Deflation - cash is king
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.
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.
Comments
Well...
I noticed that too. Try finding a half gallon of ice cream at the grocery store. They are 1.5 quarts now, but the same price. Same for the cereal I buy -- smaller box, but same price.
I'm going to offer the nomenclature screwflation. Any takers?
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.
Careful though. Say it 3 times and the Screwcrow will appear to frighten and amuse you.
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.
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.
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)
http://www.wsbt.com/news/local/25450789.html
Thanks, fixed it.
Good idea. Couple thoughts above in italics
I bought some used electric space heaters. Should be cheaper than natural gas. While I can still afford the increased prices, in general I try to be as frugal as comfortably possible, so I can save as much as possible. Goodwill and craiglist are my friends for purchases. High quality used goods should become cheaper as people cast off their bubble purchases to raise cash for food, fuel, etc.
I agree with this by the way. I've felt for a while now that the massive increase in education costs are directly related to the excessive availability of "government aid". Perhaps a system where we offer aid to the truly disadvantaged only would be both even handed and would have prevented double digit increases in tuition.
Medical costs are an even more peculiar issue, because many people falsely believe that the only constraint on medicine is ethical. "If we can extend someone's life at any cost, then we must do it," we seem to say. A person needs a new heart? Then they must have it! Forget the fact that the person is a 95 year old with alzheimer's and diabetes. Meanwhile we've got children who don't get immunized at a cost of a few dollars a shot!
</rant>
it seems like the inflation that we currently have is unsustainable, because wages are not rising to keep up. The housing market was fueling inflation in a vicious cycle because people were using their house appreciation as an ATM machine which then went out and created consumer demand. Now with housing falling that cycle should work in reverse and consumer demand should slow.
Also, assuming Obama is elected and the Iraq war winds down that will also be deflationary (or, the Iraq war has been inflationary).
Gold peaked at slightly over $1,000/oz and then broke down and looks to have now failed to rally back up to that level and looks to be failing. Oil is pulling back hard after failing to hit $150/bbl and domestic consumption of oil is actually pulling back.
Credit in general is also clearly pulling back, which is deflationary.
That all points towards further deflation to me. Although, clearly the Fed is going to try to re-inflate and congress will continue to bail out the system. At some point though their efforts may backfire and result in higher interest rates.
It isn't totally decided yet, though. I'm still strongly considering that I may be calling this several years too early, but most of the signs are pointing in a deflationary direction. Commodities would really need to pull back more sharply, unemployment would need to get worse, GDP would need to post actual losses, Iraq would need to wind down and the actions of the Fed to increase money supply and the Congress to bailout the system would need to start more clearly looking like 'pushing on a string'.
I'm also still kind of worried that Congress and Fed might actually manage to create a panic in the dollar, which would be hugely inflationary and might kick off a wage-price spiral. There is a lot of resiliency in our system so I'm very skeptical of the claims that this kind of hyperinflation is just around the corner, but there has to be a limit at some point to how far the dollar can be pushed.
That would reduce aggregate demand until you had an oversupply of food for the survivors at which point oversupply/underdemand would lead to falling prices and deflation.
Imagine prices staying flat but everyones income is cut by 20%. Smaller homes, streets filled with bicycles, a-la Peking decades ago. One car families. Living on an actual food budget and rarely eating at restaurants.
Stuff like that.
That seems like a *very* long term, 10-20+ year effect, though.
Shorter term, I still tend to think that as american consumerism contracts that will lead to a recession in China as they will have an oversupply of goods that not enough people will be buying.
There seems to be a race between global deflation/recession and BRIC decoupling.
Ultimately, BRIC decoupling wins in the long run, but I don't think those economies are decoupled enough right now to deal with the deflation that I see on the more immediate (1-3 year) timeframe.
The last time something as dire as what we are looking at happened, it led to nations allowing folks like Hitler to rise to power, complete with an implied blessing on his crazyness.
Just sayin' mobs don't act like reasonable people, and sometimes an entire nation can be a mob. It really CAN happen here. And China. And anywhere else. More importantly, it is not as unlikely as many assume.
Medicine is still funny with regards to inflation even if the person paying for it is the one using it. 200 years ago, if your 5 year old child got really sick, the best you might be able to do is pay the cutter a few days of your labor to bleed the kid and see if they got better.
Times have changed. Now, you know it's not just "sick" it's luekemia. It no longer costs 2 days labor to bleed the luekemia out. Instead, you need expensive drugs to slow it down, then you need bone-marrow transfusions, then chemo or radiation therapy. Maybe some day, we get an affordable solution to this type of problem, but today we don't have it.
Let's just assume the parent is going to be paying for all procedures by cash (no insurance and no medicaid). Now, let's say the "do all you can" option to save the child is going to cost $20,000. Do you do it? What about $100,000. What about $1,000,000.
For many(most) parents, they would pay as high of a figure as you can name so long as they could get the credit to cover it. Even if they'd be paying 70% of their gross income (uncle same usually takes 25% right?) for the rest of their lives they would probably still do as much as they can.
So, what's really the right thing to do? Just from a moral viewpoint you want to say "do what ever you can to save a life", but what if the hypothetical family has 3 otherwise healthy children? Will they be fed cheap and unhealthy food to pay for the first child's bills? Will they miss out on college?
Medical care is just plain tricky, but somehow I feel like we overspend on it in this nation. Just the other day I read an article about how much care is spent on people who are over 90 years of age. Somehow, you've got to think these people have lived full lives and that money should be focused on other people for all but the most basic needs of the over 90 crowd. It's just a very unpopular thing to say that we need some basic techniques to select who gets which procedures and who does not.
But I am thinking of the people that take their kid to the doctor for a sniffle, and stuff like that. That is why I think large co-pays are a huge benefit to keeping costs down. If there is a $25 copay, people will be a little more prudent about small stuff.
But about the leukemia stuff.
My wife's first husband died of Leukemia, leaving her with three kids under age six. The irritating part was that towards the end, Valley General had specific instructions NOT TO hook him up to "life support" machines. This had been worked out with my wife as well has her then husband. They did it anyway, to the tune of HUNDREDS OF THOUSANDS OF DOLLARS! And once they hooked him up, it would have taken an act of God to get him unhooked. It did. The act was his death.
My sister had breast cancer, and it was taken care of. But then, she and her husband are worth somewhere in the neighborhood of one billion, so it was no big deal, financially speaking anyway.
I'm 54. I never get tested for anything – at all. I eat healthy, live an active lifestyle, and figure I'm gonna go when God wants me to. My kids have all left home, my wife has a good life insurance policy and is well established. People ask me what will happen if I get cancer. My response is simple: I'll die. And to die is gain.
Of course, a secular world does not see it that way. That can make things very expensive indeed.
And insurance would be cheap if the government did not meddle in the business. They need only ensure the companies are not engaging in fraud or criminal activity. It should be perfectly fine for an insurer to refuse to insure some people. If it is clarified in the original paperwork, they should even be able to cancel your coverage once you actually get a life threatening disease. The thought here, though, is that nobody would buy such insurance unless it was dirt cheap, because it wouldn't insure much.
One thing I would really like to see is for it to be illegal to connect insurance of any kind to your employer, other than insurance to cover you while actually performing the duties of your job.
Insurance should be for catastrophe. Everything else should be paid by RobRoy.
And that is exactly what I did. $5,000 deductible. Strictly for catastrophes, which is why Lloyds of London came into existence to begin with.
I used to sell insurance. I had an acquaintance that had $10,000 deductible (for all the right reasons) and hurt himself playing tennis. He knew that he needed a specialist and went to the office to get looked at. The receptionist said they needed a referral from a doctor. He had to 'splan it several times before she understood that he was merely a man off the street that wished to pay, out of his own pocket, for their services. She was so steeped in the insurance paradigm that the meeting of the minds was long coming.
http://stockcharts.com/h-sc/ui?s=%24USD
I'm not convinced that its really deflation though and that its not just hot money in a panic looking for someplace else to land. The global economy hasn't quite gotten bad enough.