http://seattletimes.nwsource.com/html/businesstechnology/2009385125_web787qantas25.html

I think this whole debate is not about inflation/deflation but the effectiveness of the Fed. I think the inflationist camp would even agree that we would be in a Japan style recession if there were no stimulus. However, i have to disagree with the assertion that the Fed is ineffective in controlling the money supply. As sniglet stated interest rates are the primary means to increase money supply and ultra low rates would only make the recession worst (i.e. liquidity trap). But the Fed is very aware of this and are expanding credit while preventing further growth in the money supply by making direct loans to secondary markets and taking measures to keep all this new credit in the excess reserves. The Fed decided to pay interest on these excess reserves and the “stress tests” should nudge the banks to keep some of this new money in the reserves, creating a floor on interest rates. I don’t think the explosion in bank excess reserves is solely due to poor loan opportunities but prudent Fed operations.

Now regarding the ineffectiveness of the Fed keeping long term rates down. Well i guess i cant disagree since the Fed hasn’t done much about it. All this “mad money” the fed is printing has gone to purchase assets and keep short interest rates low. To my knowledge, the only measures the Fed has taken to keep long term rates low is a the purchase of MBS’s and a “pathetic” $300 billion in long term treasuries. MBS purchases can only bring down interest rate spreads with treasuries, not actual treasury rates. Inflation/deflation debate would be the least of my worries in the likelihood that the US government would default over a McMansion backed MBS. Also i don’t believe the Fed is done purchasing half the $300 billion yet and they actually sold treasuries early in the crisis so I don’t know what the big fuss is. When investors challenged the Fed a couple weeks ago with treasury and mortgage rates, the Fed didn’t even flinch yet rate fears subsided. Not to say things could go horribly wrong from now but i think Ben and his crew have done a descent job until now.

INTERESTING JON: TWO VERSIONS OF MSM

….but based on MSM’s track record predicting the unemployment and RE bubble collapse, doesn’t surprise me at all. See why I use gut feel at times?

I’d add too, and I think we can agree on this: The real blame were the CEOs that managed the engineers and subcontractors working with the engineers….Mullally and Albaugh….at least Mullally got the Hades out of Seattle before the 787 manure hit the fan….

RE: jon @ 81 –

I BEG TO DIFFER JON

CNN already pinned the blame tail on the outsourced donkey a couple days ago. Its mainstream media news. Maybe you need me to dig up the CNN transcript and prove it to you?

I’m going by what it says in today’s seattletimes.

“It’s our engineers that designed this interface,” Leach said. “Boeing is responsible for the overall design and the integration of the sections and takes responsibility for both.”

I BEG TO DIFFER JON

CNN already pinned the blame tail on the outsourced donkey a couple days ago. Its mainstream media news. Maybe you need me to dig up the CNN transcript and prove it to you?

RE: One Eyed Man @ 77 –

“Howâ��s is the 787 fuselage like Pat Shanahanâ��s colon? Upon diagnostic probing, both were found to require supplemental fiber to keep sh__ moving forward.”

I’m so glad they discovered now, before I fly on one, that the wings might fall off. Unbelievable. Makes you wonder what else might have been missed…

The good news is we won’t have to listen anymore to the insufferable complaining that all the problems of the 7-late-7 are because of outsourcing and non-union engineering.

YE OF LITTLE FAITH

So you don’t trust ole softie’s gut feel projections.

Here’s the 2006 oil barrels per day data [147] and it hit $100/barrel that year:

http://www.dawn.com/2006/03/27/ebr7.htm

Compare that to the 2009 projection URL of 85 at $70/barrel, and golly gee willerkers….we’re using 42% less projected oil today in 2009 than 2006………no wonder them darn freeways seem empty….LOL

Maybe we don’t need all them hybrids and smart cars after all? All we needed was the equivalent of depopulation to solve global warming, a good ole fashion economic crisis? LOL

“How’s is the 787 fuselage like Pat Shanahan’s colon? Upon diagnostic probing, both were found to require supplemental fiber to keep sh__ moving forward.”

I’m so glad they discovered now, before I fly on one, that the wings might fall off. Unbelievable. Makes you wonder what else might have been missed…

I am not wishing for inflation or deflation. All I am pointing out is that your article mentioning a 1% drop in consumption of oil means NOTHING, 0, on the oil prices. In fact oil is up today, seems strange doesn’t it? Swings in oil, metals, commodities, are short term, in the long term the resources are getting scarce, as someone stopped making them a long time ago.

I pulled the stats just to see how good your guess based solely on observation was. See the link below for a chart on US gas consumption. It looks to me like gasoline consumption is down about 5% on average based upon per day consumption YOY during each of the last 12 months and down about 20% off the peak per day consumption in about August 2005.

50% is way too high, but 30% off peak isn’t a bad guess based solely on traffic observation, especially when one considers that lower traffic volume probably increases the average velocity and decreases actual time on the road making the traffic volume appear lighter than the actual decrease in gas consumption.

http://tonto.eia.doe.gov/dnav/pet/hist/mttupus2m.htm

How’s is the 787 fuselage like Pat Shanahan’s colon? Upon diagnostic probing, both were found to require supplemental fiber to keep sh__ moving forward.

ITS A QTR 2 GDP THING TOO SCOTSMAN

Tomorrow is the QTR 2 GDP wrapup and the overly-optimistic we’ve fixed it all with too much mis-directed debt fans will do anything to rationalize a need for even more debt. That means keeping QTR 2 GDP negativity mitigated.

Assuming more foreclosures decrease consumer sentiment and the GDP is 70% consumer spending; we must keep it all looking “Polly Anna” and grab that VISA card that hasn’t been maxed out yet and go out and do your patriotic duty, “CHARGE”.

http://www.washingtonpost.com/wp-dyn/content/article/2009/06/23/AR2009062303500_2.html

Thanks for the clarification.

An excerpt from recent UK [we don't get this data generally from American media] news, states in part:

“…Japan’s carmakers have been the hardest hit as shipments of Japanese cars have fallen by 63 percent, with a 71 percent reduction in the number of Japanese cars heading to the US…”

The rest of the URL:

http://www.financemarkets.co.uk/2009/03/26/japanese-exports-down-by-50/

China’s Horrifying URL:

http://www.industryweek.com/articles/china_imports_exports_down_sharply_in_may_19351.aspx

But world energy use will sky-rocket anyway and America’s recession or depression doesn’t impact Asia at all? LOL

Welcome to deflation.

WISHING FOR HOUSE INFLATION OR ANY INFLATION FOR THAT MANNER, WON’T MAKE IT HAPPEN

Current COLA/CPI actuals are actuals; and what inflation actuals are you betting on?

Speaking of gas consumption though, haven’t you noticed the last year [like myself, bus drivers I talk to, and other professionals who drive for a living all day long] that traffic conjestion is way down [not a puny 1% either, try like approximately 30-50%]? Seattle must be using a lot less oil lately….huh?

Not in the media is it. Just like deflation and unemployment; we’ll just print the Polly Anna stuff that makes us smile?

Sometimes the best darn economic data we have is “just look out your window”.

Looking at the chart above I picked 5% as an average for the 15 year span. It clearly doesn’t mesh with what you’ve found. I can’t explain why. To be honest, my number seems high from other info I’ve read, but yours seems low. This site, which I use a lot, shows a 32.5% decline:

http://data.bls.gov/cgi-bin/cpicalc.pl

I wish I had more background on the data in the chart, and what was included/excluded in the calculation. Apples and Oranges?

Edit- looking at the chart again, 5% is too high, 3% would be a better average, and fits with your data.

And for the record, I think we are in for a bout of deflation followed by inflation.

That’s my estimate as to the most probable outcome, too.

This excerpt is from a response to tonight’s infomercial program found on another blog I frequent:

“Dr. Orrin Devinsky, a neurologist and researcher at the New York University Langone Medical Center, said that elites often propose health care solutions that limit options for the general public, secure in the knowledge that if they or their loves ones get sick they will be able to afford the best care available, even if it’s not provided by insurance.

Devinsky asked the president pointedly if he would be willing to promise that he wouldn’t seek such extraordinary help for his wife or daughters if they became sick and the public plan he’s proposing limited the tests or treatment they can get.

The president refused to make such a pledge, though he allowed that if “it’s my family member, if it’s my wife, if it’s my children, if it’s my grandmother I always want them to get the very best care.”

According to powerlineblog, the Democrats’ proposed plans specifically exempt all federal employees from coverage under the “public plans” being proposed.

Obama and the Democratic congress want to shove the rest of us into a crappy public plan, but they make dang sure that they and their families won’t have to be in it with us. That fact alone should tell everyone everything they need to know about this scam.

Scotsman, where do you get the figure of 75% deflation for 1920 thru 1935? I show inflation as measured by CPI as being in the neighborhood of 30%.

* Select initial and ending years within 1774-2008 period.
Year U.S. Consumer Price Index *
1920 20.04
1921 17.90
1922 16.77
1923 17.07
1924 17.10
1925 17.53
1926 17.70
1927 17.37
1928 17.13
1929 17.13
1930 16.70
1931 15.23
1932 13.66
1933 12.96
1934 13.39
1935 13.73
1936 13.86
1937 14.36
1938 14.09
1939 13.89
1940 14.03
* Average 1982-84 = 100.

http://www.measuringworth.org/datasets/uscpi/result.php

Interesting observation, but is it causal or coincidence? It’s clear that since the 1950’s the Fed has done a better job of keeping it’s member banks and politicians happy by limiting the swings of the business cycle and striking a different balance between inflation and unemployment. But there were a lot of other factors involved- exploding technology and productivity, a changing labor force, etc. It would take some real study to try and identify the “why.” Gold may be part of the answer.

RE: Hugh Dominic @ 2 –

Well the actuals to date say your “pie in the sky” hope is just that. COLAs and CPIs are already going negative as I blog…

I thought we cleared this up a few months ago with Ray Pepper.

Softwarengineer, you are not blogging, you are posting. The Tim is blogging, we are posting comments in reply.

And for the record, I think we are in for a bout of deflation followed by inflation.

I’m not that up on macro issues, but I’d question whether the fed really “printing money like crazy.” They’re borrowing money like crazy.

It looks to me like the bulk of the assets of the Fed now are in assets held as collateral for bank reserves in excess of required. Basically that is just a gimmick to get the toxic assets off the books of the banks. They have replaced the value of the MBS with reserve credits for the banks’ balance sheets.

Scotsman – I’m sure you noticed that nearly all the deflation on that chart came before the gold standard was dropped. Just a few small blips of deflation since then.

http://market-ticker.org/archives/1156-More-Bernanke,-Mr.-Issa,-And-The-Media.html

Like you, I wish more people understood that the government has much less control over the money supply than many believe. And how many folks believe the Fed sets interest rates, when in actuality they follow the market and can at best make small, short term modifications to existing trends? It’s like the sport of curling, where the puck (market forces) glides over the ice toward some final destination as the sweepers (Fed) frantically sweep to clear or fill in the ice in its path. Sure, they can speed or slow the puck to some extent, but their efforts are nothing compared to the initial momentum of the puck. The same is true with financial markets- the Fed follows, it doesn’t lead. Yet the vast majority of folks who think they know something about economics will tell you the Fed sets interest rates. Our current situation is a perfect example of the Fed pulling every kind of trick it can to keep rates low in order to help the economy, but market forces keep pushing back, and will soon enough drive rates significantly higher. Fun times!

If you go back to the first post and bring up the chart you’ll see that during the 1920-1935 period we saw an average deflationary rate of maybe 5% for 15 years or 75% total for the period . That correlates pretty closely with what Japan has seen over the last decade and a half, and ties in with those who predict 80% off in housing. It’s actually a bit less than that because you’re taking a percentage of a decreasing base, if that makes sense. But the point is it can certainly be life-changing. Indeed, even a solid 25% hit can destabilize the economy for years and years. But it doesn’t hit equally- those in debt are hurt, those who are lending reap windfalls. Those with cash or the ability to take on new debt at the bottom can see the opportunities of a lifetime. If you have significant savings, that Porsche that was $50K is now only $20K, you can buy half a dozen rental houses at the bottom verses 2 now, that sort of thing. And it’s important to remember that once a new equilibrium is reached, growth and some sense of normalcy return and life goes on.

“The Fed is printing money like mad — Hyper inflation is coming!!”

I think that one of the biggest problems with this whole inflation/deflation debate is the very concept of a money “supply”. Many people just assume that policymakers (in the government or central bank) control the supply of money. In reality, the money supply is an amorphous thing that is composed of many different factors. The mere act of extending credit (i.e. making a loan to someone) increases the money supply. That is why contracting credit shrinks the money supply.

Policymakers do have some control over the money supply, but it is more limited than generally assumed. The primary way in which central banks attempt to control the money supply is by raising or lowering the rate charged to banks who borrow money from it. Unfortunately, history has shown that interest rates alone don’t determine how willing banks are to extend credit. Moreover, central bank interest rates have very little impact on the secondary credit markets, such as asset backed securities, in which non-banks extend loans.

Recently, central banks have resorted to outright money creation through the monetization (i.e. purchases) of government debt (e.g. US treasuries), but the money that has been spent in these direct monetization schemes is quite puny (not even exceeding $500 billion so far). The lions share of “stimulus” which as taken place is in the form of government spending, but this spending is being financed almost exclusively by the issuance of MORE debt.

So here we have the government sucking money out of the private economy (i.e. through bond sales) only to re-issue it in the form of stimulus spending. This is not the same thing as “printing” money (quite the contrary, in fact).

I know people get tired of my continual references to Japan, but the nation of the rising sun did EXACTLY the same thing the US government is now doing when it’s deflationary period began 20 years ago. The Japanese government has been on a multi-decade spending spree, driving that nation’s debt to above 70% of GDP (the US debt, by contrast, is something like 30% of GDP), but deflation has NOT been stopped.

Deflation is kind of like quick-sand. The more you struggle, the worse it gets. Stimulus actions turn out to have the exact opposite results as you would think. In deflation, the rules of economics are upside down (not really, but that’s they way they appear, but that’s another whole conversation). Where low interest rates normally goose the economy in inflationary periods, they actually lead to further price declines in deflation. With super-low interest rates there is little incentive for people to extend credit, particularly in an environment when the collateral for loans is decreasing in value, thereby making loans very risky.

As I’ve suggested before, the Federal Reserve should raise rates if it wants to start turning the economy around.

http://surkanstance.blogspot.com/2008/10/another-rate-cut-another-failure.html

Life’s an adventure, that’s for sure, and the unexpected can always come over the horizon.

I’d say “yes” to #1 and #2, and #3 is the playground of those who have a better understanding than I of the intricacies of currency valuations. But even the experts there are said to be playing with half a deck- there are too many variables and unknowns to try and capture the whole picture, let alone be predictive.. Relationships between two or three currencies/economies is one thing, but a dozen major players? And what about those like the Chinese who peg and un-peg their currencies as a political expedient? A random war or two? How about some energy/oil plays? Are those free markets? The water gets deep and very murky pretty quickly.

On the positive side, I’m sure we’re about to learn a great deal of new information about how economies operate, and can spend the next couple of decades trying to sort it all out, because this time will be different from anything in the past.

. That’s why it’s so important to get out of debt if there’s a strong possibility of significant deflation. .

‘

Debt has nothing to do with it. Buying something for more money that it’s worth is the problem, whether you paid cash, or borrowed the money.

The interest rate(s) are the factor that makes debt good or bad.

Buying a house for too much money in cash is really not that much different that doing it on credit. Except, you can walk away from the debt, the cash is gone forever.

RE: DrShort @ 52 –

True, but the short story is the rest of the world is as bad off as we are, or worse. So we all sink or swim together. As we circle the drain in a swirl of activity, jockeying for position, there’s much discussion about who’s ahead, and who my escape. But the reality is we’re all likely going down the drain.

Yeah, I guess I was thinking more about the crowd that says:

“The Fed is printing money like mad — Hyper inflation is coming!!”

While that’s normally a true cause and effect, there’s other things going on right now. There’s a few big questions marks in my mind that makes me question that ordinarily true statement.

1) Isn’t the increase in money supply from the Fed more than countered by the losses in money by banks? When the bank writes off a loan, doesn’t that money just disappear out of the system?

2) Has the “velocity” of money been fundamentally slowed by this credit crunch, coming regulations, consumer habits, and renewed lending standards? MV = PY (Money x Velocity) = (price x output of goods). You can have a massive increase in the money supply and still have deflation if the velocity is reduced. Banks lending as much as possible and consumers spending as much as possible cause high velocity. We’re now pulling back from that and velocity should slow.

3) How does one country’s increase in the money supply (if you assume it is) cause inflation in a global economy? I’m sure the link is still there, but how muted is it by foreign labor markets and imports?

True, but the short story is the rest of the world is as bad off as we are, or worse. So we all sink or swim together. As we circle the drain in a swirl of activity, jockeying for position, there’s much discussion about who’s ahead, and who my escape. But the reality is we’re all likely going down the drain.

Tim, you’re confusing price changes with inflation/deflation. Strictly defined, inflation/deflation are the change between the total amount of money in the system and the total supply of goods/services for sale. It is not really a supply/demand issue, unlike individual prices for specific goods.

For example, if we cut the price of everything in half, and cut everyone’s wages in half, that would be deflation. So while your standard of living wouldn’t change in this example, the price of gas may still go up, or the cost of construction come down. But if you think about it, you can see that the whole structure of prices has ratcheted down.

You can have systemic deflation while the prices of whole groups of goods/services go up. It gets complicated, and any discussion requires specificity when discussing the issue. Price changes are not deflation or inflation- they are simply price changes. Hope that helps.

I’m not an economist though. Perhaps there’s a term for this.

Btw, softwarengineer, I replied to your #34 but the post was lost somewhere and I when I reposted it was rejected as duplicate.

But connecting up to today, to the extent that lower priced oil means lower priced products generally as the price of oil works it’s way through the economy, that is a good thing, because lower prices mean more things would sell and more employment. That’s entirely different than lower demand leading to lower prices.

RE: softwarengineer @ 38 – No! The price of a single commodity or item is not evidence at all of deflation. You’re looking at the wrong things if you think you’re trying to find evidence of deflation.

Check out the price of computers since 1990. It’s not like we had significant deflation since that time just because computers are much less expensive now.

Although the price of each computer has gone down, we own a lot more computers, so the total expenditure on computers is way up. Sometimes these labels just break down.

By deejayoh @ 37:

RE: softwarengineer @ 36 – I don’t think commodity price fluctuations are signs of deflation. Sometimes they are just fluctuations.

Exactly. It’s not like there was significant inflation when oil was at record levels.

Although oil was widely blamed, I don’t think that was the real cause of the inflation. If anything, it was deflationary because it drew money out of the country.

http://www.nber.org/papers/h0084

“The truest cause of the 1970s inflation was the shadow of the Great Depression. The memory left by the Depression predisposed the left and center to think that any unemployment was too much, and eliminated any mandate the Federal Reserve might have had for controlling inflation by risking unemployment.”

Check out the price of computers since 1990. It’s not like we had significant deflation since that time just because computers are much less expensive now.

RE: softwarengineer @ 36 – I don’t think commodity price fluctuations are signs of deflation. Sometimes they are just fluctuations.

Exactly. It’s not like there was significant inflation when oil was at record levels.

Iran’s democracy isn’t ha penning anytime soon unless we repeat the tremendously great democratic process of winning a country over like we did with IRAQ.

But couple today’s news with the IEA Report and its definitely a deflation forcast, in part:

“….The International Energy Agency has announced in its latest report that the global oil demand will reduce aggressively in 2009 as the global economic slowdown further eats away consumption. IEA in the report released on January 16th 2009 amended its former 2009 approximation down by 940,000 barrels per day to 85.3 million barrels per day, a decrease of 500,000 barrels per day year on year. It said that “Forecast global oil demand has been sharply revised down for 2009, accompanying a reappraisal of global economic prospects.”…”

The rest of the URL:

http://energybusinessdaily.com/oil/iea-expects-oil-demand-to-go-down-in-2009/

The fly in the deflation of oil prediction ointment is the Iran turmoil getting out of control. But if the democracy forces take power, maybe oil will likely go down some more….LOL