Mish on Deflation, Gold, Oil, Hyperinflation and more …
Mish is always a good read/listen for economic insight.
Public Credit Expansion Fuels Inflation
Are the current price increases we see across the board inflation? Well, price increases are never in themselves inflation, but they can be signs of inflation.
Inflation, as I have explained before, is an increase in the supply of money and credit.
Let’s see what’s been happening in the US over the past year.
Total Loans and Leases still had their peak in 2008. In early 2010 there was a big spike and they have been declining since then.
Total Bank Credit at Commercial Banks:
A similar pattern can be observed with Total Bank Credit ad Commercial banks as you can see above.
Together those two numbers give you a pretty good and complete indication as to how private credit has contracted in the in US and still continues to contract from peak credit.
However, the most complete picture of credit in the US is, as always, a number in the Fed’s Flow of Funds Report “Total Credit Market Debt Owed”:
Here we can see that indeed through 2010 there has been a resurgence in credit, in spite of a contraction in private credit. The reason is that public credit, that is money owed by governments, has soared:
Yes, we have been back in inflation mode indeed, but without the private sector playing along on a long term basis, I don’t think that this one can last very long. All that this has done is fuel speculation and bubbles again in commodities, junk bonds, and stocks. A few jobs may have been created as a result of that, a few more may get created. However, these developments are completely unsustainable. Government intervention in the past crisis has ensured that this will be a long, ongoing, and painful period, and we are witnessing it right now.
We are now in a desperate repetition of what I already warned about in 2007 when I wrote “Credit Expansion Policy“:
The policy of credit expansion has been pursued by governments time and time again. It has become prevalent in the United States under President Woodrow Wilson after the establishment of the Federal Reserve Bank under the Federal Reserve Act during the Christmas Holiday of December 1913. Since then, it has caused major credit booms and crunches in the form of asset booms and subsequent crashes and economic booms and subsequent recessions. In particular this has been the case in the years of 1929, 1987, and 2001, and will be visible in 2008 and the following years. It has always precipitated precisely the effects outlined above. Its workings and effects have been fully explained by this theory of the business cycles. No one has ever refuted the correctness of this theory.
Yet, to date economists and politicians appear completely riddled as to what causes booms and crashes. It is claimed to still be a matter of discussion amongst experts. It has been attempted to impute it upon humans’ greedy nature and natural exuberance. Whenever a crisis emerges the pundits, experts, central banks and politicians will try and regulate the market to stave off the impending crunch. They forget or don’t have the intellectual capacity to understand that it has been their own policy that has caused the crisis in the first place.
As long as the central banks keep pursuing this policy, there is no need to be surprised when the next credit crunch occurs. Neither is there any need to be surprised about the fact that all countermeasures taken by the government will turn out to be utter failures that will accomplish nothing but aggravate the crisis. For if the cause of the problem has been too much government intervention, then more government intervention will only add to it.
The only difference now is that private sector credit is not playing along anymore. In fact, private sector credit is doing precisely what it should be doing: contract.
When the next crash comes, I expect that we’ll be back in deflation mode again in no time at all, snapping back into the long term pattern of this contraction. Like I said before:
Thus the long term outlook for the US economy is the fate Japan took: A long lasting correction supercycle with one failing “stimulus” program after another, and with on and off periods where the economy slips out of and back into recessions from time to time.
And most importantly … when the next crash comes, I sure hope people will point their finger at the root causes, and not at whatever lying politicians and media minions will tell them to.
Money, Credit, Inflation, and Deflation
Endless Nonsense About Deflation
The pitiful and infantile state of the Economics profession is exposed wide in the open, every single day. Whenever you open a newspaper or turn on the TV you enter an uncontrollable shit storm of people making blind assertions, using fuzzy terms, contradicting themselves without caring, in other words taking mental craps all over the map.
Government sponsored economists are indeed the witchdoctors of our secular age.
Another great example is this guy who, in an apparent Scorpions 90’s moment, perpetrated “The Winds of Deflation“:
Three economic reports Friday that should sound warning bells about deflation.
- The Labor Department reports [2] that consumer prices are essentially flat. Compared to August 2009, prices are up 1.1%. That’s only slightly lower than the 1.2% year-on-year rise in July. Excluding volatile food and energy, however, consumer prices in August were 0.9% higher than a year earlier. That’s below the Fed’s informal inflation target of between 1.5% and 2.0%.
- In a separate report, the Labor Department said [3] real average weekly earnings were unchanged in August from July, as both the average work week and hourly earnings were flat.
- The Thomson Reuters/University of Michigan September reading of consumer confidence [4] shows consumers more pessimistic in September than in August. In fact, consumer sentiment is the lowest since August 2009.
Put the three together and you have what could be a recipe for deflation: Flat consumer prices, weekly earnings, and hours, coupled with increased pessimism about where the economy is heading.
Consumers aren’t buying. They’re acting rationally. Their debt load is still huge, they’re worried about keeping their jobs, they know they have to tighten belts, and they’re justifiably worried about the future.
But for the nation as a whole, it spells even more trouble. If consumers hold back even more, prices will start dropping. When and if they do, consumers will hold back even more in anticipation of still lower prices. That means more layoffs and less hiring.
It’s a vicious cycle. And once deflation sets in, it’s hard to reverse. Just ask Japan.
Anyone who spouts out this hilarious price spiral argument … ask them the following:
Q: Over the past 20 years, did prices not constantly fall in the computer and cell phone industries (coincidentally some of the least government regulated industries in the US)?
A: Yes, they did!
Q: And during that time, did people hold back in buying computers and cell phones, stingily awaiting the expected further price decline?
A: No, they did not!
Q: And did employment in those industries grow or fall over the past 20 years all over the world?
A: Why, it went up manyfold!!
Q: And did businesses from those industries not do exceptionally well as compared to other industries?
A: Why, of course they did!
Q: THEN WHAT THE HELL ARE YOU TALKING ABOUT??
A: But dude … don’t you get it? I have no idea what I am talking about. I merely try to skew any event into the direction where it justifies more government stimulus spending, more deficit spending, and higher taxes, don’t you get it?? Why else do you think would I hold my tenure, be respected in the echelons of power, and get invited to Bill Maher’s weekly Obama worship fest to talk about this stuff with more clueless people while looking completely superior and competent? It’s absolutely beautiful, man, you should totally try it on for size!
OK, enough of this hypothetically honest conversation … which is never going to happen of course :)
Here is some more stuff I wrote on deflation:
Deflation
Deflation is defined as a drop in the money supply. It occurs when the central bank or fractional reserve banks reduce the money supply by reversing their inflation by selling goods other than money, thus withdrawing money out of circulation, or when individuals make more re-payments as part of credit transactions (which they entered into with the central banks or fractional reserve bank) than additional money is produced.
As the money supply declines, the price of other goods in terms of money is more likely to drop over time.
Deflation is in essence a correction of the previous misallocations created by inflation.
Addendum: What I was referring to above is monetary inflation. Please see more details in Inflation & Deflation Revisited.
This is more on credit deflation AND money deflation.
And here is what I said over 1 year ago would happen if the US continues to copy the Japanese experience one by one:
From 1989 on, the Japanese government has launched one stimulus after another to no avail, leaving Japanese taxpayers with the largest public debt per capita of all industrialized nations.
A burden that the US government seems to be more than willing to have its taxpayers shoulder over the years to come unless someone picks up a history book and tries not to feverishly repeat mistakes others made in the past.
Thus the long term outlook for the US economy is the fate Japan took: A long lasting correction supercycle with one failing “stimulus” program after another, and with on and off periods where the economy slips out of and back into recessions from time to time.
This is the long term trend we are and will be in for a long time … whether Robert Reich, Paul Krugman, Ben Bernanke, Barack Obama or any other sociopathic and laughable clowns like it or not. All they can do is make it worse … and they have certainly done great at that over the past few years. Good going guys …
Gold Prices Hit All Time Record High
Today gold bugs are happy as Gold Prices Surge, Top $1,270:
NEW YORK (TheStreet ) — Gold prices were popping Tuesday as investors turned to gold as safe-haven asset after a slew of disappointing economic data.
Gold for December delivery was adding $27.30 to $1,274.40 an ounce — a record high — at the Comex division of the New York Mercantile Exchange.
The article obligatorily drones on about the cause for the gold price surge now suddenly being inflation fears again, which is of course the purest nonsense as I outlined a while back.
These people try to fit in day to day events into their tiny mental box and spout out knee jerk platitudes as quickly as they possibly can, whenever they observe one isolated incident. Gold prices rising? Inflation! Economy not growing meanwhile? Stagflation! Interest rates dropping. Deflation! Prices not rising quickly enough? Disinflation! Dollar AND gold up?? How weird!!
Few people ever dare to go ahead and attempt to explain the big picture, that is why since 2007 Treasury yields and mortgage rates have moved near or BELOW historic lows, why the dollar is up, gold is up, silver is up, and soft commodities, stocks, and home prices are down, rents are falling, and why you can get a meal at Taco Bell for under $1 …
The answer is one word: Deflation.
Deflation or Inflation – Is Public Credit Setting Off Contraction in Private Credit?
I want to follow up on something Marc Faber said the other day in the second clip.
He said that it is true that private credit is contracting, but it is being offset by a government credit expansion.
Let’s examine this suggestion a little more closely.
I regularly publish the total contraction of total private loans and credit:
This is, however, only a subset of the total credit picture. What is missing are things like corporate and government bonds, and probably some other non financial obligations.
The most comprehensive data on the total of pretty much ALL credit issued in the US is really the Federal Reserve’s Flow of Funds Report, in particular the subsection “Level tables”.
The current flow of funds report can always be accessed here and for March 11, the latest release shows us the following:
Based on these numbers we can see that total credit, when measured across all sectors, has indeed been declining throughout 2009, by roughly $466 billion, in spite of a massive ramp up in public debt.
This simply shows us the magnitude of the deflationary forces in action.
I would also add to this that we could easily double the total credit outstanding above if we included the federal government’s Medicare and Social Security obligations which nominally amount up to $43 trillion and will never be fully paid back. There is no official number to track for this since these obligations are not reported on any balance sheet and are not traded on any markets. Thus we can only assume that their present value is declining by at least the current rate of decline in the remaining credit volume (about 0.8% through 2009).
This would bring the total contraction in credit up to around $810 billion through 2009.
I’m also not sure to what extent other municipal and state pensions are covered in the flow of funds number, but I rather doubt they are included at all. A lot of those lavish union pension plans are going to have to cut back on their commitments soon, probably the next big events to shake the markets, along with commercial real estate defaults and property values declining.
And last but not least, it is rather unlikely that the current numbers are all marked to market. Government regulations across the board have ensured that banks and corporations can be rather creative in their reporting.
Either way, all this is a rather strong indication that Marc Faber’s assertion may not me correct.
Inflation or Deflation? Marc Faber vs. Mike “Mish” Shedlock
Once in a while you can observe a few minutes where people on mainstream news speak the truth. I treasure these moments …
Part 1: Mish & Faber discuss market outlook and see value in Japan
Part 2: Mish & Faber on Inflation or Deflation
In case you care about my humble views in next to these two brilliant titans, read my Inflation & Deflation Revisited.
Part 3: Mish and Faber agree “It’s too late to fix things”
Deflationary Collapse More Likely Now than in 2007
Janet Tavakoli makes some excellent points on how 2 years of endless money pumping, government bailouts, and stimuli and have accomplished the exact opposite of what was intended: Matters have gotten far worse, and the financial system is now in a much more explosive condition than back then.
Part 1
Part 2
Her book Dear Mr. Buffett
Consumer Price Index July 2009 – Real Prices Down 6.6%
The BLS reports CPI data for July 2009:
The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.2 percent in July before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Over the last 12 months the index has fallen 2.1 percent, as a 28.1 percent decline in the energy index since its July 2008 peak has more than offset increases of 0.9 percent in the food index and 1.5 percent in the index for all items less food and energy.
The official price decline over the past 12 months was 2.1 percent. That alone is unprecedented as far as I can tell. But let’s, as always, approximate real price declines:
Looking at the detailed table, one can see that owner’s equivalent rent (OER) went up by 1.7%. If we want to calculate the True CPI, we have to replace OER with the Case Shiller home price index, which most recently dropped by 16.8% over the year. If we do this, we get an overall price decline from 1 Year ago of 6.6%. (Last month’s release yielded a real price decline of 6.4%)
Not only are prices falling, they are falling at an accelerating pace. This a corollary effect of deflation, plain and simple. Some investors say we should expect inflation soon. Some expect it somewhere down the road and that it will me rampant. Most of them don’t dare use the D word, even though by all unconventional AND unconventional measures we are in the very midst of a massive deflation, not based on prices alone, most definitely not based on money supply alone, but first and foremost due to an ongoing and likely long lasting credit contraction:
Click on image to enlarge.
Since the peak in October 2008, total credit and loans/leases outstanding have fallen by $725 billion, a 4.3% drop. And this doesn’t even take into account the decline in outstanding bond prices and unfunded liabilities. It is, indeed, tough to ascertain whether there is a decline in the net present value of unfunded liabilities. Thus we shall ignore them for now. However, bond prices have definitely declined across the board.
If we conservatively assume, for the sake of simplicity, that those bonds have contracted by about the same percentage since October 2008, this would give us a total credit contraction of around $2.15 trillion since the peak.
On top of that, I don’t think that people are oblivious to the fact that there is absolutely no way that all social security and medicare benefits will ever be paid. Thus it would only be reasonable to conservatively assume that the present value of those liabilities has dropped by the same amount. This would almost double the total contraction to $4 trillion.
It is, on top of that, rather questionable whether all this credit is marked to market. I would say that all this number gives us at the moment is at the low end of the range. Meanwhile, the true money supply since then has grown by merely $170 billion.
Why is this so important? Because it shows us the magnitude of the deflation that we are in right now, a deflation with all its consequences on home prices, consumer prices, interest rates, and stock prices. And it gives us a solid foundation to understand why various investors and maintream journalists who continue to expect, fear, or hope for inflation anytime soon are way off base and will be proven wrong in the long run.
As far as a general mid-term trend one can expect based on this data, as far as certain asset classes are concerned:
Bullish: Treasurys, Dollar, Gold, (maybe) Silver
Bearish: Stocks, Corporate Bonds, Foreign Currencies (except for the Yen maybe), Soft Commodities
Total US Credit and Loans – How Much Contraction Since Peak?
I have been trying to put together a complete picture of the credit situation in the US, in a historical chart on a weekly or monthly basis. The closest I have come is to take the St. Louis Fed’s figures for “Bank Credit at Commercial Banks” and “Total Loans & Leases at Commercial Banks“. Together they currently add up to around $16 trillion.
For a complete measure of total US debt it is still insufficient. The market for all bonds (public and private) comprises approximately $34 trillion (about $11 trillion of that is public federal debt). This, added to the previous $16 trillion, makes a total of $50 trillion.
Then there are unfunded social security and medicare obligations of about $43 trillion according to the Treasury’s own Financial Report for 2008:
The SOSI provides additional perspective on the Government’s long term estimated exposures and costs. However, it should be noted that the Government’s financial statements do not reflect future costs implied by any current policy, such as national defense, the global war on terrorism, and disaster relief and recovery. Table 3 shows the Government’s estimated present value of future social insurance expenditures, net of dedicated future revenues for the programs reported in the Statement of Social Insurance (SOSI), projected to be $43 trillion as of January 1, 2008 for the ‘Open Group’6. While these expenditures are currently not considered Government liabilities, they do have the potential to become liabilities in the future, based on the continuation of the social insurance programs’ provisions contained in current law.
A liability, or debt, is simply “the obligation of one person or group to provide future goods to another person or group.” Thus, for the discerning economist, it is rather irrelevant if the government “considers” or “officially calls” them liabilities. As far as their impact on human action is concerned, and thus all that economics cares about, they are debts. This brings the total US debt up to around $93 trillion (with total public debt at around $54 trillion).
It is reasonable to also include stocks in the overall credit picture. In fact, if we want to be consistent, and really measure the total amount of credit, meaning claims to future money at the expense of present money, we have to include them. This may appear unconventional as far as our common understanding of credit is concerned, but it doesn’t change the praxeological nature of stocks and thus their fluctuation’s effects on human action.
According to this post, total stock market capitalization is around 35 trillion, with about 30% of that being US equities:
This implies that total stock market capitalization is currently at around $10 trillion in the US, which pushes total credit in the US up to around $103 trillion.
Stocks have, on the net, remained about flat since October 08. But all other credit classes have dropped. I haven’t found detailed monthly figures for the total bonds and the unfunded liabilities. Thus we have to stick with the figures on bank credit and loans/leases from the St. Louis Fed in order to infer from that the overall credit trend:
Click on image to enlarge.
Since the peak in October 2008, total credit and loans/leases outstanding have fallen by $725 billion, a 4.3% drop. And this doesn’t even take into account the decline in outstanding bond prices and unfunded liabilities. It is, indeed, tough to ascertain whether there is a decline in the net present value of unfunded liabilities. Thus we shall ignore them for now. However, bond prices have definitely declined across the board.
On top of that, I don’t think that people are oblivious to the fact that there is absolutely no way that all social security and medicare benefits will ever be paid. Thus it would only be reasonable to conservatively assume that the present value of those liabilities has dropped by the same amount. This would almost double the total contraction to around $4 trillion.
It is rather questionable whether all this credit is marked to market. I would say that all this number gives us at the moment is at the low end of the range. Meanwhile, the true money supply since then has grown by merely $170 billion.
Why is this so important? Because it shows us the magnitude of the deflation that we are in right now, a deflation with all its consequences on home prices, consumer prices, interest rates, and stock prices. And it gives us a solid foundation to understand why various investors and maintream journalists who continue to expect, fear, or hope for inflation anytime soon are way off base and will be proven wrong in the long run.
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