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Does the New York Times confirm deflation spiral theory or signal the end of disinflation?

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  • Does the New York Times confirm deflation spiral theory or signal the end of disinflation?

    Does the New York Times confirm deflation spiral theory or signal end of disinflation?

    As readers know, I have been unable over the years to resist my deflation obsessed friend Rick Ackerman's taunts. For years and years he's argued that when the credit bubble collapses, the US economy will devolve into a 1930s style deflation spiral with prices falling for years, 25% unemployment, soup lines, and perhaps a return of the Jazz Age. His latest is a response to heat he's getting from his readers to the completely unprovoked attack we launched against the deflationist camp last week with Deflationista takes on iTulip to prove deflation is here! and The truth about deflation.

    Over the weekend Rick shot me a note to point out the Sunday New York Times article on deflation: "Even the New York friggin’ Times is onto the story now – on the front page, no less."

    This was followed by Rick's latest on deflation that says in part:
    "In any event, we’d suggest that readers imbibe articles about the economy in USA Today, the Times, the Wall Street Journal et al, with a grain of salt. The mainstream media did not see this disaster coming and even now seem incapable of imagining how much worse it could get. Conventional news outlets are barely paying lip service to those whose forecasts have been ahead of the curve for years. The truth is, deflationists were regarded as fringe lunatics until relatively recently. Writing for Barron’s and the San Francisco Examiner, we had the subject all to ourselves until around 1998, when the collapse of the Thai baht and its spillover effect on Asia brought a few more like-minded “lunatics” out of the woodwork.

    I’ve promised to don a grass skirt and dance a hula in Times Square in mid-February if I am wrong. I wonder what Wall Street will look like with Goldman at $24.

    Here's my response.

    Rick,

    I always enjoy receiving your notes, but you’ve got to be kidding. Is it possible that you and I both live in the same country, the United States of Goldman Sachs? We both know that our Minister of Finance Henry Paulson’s company recently turned–presto!–into a commercial bank so that it could absorb the assets of failed banks at a fire sale prices. The perks won’t stop there. Yet you say that our Minister’s firm can suffer an ignominious a decline in share price?

    Think Gosbank, man!

    The disinflationary period we’ve been warning about years before the housing bubble popped, producing asset price deflation and spilling over–if only briefly–into commodity prices and wages, is here. Now all you have to do to see it is look out the window. Your mistake is that you can’t see past it to what is on the other side.

    Government, and lots of it!

    I sent you the picture of capital flows years ago when you were saying that the Fed can't print to save the soon to be crashed banks. Take another look. It shows what I figured was due to happen when the endogenous credit markets blew up and recession hit households and businesses during the asset price deflation. In a phrase, fiscal stimulus.

    Ever go to Japan? I’ve been there several times over the past 20 years. Japan may be famous among economists for its “deflation” but if you go I recommend you bring lots of money because everything is very, very expensive there for us hapless Americans whose currency has been devalued.

    Not so bad for the Japanese, though. From 1999 to 2007, Japanese wages climbed 8% while the CPI (theirs isn’t as phony as ours, by the way) fell 2.3%. Stuff got slightly cheaper relative to wages, but not exactly the USA’s 1930s Great Depression. Unemployment never exceeded 5.4% there either–not even close to the 9% unemployment we got here in the US in 1983. Here, after our first bubble in tech stocks popped, it was the other way around: our government's reflation policy after the last “deflation” in 2002 caused consumer prices to increase more than wages, up 24% and 23% respectively since then.


    (Hat tip to member Bill for locating the research)

    This chart shows what Japan did when its asset bubble popped and its “balance sheet recession”–a euphemism for debt deflation–followed. New Deal, pal, 1990s style. Note government spending produced more than half the total demand for credit in some years.

    We’ll do “better” than that. In fact, we already have. How much has the Fed expanded its balance sheet already? How much of the housing bubble is already on the US government’s balance sheet? And that was the last bubble, the first fiscal stimulus ever done in reverse–first the jobs then the government spending rather than the more traditional order of stimulus then jobs.

    Whether Obama or McCain wins tomorrow, you can bet that public money will flow like water over Niagara Falls, but to different places. The question isn’t money or not, deflation or not, it’s where to? Orange Country for the military industrial complex or Massachusetts for biotech? Coal or nuclear? Fox News or Frontline?

    Where will the money come from? Why, from all of us, my friend! The future savings of the current and next generation are already spent. For the next ten years at least we’re all just cash flow to pay down debt while government spending generates the demand that creates the jobs that generates the income we use to pay down the debt.

    Good news! No deflation spiral in Japan or here. The bad news: more government and less private markets. Definitely less consumption. The only way to avoid a slow, grinding decline in our standard of living is a new productivity miracle. Tell the Silicon Valley guys and gals to crank it up! We need another invention like the Internet, but this time let’s not give it away. Wonder how much export income we lost by not licensing the Internet to China? Not that they'd actually pay–they'd rather buy Treasury Bonds than shell out license fees for the hundred million Microsoft software licenses they've pirated.

    Look, you got the current crisis driven dollar rally part right years ago. Good work. Now look beyond it. A dollar rally ain’t deflation. It’s a panic out of stupid investments in securities not denominated in dollars. What’s the trade? When it ends so does some of the source of disinflation. Not to say it won't go on longer, but markets appear to already be pricing in what comes next.

    Ask yourself this: In the face of crashing global markets and a developing world-wide depression, why does oil hang stubbornly above $60, a “bubble” price just two years ago? Do commodity markets smell a global orgy of government spending on the way? Also, last we checked, governments aren't all that good at finding commodities, only at taxing them once someone has gone to the trouble and expense of finding and producing them. That's why Mexico and Russia seem to have suddenly run out of oil, coincident with taxation creating disincentives to invest in exploration and kleptocrats chasing off anyone with know-how out the country. (That's not an ad for either McCain or Obama, by the way. It's just a cold, hard fact.)

    Add it all up and it's disinflation then inflation, just as we’ve been saying for years. Disinflation first–it's here–followed by inflation–it's coming.

    The mainstream press, as you know, fulfills an important function in the execution of monetary policy. When the stories on inflation reached fever pitch last year it was time to get out of commodity positions, just as when deflation made the front page in 2002 it was time to back up the truck and buy gold. In this disinflation/deflation cycle–and it's a big one!–maybe we shouldn't wait for the next Deflation: Making Sure "It" Doesn't Happen Here speech from Bernanke like the one he gave November 22, 2002 when gold was trading at $316.

    We may have to wait a while for the shots of you hula dancing in Times Square, but we're patient. We promise to post them here on the front page of iTulip.com.

    Your pal,

    Eric

    iTulip Select: The Investment Thesis for the Next Cycle™
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    Last edited by FRED; 11-03-08, 05:13 PM.

  • #2
    Re: Does the New York Times confirm deflation spiral theory or signals end of disinflation?

    Thanks needed a fix. Just so U know U R the only one I read that makes sence - keep it up please - Hey when U use Rick put his last name in OK I get paranoid.
    Last edited by rabot10; 11-03-08, 03:48 PM.

    Comment


    • #3
      Re: Does the New York Times confirm deflation spiral theory or signals end of disinflation?

      That Richard Koo presentation is getting a lot of mileage already.

      Comment


      • #4
        Re: Does the New York Times confirm deflation spiral theory or signals end of disinflation?


        Fiscal policy needed Fedís Fisher says
        Feds balance sheet to expand to 3T

        http://www.bloomberg.com/avp/avp.htm...QK9Gw9_qBU.asf

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        • #5
          Re: Does the New York Times confirm deflation spiral theory or signal the end of disinflation?

          You know, i think am starting to "Tune in" to EJ now............it makes a lot of sense. What i wonder though is:-

          How long a period is the "Dis-inflation"
          How much inflation afterwards?

          Mike

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          • #6
            Re: Does the New York Times confirm deflation spiral theory or signal the end of disinflation?

            OK, I thought it was a weakening dollar that would lead to inflation. Wrong. Thats just a symptom.

            OK, then it is bloated government spending that is going to lead to inflation. But that won't work either, since that assumes that our generous benefactors continue buying Ts, which is unlikely, at least not to the extent that is needed to fund US fiscal deficits going to the moon, especially since these same lenders got their own internal problems that need fixin, requiring they spend their money domestically.

            OK, then the money will come from an increase in taxes, used to create all those new jobs re-building our infrastructure and creating an alternative energy utopia. Oops, that won't work either, since jobs are disappearing. OK, then the money for the New New Deal will come from others areas where the government cuts spending. No, not likely, not at least to the extent needed since the level of social protest will kill the attempt.

            OK, then the federal government can shift the burden to states, counties, and cities. Oops, won't work since they'll need federal government help to keep from going bankrupt.

            Maybe some clarity will help here. Got any?

            Oh, I almost forgot, the all powerful federal government and central bank will simply print gobs of money used to buy Treasuries at the long end, far outstripping any debt deflation, neutralizing the higher yields that would result from a cutback (and maybe even selling) by foreigners of Ts.

            Guess that solves it.

            Comment


            • #7
              Re: Does the New York Times confirm deflation spiral theory or signal the end of disinflation?

              I am not a voting member, but if I was, I'd say that artwork overlay on the Primary Money Flows diagram deserves an Emmy.

              * Yes, I know the Emmies are for TV, but the fact I'm awarding it to blogging artwork somehow seems about right. Especially when TV should be spending time focusing on issues raised by ITulip.com given the gravity of things swirling about today. "It's a twister! It's a twister!" and "We're not in Kansas anymore, Toto."

              Comment


              • #8
                Re: Does the New York Times confirm deflation spiral theory or signal the end of disinflation?

                BUY all the gold you can under $600.

                I hear the IMF is selling 400 tonnes, so price may fall, allowing new players to BUY. I heard this from Jim Rogers on Bloomberg 3-11-2008 (video).

                Stock market selling isnt over.

                And Goldman Sachs and JP Morgan will use this chance to LONG gold !

                Comment


                • #9
                  Re: Does the New York Times confirm deflation spiral theory or signal the end of disinflation?

                  Originally posted by icm63 View Post
                  BUY all the gold you can under $600.

                  I hear the IMF is selling 400 tonnes, so price may fall, allowing new players to BUY. I heard this from Jim Rogers on Bloomberg 3-11-2008 (video).

                  Stock market selling isnt over.

                  And Goldman Sachs and JP Morgan will use this chance to LONG gold !
                  400 tons of gold is roughly equal to 14.1 million ounces (not tr. oz used here, but anyway). At a price of $725 / oz this gives us... $US 10.23B.

                  Now, by the time you finish reading this post, the US federal debt will increase by about just as much...

                  Comment


                  • #10
                    Re: Does the New York Times confirm deflation spiral theory or signal the end of disinflation?

                    money supply lost due to collapsing commercial lenders is say 10T

                    gov goes out and injects 5T

                    you still have deflation

                    however, the real question is: at what cost will the gov inject capital into the system? this is where the inflation genie may get released, but i am afraid that bernanke fooled us with his "helicopter" speech: it was meant to fool us into inflation hedges, when in fact, central bank money is constant and hence appreciating while commercial bank money becomes more and more scarce.

                    Comment


                    • #11
                      Re: Does the New York Times confirm deflation spiral theory or signal the end of disinflation?

                      Originally posted by phirang View Post
                      money supply lost due to collapsing commercial lenders is say 10T

                      gov goes out and injects 5T

                      you still have deflation

                      however, the real question is: at what cost will the gov inject capital into the system? this is where the inflation genie may get released, but i am afraid that bernanke fooled us with his "helicopter" speech: it was meant to fool us into inflation hedges, when in fact, central bank money is constant and hence appreciating while commercial bank money becomes more and more scarce.
                      Yeah, I'm afraid of this as well. This would be a HUGE power grab, printing all of that money and placing it in the hands of consolidated super banks while the general public wastes away on deflation.

                      This Quote is particularly haunting coming from a founder, honorary chairman, and lifetime trustee of the Trilateral Commission, an honorary chairman of the Americas Society and the Council on Foreign Relations, Bilderberg chairman and very likely trustee of the federal reserve itself.

                      "Some even believe we are a part of a secret cabal working against the best interests of the United States, characterizing my family and me as 'internationalists' and of conspiring with others around the world to build a more integrated global political and economic structure - one world, if you will. If that's the charge, I stand guilty and I am proud of it."
                      - David Rockefeller from his book, David Rockefeller: Memoirs.

                      And also this one among many others
                      Speaking at the Sept. 23, 1994 United Nations Ambassadors' dinner, David Rockefeller remarked,
                      "This present window of opportunity, during which a truly peaceful and interdependent world order might be built, will not be open for too long." "We are on the verge of a global transformation. All we need is the right major crisis and the nations will accept the New World Order."

                      Comment


                      • #12
                        Re: Does the New York Times confirm deflation spiral theory or signal the end of disinflation?

                        Originally posted by tombat1913 View Post
                        Yeah, I'm afraid of this as well. This would be a HUGE power grab, printing all of that money and placing it in the hands of consolidated super banks while the general public wastes away on deflation.

                        This Quote is particularly haunting coming from a founder, honorary chairman, and lifetime trustee of the Trilateral Commission, an honorary chairman of the Americas Society and the Council on Foreign Relations, Bilderberg chairman and very likely trustee of the federal reserve itself.

                        "Some even believe we are a part of a secret cabal working against the best interests of the United States, characterizing my family and me as 'internationalists' and of conspiring with others around the world to build a more integrated global political and economic structure - one world, if you will. If that's the charge, I stand guilty and I am proud of it."
                        - David Rockefeller from his book, David Rockefeller: Memoirs.

                        And also this one among many others
                        Speaking at the Sept. 23, 1994 United Nations Ambassadors' dinner, David Rockefeller remarked,
                        "This present window of opportunity, during which a truly peaceful and interdependent world order might be built, will not be open for too long." "We are on the verge of a global transformation. All we need is the right major crisis and the nations will accept the New World Order."

                        Oh, but Bernanke and Greenspan are too stupid to realize there's a problem... who's dumb now: those who got tricked into the inflation hedge trade?

                        Notable: I recall during a Fed dinner a while back the CNBC reporter remarked that Bernanke was particularly satisfied with his efforts to combat inflation.

                        Let's see if Jim Sinclair can afford to turn on the heat next year... i'm personally short gld now!!!

                        Comment


                        • #13
                          Re: Does the New York Times confirm deflation spiral theory or signal the end of disinflation?

                          Originally posted by phirang View Post
                          Oh, but Bernanke and Greenspan are too stupid to realize there's a problem... who's dumb now: those who got tricked into the inflation hedge trade?

                          Notable: I recall during a Fed dinner a while back the CNBC reporter remarked that Bernanke was particularly satisfied with his efforts to combat inflation.

                          Let's see if Jim Sinclair can afford to turn on the heat next year... i'm personally short gld now!!!
                          Its the trade within a trade, and yet another rhyme with history - not unlike 1974-76.
                          I've been hedged to varying degrees since April or so.
                          http://www.NowAndTheFuture.com

                          Comment


                          • #14
                            Re: Does the New York Times confirm deflation spiral theory or signal the end of disinflation?

                            Originally posted by icm63 View Post
                            BUY all the gold you can under $600.

                            I hear the IMF is selling 400 tonnes, so price may fall, allowing new players to BUY. I heard this from Jim Rogers on Bloomberg 3-11-2008 (video).

                            Stock market selling isnt over.

                            And Goldman Sachs and JP Morgan will use this chance to LONG gold !
                            hope you listened to ej and didn't wait for gold to fall to $600. nov. 3, 08 @ $739 was a decent buyin price.

                            Comment


                            • #15
                              Re: Does the New York Times confirm deflation spiral theory or signal the end of disinflation?

                              Originally posted by metalman View Post
                              hope you listened to ej and didn't wait for gold to fall to $600. nov. 3, 08 @ $739 was a decent buyin price.
                              I had to buy in at $896.

                              Comment

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