Posted: Fri Oct 22, 2004 10:22 pm Post subject: Deflation and Stagflation; An Ominous Portent
The United States is flirting with a low-grade depression, (deflation) one that may last for years. The meaning of deflation is that assets of almost every kind, from financial investments and real estate to manufactured goods and commodities, will be revalued downward correcting for the falsely optimistic asset valuations achieved during the easy credit years. The real risk lies more in stagflation than deflation. Stagflation is a term that originated in the early 1970s to identify the simultaneous occurrence of recession and inflation. When both occur at once, fiscal and money managers are at a loss concerning what to do next. The great difficulty for policy-makers is that this doesn't much feel like a crisis--not yet anyway, for most Americans. So where's the urgency to undertake radical remedies? Nobody knows what will unfold if nothing is done, but the consequences of waiting to find out could be horrendous for the broad ranks of Americans.
Basically, what's under way is a brutal unwinding of the delusional optimism like that which reigned during the dot.com bubble; excesses like the hyperinflation in financial assets and the swollen ambitions that led investors and companies to wildly overvalue their prospects and their stocks for future returns. Now, we have the real estate bubble which will burst when long term interest rates rise or when the unemployment rate is so high that it impairs household marketability.
China, given its burgeoning low-wage output, is now the world's main deflationary engine. Prices and wages have to come down if we are to compete. What I find most remarkable, is that there is no debate on these momentous matters. Seems the strongest thing the US government is doing is asking China to float its currency, which, by many estimates, is under-valued 40%.
From all outward appearances, it appears that the Federal Reserve is deliberately inducing price inflation to counter the deflationary forces, while fudging the CPI and inflation numbers. Rising prices will automatically ease the debt burdens of borrowers by diluting money's real value (that's why creditors always adamantly oppose inflation). In a perverse way, peak-oil is a god-send. If you intend to jump-start an $11 trillion economy, you have to print a bunch of debt money. The US government has a technology, called a printing press that allows it to produce as many US dollars as it wishes at essentially no cost. We have not finished paying the consequences of our international monetary system based on fiat money. If things deteriorate further, who knows, the government's deficits may have to grow twice as large to become effective therapy. While the political climate is not yet ripe, forward-looking progressives should already be drawing up a grand list of spending projects--repairing the tattered infrastructure and launching innovative public investments that speak to the future, like--let's see--renewable energy! What a concept!
We are soon going to have to face up to some long-suppressed truths. Globalization, for instance, has been good for US multinationals but not for the balance sheet of the American economy. That is the meaning of the huge trade deficits, the accumulating indebtedness that inevitably will produce a painful reckoning in standards of living. We cannot continue to consume more than we produce by borrowing every year from abroad. 80% of the world's savings are tied up in the US debt. If China can produce US quality products for Wal-Mart at an average of $.64/ hour, how can we ever hope to compete? I'll tell you how--by being willing to work for the same wage here. Gulp! We did it to ourselves, you know. We exported our American know-how and our factories to the developing countries. You reap what you sow. Many wish to blame the multi-nationals, but how could they continue to survive if they did not? "Buy American" was a short-lived bumper sticker. The globalized system the United States launched and protected throughout the cold war decades approaches its own reckoning with the dilemma of too many factories and not enough buyers -- and the buyers the world has--us--are doing it all on credit.
The gathering evidence also suggests that the mass-consumption economy that has flourished since World War II may at last be running out of gas--literally. Too many indebted consumers are tapped out or will be in hard times. The savings rate is down to .2%. No rebound ability there, I am afraid. Who's going to buy all this stuff? Who's going to continue to lend us the money? To end on a positive note, maybe this is the long-awaited "market signal" for us to start investing in the "problems" the country has long neglected. It's time to invest in the energy technologies and industrial transformations required for the post hydrocarbons age of an ecologically sustainable prosperity. Food for thought, any way. _________________ A Saudi saying, "My father rode a camel. I drive a car. My son flies a jet-plane. His son will ride a camel."
Live in Arizona? Check out: http://sustainablearizona.org and read my blog.
Last edited by MonteQuest on Fri Apr 08, 2005 9:50 am; edited 2 times in total
MonteQuest, could you please clear something up for me:
My understanding of the co-dependent relationship between China's economy and the US economy is basically:
China says to America: "Here, borrow some more money from us, and then use the borrowed money to buy the goods we produce."
US: "Sounds good!"
Is this a correct assessment? Is there more to it than that?
I've heard all the usual anti-globalization arguements before, but I've never explicitly come across the one about massive foreign debt a la the USA. Thanks for bringing it to our attention- unlike most economic arguements, this one appears to be based on reality, not theory and normative speculation.
MonteQuest, could you please clear something up for me:
My understanding of the co-dependent relationship between China's economy and the US economy is basically:
China says to America: "Here, borrow some more money from us, and then use the borrowed money to buy the goods we produce."
US: "Sounds good!"
Is this a correct assessment? Is there more to it than that?
Basically yes, but it entails a bit more. China needs huge amounts of energy to grow its economy. To buy oil, it must have dollars, so it targets the US with it's exports and pegs the Chinese currency to the dollar, making it's exports cheap for American consumers. With this massive infusion of dollars, it must also grow it's currency the same. With all these "dollars" sitting around, they buy dollar denominated assets like US Treasuries or bonds and fund our debt. Interest rates drop, and people refinance their homes or make capital purchases like autos. Their property value goes up due to market demand and they think they are richer, but they are merely just farther out on the proverbial limb. When the trade deficit grows more than 5% of GDP, the cost of capital becomes excessive. A correction has to bring things into balance. We just keep printing more money to put it off, hoping that good times will return to fantasy land. _________________ A Saudi saying, "My father rode a camel. I drive a car. My son flies a jet-plane. His son will ride a camel."
Live in Arizona? Check out: http://sustainablearizona.org and read my blog.
Could you help me understand how the yuan at its current fixed rate plays into this?
Why would it suddenly appreciate against the dollar by 40%?
Will China unpeg the yuan? The US seems to be crowing about it more and more. Can the US really even force China to do so, since all they would have to do is stop buying our debt, turn those dollars into hard assets (like they seem to be doing), and/or sell dollars to mount a not-so-subtle speculative attack on the dollar...They are our banker, so to speak... but they need us to buy their goods, too...Could they also print more yuan to maintain their trade advantage (devaluing their currency against the dollar) if it was unpegged?
Also consider this: If you owe the bank a little money and can't pay, you have a problem...If you owe the bank a ton of money and can't pay, then the bank has a problem. But add to this, too, what if you could pay "the bank" all the money you owe because you just printed a fresh batch of dollars? It does seem to make sense that we can print all the dollars we want, it just won't have as much value per dollar..
What mind-numbing things these are! No wonder no one but central bankers and multinationals and ultra wealthy seem to care about it...until the rest of the folks realize that they're gettting squeezed either by real-value falling wages and/or rising prices.
How does the US get around its' debt without monetization? The Fed looks to be in quite a bind since if they continue to raise rates in the face of a "slowdown" it will be negatively received.. But their other weapon, monetization, fans the flame of, and is truly the cause of, inflation and currency devaluation... Will rising commodity prices be their patsy doing its' dirty (inflation) work?
I see the Fed reacting to any possible liquidity crises by further monetization...fueling devaluation and stoking inflation. In an environment of stagnant or falling real-value wages and income, this is a big problem. I don't see what the Fed would do in such a situation either.
I've also agreed with the hypothesis that rising commodity prices, including and especially oil, are basically reflecting (or is the cause or effect of?) the dollar devaluation as producer and consumer countries alike need dollars to trade them... For example, if Saudi must trade oil in dollars, and that dollar they receive for the oil buys less, they would want to at least receive more (but worth less than before) dollars for that oil.. Same thing for consuming countries, such as China, if they must hold dollars or dollar-denominated assets, they should expect to pay more dollars for the same amount of oil, but maybe in their real terms, the value of the oil stayed the same, it just cost more "dollars" to get it... Also note that rising oil "cost" seems to have paralled the fall in the dollar in the last three years...
Add oil depletion into the picture, and the outlook looks worse. Lack of spare capacity, security concerns, war, limited supply growth, "unforeseen" demand growth fuel the fire even more.
In the good 'ole days, rising oil prices could be squashed by having a certain key producer open up the taps.. But no more it seems.. Now the only limiter on prices, from an economist's point of view (and remember they are still in charge) may be demand curtailment... Demand destruction, that is...the Fed just whistling while prices rise high enough a slowdown occurs (that means people lose jobs!).. and not actually make a meaningful effort to lower prices...
I find it interesting that the Fed or the adminstration seems not "too" concerned about oil prices...do they know it needs to happen to destroy demand and then provide the ready cash to ensure the wheels are greased? If they view oil price rise as temporary, then why do so many say high prices are here to stay? Is it that the price rise will be temporary because maybe soon if will become too expensive to afford and create the massive changes that need to occur in a rapid period of time that would be unable to occur because of the political impalability such measures would create if put in place pro-actively?
A few times some have posted a chart on the value of oil in real value terms... one had a oil/gold time value chart that was helpful...Maybe it was Financial Sense or FTW...
Anyway, sometimes I think of oil, like gold, as an international currency of exchange...It retains its' value essentially the same, but the relationship to fiat money changes with that reference value...So if we are pricing oil in dollars, and dollars are worth less (that's "worth less", not "worthless", not yet anyway), then the price must rise.
The only thing is, we need and use oil. We don't "need" gold. But gold is expected to rise in value in the future (contango futures market) while oil is expected to fall (backwardation). With contango, you'll see producers withhold inventories (just read about a gold producer today who's keeping 1/3 of their production to sell for a higher price later). If we start to see producers find reasons to withhold production, watch out! I honestly think in the near term future such oil withholding, if it occurs, and supplies were desperately thing, this would be considered an act of war... So imagine if Venezuela just happens to have a strike again (maybe engineered, maybe not)...for a long time...and the markets started going crazy, we'd see a possible military solution toot sweet, I'd imagine.. Look at Russia, and how nice their oil production recovery worked to their advantage...
It's the great game again...not that it ever ended, really. Major players are US, Russia, China, UK, Western Europe with non-Sino Asia, the Middle East, Africa, all playing key parts..
Currencies are constantly changing in purchasing power. When they are allowed to float against other currencies, they find their own level as opposed to being pegged to one, as is the current case with the renimbi (yuan). If allowed to float , it would, by most accounts rise about 40%. Why? Look at China, it is growing like gang busters! Almost 10% growth. It is the world's producer of goods. China has pegged the value of the yuan to the U.S. dollar by buying or selling dollars since 1995. The obvious sign of the undervaluation of the yuan is China's swelling national accounts. The country's dramatic success in export markets has made it a magnet for foreign currency. Freeing the exchange rate would almost certainly result in an influx of speculative "hot money" that helped cause the pan-Asian financial crisis of 1997-98. _________________ A Saudi saying, "My father rode a camel. I drive a car. My son flies a jet-plane. His son will ride a camel."
Live in Arizona? Check out: http://sustainablearizona.org and read my blog.
China has little complaint about the exchange rate. Indeed, most Chinese firms and policy makers have welcomed the cheap yuan, seeing it as helping to underpin the country's long economic boom.
Quote:
How does the US get around its' debt without monetization?
They seem to be betting on the come. If you have read my other posts on this issue in different threads, you will see that I am convinced they no longer have any monetary control with regard to stimulus or correction.
Uncharted waters. And yes, I think they want to let prices rise, while lying to the public about the real rate of inflation. Dumpo the dollar, get the debt load back to a "manageable range". Sounds hilarious, doesn't it?
And yes, OPEC will want more for their oil, maybe a good time to switch to the euro? We don't have anything they want to buy anyway with their dollars. Stand by for news! _________________ A Saudi saying, "My father rode a camel. I drive a car. My son flies a jet-plane. His son will ride a camel."
Live in Arizona? Check out: http://sustainablearizona.org and read my blog.
And yes, OPEC will want more for their oil, maybe a good time to switch to the euro? We don't have anything they want to buy anyway with their dollars. Stand by for news!
Actually, they (Saudi, China, etc) are not allowed to buy anything but U.S debt with their dollars! Just recently I read that attempts to buy US corporations or other such assets would be considered "an act of war"! Now, then, who's got the real power in this country in that light?
Oh, and also consider that with peak, as the shift goes from a buyer's market, to a seller's market, that means that the countries with the remaining reserves are oh so much more valuable...And ripe for take-over so that really valuable oil can be turned into profit..
I've been hearing a few buzzings about how certain countries (Iran, Saudi) are not properly maximizing their production potential (comments from the majors - Shell, I think, but I could be wrong) and how they need "access" to them so their production could be better realized (like recent comments on Iraq and how production wasn't being maximized with SH). And then this part week Saudi says they don't need any help developing more production, they have the money and the expertise (translation: no need to topple or slice off a chunk)...
Currencies are constantly changing in purchasing power. When they are allowed to float against other currencies, they find their own level as opposed to being pegged to one, as is the current case with the renimbi (yuan). If allowed to float , it would, by most accounts rise about 40%. Why? Look at China, it is growing like gang busters! Almost 10% growth. It is the world's producer of goods. China has pegged the value of the yuan to the U.S. dollar by buying or selling dollars since 1995. The obvious sign of the undervaluation of the yuan is China's swelling national accounts. The country's dramatic success in export markets has made it a magnet for foreign currency. Freeing the exchange rate would almost certainly result in an influx of speculative "hot money" that helped cause the pan-Asian financial crisis of 1997-98.
Ha! Exactly! And I understood that only yesterday, that US would orchestrate massive speculative currency attack against China if it could, so that's why China is somewhat reluctant to depeg
...unless some ASEAN common currency structure is created, in imitation of European single currency. Any news on that front, BTW?
...unless some ASEAN common currency structure is created, in imitation of European single currency. Any news on that front, BTW?
The process of economic integration is difficult, as demonstrated by the postwar evolution of Europe, and the Asian situation is even more complicated than Europe's. Free trade areas and currency unions require both extensive technical cooperation and sustained political determination. The process is likely to evolve slowly over a number of years rather than emerge full blown in the short term. A number of new developments have begun to change this picture. The most dramatic was the Asian financial crisis and the response to that crisis that emerged during 1997-98.
An onset of recession in the United States will sharply accelerate US protectionist pressures--especially with a trade deficit already approaching $600 billion annually--and intensify the Asian reaction. So, yes, the successful launch of the euro has led some Asian leaders to ask why East Asia cannot work toward creating a common currency of its own. Almost all countries in the region are seeking new exchange rate regimes. They surely do not want to restore the dollar pegs that contributed to bringing on the crisis of 97-98. But neither do they want to maintain the free floats to which they were forced, given the massive overshoots which resulted and the inherent instability of such systems. Of course, they could adopt a common currency basket, in which to denominate and reference their currencies, but most of the countries continue to view each other as economic rivals more than potential partners. China and Japan are now clearly competing for the leadership of Asia; Japan is still a larger and much richer economy but the time when it could have seized leadership may now have passed and China is clearly set now to become the world's economic engine. So, bottom line, I just don't see a new ASEAN currency happening anytime soon. Too much Asian "honor" at stake. They couldn't do it pre-Asian banking crisis to avoid the collapse, so I doubt they can get it together now. _________________ A Saudi saying, "My father rode a camel. I drive a car. My son flies a jet-plane. His son will ride a camel."
Live in Arizona? Check out: http://sustainablearizona.org and read my blog.
Last edited by MonteQuest on Fri Apr 08, 2005 9:53 am; edited 1 time in total
As I predicted, here is the first call for the return of stagflation:
The New Stagflation
Quote:
Next year's economic difficulties are already on the horizon. Growth is slowing as the housing market cools and consumers rein in their spending. Inflation is rising a bit, driven mainly by oil prices, health care costs, and corporate price increases, fueling a spectacular recent profit surge. Job creation is weak, and wages are flat. This is the new stagflation – an unpleasant reminder of the economic cost of unilateral war.
China has little complaint about the exchange rate. Indeed, most Chinese firms and policy makers have welcomed the cheap yuan, seeing it as helping to underpin the country's long economic boom.
Last week-end China has announced that they will partially unpeg the Yuan, allowing it to move against the dollar. This is the reason for the current slide in the dollar
Basically yes, but it entails a bit more. China needs huge amounts of energy to grow its economy. To buy oil, it must have dollars, so it targets the US with it's exports and pegs the Chinese currency to the dollar, making it's exports cheap for American consumers.
China indeed needs large amounts of oil and other commodities. But this year we've seen a shift in policies. Instead of buying the oil and raw materials they are buying oilfields and mines. They have bought oil sands in Canada and oilfields in the Middle East as well as copper and aluminum mines. This means that they are becoming less dependent on the dollar despite their increasing consumption.
Here's a great resource for info on the Oil Crisis:
Quote:
Oil prices shocks have a stagflationary effect on the macroeconomy of an oil importing country: they slow down the rate of growth (and may even reduce the level of output – i.e. cause a recession) and they lead to an increase in the price level and potentially an increase in the inflation rate. An oil price hike acts like a tax on consumption and, for a net oil importer like the United States, the benefits of the tax go to major oil producers rather than the U.S. government.
Since it looks like "stagflation" is rearing its ugly head, I though I would bump this thread up and refresh everyone on where this leads.
The Recovery That Isn't & The Bust That Will
Quote:
I submit to you, dear reader, that most everything you’ve heard about the economic recovery is a pack of lies, a fraud, a joke, propaganda, twaddle and fiddle-faddle, sprinkled with a liberal dose of bullpucky and a pinch of hogwash for good measure.
Now that we’ve gotten the niceties and formalities out of the way, let me share with you how I REALLY feel.
Most readers already know that the official statistics are a pile of hooey, routinely manipulated to demonstrate an economic fantasy that doesn’t really exist. Basically the feds get to write their own report card every month and they’re not exactly loathe to take some liberties in compiling the numbers. (If there’s one thing feds are good at, it’s TAKING liberties.) We’ve been over this before, but let’s review a few blatant examples to lay the foundation.
First off, one of the biggest frauds: GDP. This fabrication is calculated using all manner of mumbo jumbo that I purport neither to care about nor understand. AND the official inflation data. Anyone who doesn’t sleep under a bridge and force windshield washings upon unsuspecting drivers for a living knows that official inflation data is about as out of touch with reality as Rosie O’Donnell is out of touch with the concept of stopping at just one helping. We all know that the inflation figures are routinely UNDERstated, which leads to an OVERstatement of GDP growth.
The inflation data makes ridiculous assumptions about housing costs. Those numbers are calculated utilizing rental rates and as we all know, rental rates have NOT kept pace with surging home prices. As far as the Fed is concerned, the cost of housing has only risen modestly even as they pat themselves on the back for surging home values. You can’t really reconcile the dual “successes”, but the Fed trusts that the average consumer will continue to accept the official line and never question the obvious disparity.
The employment data. Now here’s a real piece of work. These numbers fail to account for disgruntled workers who have left the job search. The actual unemployment rate is estimated as twice as high as the official figures. Never mind that the bulk of job growth is a statistical fiction based on questionable assumptions. It may surprise you to learn that the job growth is NOT measured by doing a head count of ACTUALLY created jobs.
Last but certainly not the least absurd, Alan Greenspan’s favorite “hedonic pricing method” which makes all kinds of wacky assumptions that only a bureaucrat could love. At $25,000 a piece, the Fed doesn’t consider cars to be much more expensive than $10,000 cars twenty years ago because they’re better and loaded with more features today! Oddly enough, however, computers that cost $1000 are actually worth several times that when calculating capital spending data because, well, because computers are better and loaded with more features today. Inflation down, capital spending up. Voila! Economic recovery courtesy of Fed statistamathemagics!
Link _________________ A Saudi saying, "My father rode a camel. I drive a car. My son flies a jet-plane. His son will ride a camel."
Live in Arizona? Check out: http://sustainablearizona.org and read my blog.
Last edited by MonteQuest on Thu Apr 07, 2005 9:22 pm; edited 1 time in total
Monte Quest, Deflation? How so? Prices lower to meet what people can afford? How about prices keep inching upward as the dollar weakens against other currencies, making imports more expensive, regardless of what people can afford.
If only 20% of the population can afford to take part in the traditional economy, that's okay. Corporations don't need the bother of catering to the great unwashed anyway. Walmart will be for the few remaining in the middle class and the upper class. Everyone else will be shopping on ebay, garage saling, thrift stores, etc... and buying something brand new, once in a while, not often, like today.
If you look at how Buscho is positioning US economy right now, it's as if he doesn't give a rat's a** about price inflation. He's creating a fortress America, will bring industry and manufacturing back home, but seek to control oil and guns internationally.
I remember when I was a kid, before the age of cheap imports. Housing was cheap, noone even knew about the stock market, it was so irrelevent, and everything else was really expensive. It'll look like that, but more so.
Asset bubbles will pop because there will be no pricing power in the rest of the economy. Housing and stock market are the only sectors with any slack.
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