Deflation - cash is king

[Robroy]

We are in for an interesting ride here. There is more and more evidence that deflation is clearly here. This article prompted my creation of this thread but there are many others:
http://www.minyanville.com/articles/inf ... from/yahoo

The graphic is very instructive. Remember the Japanese deflation of the 90's? At least the Japanese were avid savers. We are not so fortunate. Funny thing about this is that it is really not rocket science. I have found that the closer to the facts at hand ones analysis is, and the more thought out the explanation, the less need for logic gymnastics and word parsing. The case for deflation is actually very simple - yet not simplistic - and easily explained.

[Robroy]

We are also seeing layoffs now at the airlines. American and Alaskan are two I know of off the top of my head. We seem to see separate industries starting to fall, one at a time. What is more interesting is that it is amazing how we "take in stride" the things happening now when experts said, as little as a few months ago, that many of these things could not happen unless things were REALLY bad.

Well...

[Markor]

It's been interesting watching grocery store prices rise significantly in a short time. The manufacturers are employing smaller packaging to try to hide the inflation somewhat. My health insurance just went way up again. I'm fine with all this as long as house prices plummet, at least until I buy again.

[Lake Hills Renter]

[rose-colored-coolaid]

So when does this economic phenomena get a real name? The combination of prices falling on everything most people own and prices rising on anything most people don't.

I'm going to offer the nomenclature screwflation. Any takers?

[Markor]

I second "screwflation"

Manufacturers are also trying to ease people into the higher prices by having sales on the smaller packages, for the time being. I've been stocking up on cereal at $2.50 per pound or less, the same price as the generic brand. Eventually it'll be $4+ per pound or whatever.

[WestSideBilly]

Screwflation, indeed.

[rose-colored-coolaid]

[Robroy]

I think we are seeing temporary inflation in commodities, but give it six months and see where we are. If the government cannot inject cash in the system and jobs are shrinking or even dropping in their value (as is the case in one article I posted in another thread) we could be in for serious deflation in wages and jobs while prices, on average, remain flat or fall slower than income.

OTOH, there was one article that mentioned that when large defaults happen, the result is that the money basically vanishes from the system. If the fed loans a bank a million bucks but no actual cash exchanges hands and the bank loans it to a developer and the developer pays wages (again, in the form of a check or electronic deposit), but never pays back the bank, which never pays back the fed, where did the money go?

We could see a Depression Era money supply contraction while the fed TRIES to loan money but there are no takers. That will result in deflation.

I think the inflationary pressure now is only temporary. People don't fully understand the magnitude of the "creative financing" bubble that is bursting. The amount of money that will be pulled from circulation is truly staggering and there is nothing our rich uncle can do about it. It is simply bigger than him.

[deejayoh]

The most common definition I see for inflation is a generalized increase in prices - which includes both goods and wages. If I recall correctly from my econ classes, it is typically associated with increases in the money supply.

So what is happening today? We have a situation where prices are going up on a limited set of goods, but wages are flat to down. In the seventies you had CPI going up at 2 digit rate and wages matching it. Remember Wage and Price controls in the 70's? It was both! And the price of housing - the biggest item on consumer budgets? Falling at unprecedented rates. It doesn't seem to be a "generalized increased in prices" at all. So the argument that you should buy a house because you'll be able to pay back your mortgage in inflated dollars just doesn't hold water when your wages aren't increasing. If you want to paint the extreme case of this, consider a real estate agent buying property. Are their wages are going up? (hint: they're paid based on a straight percentage of a deflating asset class, and volumes are down)

And what is happening to money supply? Is it increasing? Based on what I've read, I don't think so. The fed has tried - through the discount rate - to increase lending which in turn increases money supply. But it hasn't worked. No one is lending anything. They are too scared. So velocity of money has dropped which decreases the money supply. Does it offset the hundreds of billions the Fed has dropped in through the alphabet soup programs? I don't know. But the mere fact that the fed is dropping all this money into the system says they must be worried about velocity.

But back to prices and inflation. IMO, prices are rising for two reasons:
1) foreign goods are getting more expensive because of the fall in the value of our currency. This is not inflation. You want lower prices? Buy domestic goods. Can't find them? Sorry. The fact that we don't happen to make anything any more is the result of years of our eroding competitive advantage - but it's not sudden inflation.
2) increased demand relative to supply of commodities. Again, this is not inflation. It's basic economics. Demand increases, while supply stays flat. Prices increase. These commodities are going into all sorts of stuff you buy and driving prices up. But again, not inflation.

All this doesn't add up to inflation to me. It adds up to paying the piper for years of mismanagement with the net result that we're all going to feel a lot poorer. When I see high interest rates, and wages rising _i'll believe we are in an inflationary spiral. But right now it seems like a convenient distraction when the reality is were pretty screwed.

[rose-colored-coolaid]

Just a follow on to what DJO posted. I think it might be reasonable to consider which prices are going up and which are going down.

UP:
Fuel
Food
Metals
Medical Care


DOWN:
Real Estate
Autos
Alternative energy sources (e.g. solar panels on your roof)
Generic Drugs
Electronics
Wood


And here's a few things I'm unsure about, but seem flat:
Electricity
Entertainment (thus far)

[jon]

You might think we are uniquely screwed now, but they said pretty much the same back in the 70s, except back then it was called stagflation - a combination of stagnation and inflation. Prior to that time, the relationship between money supply and inflation was controversial. The predominant theory then was that inflation was the result of full employment. The high unemployment during that time, plus the drop in inflation during the recession in the early 80s, put to rest that theory. We are left with the money supply explanation, which is a little too vague for my taste. To me, the economy is a dynamic system, for which the idea of a money supply is an adequate approximation.

[sniglet]

[rose-colored-coolaid]

[deejayoh]