Inflation versus deflation debate for Red Pill consumers

[metalman]

well, i didn't get an answer to my question to mish. his "deflation" arguments are a lot of hand waving. as the dollar tanks and commodity inflation continues to rip ala kapoom, here's what yer gonna get from the deflationists like mish. "oh, no. i never said deflation. what i said was... blah."

[FRED]

well, i didn't get an answer to my question to mish. his "deflation" arguments are a lot of hand waving. as the dollar tanks and commodity inflation continues to rip ala kapoom, here's what yer gonna get from the deflationists like mish. "oh, no. i never said deflation. what i said was... blah."

Notice I just added "Chief Cynic" to your title. Select subscriber can expect similar tagging. If you don't like your tag, just tell me and I'll change it.

As for Mish...

[metalman]

Notice I just added "Chief Cynic" to your title. Select subscriber can expect similar tagging. If you don't like your tag, just tell me and I'll change it.

As for Mish...

ok, i really want "head of dept. of drugs, alcohol and firearms" but i'll settle for "chief cynic."

mish is hardcore deflationist. fer example...
The Psychology of Deflation

" Beginning in November, Outback plans to cut prices across its menu."

you're friggin, kidding, right? got three chinese take-out menus right here, each about six months apart, with much higher prices on each.

how about:

Deflation is in the Cards by Mike Shedlock

"Yes Readers, that is correct. The answer to the "Great Flation Question" is DEFLATION. I am not going to wimp out and say "stagflation", and rest assured it is not "inflation" which means that the "hyper-inflation" that many see coming is totally laughable."

i rest my case.

[Lukester]

I don't understand. Where'd Mish go?

Seriously - Weren't we just getting warmed up? :confused:

[Mish]

well, i didn't get an answer to my question to mish. his "deflation" arguments are a lot of hand waving. as the dollar tanks and commodity inflation continues to rip ala kapoom, here's what yer gonna get from the deflationists like mish. "oh, no. i never said deflation. what i said was... blah."

Metalman did it ever occur to you that perhaps I was busy?

I suppose I could turn the tables and say when the heck are we going to get all the hyperinflation people are calling for? Where is it? By the way, when is the last time housing fell in hyperinflation?

I was an still am calling for deflation. And I even disagreed with Gary North about it being here right now.

So you are challenging my personal reputation without merit, simply because you do not like my call. That is how it appears to me.

But if I remember your question correctly it was about velocity. Someone asked about it if it was not you.

I am aware that Shostak thinks its a useless idea. He said so in http://www.mises.org/story/918

I do not pick arguments with Shostak easily. But even if I have no measure of it, I can say that when Japan printed, there was no demand for credit and the money essentially just sat. In a fiat world unless there is borrowing and use of credit there is no inflation.

If you don't like my take perhaps you can believe Paul Kasriel



Email from Paul Kasriel

Japan experienced a deflation in recent years because the bursting of its asset-price bubble in the early 1990s created huge losses in its banking system. The Japanese banks had financed the asset-price bubble. When it burst, the debtors could not keep current on their loans to the banks and therefore were forced to turn back the collateral to the banks. The market value of the collateral, of course, was less than the amount of the loans outstanding, thereby inflicting huge losses of capital to the Japanese banks. With the decline in bank capital, the Japanese banks could not extend new credit to the private sector even though the Bank of Japan was offering credit to the banks at very low nominal rates of interest.

Banks are an important transmission mechanism between the central bank and the private economy. If the banks are unable or unwilling to extend the cheap credit being offered to them by the central bank, then the economy grows very slowly, if at all. This happened in the U.S. during the early 1930s.

U.S. banks currently hold record amounts of mortgage-related assets on their books. If the housing market were to go into a deep recession resulting in massive mortgage defaults, the U.S. banking system could sustain huge losses similar to what the Japanese banks experienced in the 1990s. If this were to occur, the Fed could cut interest rates to zero but it would have little positive effect on economic activity or inflation.

Short of the Fed depositing newly-created money directly into private sector accounts, I suspect that a deflation would occur under these circumstances. Again, crippled banking systems tend to bring on deflations. And crippled banking systems seem to result from the bursting of asset bubbles because of the sharp decline in the value of the collateral backing bank loans.

Hope this helps,

Paul

Paul L. Kasriel

Sr. V.P. and Director of Economic Research

The Northern Trust Company

50 South LaSalle Street

Chicago, IL 60603

a portion of the followup interview...

Mish: What if Bernanke cuts interest rates to 1 percent?
Kasriel: In a sustained housing bust that causes banks to take a big hit to their capital it simply will not matter. This is essentially what happened recently in Japan and also in the US during the great depression.

Mish: Can you elaborate?
Kasriel: Most people are not aware of actions the Fed took during the great depression. Bernanke claims that the Fed did not act strong enough during the great depression. This is simply not true. The Fed slashed interest rates and injected huge sums of base money but it did no good. More recently, Japan did the same thing. It also did no good. If default rates get high enough, banks will simply be unwilling to lend which will severely limit money and credit creation.

No one to date has countered this logic. Not a single person. People believe in the Fed's ability to inflate. I don't for the reasons above.


Japan tried and failed. Bernanke will as well.
1) banks have to be willing to lend
2) consumers and corporations have to be willing to borrow

In a big recession with falling corporate profits and rising bankruptcies in both consumer and corporate sectors neither is likely and all it takes is one.

You are of course free to disagree. But I prefer to see a good theory as to why. As far as I am concerned unless you can come up with a better theory you are the one doing the hand waving.

Mish

[metalman]

Metalman did it ever occur to you that perhaps I was busy?

I suppose I could turn the tables and say when the heck are we going to get all the hyperinflation people are calling for? Where is it? By the way, when is the last time housing fell in hyperinflation?

you said deflation was happening in 2005 and 2006. it's 2007 and now it's a MishMash of revisionism and doubletalk and nonsense. sorry, but that's my take.

I was an still am calling for deflation. And I even disagreed with Gary North about it being here right now.

you said it was happening in 2005! what do you mean you are disagreeing with gary about it happening now?

So you are challenging my personal reputation without merit, simply because you do not like my call. That is how it appears to me.

you called deflation in 2005. and 2006. and 2007. meantime gold and stocks go up and up and up. ain't the call i don't like it's the pretending to not say what you said. fess up to mistakes. everyone makes them.

But if I remember your question correctly it was about velocity. Someone asked about it if it was not you.

I am aware that Shostak thinks its a useless idea. He said so in http://www.mises.org/story/918

more twaddle. i don't give a shit what shostak thinks. what do you think?

I do not pick arguments with Shostak easily. But even if I have no measure of it, I can say that when Japan printed, there was no demand for credit and the money essentially just sat. In a fiat world unless there is borrowing and use of credit there is no inflation.

If you don't like my take perhaps you can believe Paul Kasriel

http://globaleconomicanalysis.blogsp...l-kasriel.html

does paul know you're using his rep this way? ej seems connected to a lot of folks. bet he can ask him. ej?

Email from Paul Kasriel

Japan experienced a deflation in recent years because the bursting of its asset-price bubble in the early 1990s created huge losses in its banking system. The Japanese banks had financed the asset-price bubble. When it burst, the debtors could not keep current on their loans to the banks and therefore were forced to turn back the collateral to the banks. The market value of the collateral, of course, was less than the amount of the loans outstanding, thereby inflicting huge losses of capital to the Japanese banks. With the decline in bank capital, the Japanese banks could not extend new credit to the private sector even though the Bank of Japan was offering credit to the banks at very low nominal rates of interest.

Banks are an important transmission mechanism between the central bank and the private economy. If the banks are unable or unwilling to extend the cheap credit being offered to them by the central bank, then the economy grows very slowly, if at all. This happened in the U.S. during the early 1930s.

U.S. banks currently hold record amounts of mortgage-related assets on their books. If the housing market were to go into a deep recession resulting in massive mortgage defaults, the U.S. banking system could sustain huge losses similar to what the Japanese banks experienced in the 1990s. If this were to occur, the Fed could cut interest rates to zero but it would have little positive effect on economic activity or inflation.

Short of the Fed depositing newly-created money directly into private sector accounts, I suspect that a deflation would occur under these circumstances. Again, crippled banking systems tend to bring on deflations. And crippled banking systems seem to result from the bursting of asset bubbles because of the sharp decline in the value of the collateral backing bank loans.

Hope this helps,
Paul

Paul L. Kasriel
Sr. V.P. and Director of Economic Research
The Northern Trust Company
50 South LaSalle Street
Chicago, IL 60603

shame on you using this email to back up every lame deflation claim you make. what does this have to do with your claim a decline in the velocity of money = deflation? following your point that "Shostak thinks its a useless idea" meaning velocity of money data don't = deflation. don't just cover your bases, make up your mind.

a portion of the followup interview...

Mish: What if Bernanke cuts interest rates to 1 percent?
Kasriel: In a sustained housing bust that causes banks to take a big hit to their capital it simply will not matter. This is essentially what happened recently in Japan and also in the US during the great depression.

Mish: Can you elaborate?
Kasriel: Most people are not aware of actions the Fed took during the great depression. Bernanke claims that the Fed did not act strong enough during the great depression. This is simply not true. The Fed slashed interest rates and injected huge sums of base money but it did no good. More recently, Japan did the same thing. It also did no good. If default rates get high enough, banks will simply be unwilling to lend which will severely limit money and credit creation.

good quote and good point. but timing is everything. maybe i'm wrong but i get the idea from reading the info here on itulip that the fed waiting too long in the 1930s and the boj too long in the 1990s. someone help me out here but i think the case is made in the deflation piece here.

No one to date has countered this logic. Not a single person. People believe in the Fed's ability to inflate. I don't for the reasons above.

it ain't that simple. as this red pill piece says, if the collapse of the fire econ gets out of control, yes we get asset price deflation. but in the usa that means commodity price inflation. your analysis is primitive.

Japan tried and failed. Bernanke will as well.
1) banks have to be willing to lend
2) consumers and corporations have to be willing to borrow

In a big recession with falling corporate profits and rising bankruptcies in both consumer and corporate sectors neither is likely and all it takes is one.

think you mean 'either is likely' but again, where's the evidence? the numbers? i know you're new here but we're into evidence not positions. and don't get offended because we do this to people with credentials.

You are of course free to disagree. But I prefer to see a good theory as to why. As far as I am concerned unless you can come up with a better theory you are the one doing the hand waving.

i guess i've swallowed the red pill. i see all the fire economy machinery. ugh!

Mish[/quote]

[Spartacus]

hehehhehheh ...

When a couple of beauty salons were reducing their prices it was deflation (this was from a Mish article a couple of years back)

Deflation, NO question, NO doubt.

Not a limited local phenomenon, not supply and demand, NO, NO, NO - the only possible explanation was deflation beginning.

But today, for the price of oil .... every explanation BUT inflation must be considered first.

(he may be right about the petrol price, I'm not arguing that point at the moment, just pointing out the selectivity)

Oil is set to hit $100 a barrel: Is This Deflation?

Here is an interesting reader question from last week:

Mish,
Oil is set to hit $100 a barrel.
Gold is set to hit $800 an ounce.
Other commodities are periodically breaking all time highs.
Is this deflation?

My Reply:

No, of course not.
Then again the price of oil has little or nothing to do with inflation, at least in any measurable sense.

The above sentence may seem shocking to many, but before we proceed we must agree on a definition of inflation. The definition of inflation that I am using is this: Inflation is an increase in money supply and credit.

For further discussion of that definition, please see Which Comes First: The Cart or the Horse? And with the horse in front of the cart where it belongs, let's look at oil prices.

Ten Possible Factors Behind Oil's Rise

[/QUOTE]

[metalman]

hehehhehheh ...

When a couple of beauty salons were reducing their prices it was deflation (this was from a Mish article a couple of years back)

Deflation, NO question, NO doubt.

Not a limited local phenomenon, not supply and demand, NO, NO, NO - the only possible explanation was deflation beginning.

But today, for the price of oil .... every explanation BUT inflation must be considered first.

(he may be right about the petrol price, I'm not arguing that point at the moment, just pointing out the selectivity)

[/quote]

the doubletalk is too much.

buddy sent me this today. no, it isn't me. honest! who's behind this? a fellow ituliper? i wanna contribute!
Mush's Global Economic Trend Nonsense


Thoughts on the global economy, housing, gold, silver, interest rates, oil, energy, China, rabbits, yen, buckets of water, wind, freezing cold beer, euros, wall fasteners, carrots, cat pee.






http://globaleconomicnonsense.blogspot.com/

[Rajiv]

Banks are an important transmission mechanism between the central bank and the private economy. If the banks are unable or unwilling to extend the cheap credit being offered to them by the central bank, then the economy grows very slowly, if at all. This happened in the U.S. during the early 1930s.

Mish: What if Bernanke cuts interest rates to 1 percent?
Kasriel: In a sustained housing bust that causes banks to take a big hit to their capital it simply will not matter. This is essentially what happened recently in Japan and also in the US during the great depression.

Mish: Can you elaborate?
Kasriel: Most people are not aware of actions the Fed took during the great depression. Bernanke claims that the Fed did not act strong enough during the great depression. This is simply not true. The Fed slashed interest rates and injected huge sums of base money but it did no good.

In Support of this argument is the following piece of history
Climbing Out of the Great Depression

What was Roosevelt's "New Deal"?

First, it was a unique moment in American political history. Usually American politics is the politics of gridlock. James Madison and company constructed the American political system so that it would be broken by design: maneuvering programs and policies through several layers of committees, two legislative houses, past the president, and into execution is very complex, and overwhelming procedural obstacles can be erected by determined opponents at almost every step along the path. Legislative majorities for one party or the other in either house of the legislature are almost always small. American is governed by increments, from the center. Between 1900 and 1950 there were times when one party had a solid majority in the House, but its majority in the Senate then was small.

The elections of the 1930s were different. Roosevelt won 59 percent of the vote in 1932--an eighteen percentage-point margin over Herbert Hoover. Congress swung heavily Democratic in both houses. The 1930s would see Democratic political dominance in the congress to an extent never before seen since the Civil War. For the first and only time, the president and his party had unshakable working majorities in both houses of the legislature.



But the new majority in congress had no idea what it was to do. It was looking for direction from the newly-elected president: whatever Roosevelt sent down, the congress would probably pass.

Roosevelt had no idea what he was to do, either. But he did have a conviction that he could do something important. So was born the strategy of the New Deal: try everything you can think of to cure the depression; drop and abandon the things that do not seem to be working; push the things that do seem to be working. And the important thing was action to change how America worked for two reasons. First because action would raise hopes, and as Roosevelt said in his inaugural address:

Let me assert my firm belief that the only thing we have to fear is fear itself--nameless, unreasoning, unjustified terror.

Second because the old way of doing things was clearly broken:

We are stricken by no plague of locusts. Plenty is at our doorstep, but a generous use of it languishes in the very sight of the supply. Primarily this is because rulers of the exchange of mankind's goods have failed through their own stubbornness and their own incompetence, have admitted their failure, and have abdicated.... The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths.

.
.
.
Also on May 18, President Roosevelt submitted to congress the center-piece of his first hundred days: the National Industrial Recovery Act, or NIRA.

• Businesses won the ability to collude--to draft "codes of conduct" that would make it easy to maintain relatively high prices, and to "plan" to match captacity to demand.
• Socialist-leaning planners won the requirement that the government--the National Recovery Administration, or NRA--approve the industry-drafted plans.
• Labor won the right to collective bargaining, and the right to have minimum wages and maximum hours incorporated into the industry-level plans.
• Spenders won some $3.3 billion in public works.

But what did it all add up to? The NIRA broke the back of expectations of future deflation. The creation of deposit insurance and the reform of the banking system made savers willing to trust their money to the banks again, and began the reexpansion of the money supply. Corporatism and farm subsidies spread the pain of the Great Depression to some extent. These three policy moves kept things from getting worse, and probably made things somewhat better.

But the rest of Roosevelt's "hundred days"? It is not clear whether the balance sheet of the rest of the hundred days is positive or negative. The "economy" bill that cut spending and relief did harm. Much of financial market regulation (save deposit insurance) was simply irrelevant to the Great Depression. Farm subsidies set the American government on a path that would prove expensive and counterproductive for the next sixty years.

More important, perhaps, people relatively soon decided that they did not like the combination of "corporatist" government-business cooperation and business collusion embodied in the NRA. Consumers complained that the NRA raised prices. Workers complained that it gave them insufficient voice. Businessmen complained that the government was telling them what to do. Progressives complained that the NRA created monopoly. Spenders worried that collusion among businesses raised prices, reduced production, and increased unemployment. A committee to study the NRA headed by progressive lawyer Clarence Darrow denounced the NRA for promoting monopoly, urged a return to free competition, and then for good measure denounced competition as "savage and wolfish" and called for socialism: government nationalization of industry.

In May 1935 the Supreme Court unanimously declared the NIRA and its implementing agency, the NRA, unconstitutional. Roosevelt's experiment with "corporatism"--which crusty Democrats like Senator Carter Glass denounced as "the utterly dangerous effort of the federal government at Washington to transplant Hitlerism to every corner of this nation" was over. It was not success.

By the end of 1933 Roosevelt had shifted his attention to monetary matters: recovery was to be promoted by raising the prices of commodities in dollars, and the prices of commodities in dollars were to be raised by devaluing the dollar in terms of gold. By the end of January 1934 Roosevelt fixed the value of the dollar at 1/35 of a (troy) ounce of gold, fifty-nine percent of its pre-1933 gold-standard parity. But the full-fledged policy of monetary inflation and mammoth fiscal deficits that might have pulled the country out of the Great Depression quickly--that did pull Germany under Hitler out of the Great Depression quickly--was not tried. 1934 was a better economic year than 1933, 1935 was better than 1934, and 1936 was better than 1935, but not by much.

The slide in which each year was worse than the one before had been ended by the Depression. Some ground had been regained. But happy days were not here again.
.
.
Winners and Losers from the Depression:

Workers who kept their jobs, even with reduced hours, and financiers whose money was invested in bonds prospered during the Depression. Their nominal incomes in dollars dropped, but prices dropped even more: the baskets of goods they could buy increased. Farmers, workers who lost their jobs, and entrepreneurs who had bet their money on continued prosperity were the big losers of the Depression. Production was a third less than normal and the distribution of income had shifted toward those who kept steady employment or who had invested their financial wealth conservatively. As a result, at the nadir the standard of living of losers taken all together was perhaps half of what it had been in 1929.

[EJ]

In Support of this argument is the following piece of history
Climbing Out of the Great Depression

Many forget it was the event of The Great Depression that created the political mandate to prevent a repeat: give us activist central banks and inflationary government policy! So here it is.

It's an election year. There may be recession, if that's useful to get Hillary elected as it was to get Bill elected, but no catastrophe. After that, who knows.

If you are in business, I will give you an analogy. Imagine you are VP Sales. One day your boss, the CEO, comes into your office. He says, "We are very close to closing a round of funding. If we close the funding we may survive to be a great company and make everyone rich. If we do not close the funding we will fail and never know. It's up to you."

Of course the VP Sales has the pipeline to make a huge quarter if he jams on his guys to close all the deals, but he'll blow the rest of the year.

That's what's going on now in the Fed and US government. Take it from an ex-CEO and ex-VP Sales.

p.s. No, I never did this myself, but I have had it done to me.

[bart]

Mish: What if Bernanke cuts interest rates to 1 percent?
Kasriel: In a sustained housing bust that causes banks to take a big hit to their capital it simply will not matter. This is essentially what happened recently in Japan and also in the US during the great depression.

Mish: Can you elaborate?
Kasriel: Most people are not aware of actions the Fed took during the great depression. Bernanke claims that the Fed did not act strong enough during the great depression. This is simply not true. The Fed slashed interest rates and injected huge sums of base money but it did no good. More recently, Japan did the same thing. It also did no good. If default rates get high enough, banks will simply be unwilling to lend which will severely limit money and credit creation.

No one to date has countered this logic. Not a single person. People believe in the Fed's ability to inflate. I don't for the reasons above.

I've countered it a few times but not here on iTulip.

Although Kasriel is correct about base money being pumped by the Fed during the Great Depression (the light blue line below) and the Fed tried to loosen up on credit, that was pretty much all they did. They did not, for example, print cash (about 1/2 of M1) as is shown by the following chart:





They also allowed many thousands of banks to fail rather than mount rescue operations or encourage Congress to do the same. They didn't make that mistake in the '80s or '90s or recently.

They were also quite slow in lowering the discount rate from its 6% peak in 1929. It didn't get down to 2.5% until mid 1931, and then actually was moved back up to 3.5% until mid 1933.
There's more data like this too.

On Japan, I maintain that Japan simply did not try very hard (or hard enough) to offset the deflation. When they really did pump in the period 2002-3, the reaction was unmistakable - the Nikkei and real estate, etc. did bottom and start back up.





Basically, I believe Bernanke is much closer to being right than Mr. Kasriel... and its the only broad area in which I disagree with Mr. Kasriel.

[herbkarajan]

Regarding Kasriel in Mish's post - what he is saying - dysfunctional/broken banking system = deflation.

Whoever bets on deflation is making a bet that significant part of the US banking system will fail under bad loans

If you believe Citi, JPM, Goldman and others won't be able to write down bad loans with the help of the Fed, then you have your answer

The side effects of the rescue plan on the real economy is a different story

If Mish wants to engage in a theoretical debate about 'liquidity trap' he should reread his hero's article in bloomberg from 2003
http://forums.sohh.com/showthread.php?t=317283