the Select area. Will do so tomorrow.

Louie.G
10-07-08, 04:38 PM
If we zoom in on various periods show on the chart you will see what appears to be entry into a deflationary period, for example in 2001. AS the article points out, dollar depreciation is the "foolproof way" out of deflation, and as the zero bound tends to cause a reversal of capital inflows to the US, the US economy has a built-in anti-deflation mechanism: foreign debt.


http://www.itulip.com/images/inflationhistory1801to2008.gif

OK forgive my ignorance here and my possible lack of correct terminology, but I have become a little confused. There seems to be some issue in posts as regards using the terms Deflation and Disinflation. While I feel I have an understanding of Ka Poom and I believe it is an accurate predictive indicator can you please clarify this for me....

Upon reading Ka Poom http://www.itulip.com/kapoomtheory.htm I note that in the first (top) graph you mention DEFLATION. On the last (bottom) Graph you mention DISINFLATION. Both are followed by POOM, which to me is logical.

Thus I would summise that it is the exogenous events and their timing that are more important. Of course if a bubble crashes, it should cause a reduction in the rate of inflation (disinflation) which could lead to deflation depending on how serious the event is and how much the fed intervenes to try and stop deflation occuring.

The other problem I see is the Global side of things. A lower exchange rate is basically importing inflation a higher FX rate is importing Deflation, to a certain limitied extent.

However in the global economies, if the USD is the primarily reserve currency, the inverse to the US situation would be the case. So USD strong = imported inflation (to a certain extent) everywhere else in the world. So in their case it would be Poom - Ka so to speak. However the exogenous event of FIRE Melt down would obviously switch it back to Ka Poom for them as well

So to summarise, I presume I am right to say that Poom will follow a period of EITHER DISINFLATION and/or DEFLATION provided the exogenous event(s) that need to happen do happen. Ka Poom primarily is based on the US economy and thus will be more relative there.

My last query is how will the actions of other Central Banks and economies around the world, have an effect on Ka Poom. I would think that FX rates would be one aspect. In my humble opinion, the USD has taken the place of Gold, as far as Foreign FX exchange rates are concerned. By that I mean that USD is the only thing that their currency can be measured against with any form of relativeness. So that in itself would put this current "Credit" crisis into new and uncharted waters, as against 1929 or 1871. Now we are probably more than ever at the whim and call of emotional, greedy and fear based decisions being made by various countries all trying to look after their own best interests.

Having been hammered yesterday in AUD, NZD and GBP because everyone wants/needs to buy USD I now have a dilemma, which I will resolve by simply freezing the other currencies and using only our USD reserves, then hopefully releasing the others when the USD begins to fall. If you know when that will happen please let me know.

So the USD goes up because people need them to settle contracts, pay debt denominated in USD, which in turn could limit the ability of the built in "Anti-Deflation" Mechanism to kick in. So if foreign Economies realise that they have huge exposure to debts, right-offs etc denominated in USD, they will need to keep buying USD which could possibly lead the USD into full blown deflation by default, (Because their purchase of USD would tend to hold up it's value) thus extending the time frame of Ka and worsening the US situation and so on goes the worldwide spiral downwards.

So I could suggest that maybe one critical factor that possibly might have an effect is the total value of USD denominated Debt, equity, investments etc that may need to be settled in USD currency in the future.

Thanks in advance. Ohh By the way. The sun came up again this morning, rising from the east, so all is well

Cheers

phirang
10-07-08, 09:30 PM
OK forgive my ignorance here and my possible lack of correct terminology, but I have become a little confused. There seems to be some issue in posts as regards using the terms Deflation and Disinflation. While I feel I have an understanding of Ka Poom and I believe it is an accurate predictive indicator can you please clarify this for me....

Upon reading Ka Poom http://www.itulip.com/kapoomtheory.htm I note that in the first (top) graph you mention DEFLATION. On the last (bottom) Graph you mention DISINFLATION. Both are followed by POOM, which to me is logical.

Thus I would summise that it is the exogenous events and their timing that are more important. Of course if a bubble crashes, it should cause a reduction in the rate of inflation (disinflation) which could lead to deflation depending on how serious the event is and how much the fed intervenes to try and stop deflation occuring.

The other problem I see is the Global side of things. A lower exchange rate is basically importing inflation a higher FX rate is importing Deflation, to a certain limitied extent.

However in the global economies, if the USD is the primarily reserve currency, the inverse to the US situation would be the case. So USD strong = imported inflation (to a certain extent) everywhere else in the world. So in their case it would be Poom - Ka so to speak. However the exogenous event of FIRE Melt down would obviously switch it back to Ka Poom for them as well

So to summarise, I presume I am right to say that Poom will follow a period of EITHER DISINFLATION and/or DEFLATION provided the exogenous event(s) that need to happen do happen. Ka Poom primarily is based on the US economy and thus will be more relative there.

My last query is how will the actions of other Central Banks and economies around the world, have an effect on Ka Poom. I would think that FX rates would be one aspect. In my humble opinion, the USD has taken the place of Gold, as far as Foreign FX exchange rates are concerned. By that I mean that USD is the only thing that their currency can be measured against with any form of relativeness. So that in itself would put this current "Credit" crisis into new and uncharted waters, as against 1929 or 1871. Now we are probably more than ever at the whim and call of emotional, greedy and fear based decisions being made by various countries all trying to look after their own best interests.

Having been hammered yesterday in AUD, NZD and GBP because everyone wants/needs to buy USD I now have a dilemma, which I will resolve by simply freezing the other currencies and using only our USD reserves, then hopefully releasing the others when the USD begins to fall. If you know when that will happen please let me know.

So the USD goes up because people need them to settle contracts, pay debt denominated in USD, which in turn could limit the ability of the built in "Anti-Deflation" Mechanism to kick in. So if foreign Economies realise that they have huge exposure to debts, right-offs etc denominated in USD, they will need to keep buying USD which could possibly lead the USD into full blown deflation by default, (Because their purchase of USD would tend to hold up it's value) thus extending the time frame of Ka and worsening the US situation and so on goes the worldwide spiral downwards.

So I could suggest that maybe one critical factor that possibly might have an effect is the total value of USD denominated Debt, equity, investments etc that may need to be settled in USD currency in the future.

Thanks in advance. Ohh By the way. The sun came up again this morning, rising from the east, so all is well

Cheers

The USD you speak of sit in vaults in BRIC's and OPEC. They will repatriated duly.:D

Teehee... they thought they'd our gems when in fact they get our gizzards!

GRG55
10-10-08, 12:26 AM
I have very little experience in economics, so could you elaborate on this for me?

Say you are growing cotton, for example.
The clothes manufacturer is ordering less cotton because consumers are buying fewer clothes. You cut back on your production of cotton, but you're also cutting back on your input costs, because you need less labor, fuel, fertilizer to produce a smaller amount of cotton. Plus, basic material inputs, such as fuel and fertilizer are dropping in cost, so you can actually sell your cotton for less than before, which is a perfect match for consumers who have less money.

I agree, supply would be destroyed, because there is less demand . . . but wouldn't the reduced supply be matched to the now reduced demand level. So I don't understand how supply destruction would increase prices?

raja: What you describe is part of the "normal" situation. And another normal part is that over times of plenty basic commodity producers around the globe increase production and increase production and increase production, until the glut exceeds consumption by such a margin it takes years to work off the overcapacity [by a combination of bankrupcy and closure of the highest cost sources and the gradual expansion of economies and population to take up the slack over time].



However the difference this time is primarily threefold [this is a simplfied summary, but forgive me as it is late]:

Supply response in this so-called commodity bubble has been anemic, compared to historical patterns, in many critical commodity sectors. This price cycle didn't last long enough to overcome the scepticism, through much of this cycle, of commodity companies and capital markets that the higher prices were sustainable - a deeply ingrained scepticism after a quarter century of brutal declines in those businesses. Further, most of the available cashflow and capital went to fund unprecedented early cycle M&A between the majors and intermediates. The cycle time to bring on substantive new, green-field production of most commodities is longer, much longer, than this price cycle allowed.
Capital markets are exerting discipline over the high cost producers much, much faster than usual...the money [credit] is simply not available to keep low/zero/negative margin commodity sources in production. This is a break with past experience.
Finally, resource extraction and commodity production is a very capital intensive activity. And when capital is not available it does not matter what the input costs and product prices are doing. Supply simply will not expand without capital. Lots of capital. To use your example, if you grow cotton, it matters not a whit that your input costs in US$ are declining. If you cannot secure sufficient credit at planting time to buy those inputs [seed, fertilizers, fuel and so forth] then you will grow less, or perhaps not at all. And we are in a capital markets/credit situation that will not self-correct, nor will it quickly respond to the increasingly desperate government interventions to correct it.
These are the reasons that this so-called commodity bubble collapse will not involve many years of working off huge quantities of uneconomic commodity production overcapacity.

Nor will supply increase quickly when the global economy inevitably recovers and begins to grow again. The unprecedented nationalizations now underway imply that, for the first time since FDR's New Deal, governments will have an enormous hand in capital allocation decisions in the next global economic recovery. And you can guess where they will want to direct most of the money. Your cotton growing farmer friend should do fine, since governments everywhere view agriculture subsidies as a national birthright.

Provided he can get the diesel to run his John Deere...:D

phirang
10-10-08, 12:39 AM
raja: What you describe is part of the "normal" situation. And another normal part is that over times of plenty basic commodity producers around the globe increase production and increase production and increase production, until the glut exceeds consumption by such a margin it takes years to work off the overcapacity [by a combination of bankrupcy and closure of the highest cost sources and the gradual expansion of economies and population to take up the slack over time].




However the difference this time is primarily threefold [this is a simplfied summary, but forgive me as it is late]:

Supply response in this so-called commodity bubble has been anemic, compared to historical patterns, in many critical commodity sectors. This price cycle didn't last long enough to overcome the scepticism, through much of this cycle, of commodity companies and capital markets that the higher prices were sustainable - a deeply ingrained scepticism after a quarter century of brutal declines in those businesses. Further, most of the available cashflow and capital went to fund unprecedented early cycle M&A between the majors and intermediates. The cycle time to bring on substantive new, green-field production of most commodities is longer, much longer, than this price cycle allowed.
Capital markets are exerting discipline over the high cost producers much, much faster than usual...the money [credit] is simply not available to keep low/zero/negative margin commodity sources in production. This is a break with past experience.
Finally, resource extraction and commodity production is a very capital intensive activity. And when capital is not available it does not matter what the input costs and product prices are doing. Supply simply will not expand without capital. Lots of capital. To use your example, if you grow cotton, it matters not a whit that your input costs in US$ are declining. If you cannot secure sufficient credit at planting time to buy those inputs [seed, fertilizers, fuel and so forth] then you will grow less, or perhaps not at all. And we are in a capital markets/credit situation that will not self-correct, nor will it quickly respond to the increasingly desperate government interventions to correct it.
These are the reasons that this so-called commodity bubble collapse will not involve many years of working off huge quantities of uneconomic commodity production overcapacity.

Nor will supply increase quickly when the global economy inevitably recovers and begins to grow again. The unprecedented nationalizations now underway imply that, for the first time since FDR's New Deal, governments will have an enormous hand in capital allocation decisions in the next global economic recovery. And you can guess where they will want to direct most of the money. Your cotton growing farmer friend should do fine, since governments everywhere view agriculture subsidies as a national birthright.

Provided he can get the diesel to run his John Deere...:D

Herein lies the art of commodity trading... there are going to be severe dislocations(on the upside:D) in many commodity markets, especially when nations resort to Keynsian policies and wars to get GDP up.

The DRC and the Tenke project are great examples of the problems facing mining going forward... why is CODELCO bothering with Minmetals to do M&A in Africa and Asia if their reserves are fine?

I'd also note that the massive infrastructure commitments will hit the two (formerly;)) tightest markets: steel and copper.

Contemptuous
10-10-08, 01:09 AM
Phirang - if you bothered to unpack that for the regular readership without the racy condensed reference, it would appear less flashy. Win converts ... that sort of thing. That's what EJ does. He takes the intricacies and technicals, and without any fanfare he "unpacks" them for the general readership for maximum accessibility. This elicits instant respect. The inverse of that is the minor specialist, who deposits the fruit of his narrow focus of studies in gaudy packets. You are informative, but you are flashy. Sorry, it's a "style thing". You leave a trail of unanswered questions to your assertions elsewhere.


Herein lies the art of commodity trading... why is CODELCO bothering with Minmetals to do M&A in Africa and Asia if their reserves are fine?

bill
10-10-08, 02:48 AM
Nor will supply increase quickly when the global economy inevitably recovers and begins to grow again. The unprecedented nationalizations now underway imply that, for the first time since FDR's New Deal, governments will have an enormous hand in capital allocation decisions in the next global economic recovery.



Government Infrastructure Bank (or regional state by state gov. owned banks) injecting capital for selected projects?
…and as the dollar continues down creating inflation and limited inventory we may have to use domestic resources.
http://www.itulip.com/forums/showthread.php?p=26306#poststop
http://itulip.com/forums/showthread.php?p=26408#post26408

phirang
10-10-08, 03:34 AM
Phirang - if you bothered to unpack that for the regular readership without the racy condensed reference, it would appear less flashy. Win converts ... that sort of thing. That's what EJ does. He takes the intricacies and technicals, and without any fanfare he "unpacks" them for the general readership for maximum accessibility. This elicits instant respect. The inverse of that is the minor specialist, who deposits the fruit of his narrow focus of studies in gaudy packets. You are informative, but you are flashy. Sorry, it's a "style thing". You leave a trail of unanswered questions to your assertions elsewhere.

feel free to PM me... i'm a flighty fellow eh.

Starving Steve
10-11-08, 07:12 PM
The fact that baby boomers now desperately need to save for retirement means one thing: less consumption. The "go-go" economy of the boom years is over.

The idiots running the central banks will have fits and print like crazy, but the banks won't lend. Banks will hoard money.... And why should banks lend when the risks of lending in a recession are great and the rewards for lending are near zero?

Would you lend $100,000 overnight to any business for $3 or $4 interest? Even if you could collect fees for the loan, would you lend? And if you take collateral for lending, as banks do, what is illiquid collateral worth now when everything is so uncertain?

This all means that the deflation feeds upon itself, no matter what the central banks do. Only if the dollar is sharply de-valued, do we get out of this deflation-spiral. But that would mean hyper-inflation and a complete collapse, not just in the U.S. but everywhere in the world. Everyone would flee from the dollar and probably from all world paper money, all paper assets, and nearly everything.

metalman
10-11-08, 09:03 PM
Only if the dollar is sharply de-valued, do we get out of this deflation-spiral. But that would mean hyper-inflation and a complete collapse, not just in the U.S. but everywhere in the world. Everyone would flee from the dollar and probably from all world paper money, all paper assets, and nearly everything.

nah. the dollar dies a slow death ala the pound sterling, in steps. the usa grows poorer and poorer over decades. imports become more and more expensive. the two car family becomes the one car family. eating out is a treat. we become like the brits before they found oil in the north sea, except without the imf to bail it out after it hits bottom... we pine for the old days, glorify our 'culture' and so on. get ready of a decade of sappy, sentimental movies about the america's past glory. a legacy of literacy led the brits to invent punk rock. americans invented hip hop.

except there is no usa 'north sea oil... on and on it goes. the us economy shrinks and shrinks and shrinks. chinese water torture... so to speak. a degenerating empire like the brit's but without the class.

Contemptuous
10-11-08, 10:05 PM
You sound like you've been reading Kunstler. Good writer BTW. I think it was unfair to lump him together with Mishmash and Ackermash. "Poorer and poorer, and poorer and poorer ... :D


nah. the dollar dies a slow death ala the pound sterling, in steps. the usa grows poorer and poorer over decades. imports become more and more expensive. the two car family becomes the one car family. eating out is a treat. we become like the brits before they found oil in the north sea, except without the imf to bail it out after it hits bottom... we pine for the old days, glorify our 'culture' and so on. get ready of a decade of sappy, sentimental movies about the america's past glory. a legacy of literacy led the brits to invent punk rock. americans invented hip hop.

except there is no usa 'north sea oil... on and on it goes. the us economy shrinks and shrinks and shrinks. chinese water torture... so to speak. a degenerating empire like the brit's but without the class.

Jim Nickerson
10-11-08, 10:05 PM
From a Jeremy Grantham interview in Barron's 10/11/2008



Barron's: With the Fed and other central banks lowering rates last week, are you worried about inflation?

Grantham: My view is, "Forget inflation, guys." This is serious, the real McCoy, and you don't have to worry about little things like inflation. Global growth will slow down, commodities will be weaker for a while, and inflation is a thing of the past. Now we are talking about getting the financial machinery to work and just keeping [gross domestic product] grinding along.



And for just a bit of humility from what I think is a smarter than average guy.



Barron's: Where do you see all of this going?

Grantham: I want to emphasize how little I understand all of the intricate workings of the global financial system. I hope that someone else gets it, because I don't. And I have no idea, really, how this will work out. I certainly wish it hadn't happened. It is just so intricate that all I can conclude, by instinct and by reading the history books, is that it will be longer, harder and more complicated than we expect.

GRG55
10-13-08, 12:04 AM
nah. the dollar dies a slow death ala the pound sterling, in steps. the usa grows poorer and poorer over decades. imports become more and more expensive. the two car family becomes the one car family. eating out is a treat. we become like the brits before they found oil in the north sea, except without the imf to bail it out after it hits bottom... we pine for the old days, glorify our 'culture' and so on. get ready of a decade of sappy, sentimental movies about the america's past glory. a legacy of literacy led the brits to invent punk rock. americans invented hip hop...

According to the cable service I had in my flat in London I had access to about 100 channels. On any given night at least 50 of them seemed to be broadcasting various documentaries about the glorious events of WWII...the Battle of Britain, Bletchley Park, RAF Lancaster Squadron 617 [the Dam Busters] were particularly popular.

I used to be thankful I'm Canadian and can relate to British humour [Lukester will understand what I mean] as I switched to another channel.

P.S. It'll probably last more than a decade...


except there is no usa 'north sea oil... on and on it goes. the us economy shrinks and shrinks and shrinks. chinese water torture... so to speak. a degenerating empire like the brit's but without the class.

Maybe no North Sea oil, but what about that "wall of wind" that T. Boone keeps talking about on my PBS telly up here?

raja
10-13-08, 08:59 AM
raja: What you describe is part of the "normal" situation. And another normal part is that over times of plenty basic commodity producers around the globe increase production and increase production and increase production, until the glut exceeds consumption by such a margin it takes years to work off the overcapacity [by a combination of bankrupcy and closure of the highest cost sources and the gradual expansion of economies and population to take up the slack over time].



However the difference this time is primarily threefold [this is a simplfied summary, but forgive me as it is late]:

Supply response in this so-called commodity bubble has been anemic, compared to historical patterns, in many critical commodity sectors. This price cycle didn't last long enough to overcome the scepticism, through much of this cycle, of commodity companies and capital markets that the higher prices were sustainable - a deeply ingrained scepticism after a quarter century of brutal declines in those businesses. Further, most of the available cashflow and capital went to fund unprecedented early cycle M&A between the majors and intermediates. The cycle time to bring on substantive new, green-field production of most commodities is longer, much longer, than this price cycle allowed.
Capital markets are exerting discipline over the high cost producers much, much faster than usual...the money [credit] is simply not available to keep low/zero/negative margin commodity sources in production. This is a break with past experience.
Finally, resource extraction and commodity production is a very capital intensive activity. And when capital is not available it does not matter what the input costs and product prices are doing. Supply simply will not expand without capital. Lots of capital. To use your example, if you grow cotton, it matters not a whit that your input costs in US$ are declining. If you cannot secure sufficient credit at planting time to buy those inputs [seed, fertilizers, fuel and so forth] then you will grow less, or perhaps not at all. And we are in a capital markets/credit situation that will not self-correct, nor will it quickly respond to the increasingly desperate government interventions to correct it.

These are the reasons that this so-called commodity bubble collapse will not involve many years of working off huge quantities of uneconomic commodity production overcapacity.

Nor will supply increase quickly when the global economy inevitably recovers and begins to grow again. The unprecedented nationalizations now underway imply that, for the first time since FDR's New Deal, governments will have an enormous hand in capital allocation decisions in the next global economic recovery. And you can guess where they will want to direct most of the money. Your cotton growing farmer friend should do fine, since governments everywhere view agriculture subsidies as a national birthright.

Provided he can get the diesel to run his John Deere...:D
If I understand you correctly, your are saying there will be a shortage of supply, and consumer prices would be higher as a result. But as mcgurme points out, commodity costs are lower now. Are you suggesting this is only a short-term effect?

Seems like right now the cotton farmer has relatively cheap diesel to run his John Deere, so no need to raise prices. If he does, his jobless customers won't be able to afford new clothes and he'll go out of business. ;)

Deflation.

GRG55
10-14-08, 01:15 AM
If I understand you correctly, your are saying there will be a shortage of supply, and consumer prices would be higher as a result. But as mcgurme points out, commodity costs are lower now. Are you suggesting this is only a short-term effect?

Seems like right now the cotton farmer has relatively cheap diesel to run his John Deere, so no need to raise prices. If he does, his jobless customers won't be able to afford new clothes and he'll go out of business. ;)

Deflation.

Well if you think he has relatively cheap diesel right now then you would have to come to the conclusion you have.

You would also have to believe that we've just had an "oil bubble" that burst, bringing oil all the way back down to...the same price it was one year ago, and a full 5 times what it was in the last recession [and one may wish to note the crude curve is back in contango]

Hope your cotton farmer friend feels equally fortunate about his fuel prices...

raja
10-14-08, 07:48 AM
Well if you think he has relatively cheap diesel right now then you would have to come to the conclusion you have.

You would also have to believe that we've just had an "oil bubble" that burst, bringing oil all the way back down to...the same price it was one year ago, and a full 5 times what it was in the last recession [and one may wish to note the crude curve is back in contango]

Hope your cotton farmer friend feels equally fortunate about his fuel prices...
In this global recession/depression, there are two counter-balancing forces at work -- gov't printing money and demand destruction. The former is inflationary, and the latter is deflationary. How these forces will play out over time is hard to say.
However, it seems my call in a previous post of all commodities down has come to pass . . . .

My concern for the future is as mcgurme elucidated in a previous post:



- The US has accumulated mountains of "stuff". If we decide to go on a "stuff" diet, this may throttle back consumption more rapidly than producers can adjust. EJ has stated elsewhere (wish I had the link) that in today's markets, producers have a great deal of just in time capability that can be throttled back. That may be true in some sectors, such as computer production. But consider this - last time I visited my local campus surplus, there were hundreds of perfectly good, usable PC computers for sale, for $100 each. They had been traded out for new ones then surplused. How long could people get by not buying any new computers, just using old ones? A long, long time. The same is true with another thing near and dear to my heart, bicycles. I know of people who have as many as 20 bikes in their basement or garage. If things get tough, and all those people move to sell all those bikes, the industry will simply shut down, until the surpluses accumulated in the last 30 years work their way out of the system. Nearly every stuff-related industry in the US (and hence producers around the globe) faces a total shut-down of buying, if people loose confidence.

- To some extent, this is even true of food and oil (in the short term only, not long term - Lukester, I still believe in peak oil, don't worry). The US has an "epidemic of obesity". That would seem to indicate a lot of people could stand to eat less and walk or bike more. What if a lot of those people decide to start doing exactly that? Especially if they loose their jobs and can't afford to eat so much or drive everywhere anymore. Maybe global decoupling will take up the slack, but I doubt it, in the short term. All one has to do is look at the global "coupling" of the sliding markets to see that true decoupling has not yet happened. In any case, people still need to eat, but if everyone dramatically cuts back on consumption of calorie rich foods, this could have a substantial impact (albeit temporary). Same true for oil (again, temporarily).

So, my point is, if people truly loose confidence, and just halt all discretionary spending, this could accelerate into full blown deflation.

Ultimately, the printing presses will likely catch up. But in my view, the speed, length, and depth of the "Ka" we are in could each be much greater than anticipated. I think this would inflict a lot of pain on everyone if true. We may shift from a game of "wealth preservation" to a game of "self preservation".

c1ue
10-14-08, 11:53 AM
Please define what 'cheap' is.

In my book, gasoline and diesel are still multiples of what they were 3 years ago.

touchring
10-14-08, 01:41 PM
Please define what 'cheap' is.

In my book, gasoline and diesel are still multiples of what they were 3 years ago.



haha, SKF at $113 is beginning to look cheap. Any thoughts? :D

c1ue
10-15-08, 08:23 AM
Having dumped last Thursday to avoid the weekend, I'm now waiting for all the banks to finish their quarterly reporting.

Interesting how JPM recorded a $500M profit from the WaMu acquisition - which was greater than their profit for the quarter.

phirang
10-15-08, 08:26 AM
Having dumped last Thursday to avoid the weekend, I'm now waiting for all the banks to finish their quarterly reporting.

Interesting how JPM recorded a $500M profit from the WaMu acquisition - which was greater than their profit for the quarter.

Tovarish, Stavka declared there are no longer losses during 5-yr Banking Long March, only strategic withdrawls.:)

GRG55
10-16-08, 08:51 AM
http://www.itulip.com/images/debtdefkation.jpgStill no deflation: Disinflation then lots of inflation



STILL NO DEFLATION.

Cut through all the bullshzt and your cost of living is still going UP. Ben must be tearing out what little hair he has left [on top]...



U.S. Consumer Prices Unchanged in September; Core Rate Up 0.1%
(http://www.bloomberg.com/apps/news?pid=20601087&sid=a6XN1cqGbnA0&refer=home)
By Timothy R. Homan
Oct. 16 (Bloomberg) -- The cost of living in the U.S. was unchanged in September, restrained by plunging fuel costs and decreases in automobile prices and airline fares that signal the slowing economy is starting to cool inflation.

No change in prices, less than the 0.1 percent increase anticipated by the median estimate of economists surveyed, followed a 0.1 percent drop the prior month, the Labor Department said today in Washington. So-called core prices, which exclude food and energy, rose 0.1 percent, also less than forecast...

...Prices increased 4.9 percent in the 12 months to September after a year-over-year gain of 5.4 percent in August. The core rate increased 2.5 percent from September 2007, the same as the year-over-year increase in the prior month...

GRG55
10-16-08, 09:50 AM
...Cut through all the bullshzt and your cost of living is still going UP...

Except if you plan to buy another flat panel TV this holiday season...:)



Flat-panel TV prices set to dive, analysts say

<!-- Google TOP Adsense block -->By PETER SVENSSON , AP Technology Writer, Technology (http://technology.physorg.com/) / Business (http://technology.physorg.com/sub_Business/)

(AP) -- A combination of weak consumer spending and a peak in manufacturing capacity will push prices for flat-panel TVs down to unprecedented lows this holiday season, according to analysts.

David Barnes, analyst at NPD Group's DisplaySearch unit, said prices look set to decrease rapidly starting on "Black Friday," the day after Thanksgiving, and lasting through next year.


It's even possible that 32-inch LCD TV sets, which now usually cost $600 to $700, will go as low as $350 in stores. That's a significant level: It's close to the long-run average price for a TV in the U.S., Barnes said Tuesday.

He believes these smaller sets will be the big sellers this year, as consumers, and possibly also credit-card companies that had fueled big-ticket spending, tighten their belts.

"We're about at the point where the 32-inch set will be the commodity," Barnes said Tuesday.

Larger 40- or 42-inch sets are already dipping below the $1,000 level, another important psychological barrier.

c1ue
10-17-08, 03:07 AM
Except the LCD and plasma TVs use more electricity than the old sets.

How's that for a hidden cost of ownership :rolleyes:

Its like getting the monster SUV when you reserved the mid-size rental car.

LargoWinch
10-17-08, 09:08 PM
Except if you plan to buy another flat panel TV this holiday season...:)



Flat-panel TV prices set to dive, analysts say

<!-- Google TOP Adsense block -->By PETER SVENSSON , AP Technology Writer, Technology (http://technology.physorg.com/) / Business (http://technology.physorg.com/sub_Business/)

(AP) -- A combination of weak consumer spending and a peak in manufacturing capacity will push prices for flat-panel TVs down to unprecedented lows this holiday season, according to analysts.

David Barnes, analyst at NPD Group's DisplaySearch unit, said prices look set to decrease rapidly starting on "Black Friday," the day after Thanksgiving, and lasting through next year.


It's even possible that 32-inch LCD TV sets, which now usually cost $600 to $700, will go as low as $350 in stores. That's a significant level: It's close to the long-run average price for a TV in the U.S., Barnes said Tuesday.

He believes these smaller sets will be the big sellers this year, as consumers, and possibly also credit-card companies that had fueled big-ticket spending, tighten their belts.

"We're about at the point where the 32-inch set will be the commodity," Barnes said Tuesday.

Larger 40- or 42-inch sets are already dipping below the $1,000 level, another important psychological barrier.






Electronics is in a class of its own when you apply hedonic measurements.

metalman
10-17-08, 10:18 PM
Electronics is in a class of its own when you apply hedonic measurements.

blow out the current inventory at fire sale prices, then no more. want to buy a flat panel tv? 'splurge' like the icelanders!


Icelandic Shoppers Splurge as Currency Woes Reduce Food Imports (http://www.bloomberg.com/apps/news?pid=20601087&sid=aVFtDRGwcc50&refer=home)
By Chad Thomas

Oct. 13 (Bloomberg) -- After a four-year (http://www.bloomberg.com/apps/quote?ticker=ICGOYOY%3AIND) spending spree, Icelanders are flooding the supermarkets one last time, stocking up on food as the collapse of the banking system threatens to cut the island off from imports.


``We have had crazy days for a week now,'' said Johannes Smari Oluffsson, manager of the Bonus discount grocery store in Reykjavik's main shopping center. ``Sales have doubled.''
they ain't splurging, chad! they're stocking up! for the next 10 years!

that tv they buy today is the last new tv they'll see for a decade.