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EJ
04-30-09, 09:43 AM
http://www.itulip.com/images/1981_IBM_PC_Neg.jpg Everyone is wrong, again – 1981 in Reverse Part I: The Great Divide – Eric Janszen

It’s October 1981, the year IBM launched personal computer, air traffic controllers went on strike and were fired by President Reagan, and Israeli jets destroyed a nuclear plant in Iraq. The annual inflation rate in September was over 12%, a 30 year Treasury bond carried a constant maturity rate of 14.68%, and the Effective Fed Funds Rate hit 15.5% as the Paul Volcker Fed stood on the brake pedal, determined to crash the economy to cut off multiple simultaneous inflation channels -- energy cost-push, supply shock, and the reckless monetary policy of the previous administration.

Thing is, no one believed it.

A risk-free government bond promised 14.68% interest for 30 years but no one wanted them. Gold traded between $432 and $453, or $1011 and $1063 in 2009 dollars, well below a peak of $850 – nearly $2000 2009 dollars -- on January 21, 1980.

With perfect 20/20 hindsight we ask, what was going on the heads of investors then? That 30 year bond produced stellar after-inflation returns for decades, and on a risk-adjusted basis was the best investment of a generation.

No one wanted it.

Why did investors collectively not see that the inflation rate was destined to fall? Few believed that the U.S. government was serious about putting the economy through two massive recessions, earning the certain wrath of voters, in order to wring inflation expectations out of the economy. Fixed income investment professionals didn’t believe it, stock market investors didn’t believe it, and certainly the gold bugs didn’t believe it. Some held on for 20 years as gold went down, down, down.

Just about everyone expected the politicians to chicken out and let inflation go on forever.

The majority were wrong.


http://www.itulip.com/images/CPIvs30YYTBONDvsFedFunds1977-2009.gif


Today, the situation is a near perfect reverse of the situation investors faced in 1981. The annual inflation rate in March was a deflationary -1.7%, a 30 year Treasury bond carries a rate of 3.64%, the Effective Fed Funds Rate is close to 0%. Today just as few investors believe that central banks and governments are serious about, and capable of, halting deflation as expected the exact opposite of the same institutions 28 years ago – not this year, nor next year, nor in ten years, or even twenty.

The Great Divide

Humans extrapolate the recent past into the infinite future. But the history of transitions from inflation to deflation and back to inflation again is a story of discontinuous asset price responses to fiscal and monetary inputs.


http://www.itulip.com/images/CPI1913-2009.gif


The current deflation period D shares more in common with the early 1920s depression period A than The Great Depression period B and bears no similarity to the disinflation created by the Fed in the early 1980s period C. Neither The Great Depression nor the depression that followed the end of WWI were intended as the 1981 and 1983 recessions were. Note the very quick reversal of deflation in 1921, and also the sharp reversal in 1933 when the U.S. devalued the dollar 69% against gold.

Deflation expectations have over the past two quarters become so deeply embedded in investor’s minds that they now see a deflationary pricing environment persisting for decades, this despite the fact that only a year ago they could not shake the prospect of ever rising inflation, fed as it was by cost-push energy import prices, in turn driven by a weak dollar. Markets also expect central banks, as the economy climbs out of recession, to move quickly to respond to any sign of inflation with rate hikes before inflation price cycles set in.

In other words, the vast majority of investors believe that central banks and governments have so fine tuned fiscal stimulus and monetary policy that the economy can grow out of recession without significant inflation and also that our government is willing to risk sending the economy back into recession in order to halt inflation, if it re-emerges.

We think investors have it wrong again. Big time. We see a collective miscalculation as great as 1981, but in reverse.

We believe the current Fed and administration will embrace a nominal economic recovery, even if real growth is negative, that is, even at the cost of high inflation. As usual, the inflation will be hidden by the government’s inflation data indexing and computation methodology, and manipulation of Treasury bond yields across the curve, but evidence will be apparent all around us. The benchmark 10 year Treasury bond price is now overtly manipulated by Fed. But commodity markets generaly are not. So while the bond markets are now pricing in a real economic recovery with very slow growth and near zero inflation for the foreseeable future, commodity investors are pricing in negative real growth just ahead. Call it The Great Divide.

Inflation inflection indicators

The anomaly in, then, in our model of current period as the negative image of the 1981 period are commodity prices, especially oil, and metals, including gold.

During the last period of deflation, these traded well below prices we see today.


http://www.itulip.com/images/CCI1956-2009.gif


The $2.2 trillion in global fiscal stimulus committed by governments over the past six months, with the U.S. and China leading the pack with 5.5% and 7.5% of GDP spent respectively, dedicated to demand creation plus trillions more in cash from central banks into the banking system to boost credit creation has at last halted the deflationary process in its tracks. Many falling trends, from retail sales to personal consumption expenditures, have either slowed their decline or even reversed. The euphoria that markets are expressing may be short lived, either because the growth will turn out to be unreal in the sense that it is self-sustaining or that it cannot be self-sustaining without also being inflationary and not real.

Our thesis since the middle of last year is that inflation will arise by late 2009 to early 2010 from three channels. One, a reduction in supply of raw, intermediate, and finished goods relative to demand due to the impact of the credit crunch on producers and retailers (see Fed cuts dollar, Fire sales and F.I.R.E. sales, Duh-flation, and the Bezzle is shrinking... again (http://www.itulip.com/forums/showthread.php?p=66592#post66592)). Two, the inevitable impact of excessive money growth with lag effects (see Ka-Poom Theory deflation-inflation two-step: Too complex for deflationsts to grasp? (http://www.itulip.com/forums/showthread.php?p=60311#post60311)). Three, a weakening dollar once global deleveraging ends (see Confusion reigns: A crisis-driven global rush to dollar liquidity is not deflation (http://www.itulip.com/forums/showthread.php?p=52818#post52818)). We review these forecasts below.

Inventory Drop


http://www.itulip.com/images/realinventory1929-2009.gif


Yesterday the market rallied on decline in inventories. Again, the communal thought process is that this is a recession like any other since WWII and the decks are now cleared for inventory rebuilding. But as I have explained since at least 2005, this depression is nothing like any of the Fed induced recessions that have occurred since the end of WWII.

As previously noted, starting in Q3 2009 we should start to see the inflationary impact of the credit crunch induced supply crash. In this context, low inventories reflect a lack of availability of credit to float inventory. Persistent low inventories will cause prices to rise as Keynesian demand side stimulus succeeds while output and supply remain constrained.

Dollar Peaking


http://www.itulip.com/images/dollar1973-2009.gif


A period of global deleveraging began last year that drove up demand for dollar denominated assets and with them the dollar itself. In July 2008, we estimated that the period of deleveraging to last for approximately six months. In line with that forecast, the dollar rally produced by safe haven flight appears to be ebbing.

Money Growth


http://www.itulip.com/images/MZMvsCPI1980-2009.gif


Money at Zero Maturity shows the Fed still standing on the gas. The long-term correlation between the money supply and inflation is irrefutable.


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


If the Fed keeps ramping the money supply in this fashion, inflation is inevitable.

Note we do not talk about velocity of money in this analysis. As Dr. Peter Warburton reminded me in a call yesterday, velocity is volatile – changes diection quickly -- and has zero predictive value, unlike the money supply itself. Using the velocity of money to try to detect the future direction of inflation is like running through the woods at full speed with your eyes closed and your arms extended in hopes of avoiding injury.

Summary

As the period of rising inflation arrives, the U.S. economy will appear to recover -- and will in nominal terms, but not in real terms. The commodity markets are wise to this; unlike the 1981 period, the bond market investors are not. As the 1981 era, the equity markets are confused, not knowing whether to price in inflation or deflation, as the credit crunch reduces supply (inflationary), creates industry consolidation (inflationary), while weak demand weighs on earnings (deflationary). The cross-currents in our view weigh in favor of a general price inflation in coming quarters.

In Everyone is wrong, again – 1981 in Reverse Part II: Nine Signs of Inflation we review a recent paper by Dr. Warburton following our interview with him yesterday.

http://www.itulip.com/images/ninesignsinflationSM.gifEveryone is wrong, again – 1981 in Reverse Part II: Nine Signs of Inflation – Eric Janszen (http://www.itulip.com/forums/showthread.php?p=95399#post95399)
($ubscription) (http://www.itulip.com/forums/showthread.php?p=95399#post95399)

There we were, slaving away on a new macro analysis, trying to navigate our post FIRE Economy, post-market world, with its fiscal spending boom and bust cycles, and the Fed buying benchmark 10 year Treasury bonds, messing with the world's sea level measure of inflation, U.S. sovereign bond yields.

Despite taking an approach to disprove our own theory of impending inflation, all the data kept leading us back to our conviction that we will see significant inflation arising in the U.S. as soon as Q4 2009 but no later than early 2010 due to a combination of three factors: one, credit crunch induced supply shock meets Keynesian fiscal spending based aggregate demand stimulus; two, persistent money supply growth after lag effects; and three, cost-push price inflation as we experienced in the 2004 to 2008 period, the last time the dollar weakened, once the bid for dollars slows after the end of global debt deleveraging in Q1 2009.


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Ted Q. Sipp
04-30-09, 12:34 PM
Do you have a link to any of Warburton's work? He doesn't seem to have much of an online presence...

cjppjc
04-30-09, 12:43 PM
Thank you for this. Let's see what happens. Now Metalman will have another link to use.

caleodred
04-30-09, 12:55 PM
Some of the exact same thoughts occurred to me on Monday, that we have already transitioned from a brief period of deflation, in the fall and winter of last year, to a current bout of stagflation that started in March, where we have zero growth, high unemployment, stagnant wages, and price inflation. But most people don't realize this yet; they think we are still in deflation, which would be negative growth and declining prices.

But this stagflation will also be brief, and by the fall we will have entered into a raging inflationary period. If the government doesn't stop it then, it will turn into hyperinflation; it is too early to tell.

caleodred
04-30-09, 12:57 PM
Sorry, I am new to these forums. My last post (my first post here, actually), was meant as a reply to Eric's original post.

MarkL
04-30-09, 01:02 PM
Eric, From a purely historical perspective, it doesn't appear that inflation typically follows deflation as rapidly as you're predicting. To take
the 1922 example that you say is similar to today, the CPI merely went back to 0%, held for a few years, followed by further deflation.
In fact, in the 1922 example we don't see the CPI even reach 3% until after WWII some 20 years later.







http://www.itulip.com/images/CPI1913-2009.gif








The current deflation period D shares more in common with the early 1920s depression period A than The Great Depression period B and bears no similarity to the disinflation created by the Fed in the early 1980s period C. Neither The Great Depression nor the depression that followed the end of WWI were intended as the 1981 and 1983 recessions were. Note the very quick reversal of deflation in 1921, and also the sharp reversal in 1933 when the U.S. devalued the dollar 69% against gold.

Let's look at the other examples:
While all of these are "sharp reversals" they are not sharp reversals to inflation, but rather reversals to the median CPI for that period.
In 1933 "B" we trundle along the bottom for 3 years and then reverse... to zero CPI.

In 1980 "C" the reversal takes us to less significant inflation than we had... and since then the mean has been in that 2.5-5% arena
until recently due to oil.

To summarize, there is arguably no historical precedent where deflation has quickly and immediately (within a year) reversed to
significant inflation. Even the significant inflation we experienced from 1975-1979 wasn't really preceded by a significant deflationary period.

So why is this situation different from every other time? Why isn't it more historically likely that we'll reverse to 2%-4% (recent mean) and float
around that mean for 5 years as happened in BOTH 1980 and 1922?

Mega
04-30-09, 01:23 PM
EJ
Over here in Blighty the Bank of England keep talking about "Recovery". They say "Recovery" will happen around the 4th quater of 09. They also say that we know that "Recovery" is happening because it "might" bring a burst of inflation with it.

Only a few days ago they said that they are ready to act on any inflation that "Might" appear towards the end of the year.

Mike

Supercilious
04-30-09, 01:27 PM
The current deflation period D shares more in common with the early 1920s depression period A than The Great Depression period B and bears no similarity to the disinflation created by the Fed in the early 1980s period C.


EJ please correct quickly this mistake. We are currently in disinflation not deflation.( The Ka Poom theory says it's disinflation followed by a lot of inflation)
I think metaman's head will explode soon. :D

skyson
04-30-09, 01:48 PM
Eric, From a purely historical perspective, it doesn't appear that inflation typically follows deflation as rapidly as you're predicting. To take
the 1922 example that you say is similar to today, the CPI merely went back to 0%, held for a few years, followed by further deflation.
In fact, in the 1922 example we don't see the CPI even reach 3% until after WWII some 20 years later.
Let's look at the other examples:
While all of these are "sharp reversals" they are not sharp reversals to inflation, but rather reversals to the median CPI for that period.
In 1933 "B" we trundle along the bottom for 3 years and then reverse... to zero CPI.

In 1980 "C" the reversal takes us to less significant inflation than we had... and since then the mean has been in that 2.5-5% arena
until recently due to oil.

To summarize, there is arguably no historical precedent where deflation has quickly and immediately (within a year) reversed to
significant inflation. Even the significant inflation we experienced from 1975-1979 wasn't really preceded by a significant deflationary period.

So why is this situation different from every other time? Why isn't it more historically likely that we'll reverse to 2%-4% (recent mean) and float
around that mean for 5 years as happened in BOTH 1980 and 1922?

From my reading of EJ's articles in the past, 1. the 1980 recession was purposefully engineered by the Fed, but the current crisis is basically out of control. 2. when in the 1922 depression, the dollar was backed by gold, now it is backed by the "full credit and faith of the US government":eek::D. Also, US was a creditor then and debtor now.

I am an economic novice, but I think those are the major differences?

FRED
04-30-09, 03:15 PM
Eric, From a purely historical perspective, it doesn't appear that inflation typically follows deflation as rapidly as you're predicting. To take
the 1922 example that you say is similar to today, the CPI merely went back to 0%, held for a few years, followed by further deflation.
In fact, in the 1922 example we don't see the CPI even reach 3% until after WWII some 20 years later.
Let's look at the other examples:
While all of these are "sharp reversals" they are not sharp reversals to inflation, but rather reversals to the median CPI for that period.
In 1933 "B" we trundle along the bottom for 3 years and then reverse... to zero CPI.

In 1980 "C" the reversal takes us to less significant inflation than we had... and since then the mean has been in that 2.5-5% arena
until recently due to oil.

To summarize, there is arguably no historical precedent where deflation has quickly and immediately (within a year) reversed to
significant inflation. Even the significant inflation we experienced from 1975-1979 wasn't really preceded by a significant deflationary period.

So why is this situation different from every other time? Why isn't it more historically likely that we'll reverse to 2%-4% (recent mean) and float
around that mean for 5 years as happened in BOTH 1980 and 1922?

Your information is incorrect. From The truth about deflation: (http://www.itulip.com/forums/showthread.php?p=57193#post57193)


http://www.itulip.com/images/cpi1913-2008G.gif

http://www.itulip.com/images/cpi1930-1939G.gif

http://www.itulip.com/images/cpi1968-1980G.gif

Supercilious
04-30-09, 04:24 PM
So the D area in the chart below should be read as disinflation?
http://www.itulip.com/images/CPI1913-2009.gif

jk
04-30-09, 04:26 PM
As previously noted, starting in Q3 2009 we should start to see the inflationary impact of the credit crunch induced supply crash.
how does this timing reconcile with the prediction of 20% u3 unemployment?

brendan
04-30-09, 04:36 PM
Eric, From a purely historical perspective, it doesn't appear that inflation typically follows deflation as rapidly as you're predicting. To take
the 1922 example that you say is similar to today, the CPI merely went back to 0%, held for a few years, followed by further deflation.
In fact, in the 1922 example we don't see the CPI even reach 3% until after WWII some 20 years later.
Let's look at the other examples:
While all of these are "sharp reversals" they are not sharp reversals to inflation, but rather reversals to the median CPI for that period.
In 1933 "B" we trundle along the bottom for 3 years and then reverse... to zero CPI.

In 1980 "C" the reversal takes us to less significant inflation than we had... and since then the mean has been in that 2.5-5% arena
until recently due to oil.

To summarize, there is arguably no historical precedent where deflation has quickly and immediately (within a year) reversed to
significant inflation. Even the significant inflation we experienced from 1975-1979 wasn't really preceded by a significant deflationary period.

So why is this situation different from every other time? Why isn't it more historically likely that we'll reverse to 2%-4% (recent mean) and float
around that mean for 5 years as happened in BOTH 1980 and 1922?

EJ is using the wrong graph for CPI, I think--it would be clearer if he used the graph showing the % change from a year prior: http://research.stlouisfed.org/fred2/graph/?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23B3CDE7&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&&s_1=1&s[1][id]=CPIAUCSL&s[1][transformation]=pc1&s[1][scale]=Left&s[1][range]=Max&s[1][cosd]=1947-01-01&s[1][coed]=2009-03-01&s[1][line_color]=%230000FF&&s[1][mark_type]=NONE&s[1][line_style]=Solid&s[1][vintage_date]=2009-04-30&s[1][revision_date]=2009-04-30 (http://research.stlouisfed.org/fred2/graph/?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23B3CDE7&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&&s_1=1&s%5B1%5D%5Bid%5D=CPIAUCSL&s%5B1%5D%5Btransformation%5D=pc1&s%5B1%5D%5Bscale%5D=Left&s%5B1%5D%5Brange%5D=Max&s%5B1%5D%5Bcosd%5D=1947-01-01&s%5B1%5D%5Bcoed%5D=2009-03-01&s%5B1%5D%5Bline_color%5D=%230000FF&&s%5B1%5D%5Bmark_type%5D=NONE&s%5B1%5D%5Bline_style%5D=Solid&s%5B1%5D%5Bvintage_date%5D=2009-04-30&s%5B1%5D%5Brevision_date%5D=2009-04-30)

Unfortunately the data in this set doesn't go back prior to WWII.

FRED
04-30-09, 04:40 PM
how does this timing reconcile with the prediction of 20% u3 unemployment?

No wage price inflation channel is assumed.

FRED
04-30-09, 04:42 PM
EJ is using the wrong graph for CPI, I think--it would be clearer if he used the graph showing the % change from a year prior: http://research.stlouisfed.org/fred2/graph/?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23B3CDE7&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&&s_1=1&s[1][id]=CPIAUCSL&s[1][transformation]=pc1&s[1][scale]=Left&s[1][range]=Max&s[1][cosd]=1947-01-01&s[1][coed]=2009-03-01&s[1][line_color]=%230000FF&&s[1][mark_type]=NONE&s[1][line_style]=Solid&s[1][vintage_date]=2009-04-30&s[1][revision_date]=2009-04-30 (http://research.stlouisfed.org/fred2/graph/?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23B3CDE7&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&&s_1=1&s%5B1%5D%5Bid%5D=CPIAUCSL&s%5B1%5D%5Btransformation%5D=pc1&s%5B1%5D%5Bscale%5D=Left&s%5B1%5D%5Brange%5D=Max&s%5B1%5D%5Bcosd%5D=1947-01-01&s%5B1%5D%5Bcoed%5D=2009-03-01&s%5B1%5D%5Bline_color%5D=%230000FF&&s%5B1%5D%5Bmark_type%5D=NONE&s%5B1%5D%5Bline_style%5D=Solid&s%5B1%5D%5Bvintage_date%5D=2009-04-30&s%5B1%5D%5Brevision_date%5D=2009-04-30)

Unfortunately the data in this set doesn't go back prior to WWII.

This is easier to read.


http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=630&height=378&bgcolor=%2399FF99&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&&s_1=1&s%5B1%5D%5Bid%5D=CPIAUCNS&s%5B1%5D%5Btransformation%5D=pc1&s%5B1%5D%5Bscale%5D=Left&s%5B1%5D%5Brange%5D=Max&s%5B1%5D%5Bcosd%5D=1913-01-01&s%5B1%5D%5Bcoed%5D=2009-03-01&s%5B1%5D%5Bline_color%5D=%230000FF&&s%5B1%5D%5Bmark_type%5D=NONE&s%5B1%5D%5Bline_style%5D=Solid&s%5B1%5D%5Bvintage_date%5D=2009-04-30&s%5B1%5D%5Brevision_date%5D=2009-04-30

jk
04-30-09, 04:48 PM
No wage price inflation channel is assumed.
my point is more that very high unemployment means very low levels of demand, so that supply constraints are less likely to bite. otoh, if supply constraints are causing cost-push inflation, it implies a level of demand inconsistent with the very high levels of unemployment predicted.

it will take some time for a 20% u3 to emerge, even if we ratchet up [down?] to losing 1,000,000 jobs per month. but q3 is only a few months away.

trying to reconcile these ideas, it looks to me like the implicit prediction is for a false glow of health to appear with price rises in q3, with another leg down in the economy happening sometime thereafter, with the high unemployment achieved later, and with another sell-off in commodities likely to occur at that time.

is that what you have in mind?

metalman
04-30-09, 05:37 PM
my point is more that very high unemployment means very low levels of demand, so that supply constraints are less likely to bite. otoh, if supply constraints are causing cost-push inflation, it implies a level of demand inconsistent with the very high levels of unemployment predicted.

it will take some time for a 20% u3 to emerge, even if we ratchet up [down?] to losing 1,000,000 jobs per month. but q3 is only a few months away.

trying to reconcile these ideas, it looks to me like the implicit prediction is for a false glow of health to appear with price rises in q3, with another leg down in the economy happening sometime thereafter, with the high unemployment achieved later, and with another sell-off in commodities likely to occur at that time.

is that what you have in mind?

my read on this jk is that we're going to see a nominal improvement in gdp in q3 2009 and a temporary recovery in unemployment. then things turn down again in q4. even if unemployment keeps rising and demand falls faster than supply... maybe credit for producers improves?... that sill leaves the other 8 ways of inflation. :)

what if the usa hits a wall on spending in the next fiscal spin cycle... in 2010?

the more i read this stuff the more clear to me it is that there are so many variables at work... market and political and random... who really knows what the hell is going to happen? whatever it is, a 1930's deflation spiral or 1990's japan deflation drift is low probability.

Mega
04-30-09, 05:45 PM
Ej/Fred:-
http://www.guardian.co.uk/business/2009/apr/30/home-retail-group-foreign-goods
Mike

Supercilious
04-30-09, 06:04 PM
Hmmm.... Nobody wants to touch the subject of disinflation any more. I guess that leaves just me and metalman as defenders of the disinflation cause.

cjppjc
04-30-09, 07:42 PM
Hmmm.... Nobody wants to touch the subject of disinflation any more. I guess that leaves just me and metalman as defenders of the disinflation cause.


I'm sticking with biflation:cool:

markoboston
04-30-09, 08:21 PM
how does this timing reconcile with the prediction of 20% u3 unemployment?

Even with 20% U3 in the US, unemployment seems to have troughed at much lower levels in China, India, Brazil, and other relatively fast-growing economies. As demand picks up elsewhere in the world (and perhaps stabilizes in the US with massive government stimulus), with supply constrained, prices for consumables will rise.

Contemptuous
04-30-09, 10:13 PM
Whatever that means.


I'm sticking with biflation:cool:

cjppjc
04-30-09, 10:55 PM
Whatever that means.

Alright already. UGH. Biflation look it up. I think it's in our future.

jtabeb
04-30-09, 11:22 PM
Alright already. UGH. Biflation look it up. I think it's in our future.

Yes (don't worry, third post is the charm), Yes, and Yes

cjppjc
04-30-09, 11:33 PM
Yes (don't worry, third post is the charm), Yes, and Yes


Thanks. Lukester has a hard on for me right about now.
Btw, just got my first silver maples. Very nice. I now have the complete North American set. The Libertads look the best I think.

metalman
04-30-09, 11:45 PM
Hmmm.... Nobody wants to touch the subject of disinflation any more. I guess that leaves just me and metalman as defenders of the disinflation cause.

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metalman
04-30-09, 11:58 PM
Hmmm.... Nobody wants to touch the subject of disinflation any more. I guess that leaves just me and metalman as defenders of the disinflation cause.

<object width="425" height="344"><param name="movie" value="http://www.youtube.com/v/_kCTb509Tb4&hl=en&fs=1"></param><param name="allowFullScreen" value="true"></param><param name="allowscriptaccess" value="always"></param><embed src="http://www.youtube.com/v/_kCTb509Tb4&hl=en&fs=1" type="application/x-shockwave-flash" allowscriptaccess="always" allowfullscreen="true" width="425" height="344"></embed></object>

jandkmeyer
05-01-09, 12:52 AM
Quite the games that are played after nearly all EJ writings - like Chauncey Gardener describing his winter chores and the pundits pronouncing "There will be growth in the Spring!"

My own interpretation of EJ's/Warburton's tea leaves is "stagflation"; low capacity utilization but prices pushed upward by some combination of loose fiscal policy and a sinking dollar. But nothing too exciting. No wage inflation or new era of loose lending to really drive things. Seems like we've gone back to slow motion train wreck mode.

Supercilious
05-01-09, 01:40 AM
<object height="344" width="425">


<embed src="http://www.youtube.com/v/_kCTb509Tb4&hl=en&fs=1" type="application/x-shockwave-flash" allowscriptaccess="always" allowfullscreen="true" height="344" width="425"></object>Yessss! I knew it!!! Metalman please confirm that the dumb blond chick in the clip is you. I have a bet to collect.
(See lukester you didn't believe me when I told you metalman must be the blond type and not the ordinary one. You owe me a 12 pack of beer)

Now on a more serious tone, can FRED or EJ confirm or not if identifying the D area as deflation (and not disinflation) is not a mistake in EJ's piece? If that is so, what have they done with my beloved disinflation. Was metalman's blood spilled in vain to defend the "its not deflation, it's disinflation" theory?

MarkL
05-01-09, 01:57 AM
Thank you, but the percentage change showing relative CPI change doesn't really help as I'm trying to determine whether actual significant inflation (7%-15%) will kick in quickly (ie within a year), by looking at whether it has ever historically kicked in quickly. It doesn't appear to me as if it has. Fred posted some graphs that show CPI on a monthly basis instead of an annual basis, which shows it might have jumped for a month or so, but never for long enough to really pay down my house. EJs graph on an annual basis shows CPI measured by the year and I think is a better measure of prolonged inflation... and I still don't see that inflation has ever kicked in within a year of a deflationary/disinflationary period. Almost always it takes several years...

johngaltfla
05-01-09, 05:34 AM
IMHO, the traditional measurements used by the deflationistas for "wage inflation" are somewhat skewed by their bias. If one uses the BEA Wage Cost analysis we have consistently experienced wage inflation for well over 15 years and using the government's own data, it is reflected in a persistent move upwards, much like our monetary base has been. Total compensation is a much more accurate measure and indicates that no matter the screams of "you can't have inflation without wage inflation" the numbers tell the tale.

I will be updating the data on these charts this weekend to keep it current.

http://johngaltfla.com/blog2/wp-content/uploads/2009/03/EMPLOYERCOSTSCOMP.jpg
Wages, minus additional benefits and compensation:
http://johngaltfla.com/blog2/wp-content/uploads/2009/03/EMPLOYERCOSTSCOMPWAGES.jpg

Eric, you're spot on again and I'm amazed that there is still a debate about monetary inflation versus a temporary credit contraction. The failure that the deflatioinistas fail to address is that government created credit will eventually impact velocity and the borrower of first resort will soon emerge at the lender of massive resort to the general economy.

johngaltfla
05-01-09, 05:42 AM
One more thing; if the Federal Reserve does not re-engage into buying the 10 and 30 year bonds within the next 30 days and allows the yields to accelerate to the upside the ARM reset disaster will accelerate into the fall and any pretense of a recovery will fail in 2009. Thus I think they will execute a dual course of action with a massive bond purchase program once yields approach 3.50% on the 10 and a devaluation, stealth as it might seem, of the USD to fire up the export sector again.

Failure to do so will only magnify the unemployment situation and exponentially expand the bankruptcies we are soon to experiencing in all aspects of the construction and construction supply sectors of the economy.

It is truly, inflate or die.

jk
05-01-09, 06:29 AM
IMHO, the traditional measurements used by the deflationistas for "wage inflation" are somewhat skewed by their bias. If one uses the BEA Wage Cost analysis we have consistently experienced wage inflation for well over 15 years and using the government's own data, it is reflected in a persistent move upwards, much like our monetary base has been. Total compensation is a much more accurate measure and indicates that no matter the screams of "you can't have inflation without wage inflation" the numbers tell the tale.

I will be updating the data on these charts this weekend to keep it current.

http://johngaltfla.com/blog2/wp-content/uploads/2009/03/EMPLOYERCOSTSCOMP.jpg
Wages, minus additional benefits and compensation:
http://johngaltfla.com/blog2/wp-content/uploads/2009/03/EMPLOYERCOSTSCOMPWAGES.jpg

Eric, you're spot on again and I'm amazed that there is still a debate about monetary inflation versus a temporary credit contraction. The failure that the deflatioinistas fail to address is that government created credit will eventually impact velocity and the borrower of first resort will soon emerge at the lender of massive resort to the general economy.
wage increases are not prima facie inflationary. you have to account for productivity changes.

ThePythonicCow
05-01-09, 09:02 AM
wage increases are not prima facie inflationary. you have to account for productivity changes.
Yup - the productivity of our government employees has increased dramatically. More red tape, regulations, propaganda, taxes, and bureaucratic nonsense :rolleyes::rolleyes:.

You are correct of course in some cases. The wages of the Chinese worker went up some, but their productivity went up more, and even better, their productivity was displacing higher cost manufacturing in the more "advanced" economies.

vinoveri
05-01-09, 11:05 AM
...The failure that the deflatioinistas fail to address is that government created credit will eventually impact velocity and the borrower of first resort will soon emerge at the lender of massive resort to the general economy.

And the borrower of first resort will also be the investor/speculator of massive resort:
1. Goldman et al borrow "free money" from Uncle Sam and the other global fiat uncles
2. These various broker-dealer and preferred borrowers then, buy equities, commodities and any asset class they wish - causing rising stock markets, commodity inflation etc.
3. Consumers see their 401ks going back up as well as their purchasing power going back down - so with a combination of confidence (wealth effect and rising stock market) and fear (of inflation) AND renewed access to credit - the consumption and mild leveraging returns.

While I agree in theory with the austrians that only real capital can build real wealth, I'm not so sure that the world can't run a long long time on fictitious fiat capital and wealth. Unfortunate and unjust as it is, most don't recognize the unfairness or worse don't care. The "monopoly money" system can continue to run as long as that greenback continues to be accepted for labor.

goadam1
05-01-09, 01:41 PM
And the borrower of first resort will also be the investor/speculator of massive resort:
1. Goldman et al borrow "free money" from Uncle Sam and the other global fiat uncles
2. These various broker-dealer and preferred borrowers then, buy equities, commodities and any asset class they wish - causing rising stock markets, commodity inflation etc.
3. Consumers see their 401ks going back up as well as their purchasing power going back down - so with a combination of confidence (wealth effect and rising stock market) and fear (of inflation) AND renewed access to credit - the consumption and mild leveraging returns.

While I agree in theory with the austrians that only real capital can build real wealth, I'm not so sure that the world can't run a long long time on fictitious fiat capital and wealth. Unfortunate and unjust as it is, most don't recognize the unfairness or worse don't care. The "monopoly money" system can continue to run as long as that greenback continues to be accepted for labor.

It can run as long as there is someone to exploit in the scheme. Plenty of cheap labor. But we are running out of some important stuff like fisheries. Kill the pirates. Keep enough rice in bellies. Keep Idol on here.

johngaltfla
05-01-09, 05:13 PM
wage increases are not prima facie inflationary. you have to account for productivity changes.

According to the argument presented by the deflationist side, it is.

And please, tell me, where in government wage structure does productivity come into account? I'd love to hear that one as their percentage share of GDP increases month over month...

johngaltfla
05-01-09, 05:19 PM
And the borrower of first resort will also be the investor/speculator of massive resort:
1. Goldman et al borrow "free money" from Uncle Sam and the other global fiat uncles
2. These various broker-dealer and preferred borrowers then, buy equities, commodities and any asset class they wish - causing rising stock markets, commodity inflation etc.
3. Consumers see their 401ks going back up as well as their purchasing power going back down - so with a combination of confidence (wealth effect and rising stock market) and fear (of inflation) AND renewed access to credit - the consumption and mild leveraging returns.

While I agree in theory with the austrians that only real capital can build real wealth, I'm not so sure that the world can't run a long long time on fictitious fiat capital and wealth. Unfortunate and unjust as it is, most don't recognize the unfairness or worse don't care. The "monopoly money" system can continue to run as long as that greenback continues to be accepted for labor.

I side strongly with the Austrian theory that capital seeks open markets to exploit for the purpose of increased economic efficiency to maximize profits. Thus the system outlined by the Keynesians and deflationists regarding a perpetual government increase in their share of economic activity pushes the good capital out of the market thus forcing them to double down or increase the government share or zombie capital to keep the status quo. The only growth created is a statistically flawed analysis concocted to create the illusion of growth. Once you start dissecting the government's methodology, you realize quickly that when GDP is expressed in real money, we have basically experienced very little real growth since the gold standard was removed in the 70's. Inflation looks like growth to the ignorant and foolhardy but the truth is that your returns have to increase exponentially to keep ahead of the true inflation rate to insure an adequate return.

That is why so many real capitalists are fleeing to Singapore, Hong Kong and hard as this is to say, Shanghai to seek real returns on their investments.

photoncounter
05-01-09, 05:40 PM
Thank you, but the percentage change showing relative CPI change doesn't really help as I'm trying to determine whether actual significant inflation (7%-15%) will kick in quickly (ie within a year), by looking at whether it has ever historically kicked in quickly. It doesn't appear to me as if it has. Fred posted some graphs that show CPI on a monthly basis instead of an annual basis, which shows it might have jumped for a month or so, but never for long enough to really pay down my house. EJs graph on an annual basis shows CPI measured by the year and I think is a better measure of prolonged inflation... and I still don't see that inflation has ever kicked in within a year of a deflationary/disinflationary period. Almost always it takes several years...

I remember reading it on these pages and something you may want to consider -- deleveraging that took about 2-3 years during the great depression only took about 6 months this time (for the same amount).

WildspitzE
05-01-09, 10:11 PM
One more thing; if the Federal Reserve does not re-engage into buying the 10 and 30 year bonds within the next 30 days and allows the yields to accelerate to the upside the ARM reset disaster will accelerate into the fall and any pretense of a recovery will fail in 2009. Thus I think they will execute a dual course of action with a massive bond purchase program once yields approach 3.50% on the 10 and a devaluation, stealth as it might seem, of the USD to fire up the export sector again.

Failure to do so will only magnify the unemployment situation and exponentially expand the bankruptcies we are soon to experiencing in all aspects of the construction and construction supply sectors of the economy.

It is truly, inflate or die.

A large part of the Fed game is expectation management. The current rally on risk, whether it's based on perception and/or actual stimulus, if it goes unchecked, may potentially create enough momentum to override the Fed's limits for QE (alone) in the QE poker game.

The more effective means of curtailing Rf yields would be to re-instill a little fear into any weak sisters, whether through perception (negative or continued bleak commentary) or by diminishing the stimulus to pull back on the reigns of risk taking.

Perhaps, this is why the stress tests are being delayed, and why "what will be released" is still being debated. It also gives the institutions enough time to complete any capital raising efforts, as well as position themselves to profit from any expected results. Have you also noticed how it's being beaten into the public consciousness that unemployment will continue to be ugly way past the recession?

ThePythonicCow
05-01-09, 10:31 PM
Have you also noticed how it's being beaten into the public consciousness that unemployment will continue to be ugly way past the recession?
What are you suggesting here? Why would the Powers That Be want to frighten us with expectations of high unemployment?

I'm not doubting that they would do this ... I'm just missing the motivation in this case.

WildspitzE
05-01-09, 10:38 PM
What are you suggesting here? Why would the Powers That Be want to frighten us with expectations of high unemployment?

I'm not doubting that they would do this ... I'm just missing the motivation in this case.

I should erase that sentence as it is rather out of place in the stream of consciousness that I had while writing, I was trying to highlight an example of the massive amount of expectations management that is going on - one way or the other.

ThePythonicCow
05-01-09, 10:52 PM
I should erase that sentence as it is rather out of place in the stream of consciousness that I had while writing, I was trying to highlight an example of the massive amount of expectations management that is going on - one way or the other.
Drat. Yeah, I suppose that sentence was out of place. But it was still intriguing. I was still hoping you could explain why you thought "they" might want to manage our unemployment expectations upward (more jobless for longer).

WildspitzE
05-01-09, 11:20 PM
Drat. Yeah, I suppose that sentence was out of place. But it was still intriguing. I was still hoping you could explain why you thought "they" might want to manage our unemployment expectations upward (more jobless for longer).

Well, let's throw some ideas against the wall.

(A) If one wants to temper the size of the inflation premium that is a component of bond yields (particularly corporate debt that isn't helped by QE), one may want to keep hammering at the existence of continued deflationary loops, e.g. unemployment.

(B) If one wants [to continue] to promote inflation, and temper the possibility that people completely lose faith in the currency [after massive intervention], one may want to make everybody believe that deflation is alive and well. Conversely, if one wants to promote deflation, one may want to make everybody believe that inflation is a problem.

(C) If one is trying to make a bullish case for the stock market, and one wants people to ignore that pesky economic reality, I can think of a few examples:

(1) under promise and over deliver - the end of employment in america is around the corner! hey, look, we "only lost" 630K. Whew, I expected 800K; or

(2) the market has accurate foresight, and in the past unemployment doesn't recover until the economy has recovered, and way past the stock market bottom -- ignore the unemployment figures, focus on this other data over here, the bottom is in baby.

ThePythonicCow
05-01-09, 11:27 PM
Ok - that makes more sense. Thanks.

Perhaps "they" did the same thing with the stock market over the last few months. First cram it down so that they could (1) steal a couple trillion of freshly minted money without upsetting us too much, and (2) then be able to start pushing it up and get us believing that "the bottom is in baby."

occdude
05-02-09, 02:01 PM
Deflation, inflation, dollar devaluation inflation. With dollar printing and the fact that the dollar is the international reserve currency, you should see inflation kick up in places outside the country with large dollar reserves, namely China and oil producing nations.

This will force them to ask for more dollars and will lead to inflation in the US and possibly a currency crisis. The episode before the deflationary period in the fall of 08, with increased oil prices and a relatively mild bout of inflation will rear its ugly head again this summer. The government will be forced by our creditors to adopt more fiscal discipline which will lead to a renewed deflationary period.

Look for the inflationary-deflationary cycles to get more extreme until they meet with gold being the representative of inflation and the stock market representing deflation Cycles should last roughly 6mos a piece with periods like the one at current, that seem normal as one force subsides and the other kicks in.

Supercilious
05-02-09, 04:37 PM
Hmmm ... I got no reply yet from FRED at my question on the disinflation issue.

Thanks anyway for the new title and the avatar. I'm just curious if the gift was due to making fun of metalman or for not being convinced about the disinflation theory, the TIPS graphical theory, the Dollar Ratchet theory or the Peak Cheap Oil theory :)

Someone must been very frustrated and out of arguments to resort to such juvenile admin humor....

Do I have any chance to get a reply if the official position is that we are still experiencing disinflation?

metalman
05-02-09, 04:51 PM
Hmmm ... I got no reply yet from FRED at my question on the disinflation issue.

Thanks anyway for the new title and the avatar. I'm just curious if the gift was due to making fun of metalman or for not being convinced about the disinflation theory, the TIPS graphical theory, the Dollar Ratchet theory or the Peak Cheap Oil theory :)

Someone must been very frustrated and out of arguments to resort to such juvenile admin humor....

Do I have any chance to get a reply if the official position is that we are still experiencing disinflation?

ha ha! great avatar, symbols. you request it? i now respect your sense of humor about yourself. damn cool. maybe i was wrong about you.

ej's latest is a transition between disinflation/deflation and inflation... dollar leveling off. last week the fed failed to keep the 10 yr below the magic 3%. how come?

china canceled usa's credit card? (http://www.google.com/hostednews/afp/article/ALeqM5i4estRSYeFBIII9kezxnP4jgoGZQ)

bond market not buying the low inflation bs already? time for the ben to make another dire speech about deflation, no?

peak cheap oil... still on. peak cheap + demand crash = $51 vs $10 today.

dollar ratchet... that's why the dollar didn't crash ala schiff. do his clients have any money left to benefit when the dollar hits 40?

what's the 'tips graphical theory'? :confused:

NFN_NLN
05-02-09, 08:27 PM
I pulled out of the stock market at the right time (early '08). I didn't buy PMs because they had already shot up by the time I started looking into them. No big loss. After the crash (fall '08) I put a small fraction of money into commodities. They did extremely (40% well) but I put such a small amount of money it didn't really do much overall.

I've missed out on the ~20% rally since the mega crash. Which is fine by me because I also missed out on the ~-42% dip. I'm leery about putting money into the market due to the DOW-3000 nutts. My gut tells me to wait until summer '09 earnings reports which should result in a pull back before buying commodities and blue chips? I don't want to buy gold, if anything I would buy platinum.

Looking for retard simple constructive criticism.

ThePythonicCow
05-02-09, 08:34 PM
Looking for retard simple constructive criticism.Unfortunately for your request, it seems to me that we here on the iTulip forums don't do much of that. Rather we react, usually favorably and sometimes with significant added detail and insight, to the long term analysis of the economic situation by the forum's owners and a few other fine contributors. We also jaw and jab and throw in less related comments -- got to season up the mix.

bart
05-02-09, 09:58 PM
I pulled out of the stock market at the right time (early '08). I didn't buy PMs because they had already shot up by the time I started looking into them. No big loss. After the crash (fall '08) I put a small fraction of money into commodities. They did extremely (40% well) but I put such a small amount of money it didn't really do much overall.

I've missed out on the ~20% rally since the mega crash. Which is fine by me because I also missed out on the ~-42% dip. I'm leery about putting money into the market due to the DOW-3000 nutts. My gut tells me to wait until summer '09 earnings reports which should result in a pull back before buying commodities and blue chips? I don't want to buy gold, if anything I would buy platinum.

Looking for retard simple constructive criticism.




Lots of folk did worse, give yourself an atta-boy or two.
On a regular basis - add to winners, drop losers.
Consider your dollar exposure risk to a "currency event".
Invest in educating yourself more.

skyson
05-03-09, 01:50 AM
Invest in educating yourself more.


I want to study macro-economics in depth, where do I start? Thanks.

ThePythonicCow
05-03-09, 12:18 PM
I want to study macro-economics in depth, where do I start? Thanks.
Follow the current financial collapse closely. After a few years, you will know much about macro economics.

bart
05-03-09, 12:39 PM
I want to study macro-economics in depth, where do I start? Thanks.

I wish I had a straight and simple answer.

There are large differences in the major schools - Austrian, Keynes, Friedman and the Chicago school - and all of them have significant shortcomings. And then there's the political and vested interest and spin influences on the basic concepts, the largest of which revolves around what inflation is, how its defined and what causes it.

A visit to a library or large book store or both is probably the best overall idea, and look for books that make sense to you personally. A glossary like iTulip's or mine is also invaluable - the terminology can get quite messy.

Supercilious
05-03-09, 07:17 PM
ha ha! great avatar, symbols. you request it? i now respect your sense of humor about yourself. damn cool. maybe i was wrong about you.
Well, I asked a Fred or EJ a question trying to understand if the official iTulip position with regard to "no deflation, only disinflation" , has changed ... and I get a great new avatar and title,... I guess this proves my point, beyond any doubt. When FRED runs out of arguments resorts to cheap juvenile attacks against all those who dare to question the official iTulip position.


ej's latest is a transition between disinflation/deflation and inflation... dollar leveling off.
If I remember correctly not long ago you were parroting the mantra "no deflation, just disinflation and then a lot of inflation". And everybody who dared to question that was subjected to your misplaced an low IQ rhetoric. Metalman do you still believe in the "no deflation, just disinflation and then a lot of inflation" concept? Are you going to attack EJ now ?:D

last week the fed failed to keep the 10 yr below the magic 3%. how come?

china canceled usa's credit card? (http://www.google.com/hostednews/afp/article/ALeqM5i4estRSYeFBIII9kezxnP4jgoGZQ)

Stop the BS metalman. I don't think you have the required depth to understand what really happened with China reducing the treasuries purchase.


dollar ratchet... that's why the dollar didn't crash ala schiff. do his clients have any money left to benefit when the dollar hits 40?
I thought FRED made an admission that the call on the $780/oz floor for the gold price as indicated by Dollar Ratchet Theory was wrong. At that time when I said that gold can move bellow that, you also made clueless chart attacks in order to sustain the official "truth", ....which was obviously wrong.

Metaman I hope you do realize your aggressive parroting is actually disservice to iTulip. It saps the credibility of the official position.


what's the 'tips graphical theory'? :confused:

I think the TIPS Graphical Theory ( or the TIPS Whoah Theory) was summarized by FRED here :)
(http://www.itulip.com/forums/showpost.php?p=58488&postcount=26)

skyson
05-03-09, 09:28 PM
Many thanks to pythoniccow and bart.:)

MarkL
05-03-09, 09:38 PM
I also find setting your avatar to PeeWee and not responding a bit inappropriate. Are you sure this was one of the system admins and not a hacker? I've spoken with Eric a couple of times and he's always seemed the consummate professional and I'm sure would have an answer to your Disinflation vs Deflation question if he was aware of it.

metalman
05-04-09, 03:00 PM
I also find setting your avatar to PeeWee and not responding a bit inappropriate. Are you sure this was one of the system admins and not a hacker? I've spoken with Eric a couple of times and he's always seemed the consummate professional and I'm sure would have an answer to your Disinflation vs Deflation question if he was aware of it.

fred posted a year ago at least that non-subscriber questions don't get answered until ej's done with the subscriber questions. he's way behind... like 20+ behind.

metalman
05-04-09, 03:14 PM
Well, I asked a Fred or EJ a question trying to understand if the official iTulip position with regard to "no deflation, only disinflation" , has changed ... and I get a great new avatar and title,... I guess this proves my point, beyond any doubt. When FRED runs out of arguments resorts to cheap juvenile attacks against all those who dare to question the official iTulip position.

oh, so you didn't ask for the pee wee title and avatar. agree it's not fair if fred gave you your new avatar and title by fiat. how about we do it by a vote of members? i vote you get a picture of a troll and the title 'tickerforum troll'.

your constant attempt to poke holes in arguments here, silly repetitive conspiracy theories to explain everything, silly repetitive lame 'theories' like 'fed hammer drill', can't tell prisonplanet from pbs...


If I remember correctly not long ago you were parroting the mantra "no deflation, just disinflation and then a lot of inflation". And everybody who dared to question that was subjected to your misplaced an low IQ rhetoric. Metalman do you still believe in the "no deflation, just disinflation and then a lot of inflation" concept? Are you going to attack EJ now ?:Dyep, still true. no deflation spiral. dead on. 100% accurate. feeling sorry for your pals over at tickerforum? didn't he say inflation was impossible? deflation spiral inevitable?


Stop the BS metalman. I don't think you have the required depth to understand what really happened with China reducing the treasuries purchase.i've already forgotten symbols' conspiracy theory #243 that explains china's purchases of treasuries. what's it this week?


I thought FRED made an admission that the call on the $780/oz floor for the gold price as indicated by Dollar Ratchet Theory was wrong. At that time when I said that gold can move bellow that, you also made clueless chart attacks in order to sustain the official "truth", ....which was obviously wrong. got it. everything itulip says is wrong and everything pee wee says is right. come to think of it, pee wee is perfect for you. after reading any one of your posts all i have to do is close my eyes and imagine pee-wee giggling 'he-he!' and it all makes sense.


Metaman I hope you do realize your aggressive parroting is actually disservice to iTulip. It saps the credibility of the official position. point taken. your nonstop trolling doesn't help yours.


I think the TIPS Graphical Theory ( or the TIPS Whoah Theory) was summarized by FRED here :) (http://www.itulip.com/forums/showpost.php?p=58488&postcount=26)
(http://www.itulip.com/forums/showpost.php?p=58488&postcount=26)
so what?

EJ
05-04-09, 07:55 PM
I've returned from a trip to find a development that troubles me. I understand that you received less than respectful treatment here. Please accept my apology.

I have run several companies. One thing I have learned from it is that if you do not encourage dissent among the group, you wind up with a weak organization. By the same token if you allow disrespect among the group and of yourself, everything goes to hell.

Members of iTulip will treat each other with respect, and the standard applies doubly in iTulip administration's treatment of members. The rule also applies to members' treatment of iTulip management.

To answer your question, after dozens of interviews in 2006 and 2007 before the debt crisis, the terms "deflation" and "inflation" were generally interpreted by readers as meaning a deflation spiral as occurred in the U.S. in the 1930s and hyperinflation as occurred in Argentina in 2001 and in many nations throughout the 20th century.

To distinguish between this generally accepted meaning of the term deflation and the kind of deflation we expected, we adopted the term "disinflation" here to mean a falling rate of inflation managed by aggressive government intervention but not a self-reinforcing deflation spiral as occurred in the 1930s.

To distinguish between hyperinflation and the kind of inflation we expected, not hyperinflation but more as in the U.S. in the 1970s, albeit more severe, we use the term "high inflation" here.

Disinflation is a brief period of deflation limited to goods and services prices in the Production/Consumption Economy but not reinforced by forced liquidation of the same items purchased with credit as occurred in the 1930s. High inflation is inflation that does not exceed 100% in any one year.

The economics textbooks are not much help here. They do not even distinguish between the kind of rare deflation spiral that the U.S. experienced in the 1930s and the brief periods of deflation that Japan has experienced off and on since 1992 that we call disinflation.

Adding to the confusion, we forecast asset price deflation in the FIRE Economy which tends to occur as a self-reinforcing downward price spiral during debt deflations, except here again we expected radical government intervention.

The term "debt deflation" adds even further confusion, even though the definition is clear and simple. The confusion arises because debt can be deflated by defaults but also by rising nominal cash flows. Creditors do not win in either case and prefer a managed version of the former over a runaway version of either.

We will not see the deflation spiral that Mike Shedlock, Karl Denniger, Paul Krugman, Steve Keen, and other forecasters predicted in 2006 and 2007. In fact, commentators are already talking about inflation not more than a few months after "deflation" was widely feared. Soon enough the inflationists will be the majority again, after the fact of inflation is further confirmed by commodity prices, but not interest rates.

As contrarians we grow even more critical of our theories when we see large numbers of previously antagonistic economics commentators adopt in the moment forecasts that were no more than a theory of ours two or three years ago.

Unfortunately for those of us in the prognostication business, the fact of broad adoption confirms only what we knew then; it says nothing about the next two or three years. The drawing board future is continuously erased by the present, and all you have to show for it is what you learned from the exercise of drawing, which is at least some advantage.

ThePythonicCow
05-04-09, 08:45 PM
The drawing board future is continuously erased by the present, and all you have to show for it is what you learned from the exercise of drawing, which is at least some advantage.
That's what life is -- the exercise of drawing.

Supercilious
05-04-09, 11:41 PM
I've returned from a trip to find a development that troubles me. I understand that you received less than respectful treatment here. Please accept my apology.

I have run several companies. One thing I have learned from it is that if you do not encourage dissent among the group, you wind up with a weak organization. By the same token if you allow disrespect among the group and of yourself, everything goes to hell.

Members of iTulip will treat each other with respect, and the standard applies doubly in iTulip administration's treatment of members. The rule also applies to members' treatment of iTulip management.

To answer your question, after dozens of interviews in 2006 and 2007 before the debt crisis, the terms "deflation" and "inflation" were generally interpreted by readers as meaning a deflation spiral as occurred in the U.S. in the 1930s and hyperinflation as occurred in Argentina in 2001 and in many nations throughout the 20th century.

To distinguish between this generally accepted meaning of the term deflation and the kind of deflation we expected, we adopted the term "disinflation" here to mean a falling rate of inflation managed by aggressive government intervention but not a self-reinforcing deflation spiral as occurred in the 1930s.

To distinguish between hyperinflation and the kind of inflation we expected, not hyperinflation but more as in the U.S. in the 1970s, albeit more severe, we use the term "high inflation" here.

Disinflation is a brief period of deflation limited to goods and services prices in the Production/Consumption Economy but not reinforced by forced liquidation of the same items purchased with credit as occurred in the 1930s. High inflation is inflation that does not exceed 100% in any one year.

The economics textbooks are not much help here. They do not even distinguish between the kind of rare deflation spiral that the U.S. experienced in the 1930s and the brief periods of deflation that Japan has experienced off and on since 1992 that we call disinflation.

Adding to the confusion, we forecast asset price deflation in the FIRE Economy which tends to occur as a self-reinforcing downward price spiral during debt deflations, except here again we expected radical government intervention.

The term "debt deflation" adds even further confusion, even though the definition is clear and simple. The confusion arises because debt can be deflated by defaults but also by rising nominal cash flows. Creditors do not win in either case and prefer a managed version of the former over a runaway version of either.

We will not see the deflation spiral that Mike Shedlock, Karl Denniger, Paul Krugman, Steve Keen, and other forecasters predicted in 2006 and 2007. In fact, commentators are already talking about inflation not more than a few months after "deflation" was widely feared. Soon enough the inflationists will be the majority again, after the fact of inflation is further confirmed by commodity prices, but not interest rates.

As contrarians we grow even more critical of our theories when we see large numbers of previously antagonistic economics commentators adopt in the moment forecasts that were no more than a theory of ours two or three years ago.

Unfortunately for those of us in the prognostication business, the fact of broad adoption confirms only what we knew then; it says nothing about the next two or three years. The drawing board future is continuously erased by the present, and all you have to show for it is what you learned from the exercise of drawing, which is at least some advantage.
Thanks EJ! This is exactly the professional and clear reply I was waiting for. I got all my answers.

vinoveri
05-05-09, 10:28 AM
Unfortunately for those of us in the prognostication business, the fact of broad adoption confirms only what we knew then; it says nothing about the next two or three years. The drawing board future is continuously erased by the present, and all you have to show for it is what you learned from the exercise of drawing, which is at least some advantage.

EJ, would you please qualify this metaphor, i.e., is the drawing board blank now, or just modified with more ambiguity? What are we less sure of than we were before?

If we will see commodity inflation w/o concommitant increase in bond yields, doesn't that augur for a return to FIRE, cheap limitless money which will chase up asset prices (it appears it's already heading into stocks). Could this be a confirmation of your next bubble theory?


this timely item just popped up on bloomberg by the way:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aye5Fzy0L_ss&refer=home
Wall Street Firms Will Revert to Pre-Crisis Model, Cohen Says

Wall Street, after getting billions of taxpayer dollars, will emerge from the financial crisis looking much the same as before markets collapsed, said H. Rodgin Cohen (http://search.bloomberg.com/search?q=H.+Rodgin+Cohen&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), chairman of law firm Sullivan & Cromwell LLP (http://www.bloomberg.com/apps/quote?ticker=1147L%3AUS).
...

EJ
05-05-09, 04:38 PM
EJ, would you please qualify this metaphor, i.e., is the drawing board blank now, or just modified with more ambiguity? What are we less sure of than we were before?

A more accurate analogy is a stack of blackboards. The lower ones fall off the bottom as new ones are added to the top.


If we will see commodity inflation w/o concommitant increase in bond yields, doesn't that augur for a return to FIRE, cheap limitless money which will chase up asset prices (it appears it's already heading into stocks). Could this be a confirmation of your next bubble theory?

The FIRE Economy is over. It's remnants are on government spending support. A new system is evolving.


this timely item just popped up on bloomberg by the way:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aye5Fzy0L_ss&refer=home
Wall Street Firms Will Revert to Pre-Crisis Model, Cohen Says

Wall Street, after getting billions of taxpayer dollars, will emerge from the financial crisis looking much the same as before markets collapsed, said H. Rodgin Cohen (http://search.bloomberg.com/search?q=H.+Rodgin+Cohen&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), chairman of law firm Sullivan & Cromwell LLP (http://www.bloomberg.com/apps/quote?ticker=1147L%3AUS).
...

It's a tough environment for law firms.

Fiat Currency
05-05-09, 05:17 PM
I want to study macro-economics in depth, where do I start? Thanks.

A friend of mine asked me the same question. I gave him a copy of ...


New Ideas from Dead Economists: An Introduction to Modern Economic Thought
http://www.amazon.com/New-Ideas-Dead-Economists-Introduction/dp/0452280524

... and he liked it as an intro to various macro-economic concepts. The rest you can pick up from reading around here. New articles on any of these sites (and others) will do the rest.


www.dollarcollapse.com (http://www.dollarcollapse.com)
www.prudentbear.com (http://www.prudentbear.com)
www.safehaven.com (http://www.safehaven.com)
www.financialsense.com (http://www.financialsense.com)
www.ml-implode.com (http://www.ml-implode.com)
www.jsmineset.com (http://www.jsmineset.com)
www.321gold.com (http://www.321gold.com)
www.goldseek.com (http://www.goldseek.com)
www.nakedcapitalism.com (http://www.nakedcapitalism.com)
www.zerohedge.blogspot.com (http://www.zerohedge.blogspot.com)

phirang
05-05-09, 05:19 PM
Read anything written by Carroll Quigley: he's the (dead) philosopher to presidents.

nero3
05-05-09, 05:23 PM
I like this article. the dollar peaked around 6 months ago, when gold hit around 712, our exchange hit 189, (now around 265), and the USD NOK was around 7,3, now 6,55.

However, I won't rule out that the dollar can rally like after 1981, what have happened so far, is suggesting the dollar could be in a bull, not bear. I am not decided on this yet. In many ways, the CRB top, and the oil top in june last year, had some similarities to the top in 1980.

vinoveri
05-05-09, 09:28 PM
A more accurate analogy is a stack of blackboards. The lower ones fall off the bottom as new ones are added to the top.



The FIRE Economy is over. It's remnants are on government spending support. A new system is evolving.



It's a tough environment for law firms.

Thanks for the clarification and especially for the humor ... it helps remind me of the need to lighten up a bit; a chuckle or two can sure do wonders.

rchdenton
08-11-09, 08:23 PM
Excellent article. Thank you EJ.

I'm trying to apply this to my own situation. My understanding is that the recession ends when house building resumes. This is because house building can be turned off when times are tough. When I move house a lot of deferred purchases are precipitated (new sofa, drapes, household stuff) so retail follows house building.

As I see it we have a competitive devaluation going on with the US persuing its own interests with vigour. There doesn't seem to me to be a functional system for setting exchange rates, if there was then a surplus or deficit could not persist for more than a few months.

Do you have any insights on how these major currents will impact down under? Our NZD seems to track the Dow Jones, presumably because of fund asset allocation policies.