The last half of the title came to me as I recalled one of Johnny Carson’s most memorable lines. He was talking about how economists are supposed to be the smartest kids in the room, but at the same time can’t agree with each other what day it is. He said, “If we laid all the economists end to end around the world…it would be a good idea.” (Insert rimshot here.)
There are two basic schools of economic theory — Those who believe economies can be centrally controlled, engineered if you will — And those who believe economies should be as free as prudently possible, with regulation in place to abort fraud etc., i.e. they avoid central control as much as possible.
The engineers think they know better what ‘needs’ to be done, while consciously eschewing human responsive behavior as part of their equation. They believe if you raise/lower taxes the result will be arithmetic in nature, and that you and I won’t modify our behavior in either circumstance. That’s surely an oversimplification, but accurate.
The free market crowd says if you raise taxes you slow economies down, and if taxes are lowered more jobs are created due to more capital venturing into the market because of the lowered cost (taxes).
Then there are the folks who think they’re smarter than both schools. They try to blend what they think are the best ideas from both theories. Good luck. 🙂
We’ve all seen the argument between the two camps rage since we learned to spell economics.
I bring this up only to illustrate the current example of how the smart kids in at least one of the schools just doesn’t get it. I’ll leave it to you to decide which school that might be.
The argument today is, Are we in a deflationary cycle or are we about to enter what could be a hyper-inflationary cycle?
I lean toward deflation. Every single time an economy, any economy in the last eight centuries, has gone through a massive deleveraging, it’s been deflationary in nature. There have been no exceptions found in the research, as in zip, zero, zilch, nada. The last time we, as Americans, experienced deleveraging at this intensity level it resulted in massive deflation. According to the research, the time leading up to, and the subsequent deflationary cycle were almost textbook examples of the consequences of massive deleveraging.
I realize there are folks, (I used to be one of ’em.) who point to the massive money printing going on by the Fed, coupled with their buying of treasuries. They say that’s the working definition of inflation. Not true. For it to be inflationary, the liquidity it creates must overwhelm the economy’s ability to absorb it. The analogy might be water into a huge sponge. If the sponge is bone dry, and has a capacity of 10 gallons of water before it ‘leaks’ water (inflation), yet we only pour eight gallons into it (money printing), there’s no leakage. It was all absorbed. No inflation.
My crystal ball is as cracked as the next guy’s. But I think I’m right about being on the road to deflation. Whether on Wall Street, Main Street, or real estate in general, there’s simply far too much deleveraging to accomplish for inflation to win this battle. The sponge isn’t impressed so far.
We can’t say, “The Fed’s printin’ too much money, we’re gonna have double digit inflation” — While outa the other side of our mouths decry all the negative leverage on Wall Street and the monster default tsunami about to hit lenders. We gotta pick one. We can’t be morbidly obese and a marathon runner at the same time.
Of course, this is where the stagflation crowd enters, stage left. 🙂 Go ahead, make your case. I’d love to hear how we get inflation amidst all this deleveraging — not to mention the incredibly growing federal/state deficits. The fact remains, for over 800 years there’s not been one exception to the result of massive deleveraging in a macro economy — it’s deflationary.
I’m not only willing, I’m praying to be found wrong as we look back several years from now. I just hope I’m wrong by degree, and not because we endured hyper-inflation.
What say you?
John Kalinowski says:
Jeff – I’m definitely not an economist either, but this stuff really intrigues me, and I try to take a common sense, street-smarts approach. There seems to be one thing everyone’s overlooking in all this, and it was discussed in depth in Jim Jubak’s recent article on MSN. The article is worth reading, and touches on a point I’ve been trying to make for the last year.
The premise of the article is that everyone, including the government and wall street, expects the consumer to ramp up their spending again once we work off the excesses of the past couple years. But, what if the consumer doesn’t come back? What if the last 10 to 20 years were a complete aberration, driven by the endless consumer cycle of spending all their savings, then using credit cards, then using home equity to pay off the credit cards. The big problem now is that the home equity is gone so there’s no way to pay off the credit cards, and people will be tapped out for quite some time.
Jubak also talks about the possibility that all this false consumer demand caused nearly every industry to overbuild and create excess manufacturing demand and capacity. They did this by projecting future consumer demand based on behaviour created over the past couple decades. Factories and service industries have been built based on this false future projection of consumer buying. What if that consumer demand doesn’t come back? Then we’re in for a world of hurt since our economy won’t be able to absorb all the extra capacity, and more industries will shrink and consolidate, and more jobs will be lost.
As Realtors we see it every day. People who’ve been in their homes for 15 to 20 years or more, and have no home equity. They’ve refinanced several times including second mortgages, and their home equity ATM is now dry. This is much more the norm than the exception, but it’s completely ignored by the financial press. It think it’s because most of the money managers and talking heads are at the upper end of the income spectrum and don’t understand how the normal middle-class family has survived over the past couple decades. How did they really think people bought all those flat-screen TVs and Harleys?
Now everyone on CNBC is jumping up and down as each company beats earnings estimates as if the economy is suddenly growing again. Why can’t anyone see that all these estimates were determined when everyone thought the world was ending, so the estimates were exaggerated to the low side. In late 2008 and early 2009 most companies stopped buying everything and let their inventories run dry. In the last half of ’09 they restocked their inventory, giving a false sense of consumer demand. What happens when the consumer doesn’t come back to purchase all that inventory?
All the government stimulus has also created a false sense of demand. A perfect example is my neighbor who works for a tool & die company that works exclusively for the auto manufacturers. When the world was ending in late ’08 he was laid off and was out of work for almost a year. They brought him back in late ’09 as the Cash for Clunkers was in full swing, and most weeks he was even working overtime. Last week he was laid off again. Do we really think consumers are going out of their way to buy cars and spend now that their biggest source of extra income is gone?
Also, what happens if China’s internal demand and growth isn’t as strong as they keep telling everyone? What would we do without our biggest customer for US debt?
OK, I know this was long, but it really bothers me that people don’t see what’s happening to the consumer now that the home equity ATM is dead. Does it cause inflation or deflation? I don’t know, but read the Jubak article and lets hear what others think.
February 5, 2010 — 1:45 pm
Jeff Brown says:
John — I will read the article, thanks. I’d be infinitely more interested in Max Whitmore’s take on what Jubak says. I can’t wait for Max’s update today. The market wasn’t kind to the S&P.
I think what you’ve described in your comment is the basis for what’s been called the ‘new normal’. In fact, I suspect it might be anything but ‘new’. Sounds a lot like the normal experienced by the generations before us. I think WE were the new normal — except that it wasn’t ‘normal’, more of an aberration as you suggested.
February 5, 2010 — 2:29 pm
John Kalinowski says:
I also can’t wait to hear what Max has to say. His articles are very interesting. Glad you found him!
February 5, 2010 — 4:18 pm
Don Reedy says:
Jeff, one of the things you say is They say that’s the working definition of inflation. Not true. For it to be inflationary, the liquidity it creates must overwhelm the economy’s ability to absorb it.
Here’s my take; no more of a question: What if all the money we’ve printed is “asbsorbed” only by, or for the benefit of, the entity that prints it? Let me explain.
I premise that the stimulus is not working, and that printing money may have staved off the cold, but will certainly help us be killed by the plague. Because, you see, the liquidity we have produced (your water analogy) isn’t even getting to the driest sponge, i.e. the small businesses that must now create the jobs and growth needed to bring the bucket up out of the well. Instead, I suggest that there is indeed an already soaked sponge, our government, that is in fact “overwhelmed”, and that it is clear that the President is continuing to intend to pour more water, more money onto that sponge.
What I’m suggesting is that there are, due to the interference of the government into the economy of both this nation and the global economies affected by what we do, competing “economies”; the economy of the government as the controlling variable, and the economy of the worker, homeowner, consumer as the dependent variable in the economy. You are siting evidence of almost certain deflation caused by deleveraging, and I am questioning which economy you believe will be impacted.
Which sponge will the money be poured onto? Can there be, as it seems to me there are, really two economies coexisting so as to make analysis of deflation versus inflation impossible as to the combined condition of both? For me, evidence of the competing existence of the two economies is pretty clear. But I want to see if there’s any insight here that you believe will help answer you underlying question of deflation/inflation.
Oh, and I should say that I think we’re in for inflation, based on my concept that historical deleveraging stopped being statistically predictable once the scope, speed and global influences of governments began segmenting what had once been simply an economy.
February 5, 2010 — 5:33 pm
John Kalinowski says:
Don – You must be one of those economists, ’cause I didn’t understand a word you said. 🙂
February 5, 2010 — 5:43 pm
Don Reedy says:
John – Crap, because your comment helped me think out what I wanted to say, but obviously failed at doing. And Crap squared because I certainly am not an economist, but I honestly have a thought in this head that I’m hoping to get out.
Typical problem for me. Thanks for at least reading. As Greg has been saying in some of his recent posts where he mentions the Vook, just writing and listening to yourself think can be pretty rewarding.
February 5, 2010 — 5:54 pm
John Kalinowski says:
Don – I was just teasing. You make some good points and I’d love to hear more. Have a great weekend!
February 5, 2010 — 7:48 pm
Jeff Brown says:
Hey Don — I see your point. The gov’t indeed is soaking up much water.
However, it’s the private sector’s spending of the private sponge’s leakage that really gets the roads slick, not gov’t.
Remember, only the private sector creates income, not the gov’t. The gov’t only takes from us. Any money ‘given’ to private sector entities/people was money previously taken from the private sector.
You theorize that we’re different now than economies of the past, especially citing the global nature of today’s reality. True enough. My answer? Simple — Did gravity work any differently in the New World when Columbus got here? 🙂
Deleveraging is deleveraging not matter how it’s sliced. Like gravity, it’s power depends upon its size. The ‘physics’ of economics, the foundational principles, don’t change.
Finally, what you describe as two economies is really a zero sum game. Either you and I get to keep our hard earned money, or the gov’t takes it. Now we’re wandering into the ideological part of the arena. Every single time a personal/business income tax cut has been applied, since we’ve had those taxes in the early 20th century, they’ve created jobs and generated a growing economy. JFK knew that, and the country benefited by his application of that ideology. FDR believed in the other way, and well, we know what happened then.
Still, it’s just my understanding. Frankly, I hope we’re both all wet…so to speak. 🙂
February 6, 2010 — 8:16 am
Don Reedy says:
John and Jeff –
Thanks to both of you for putting more range into the way I see our financial world. Nice to unleash cogent thoughts on which to ruminate.
I just lost my father-in-law, who was living with us, to a fast two-month cancer that took his life. It was a good ending, as endings go, but nonetheless “death and taxes” really do seem immutable.
What interests me particularly, Jeff, is that while death, taxes, gravity and perhaps deleveraging are principles from which there is no escape, functioning fully and productively within those principles is what we’re striving to accomplish.
We’re not all wet, John, you or me. We’re merely taking a walk in the rain, soaking up insights, looking to better the was we navigate the floods or streams we’re certain to encounter.
Hey, both of you. Thanks for the discourse.
Don
February 6, 2010 — 9:46 am
Russell Shaw says:
>What say you?
That I learned something. Thank you!
February 6, 2010 — 12:30 pm
Peter Giardini says:
Jeff… I am glad to read your perspective regarding inflation vs. deflation. I too looked at all the money the Fed is printing and wanted to blindly follow the “normal” logic that with all of the money in the system… inflation had to just around the corner.
Yet, while the printing presses seem to have been running overtime since late 2008… there are still no signs of inflation. Only the slow, steady decline of most asset classes.
“Normal” and whatever it is, is now open to definition.
February 8, 2010 — 12:57 am
Brian Brady says:
“I too looked at all the money the Fed is printing and wanted to blindly follow the “normal” logic that with all of the money in the system… inflation had to just around the corner.”
As did I, Peter. What I fear is that we could very well have that money show up in commodities prices while “financial” asset prices continue to decline. The money has to go somewhere.
If our friend from Bigger Pockets is right about the expansion of the MBS purchase program, we’re in for MORE money sloshing around.
February 8, 2010 — 8:35 am
Jim Klein says:
Wow, this is a fascinating discussion. Personally, I find all contrarian economic arguments interesting…ever since I learned that “Buy low, sell high” translates directly to, “Be a contrarian!” Jeff, yours is as contrarian an argument as I’ve seen, so I’ve got a simple question to start.
We all know that inflation is not the value of anything going up, but rather the value of the dollar going down. So at first glance, inflation looks like a no-brainer—production of goods couldn’t get any lower without a giant bonfire to burn what we’ve already got, and the number of dollars couldn’t get any higher without a redoubling of printing presses! Those dollars may not be in the system yet, but there can be no doubt that they’ll get there eventually. OTOH taxation is a great means of taking dollars off the table (so to speak) and depending into which sinkhole the stickmen decide to flush it, can greatly alter how much is left in play.
So my question is this. Would your point be that current and expected deleveraging combined with some manner of removing zillions of dollars chasing fewer goods, will therefore lead to deflation? IOW, are you saying that what you see will amount to fewer dollars (or even basically the same, accounting for normal increases) chasing more goods as production ramps up? IOOW what is your simple vision as to what will happen as regards the goods produced and the dollars seeking them?
Thanks very much for your acute insight and you’ve already made a fair case just based on historical data. Of course, it’s also never happened in 800 years that there was nowhere left on the planet, to where bright productive minds might go!
February 8, 2010 — 9:50 am
Michael Cook says:
Jeff,
I think its even simplier than you might think. With $10- $11 Trillion wiped out in the stock market and real estate, consumers lost serious buying power. And before silly people go saying that wasnt real money, they should consider the fact that you could leverage against that fake money and get cold hard spendable cash. See the housing refinance boom/bust, 401k loans, etc. Deleveraging is the net effect no longer being able to do this and quite deflationary. The $2 – $3 Trillion of government spent is a drop in the bucket for now, but considering every other government is spending like water as well, I dont anticipate mass deflation.
The question is at what point does the government spending become inflationary. If rates stay this low for two more years and the government spends another $3 Trillion next year, maybe we revisit this discussion and you change your mind?
February 10, 2010 — 2:23 pm
Jeff Brown says:
Jim — Sorry to be late with my reply.
The short answer to your question allows me to revert to the sponge. It will come down to if or how much the sponge begins leaking. Your point about higher taxes falls on deaf ears, though I know what you’re saying. The excess dollars, if we avoid the ‘gas on the fire’ approach used since VJ Day more or less, can’t be in play any longer. Rather, investment in new business ventures with plenty of skin in the game.
Also, a lesson can be learned from, of all nations, Brazil. They aren’t what you’d call a super free enterprise country, but have weathered this storm far better than we. IMO an important factor has been how they’ve historically kept their banks from taking over the asylum, so to speak. This is our second go-round with banks/lenders having been given pretty much free reign.
As far as I’m concerned they should be treated as nice dogs, but with a nasty biting instinct. 🙂 Heavy chains attached to a well secured pole. Don’t like it? Then get out of banking, and do something else.
Finally, the ‘too many dollars chasing too few goods’, if it comes to pass, will continue as long as our current leadership insists on their current approach. It’s my contention much of the ‘excess’ will be used to reduce debt first, THEN invest, etc. I think all the deleveraging will result in the economy absorbing most if not all of the potentially inflationary environment you so correctly spoke of.
Frankly, IMO, if we’d just go with tax cuts across the board, including cap gains, then elect a president who understands the gov’t is really there to keep us safe so we can lead our freakin’ lives, much of this would go away. The economy would then expand, allowing the ‘potential’ excess dollars to never gain their potential. 🙂 That is, they’d be working productively instead of having been reduced in value.
February 10, 2010 — 2:49 pm
Jeff Brown says:
Michael — Good point. ‘Course I’m counting upon the American voter to send our leaders — both sides of the isle, to the woodshed this November. Another $3T? I can’t even say that out loud without my blood pressure going off the chart.
February 10, 2010 — 2:58 pm
Jim Klein says:
Jeff, thanks. I’m in way over my head here, so now I’m both fascinated and dizzy! One thing that should be remembered IMO is that government spending does find its way into the economy…maybe not in relatively productive ways, but it does get there. That’s why I was wondering if you foresaw other means of taking the money “off the table.”
Really, your point is clear enough. If the vast dollars are used to deleverage /and leverage doesn’t reoccur/ to the degree it has, that will “soak up” lots of the dollars and perhaps we move on in a non-super-inflationary environment. In the simplest of terms, is that basically what you’re saying? If so, that seems straight-forward and it also seems that there should be data to support that occurence, but I’m not even sure what that data would look like.
Even assuming this scenario, though, I can think of two problem forces. First is the assumption that people won’t do what they did, although I understand that there’s a presumption that the banks won’t be allowed to let that happen again. I don’t have a problem with that presumption, but as a general rule “not allowing to happen what people would like to happen” usually doesn’t work out too well. Opposing that, of course, would be the idea that people can also learn, and maybe they’ve learned a lesson from our recent past. That’s asking a lot though!
Along those lines, and a much larger problem IMO, is the question of the other side of the equation…production of values, or goods. For me, it’s the elephant in the room. Controlled economies just don’t produce the rightful amount of goods and so even on the assumption that these insane volumes of dollars are used to deleverage, it still seems that necessarily lower production of goods (relatively speaking, of course) will necessitate, once again, “more dollars chasing fewer goods.” And then, let’s not forget that this deleveraging is denominated in /old/ dollars. IOW how much debt could there be that’s going to be “soaked up” with these astronomical numbers of dollars?
I’m really sorry that this is so simplistic, but OTOH there’s a case to be made that all of the advanced and not-simplistic approaches haven’t fared so well either. And speaking of Brazil, there are at least two lessons to be learned from that country! In any event, I’m very appreciative of your (and others’) insight, so thanks very much.
February 10, 2010 — 8:58 pm
Jim Klein says:
>I think its even simplier than you might think. With $10- $11 Trillion wiped out >in the stock market and real estate, consumers lost serious buying power. And >before silly people go saying that wasnt real money…
I trump that silly! I’d say not that it wasn’t real money, but that it wasn’t wiped out. For every single buyer of every one of those assets, there was a seller. Sure, those buyers were wiped out, but that money didn’t disappear. Am I wrong?
February 10, 2010 — 9:10 pm
Jeff Brown says:
Jim — I’ll begin by saying I’m with you, that is, way over my head in trying to grasp the entirety of this mess.
You said, ‘…gov’t spending does find it’s way into the economy…it does get there.’
True enough. To me though, that’s akin to the antibiotics ‘getting there’ (to the patient) via the nurse rubbing it on the patient’s skin. Not too effective long run.
‘You’re assuming people won’t do what they did.’
Not really. It’s possible they’ll go back to acting stupid, but I’m betting they’re more likely not to. Why? History.
Our grandparents are Exhibit A. Their generation, and/or their parents, went through the super-boom of the 1920’s, then got body slammed for the next decade via the Great Depression, followed immediately by the hardships brought on by WWII. As a result, their behavior, at least when viewed generationally (macro), changed radically. Why do ya think as kids, we were always yelled at to ‘turn the lights off!’ 🙂
If you’ll pardon an analogy, it was like the child who always rode his bike like a bat outa hell from the driveway to the street, ignoring repeated warnings by his parents to look both ways and slow down. One day he gets hit by a car, breaking a leg badly. Think he changed his behavior the next time he rode that bike? Heck, some kids would never ride a bike again after an experience like that.
Negative motivation is, 100% of the time, more effective in securing the desired results than is the positive approach. The military doesn’t promise new recruits an extra cookie at dinner if they do what they’re told. 🙂 Still, even massive positive reenforcement has engineered massive macro behavioral changes in taxpayers. The most recent huge example was the across the board tax cuts of the 1980’s. The behavioral change was proven in terms of the yearly tax receipts of the Treasury, which went up every year. In fact, the OMB (Off. of Mngt. & Budget) reported that during an eight year period then, tax receipts in terms of dollars, rose 95%.
Think about that. Tax receipts went up, though tax rates were cut at the top from 70% to 28%. How could that be? Simple, folks work harder to make more money when the gov’t isn’t waiting outside their door to take too much of it. This resulted in folks willing to work harder to earn more money. It showed, as it was also shown in the early 1960’s with a milder tax cut, that a lower tax rate on a much larger pool of earnings can and will produce more actual dollars collected. I know it’s counter intuitive, but you can ‘look it up’. 🙂 It also makes sense, when we ponder human nature. The Soviet people used to have a saying — “They pretend to pay us, and we pretend to work.” 🙂
Imagine what would happen then, if this ‘broken economic leg’ was the catalyst for some exceptionally positive behavioral changes, while simultaneously the ideological approach by our national leadership also changed from ‘tax & spend’ to ‘cutting taxes — cutting spending’.
We’re in total agreement about controlled economies. Only the terminally arrogant believe they can accomplish it for more than five minutes.
Where will the money go — soaked up if you will?
First, some cases it’ll take more capital to buy what was lost. For example, even though the price of real estate has crashed, many of those buying props from banks are simply writing checks. And yes, I realize many are going the FHA/VA route too. Savings and/or investment will begin to take priority over toys. It won’t be the ‘new normal’ as has been the popular phrase lately. I think it’ll more appropriately be called the ‘old normal’. The same normal with which our grandparents lived, beginning in October of 1929, and thence forward.
Nothing good that will have legs is gonna happen until our leadership does two things. First, realize once and for all that they can’t control the economy through ever higher taxation, based on their belief that they ‘know better’ than those who put them in office. Second, they must have the epiphany that a room full of economic Einsteins couldn’t centrally ‘control’ our economy, so they surely can’t.
If that day ever comes, discussions about depressions and hyper-inflation will go the way of the DoDo Bird.
Make sense?
February 11, 2010 — 9:05 am
Michael Cook says:
“Sure, those buyers were wiped out, but that money didn’t disappear. Am I wrong?”
In my opinion, its like having a salary of $100k, one year and $50k, the next. Sure, you used that money to buy goods and services last year, but you are no longer generating that income this year. So all the great GDP juice you gave the economy is no longer available.
Money does not simply float around in the economy for ever. The supply is always changing as people take out loans and repay them. When people start paying down debt, rather than increasing their leverage, the supply of money declines. Furthermore, if people no longer have the option to take out debt, all they can do is repay it. Instead of being able to take out a loan based on a unrealistic valuations, borrowers are forced to pay down debt. Banks that have tightened lending standards so they are lending less. Additionally, given the lack of equity available companies hoard cash on their balance sheets or they simply pay back government loans, removing money from circulation all together.
For the most part, people bought and used goods. Elevated prices reflected the expectation of increased incomes. When incomes stopped increasing, demand dropped off a cliff. Supply and demand at its simpliest.
Long answer above, short answer, yes, you are wrong 🙂 .
February 11, 2010 — 3:07 pm
Jim Klein says:
Good stuff, Jeff! Every word makes fine sense, even as we’re still left wondering how many dollars are going to chase how many goods.
In this post, you address (basically) the production side of the equation, and make a great case for why lower taxes increase production. That’s one bright thing—outside of ivory halls and government offices, I doubt there are very many who would disagree. And I’m confident that even those few will change their minds in just a few years. It still leaves the elephant in the room, because those aren’t the people who decide how much to tax and spend. Plus, it should be remembered that savings aren’t “put to the side,” but are rather, at least in a free market, reinvested in capital values which yet again increase production.
You bring up another bright note, that maybe folks will learn that credit’s okay, but only when you can pay it back!
As I’m sure you know, it was only a generation ago that Brazil endured hyperinflation owing to the theory, “Well, we can just print up the money,” and I wonder if, when all the complexities are stripped away, we’re not doing the same thing, albeit to a much milder degree. Money supply numbers tell part of the story, but they don’t really account for complexities like the deleveraging upon which you base your theory. I think it makes good sense, but I also think there should be /some/ data that support it. I can’t quite figure out what that data might look like, but if I do, I’ll be sure and let you know. In any event, you bring an interesting idea to the table, so thanks very much for that.
February 11, 2010 — 3:52 pm
Jim Klein says:
Thanks for your reply, Michael, and I guess we’re just talking past each other. I acknowledge the effect leverage and deleverage can have on this issue, which is why I pursued it with Jeff…and will continue to pursue it separately.
I thought you were saying that the “wiping out” of assets on its own is indicative of less money in the system and, except for the effects of leverage, I was saying that this is wrong. When the 100K salary gets cut in half, if we disregard leverage, that leaves someone else with the extra 50K. That’s all I meant to imply, so sorry if I wasn’t clear.
February 11, 2010 — 4:09 pm
Jeff Brown says:
Jim — Here’s the data you want. http://bit.ly/49DC3g
February 11, 2010 — 4:31 pm
Jim Klein says:
Thanks Jeff, but that’s not the data I seek. That’s the Racing Form; I’m looking for today’s splits! I have a few comments and then I’ll be done here, I expect.
Very most importantly, we MUST remember that money isn’t wealth. IMO that’s nearly always the key to understanding these sorts of issues. It always gets confusing because money is a commodity like other commodities except that its production cost CAN be effectively zero. Plus, it’s the commodity that denominates all the other commodities, not to mention their costs of production and so on. No wonder we’re so dizzy!
I’m finding the issue of leverage extraordinarily tough in this context. While it’s sensible to say that money can be leveraged, I don’t think that’s quite right about wealth. This goes to the issue of savings, which in a wealth context is quite different from debt reduction or deleveraging. Roughly, I’d say savings is the amount of wealth that (directly or indirectly) goes to future capital values, and hence subsequent increases of production. That is, it’s the wealth that’s not consumed. What I simply can’t figure out, is what the crystal ball says about REAL savings in the current environment.
As I mentioned, I think production is the elephant in the room. It’d be tough to devise a scenario where production could possibly be decreased more than it has been. Common sense and even half-blind eyesight tells us this, regardless of any money figures or GDP stuff. And any way you cut it, that’s half of the inflation equation.
As far as the other half, I guess we’ll see what we shall see. There’s a strong argument that artificially lowering the price of something leads to relative shortages of that thing eventually, owing to the subsequent lack of incentives to produce it. There’s a tinge of that in current monetary policy, with interest rates being artificially held low, which counterintuitively would be a deflationary indication. But that gets wiped off the table since both those rates and the money supply itself can be changed with a few phone calls. Plus, you might notice that for some time now, both equities and general commodities have been moving /with/ interest rates on a day-to-day scale, which is the opposite of their usual form. That strikes me as highly suspect though the whole thing is so complex that I doubt anyone really understands the details or causation involved.
Basically, I just can’t lose that elephant. Nothing is going to improve until folks get back to work and it’s pretty tough to get back to work when a) the work is forbidden as so much is these days, and b) not working is so heavily subsidized. I haven’t even looked at any numbers, but there can be no doubt that the subsidy of not-working has reached astronomical levels.
That’s all I’ve got but if I get any solid data–which can be so tough since the data are denominated in the commodity in question–I’ll send an EMail along. While it unfortunately looks like RE as an industry won’t be any great mystery, how people can best manage their lives in the way they see fit, figures to be a giant one. Sorry I don’t have more to add, except the disclaimer that I’m just rambling personal thoughts here and don’t pretend to be even an armchair economist, let alone a real one. Thanks much to you and Greg.
February 12, 2010 — 11:58 am
Jeff Brown says:
Hey Jim — I’m pretty much with you on this, at least to the extent of supply/demand. The subsidization of ‘not working’ is indeed beginning to devour us. That goes back to one of my foundational points.
Unless the leadership in D.C. changes to a more capitalistic bent, the trend we’re seeing isn’t gonna change any time soon.
As Grandpa was fond of saying, “Continually robbing Peter to pay Paul, ends of with a sore Peter.”
February 12, 2010 — 12:12 pm
Robert Kerr says:
IMO, it’s an easy, obvious call: deflationary.
The “experts” pushing inflation (or hyperinflation, completely impossible) are the goldbugs and the Internet end-of-the-world kooks.
February 13, 2010 — 9:38 pm
Robert Kerr says:
RE: “Unless the leadership in D.C. changes to a more capitalistic bent, the trend we’re seeing isn’t gonna change any time soon.”
What does that mean, “a more capitalitsic bent?”
Tax cuts? Taxes aren’t what’s stifling our economy.
February 13, 2010 — 9:41 pm