Deflation
and Defaults: The Path Downward from Debt and Excessive Spending.
Revised and originally published 2.24.2010
Abstract: The answer
to the question whether any economy is experiencing inflation or deflation
depends critically on precise data on prices and the money supply. Since the US GDP
while our deficit ranks up there with tottering states like Iceland Greece Britain Spain California New York
The
topic of deflation, in particular, always induces a contentious political and
economic dispute[1]
consisting of those players who insist this phenomenon is in progress, and can actually
prove the existence thereof, in a fierce battle with the opposing forces who
insist we are inflating. The analysis process to solve this riddle is seemingly
wrought with technical difficulties because there are many varied financial inputs
and calculations that must be assessed by the jury in this trial until a final
verdict is returned. It appears that identical economic elements can be used to
argue either case thus leading to a conundrum.
Lessons from the Great Depression: The Deflation
fundamentals from Irving Fisher:
“Following the stock market crash of 1929 and
the ensuing Great Depression, Fisher developed a theory called debt-deflation. According to
the debt deflation theory, a sequence of effects of the debt bubble bursting
occurs:”[2]
1.
Debt
liquidation and distress selling.
2.
Contraction
of the money supply as bank loans are paid off.
3.
A fall in
the level of asset prices.
4.
A still
greater fall in the net worth of businesses, precipitating bankruptcies.
5.
A fall in
profits.
6.
A reduction
in output, in trade and in employment.
7.
Pessimism
and loss of confidence.
8.
Hoarding of
money.
9. A fall in nominal interest rates and a rise in
deflation adjusted interest rates
Is there anybody reading this who can
not see all of these nine points not glare out from this page if you
are watching our economy? So, the forces of disinformation are now aided by
politics and thus surge forth to ‘correct’ the deflationary model alarm and
attack its adherents.[3] We are certainly deflating
as the fed threw some 7.36 trillion dollars into the rescue pot that we know
of.[4] This was in September of
2008 and the money supply M2 only budged from about 7.95 trillions to 8.4
trillions months later suggesting that this money was swallowed up in some financial black hole. M3 was masked so we cannot add in certain
credit items that contracted with the financial crisis in September 2008.
Arguing
for deflation in addition to Fisher’s Nine Points above, we can look for four factors: a decrease in
the CPI [Consumer Price Index[5]],
hoarding of money, decreases in bank credit and the more unusual case of Confiscatory deflation whereby deposits
are frozen or attached. That hasn’t happened yet as banks that experienced
active runs such as Wachovia and Indy Mac[6] were rescued. Arguing for inflation in a given case we
should look for the diametric opposite change in the price of goods and
services—increasing prices rather than
falling—and an increase in the money supply M2. Here is where the elegant
simplicity of this apparently simple algebraic exercise fails because exact
estimates of prices and the true money supply are influence by politics,
questionable algorithms for their determination and other matters. It turns out
that ‘money’ has four categories all rather independent:
M0: The total of all physical currency, plus accounts at the
central bank that can be exchanged for physical currency.
M1: The total of all physical currency part of bank reserves
+ the amount in demand accounts ("checking" or "current"
accounts).
M2: M1 + most savings accounts, money market accounts,
retail money market mutual funds, and small denomination time deposits
(certificates of deposit of under $100,000).
M3: M2 + all other CDs (large time deposits, institutional
money market mutual fund balances), deposits of Eurodollars[sic] and repurchase agreements.
Unfortunately
for the purist, the money [M to be general] here is difficult to assess as the
government ceased to publish M3 for some reason, probably political. M2 is published and is about 8.4 trillion at
this writing. So the quest for accurate prices is complicated by the fact that
the CPI is wrought with
calculation difficulties such as using critical mathematical weights and assumptions
for an entire decade thus ignoring numerous current price effects from the
introduction of new products or from consumers switching purchase choices among
similar commodities.[7]
This
means, quite simply, that the absence of precise data reduces the argument to a
level of absurdity until the pertinent numbers become very large. Since there
is confusion and uncertainty any politician can make a grand case for either
process being currently dominant or the equally rational case that neither is
present. Since the current position is hazy the prospect of spending aids those
in office.
Now,
excessive debts influence the money supply and prices and can, theoretically,
force deflation or inflation from the direct effects of government’s attempts
to correct for economic problems. Here,
we must include an accurate assessment of debt and this quest becomes as
difficult as the calculation of prices or the money supply. For example, we
recently found out that Greece Tokyo GDP is over
200% there), but also focused on Greece
Excessive
spending with funding by borrowing creates asset bubbles and when these burst
wealth is summarily lost thus decreasing the possibility of addressing the debt
and frequently prompts the printing of money to mollify the problem. I predict California China
Debt is economically and
politically dangerous and here is a quote[13]:
“Feb. 24 (Bloomberg) -- Ballooning debt is
likely to force several countries to default and the U.S. Harvard University
Following banking
crises, “we usually see a bunch of sovereign defaults, say in a few years,”
Rogoff, a former chief economist at the International Monetary Fund, said at a
forum in Tokyo
Now, when the Core CPI [14] changes abruptly from some
long term trend then the experts become upset. We can read dire warnings from Michael A. Kamperman on this matter:
“The Core CPI
index was reported as minus .1%. This is the first time
since 1982 the core rate has been negative. It won’t be the last. We are in store
for many more negative Core CPI
readings over the next couple of years. Housing costs in the form of rent
and owner’s equivalent rent make up over 40% of the Core CPI rate. While the government should be using
an estimate of
actual home prices to calculate the
cost of home ownership, it remains wedded to the concept of using owner’s
equivalent rent which
was introduced in 1983.”[15]-- More Core CPI
Deflation is Inevitable [look at his charts at this link]
Thus
the Core CPI is ignoring the house
asset bubble in some respects as it offered the false indication that home
ownership was rising based on rent estimates.
For proof of this, today, the US
As for spending we hear:
“Although the federal funds rate is likely to
remain exceptionally low for an extended period, as the expansion matures, the
Federal Reserve will at some point need to begin to tighten monetary conditions
to prevent the
development of inflationary pressures,” Mr. Bernanke said in a prepared statement.”[17]-- Bernanke Reaffirms ‘Extended Period’
of Low Rates
This
spending is what is driving our deficit into an ocean of debt[18] and we rank high amongst the list of
other losers who may soon default on their sovereign debts:
|
Country
|
Deficit
as a % of
|
|
|
15.7
|
|
|
12.7
|
|
|
12.6
|
|
|
12.2
|
|
|
11.2
|
|
|
9.6
|
|
|
8.2
|
|
|
7.4
|
|
|
6.7
|
|
|
4.8
|
|
|
4
|
|
|
3.2
|
* Figures from OCED forecast in
November 2009. [19]
The debt is crushing. Since there are only 65 million workers
to handle 12 trillion dollars in National Debt [soon to be 14 and rising] and
only half of them pay taxes above the median of $32,000 then this works out to $192,000 each for these workers and that ignores Social Security,
Medicare, Medicaid and state debts.[20][21] But, there is no signal to stop
spending even th0ugh massive debts cannot be managed without gifts as we see in
the Greek Case, soon to bring at least some of the EU architecture crashing
down:
“It has three main aspects. The first is the
well-known fiscal bit. The Greeks have overspent and over-borrowed. Now they
face national bankruptcy. The EU offering loans will buy time but won't solve
the underlying problem. If it makes gifts – thereby effectively making
Greek debt its own – it will encourage other countries, especially Spain Italy Portugal Europe will crumble. As the ECB's former chief
economist put it last week, why should German taxpayers fund excessive Greek
public sector pensions?”[22]--The
current Greek crisis is merely act one of a much wider tragedy By Roger Bootle
Published: 9:15PM GMT 14 Feb 2010 [Emphasis is mine in
all quotes.]
Does this sound like the California New York , New
Jersey California California
“Officially, the state has another
gap of about $20 billion, and Schwarzenegger has proposed a budget that relies,
incredibly, on getting an extra $6.9 billion in federal aid. But the Legislature, while making some moves on the current year's
shortfall, appears to be joining Schwarzenegger in the "rosy
scenario" approach.
While Schwarzenegger hopes for a federal
bailout, Democratic
legislative leaders are hoping that a surge in revenue in January is a portent
of economic recovery that would soften otherwise deep cuts in health, welfare
and education spending.”[31]-- Dan Walters: Rosy scenario peddled as California
This is insanity. And what, might we
ask, would California Greece California Greece Europe , New York State , Michigan
All they can do is tax and spend and they cannot, as yet,
tax but they will try soon.
All the Rogoff/ Reinhart warnings are
lost in the shuffle to grab and sustain political power. We know that socialist
governments can only sustain their power by continuous spending and that means spending
other people’s money. We are on the same path as the U.K. Greece Asia will
halt buying our debt and we will have to print more money leading to more
inflation and so on and so forth.
Those who make such decisions in Washington Sacramento
rycK
[1] Deflation, Inflation,
Politics and Insanity Stewed to Perfection.
[3] Deflation,
Deflation-Phobia and Reality. The True Believers Want to Believe. The Liberals
Need our Wealth.
[4] The French Signal a Financial
Collapse and Offer Advice on How to Cope with such a Disaster. Armageddon?
[7]
The Commission concluded that more than half of the
overestimation was due to slow adjustments in the index to new products or
changes in product quality. Because the index weights are only adjusted once
every ten years, the CPI does not
account for new technologies that are adopted by consumers quickly. For
example, by 1996 there were over 47 million cellular phone users in the United
States CPI did not account for this new product until
1998. This new product lowered costs of communication when away from the home.
The commission recommended that the BLS
update weights more frequently than ten years to prevent new products from
causing upward bias in the index.
Additional upward biases were said to
come from several sources. Fixed weights do not accommodate consumer
substitutions among commodities, such as buying more chicken when the price of
beef increases. Because the CPI
assumes that people continue to buy beef, it would increase even if people are
buying chicken instead. The Commission also found that 99% of all data were
collected during the week, although an increasing amount of purchases happen
during the weekend. Additional bias was said to stem from changes in retailing
that were unaccounted for in the CPI . [3] http://en.wikipedia.org/wiki/United_States_Consumer_Price_Index#Perceived_overestimation_of_inflation
[9]
Federal Reserve Open Market Committee. http://www.federalreserve.gov/newsevents/press/monetary/20090604a.htm
[10] The Bursting of the GanGreen Bubble.
[11] People
say China
"won't have a financial crisis because there's central planning, because
there's a high savings rate, because there's a large pool of labor, blah
blah," he added. "I say of course China will have a financial crisis
one day." http://www.futureofcapitalism.com/2010/02/harvards-kenneth-rogoff-on-china
[12] Harvard’s Rogoff Sees
Sovereign Defaults, ‘Painful’ Austerity http://www.bloomberg.com/apps/news?pid=20601087&sid=aaeViPPUVSw4
[13] I quote
authorities and ohers in sufficient detail so as to avoid the nostrum that what
they say is ‘taken our of contesx’ or by any other phony excuse.
[14] The core CPI index
excludes goods with high price volatility, such as food and energy. This
measure of core inflation systematically excludes food and energy prices
because, historically, they have been highly volatile and non-systemic. More
specifically, food and energy prices are widely thought to be subject to large
changes that often fail to persist and do not represent relative price changes.
In many instances, large movements in food and energy prices arise because of
supply disruptions such as drought or OPEC-led
cutbacks in production.
[17] Bernanke Reaffirms ‘Extended Period’
of Low Rates
[18] The Debt-Deflation Trap
and the Psychosis of Government Spending
[19] http://www.telegraph.co.uk/finance/financetopics/financialcrisis/7269629/Britains-deficit-third-worst-in-the-world-table.html Published: 10:00AM GMT
19 Feb 2010
[20] The Fed Thinks of Ways
to Claw Back Some of the Stimulus Money: This Will be A Disaster as Congress
Will Continue to Spend and Spend.
[21] The Fed Thinks of Ways
to Claw Back Some of the Stimulus Money: This Will be A Disaster as Congress
Will Continue to Spend and Spend.
[22] The current Greek crisis is merely act
one of a much wider tragedy
According
to the old adage, we are supposed to beware Greeks bearing gifts. We now learn
that we also have to beware Greeks seeking them. This crisis is the first clear
expression of a problem present at the foundation of the euro. http://www.telegraph.co.uk/finance/comment/rogerbootle/7237867/The-current-Greek-crisis-is-merely-act-one-of-a-much-wider-tragedy.html?state=target#postacomment&postingId=7244956
[23] California
[24] The Road to Social
Success, Peace and Justice: California
[25] As Predicted: California
[26] Copulating
with Coprolites: The Unveiled Mechanism of Governance by Progressive Liberalism
in California
[27] The
Proud March of the Financial Lepers: Greece California
[28] California Becomes the National Leper like Greece
[29] 650,000 Strawdogs Bark at the Moon. The Obama ‘Recovery’
is a Numerical Monkey Circus
[30] Belligerent Ignorance, Phony Economics and the Clunker
Crusaders: Washington
[31] Dan Walters: Rosy scenario
peddled as California
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