The truth about deflation - Eric Janszen

[friendly_jacek]

Re: The truth about deflation

A quick and simple question for smart itulipers.
If printing $ is so easy as often hinted on itulip, why this deflation (I'm sorry, disinflation) was allowed to happen just before the elections, cratering all possible assets and creating a huge misery for US citizens?

If helicopter Ben had it all figured out and planned, why this financial fiasco reached these proportions?

Another related question. If some of the recent action on the stock markets was caused by margin calls and forced liquidations and redemption that became worse as the nominal priced went lower and lower, why this is not a deflationary spiral?

If the WMD derivatives started to implode, doesn't it create a chain reaction with more deflationary implosions?

Finally, if the future earnings go down in 2008/2009 due to credit squeeze/bursting or higher dollar or record low sentiment ratings and generate more stock selling and more margin calls, why it would not be a spiral action?

In simple words please!

I've heard so much about "printing dollars" story that I don't believe it's true anymore. Most money in modern societies is credit (isn't it 90%?). Didn't EJ declare start of credit destruction in 2007 (one of the best calls in itulip IMHO)?

[labasta]

Re: The truth about deflation

I don't see a wage inflation in the West's cards simply because of globalism.
I don't see an orderly inflation at all.
I don't see any long term deflation because of 300 million guns in the hands of people on prescription meds.
The American people like it rough and fast.
Thats why I'm starting to believe that we'll all wake up one cold morning to a Bloomberg or CNBC host talking about the added "0" in our currency and many others! By adding a "0" we get a dramatic increase in wages and prices immediately and a dramatic decrease in the value of existing debts.

Yes, I understand now that governments really can produce inflation on tap if they resort to stuff like that.

I'm not 100% sure they can equate the private debt destruction with public spending. Maybe they can. Maybe they can overshoot it. They can produce inflation on tap if they add zeros lol.

Interesting times ahead that is for sure.

The only real way to get out of this mess is to industrialise. The question of course is how. How can you compete with the Japs and the Germans, and the Chinese slave wage? The US will have to find a way. One that doesn't involve empire.

I read a long time ago that the reason for the Japanese creaming the Americans in terms of technology was because their government invested their revenue in their own companies in research and development and with subsidies etc. The Americans invested their money in their military which while having a few trickle down breakthoughs in technology could not compete with the Japanese.

Moral of the story: the military/industrial complex must die. The military must be massively reduced.

Now, that is easier said than done. Whatever happens in the meantime, will just make the situation worse (whatever it is, argue amongst yourselves). I believe the US will do all that it can to stop that happening. The US will become very reckless and dangerous in the world as they retract kicking and screaming like a child until the cancer dies and a new world is born.

Oooh, sounds dramatic yeah

Sounds like a drug addict going cold turkey. Just get out of his way!

[labasta]

Re: The truth about deflation

Good read. Thanks.

When you anticipate that the transition is not trade-able, are you saying you doubt it can be traded for big profits, or are you saying that it cannot even be traded for wealth preservation?

I can imagine that the purchasing power of the dollar for foreign goods (whether Wal*Mart or BMW) could collapse chaotically, but I'm at a loss to imagine that the purchasing power of the dollar for domestic

• goods (do we still make anything?),
• services (plenty of those),
• energy (that's going to hurt, granted), and
• food (that we can still produce in abundance, I hope)

could be cut in half chaotically.

Hmmm ... well the food from our "industrialized" big-ag depends on petro, which depends on our good friends in Venezuala, Russia, Saudi Arabia, Iraq, Iran, ... taking our dollars. Ouch. I take back that hope of abundant food.

Nevermind. I'd better cut this post off, before I get depressed again .

As I understand it, import and export prices cannot be so easily differentiated in the everyday services which we give and receive.

For example, a plumber installing a solar heater in your home. Where are the components made and put together?

The fast food outlet - beef is domestic. What about the chemical additives in the sauce and the rest - Dupont? What about the plastic ketchup bottles - the polysterine cups - the sugar satchets - the uniforms of the servers - the parts of the machines used to make the food which may need to be replaced every now and then - the flourescent light bulbs etc etc.

Now take Dupont, what goods must it import to make those chemical additives? Do you see what I mean? Everything expands back and out a long way - all the way to the cut down forest where the quarry was formed.

So a price rise here makes for a price rise there. Some services are less import intensive and so would experience less of a rise, but everyting must rise to some degree.

[metalman]

Re: The truth about deflation

I don't think he is wrong per se. He believes that the "disinflationary" period will last much longer than people realize, probably because the US is currently the global reserve currency. He sees the long term as dollar negative. I think the biggest unknowns are a) how long the disinflationary period will last and b) political/economic/military response to the crisis. A global even proxy will destroy the world for decades even centuries. Hope that we will have sensible world leaders in the future and absolutely not a neocon puppet such as McCain/Palin.

that's james k not his dad john k. ej interviewed him nov. 06. wasn't all that impressed, to be honest.

[kartius919]

Re: The truth about deflation

I don't think he is wrong per se. He believes that the "disinflationary" period will last much longer than people realize, probably because the US is currently the global reserve currency. He sees the long term as dollar negative. I think the biggest unknowns are a) how long the disinflationary period will last and b) political/economic/military response to the crisis. A global even proxy will destroy the world for decades even centuries. Hope that we will have sensible world leaders in the future and absolutely not a neocon puppet such as McCain/Palin.

[*T*]

Re: The truth about deflation

I too find this challenging to wrap my head around - perhaps it is because I am an engineer...:confused:

How about:
5) Protectionist stance regarding imports of everything but energy

How then would you pay for your energy imports?

Dollars? What would they spend those dollars on then?

[Yaowarat]

Re: The truth about deflation

But Mish can't be wrong.

[ThePythonicCow]

Re: The truth about deflation

Real wages have been falling and will continue to fall. The reason isn't global competition.

In some cases, it is global competition. I observed computer programmers doing just as good a job as myself, working on the same stuff (Linux kernel work is all done over the world wide web, by people from many countries and employers), getting paid 20% of what I got paid.

That won't last.

I suspect that automobile assembly line workers are seeing the affects of globalization as well. Which isn't to say that American or British workers are not also seeing the affects of inflation and taxes as well.

Some, such as in London, may be living modestly and paying a high price for it, but many more, across America, have been living above their means.

Yes, real wages are falling. We're probably both right, in that both globalization and excessive taxes and inflation are to blame.

[grapejelly]

Re: The truth about deflation

Wage inflation in "real" (basket of foreign currency) money ... I agree that won't happen, for the global wage pressures you note.

But wage inflation in nominal dollars can happen. Lets say first the dollar starts weakening again, sharply, so that all foreign purchased goods (like oil) cost four times what they did. Oil goes to $300/barrel.

Prices at the store, for food and energy and clothing and cars, all quadruple, as we depend so much on foreign energy and manufacturing.

Then one could see wage pressure, with increased Labor Union activism and a Labor Union President Obama, and a doubling of nominal wages.

Real wages have been falling and will continue to fall. The reason isn't global competition. It's the government taking a greater and greater percentage of our productivity through the hidden inflation tax.

You can observe this better when you travel to London. London is very expensive and the living standard isn't very good. That's what we face in the US for a protracted period.

[ThePythonicCow]

Re: The truth about deflation

I don't see a wage inflation in the West's cards simply because of globalism.

Wage inflation in "real" (basket of foreign currency) money ... I agree that won't happen, for the global wage pressures you note.

But wage inflation in nominal dollars can happen. Lets say first the dollar starts weakening again, sharply, so that all foreign purchased goods (like oil) cost four times what they did. Oil goes to $300/barrel.

Prices at the store, for food and energy and clothing and cars, all quadruple, as we depend so much on foreign energy and manufacturing.

Then one could see wage pressure, with increased Labor Union activism and a Labor Union President Obama, and a doubling of nominal wages.

[kingcopper]

Re: The truth about deflation

I don't see a wage inflation in the West's cards simply because of globalism.
I don't see an orderly inflation at all.
I don't see any long term deflation because of 300 million guns in the hands of people on prescription meds.
The American people like it rough and fast.
Thats why I'm starting to believe that we'll all wake up one cold morning to a Bloomberg or CNBC host talking about the added "0" in our currency and many others! By adding a "0" we get a dramatic increase in wages and prices immediately and a dramatic decrease in the value of existing debts.

[kartius919]

Re: The truth about deflation

I dismiss his non-sense because they are non-sense. There is absolutely no analysis in the piece, only statements and claims. I am not an economic expert, but I know bullshit when I see it and wanted to point out to anyone else why I think it is bullshit. You can't give deference to bullshit. Your glib comment was insulting.

[marvenger]

Re: The truth about deflation

this is why I'm nervous about the relatively orderly thesis of ka-poom. It seems that printing is needed to finance public deficits, and then the cure for zimbabwe style disintegration is wage increases; but how on earth does that happen? Profits are going to be hard to come by and in a capitalists system its hard to see employers giving more money to employees to prop up the entire system, they want to be the few that gets away with not increasing wages. So i don't think wages will rise enough and there will not be enough real demand and, ok maybe zim is going too far but you get something very nasty indeed.

[ThePythonicCow]

Re: The truth about deflation

Though my style of writing doesn't always convey it, I am less certain that I know what is and what is not, gold or otherwise.

Like the food I eat, I take in a variety, trying to stick to what seems healthy, and let my body, or in the case of thoughts, the hidden corners of my mind, make of it what it will.

So ... I would be less quick to dismiss Nadeem Walayat with a wave of my paw as you've done, though I can't claim to defend him either.

[kartius919]

Re: The truth about deflation

I was responding to the fallacies in his argument. I am not saying that the rise in gold indicates the adoption of a gold backed currency. His argument is based on the assumption that the price of the gold contract is an indicator of acceptance of gold as a global reserve currency. This must be true in order for him to make the claim that the decrease in the price signals that it has failed or rather the world has rejected its use as a global currency. If his assumption is true (which it is clearly not) then he does not take into account the rise in gold. He is playing around with the time frame to select a period that best suits his argument.

Gold is what it is. A limited metal that the world has at one point or another used as method of exchange. I am simply stating that the guy is a talking out of his ass and no one should listen to him unless he clarifies his arguments.