Deflation fears real or imagined?

[william the wie]

I hit critical mass on this question with a Ron Insana piece on CNBC. Here's the highpoints:

Energy prices and grains are declining.

Velocity of money is currently dropping.

Pad computing is hitting an air pocket of reduced demand.

The social media cycle of sites becoming uncool, which goes back to at least the AOL/Time-Warner merger seems to be operating as usual.

Chinese GDP accounting has once more been found to be fictional.

Russian public opinion is still out of radio contact with consensus reality.

So, what is new? So far as I can tell it's same old same old time. Anybody see anything different?

 

[TakeAStepBack]

Imagined. Highly imagined.

 

[william the wie]

Imagined. Highly imagined.

could very well be.

 

[TakeAStepBack]

There is zero substantiated and tangible evidence to support deflation.

 

[william the wie]

That depends on what regions and sectors you are talking about. The Austrian research into marginalism does allow for increasing returns through innovation and the discovery of new economies as with Moore's law of Integrated Circuits. Such increasing returns in robotics and additive manufacture are picking up.

 

[TakeAStepBack]

Of course. But not under these circumstances under the current environment. We have to keep in mind the new variables presented that basically boil down to unsustainable bubbles. Like the Fed Res. balance sheet. Even equating the awaiting reverse repo Op.

 

[william the wie]

We've got 15 or more increasing returns industries going more or less full bore and providing most new employment but the results are strange. Take fracking.

It shifts reported GDP markedly in both X-M and I accounts but it has had almost no detectable positive effect on G and C.

Take the manufacturing revolutions of CAD/CAM, Robotics and Additive manufacture.

Lots of cost reductions and quality improvements in a growing list of products but again consumption can not overcome the force of taxes, politically dictated misinvestment, overly cheap money and regulatory compliance/fees.

In other words I find neither bubbles nor deflation an adequate explanation of why the economy is stuck in the mud.

 

[Manonthestreet]

Should we be cheering for inflation

 

[william the wie]

Should we be cheering for inflation

No, that supposition is based on confirmation and other biases.

Real estate is the direct and indirect source of our two biggest internal capital markets: real estate and commodities.

The prices of buildings, mines and farms are kept at 3,144 county courthouses or equivalent in the US.

Therefore the magnitude of the 1923-6 real estate bubble was not known and therefore was not considered material until after Weiss, Case and Shiller created their housing index of statistically adequate size. At that point it became blindingly obvious that economic models that do not account for real estate markets are worthless.

The 1915-20 farming and mining bubble was even bigger than the 1923-6 housing bubble. The 1921-40 collapse of that bubble caused the great depression in my opinion.

The lack of economic models then and even worse now that do not track all capital markets is the reason inflation does not work.

 

[oldfart]

I hit critical mass on this question with a Ron Insana piece on CNBC. Here's the highpoints:

Energy prices and grains are declining.

Velocity of money is currently dropping.

Pad computing is hitting an air pocket of reduced demand.

The social media cycle of sites becoming uncool, which goes back to at least the AOL/Time-Warner merger seems to be operating as usual.

Chinese GDP accounting has once more been found to be fictional.

Russian public opinion is still out of radio contact with consensus reality.

So, what is new? So far as I can tell it's same old same old time. Anybody see anything different?

Krugman recently stated that his biggest failure of prediction in the last few years was that he projected actual deflation. I didn't think that deflation would be a problem in the United States, but I saw a real problem with Europe, Japan, and China. I think this is still the case.

What no one really anticipated (myself included) was the effect of very low rates of inflation. It seems that very low rates of inflation (under 2%) have risks of their own, enough to prevent a real recovery in any economy. One reason for this is the "revenge of Irving Fisher"; it turns out his model of depression caused by debt-deflation cycles applies to very low inflation levels as well. The overhang of private debt is stifling demand and investment.

I agree that many things look unchanged, especially in that the causes of the financial collapse remain in place. We would have been vastly better off if the financial system had failed in early 2009 rather than be bailed out by governments. The money spent propping up bad actors just made them feel invincible, and the ink hadn't dried on the metaphorical checks when the old games resumed. I think the public understands (on both the right and the left more than the corporatist middle) that the Paulson plan to bail out financial institutions while torpedoing any program for the real economy was just a four trillion dollar money grab combined with a concentration of the financial sector into an unregulated monopoly. We now truly have Teddy Roosevelt's "Money Trust".

 

[william the wie]

I hit critical mass on this question with a Ron Insana piece on CNBC. Here's the highpoints:

Energy prices and grains are declining.

Velocity of money is currently dropping.

Pad computing is hitting an air pocket of reduced demand.

The social media cycle of sites becoming uncool, which goes back to at least the AOL/Time-Warner merger seems to be operating as usual.

Chinese GDP accounting has once more been found to be fictional.

Russian public opinion is still out of radio contact with consensus reality.

So, what is new? So far as I can tell it's same old same old time. Anybody see anything different?

Krugman recently stated that his biggest failure of prediction in the last few years was that he projected actual deflation. I didn't think that deflation would be a problem in the United States, but I saw a real problem with Europe, Japan, and China. I think this is still the case.

What no one really anticipated (myself included) was the effect of very low rates of inflation. It seems that very low rates of inflation (under 2%) have risks of their own, enough to prevent a real recovery in any economy. One reason for this is the "revenge of Irving Fisher"; it turns out his model of depression caused by debt-deflation cycles applies to very low inflation levels as well. The overhang of private debt is stifling demand and investment.

I agree that many things look unchanged, especially in that the causes of the financial collapse remain in place. We would have been vastly better off if the financial system had failed in early 2009 rather than be bailed out by governments. The money spent propping up bad actors just made them feel invincible, and the ink hadn't dried on the metaphorical checks when the old games resumed. I think the public understands (on both the right and the left more than the corporatist middle) that the Paulson plan to bail out financial institutions while torpedoing any program for the real economy was just a four trillion dollar money grab combined with a concentration of the financial sector into an unregulated monopoly. We now truly have Teddy Roosevelt's "Money Trust".

While I consider Fisher's model a leading or coincident indicator rather than causal I have no other real disagreement with your post.

A healthy economy can withstand the deflationary pressures of innovation an unhealthy economy cannot.

 

[TakeAStepBack]

What defines healthy though? I mean, this is where it becomes a bit complicated. Some focus on one, two or three thing as indicators, while I find the balance extremely complex. Like human action.

 

[william the wie]

What defines healthy though? I mean, this is where it becomes a bit complicated. Some focus on one, two or three thing as indicators, while I find the balance extremely complex. Like human action.

Quite true. A few simple points:

Capital accounts and free after-after tax cash flows tend to be ignored across the political spectrum when discussing economics.

Also humans are living things and therefore are kin selective. A natural rate of interest must therefore be based on genetic returns because all brains, not just human brains, give responses fairly consistent with discounting kinship. This can be related to real after-tax interest rates but no one has done so or even attempted to do so that I am aware of.

Humans do engage in breeding and other territorial competitions as in the bubbles of 1923-6, 1983-9 and 1994-2006.

Current economic thought is based on either individual selection or group selection both of which have been proven wrong as a general case.

Economists have been consciously dodging a war with biologists over how economic exchange acts as a lower lethality selection screen basically forever. And yes I do mean all economists including von Mises and Rothbard.

 

[EdwardBaiamonte]

I hit critical mass on this question with a Ron Insana piece on CNBC. Here's the highpoints:

Energy prices and grains are declining.

Velocity of money is currently dropping.

Pad computing is hitting an air pocket of reduced demand.

The social media cycle of sites becoming uncool, which goes back to at least the AOL/Time-Warner merger seems to be operating as usual.

Chinese GDP accounting has once more been found to be fictional.

Russian public opinion is still out of radio contact with consensus reality.

So, what is new? So far as I can tell it's same old same old time. Anybody see anything different?

whats different is globalization which means its more and more unlikely that the entire world economy can suffer a significant slump or that one country is independent enough to slump as much as in the past.

 

[william the wie]

The meltdown says that you are wrong.