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Posts Tagged ‘deflation’

“Ahhh! There’s a money flood in the world economy! We’re all gonna drown in a sea of hyperinflation!” That’s what a lot of people think. And not just cranks on the internet – although there’s plenty of them – some economists sign-up to this mentality too (I was speaking with one last night who was surprised I thought otherwise).

The assumption is that the QE programs – and their equivalents elsewhere in the world – have unleashed a torrent of money into the world economy. If this did happen, inflation would, of course, start climbing. But this isn’t happening and inflation isn’t rising – yes, some people will point to the rise in energy and food prices, as well as the increase in medical costs; but these are largely exogenous, that is, external**.

Energy and food prices – while speculators may be pushing them up some – are largely due to weather conditions beyond our control – while the rising medical costs (in the US) are almost certainly due to Charlatan Obama’s pathetic excuse for a health care bill (price inflation is what happens when you structure your plan around the needs of insurance companies…).

But by and large the core CPI in many countries is simply not rising – indeed, in my own it is falling rather worryingly. The reason is that access to credit is drying up. Far from QE and its ilk pumping too much money into the economy, there, in actual fact, isn’t enough. People can’t/don’t borrow because their credit-ratings are bad. In simple terms: let’s say that you’re on the dole or facing unemployment; are you likely to go and take out a big loan for a TV or a car? And even if you want to, is the bank likely to give it to you? Probably not. And as unemployment rises and incomes fall, an increasing amount of the population lose their creditworthiness.

This is very irritating for the banks. You see, banks love lending – as can be clearly seen if we remember the recent boom/bust – because they earn loads of money from interest payments. If there are few lenders, the banks profits go down – making the directors very unhappy.

The real solution to all this, of course, is to try to make people more creditworthy by providing employment through government spending – but that doesn’t look like its on the cards at the moment.

Instead, some very shadowy ‘automatic’ economic levers are coming into play – if the banks can’t get satisfactory profits from loans because these are drying up, they have to figure out some other dodgy way to increase their revenues.

And sure enough it looks like banks are figuring out new ways to bend the rules and suck profits out of people that have already burdened themselves with too much debt.

Yes, the bankers are a shady bunch, who rarely think in the long-term. They sit around, hungry for short-term gains, not thinking about anything but. Bryce Covert writes:

It’s no surprise that banks want back in the high-risk business. Despite the cushy goodies they give away to wealthy customers, the heart of their profits is made off of those who are drowning in debt and unable to pay it back. Consumer advocate Elizabeth Warren made this clear in an anecdote she recounted in the 2006 movie Maxed Out. She describes going into a room of banking executives with statistics that prove that if they screened out customers least likely to pay they could cut bankruptcy losses in half. “Then a fellow in the back said ‘Professor Warren,’ and everyone got quiet,” she says. “‘But it would cut those people off, and that’s where we make all of our profits.’”

And so this thirst for profits has led the bankers to jack up the interest-rates on credit cards that were issued before the recent financial reforms came in – this week they’re at 14.73% and, depending on your credit, could go as high as 59.9%!

The Obama administration tried to counteract this with its financial and consumer protection reforms. But, at the time, many pointed out that these were inadequate and that profit hungry banks would find ways to bend them. And that is precisely what happened.

These reforms – even if they were more adequate than they proved to be – were only a plaster on a much bigger wound. Banks need to extend credit to people to turn a sufficient profit – if they don’t, they’ll engage in dodgy activity. People too need access to credit -  for a variety of reasons; some consumer, some entrepreneurial. So, until the population becomes more creditworthy by increasing their income and employment prospects, any other reforms will slide like water off a ducks back. And this isn’t just a lesson to be learnt in the US…

** A quick retraction (let’s see how smoothly I can get away with this without losing readers…). For some time now I’ve been insisting that the energy and food rises were not exogenous (i.e. external to the economy at large) and were, in fact, inflationary. I’ve been writing that these were largely due to speculators awash with QE funds gambling on these goods to turn a profit.

I’m not the only one saying this – and its certainly in keeping with a certain type of economic theorising. In the past few days I’ve changed my mind on this. This wasn’t a whim – in fact, I’ve changed my entire understanding of how the monetary system works; my previous understanding was a muddled, semi-Friedmanite understanding of the system – and I’ve now switched to the ‘Chartalist Theory‘ or ‘Modern Monetary Theory‘ (MMT), which is far less hazy and far more satisfactory.

Frankly, I – like so many contemporary economists – didn’t understand how the modern money system works. I assumed, like so many others, that QE and its sister programs were simply undertakings to print money. This is far from the case – I understand this now and my subsequent analyses will reflect this new enlightentment.

In my defence, this was not an easy transition – indeed, I’ve spent many hours weighing up the merits and demerits of the two theories (not to mention interrogating one of the key modern architects of MMT via email – who, being a major economist, probably had far better things to be doing). I don’t change my mind often – but when I do, I change it utterly. I only hope that such flexibility and self-criticism can be appreciated by readers and is not thought of as flakiness.

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Weathermen: a disreputable shower of jokers

I’ve written about biflation on here before. To quickly rehash: biflation occurs when prices are falling in one sector of the economy (deflation), while rising in another (inflation). Presently, there seems to be inflation taking place in the realm of food and energy prices – while deflation seems to be taking place in markets for general consumer goods and housing; two sectors that are extremely important for employment.

Today The Guardian reports that these price rises are reaching chronic levels – and that the short-term consequences are likely to be more food riots in the so-called developing world. The Guardian – presumably in order to save face and claim that they too adhere to the absurd notion of ‘balance’ that newspapers today invoke to justify their never being clear on certain issues – is a little soft on the speculators; allowing their closing quote to be perfectly formulated to divert attention away from speculation and toward adverse weather conditions:

Julian Jessop, chief international economist at Capital Economics, said: “The upward pressure on inflation this year from the recent surge in the cost of agricultural commodities will be much greater than that from the pick-up in oil prices”.

Jessop said the price of oil was rising largely as result of demand caused by a rebound in global industrial activity. “In contrast, the surge in agricultural food prices is largely a consequence of supply shocks, such as droughts in major wheat producing countries. These have been compounded by speculative pressures.”

What we’re seeing here is a classic ‘chicken and egg’ situation. Are the droughts and the like – which are undoubtedly real – causing speculators to weigh in on the market as Jessop seems to suggest; in short, is this a case of extreme weather causing price inflation which is then jumped on by speculators? Or are these droughts simply an excuse used by speculators to inflate the market – and bleed money out of everyone, from Granny May doing her grocery shopping to the malnourished of the Third World? If not food, would the speculators – awash with cheap money – be keeping their eyes open for all sorts of catastrophes; everything from war among the oil-producers to mining accidents in Latin America?

I’d be inclined toward the latter view. Credit is cheap these days – and the previous financial scam, namely the housing market, is as dead as a doornail. I think that speculators are sitting on the bench just waiting for prices in commodities to rise slightly, so that they can then pile into the market and cause a bubble to inflate.

Shills and hacks will do almost anything to distract the masses from their financial masters. Consider the argument – put forward by said shills last time commodity prices skyrocketed – that the price inflation was due to environmentalists using grain to produce clean ethanol fuel for cars. This, of course, was nonsense – while I have no love for this sort of ‘market environmentalism’, the fact is that it was speculators that were causing the crisis.

Bart Chilton, head of The Commodities Futures Trading Committee – the regulatory body in charge of preventing fraud and other forms of tomfoolery in commodities markets – pointed his finger straight at the speculators.

In his prepared testimony, Chilton noted that the skyrocketing costs of groceries in 2007 and 2008 were driven by a speculative bubble on the commodities market.

“Studies at Oxford, Princeton, Rice and MIT all suggested an influence on price by speculators,” Chilton said in his testimony.

So when finance shills start pointing to human tragedies to try and take the heat off speculators, I get suspicious. Certainly there are underlying pressures pushing up food and commodity prices – not just natural disasters, but also the fall in the price of the dollar – but it still seems that the main culprits are speculators awash with cheap and easily obtained money.

The US and the EU are now coming to recognise this – and have announced that they will be taking a look at the size of commodity markets in order to stamp on any rising bubbles. But should they be believed? Both authorities have showed themselves – steeped as they still are in the neo-liberal creed – remarkably reluctant to stop destructive speculative and financial activity.

But just like in the case of Wall Street, the politicos seem far behind public discourse on the matter. Harpers, for example, ran a powerful piece on how speculators are making money off famine and starvation. With the global mood toward speculators being what it is, this sort of talk is more than likely to increase. The international press needs to stop the ‘pseudo-balancing act’ they try in their reporting certain stories and get real. If a crime is being committed, the public has a right to hear about it in fairly black and white terms – and this is especially true if that crime is being committed against the public at large.

UPDATE: Algerians riot over the price of food (again) – damn you weatherman; have you no soul!?!

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Broke home owners burn Christmas trees for fuel as energy prices rise amidst recession

A while back I did an article where I alluded to the potential dangers of biflationbiflation, to explain once more, deflation (falling prices) in one sector of the economy and inflation (rising prices) in another sector. I also considered how likely this was to occur in the US and Ireland.

Well, the US inflation index is in – so we can continue to track it into last month. Okay, first let’s consider the sectors we should be examining. Have a look at this graph – which is from ZeroHedge and runs up to March 2010:

So, as we can see, the key sectors that we should be looking for inflation are transportation, medical care, new vehicles and, most importantly, as this is what is probably the most significant contributor to the others: energy.

Let’s go through the informations we have.

Transportation? Yep, that’s rising – it’s up 0.3% in November… that may seem small, but if you take that as an annualised rate since August we get a rather large 8.4%.

New vehicles? Well, these actually fell by 0.4% last month – and if we take that at an annualised rate since August its fallen 1.7%.

Medical costs?  Thanks to the Obama administration’s crappy healthcare ‘plan’ – or, should I say ‘insurance company monopoly pay-off’? – they crept up by 0.1% in November.

Energy prices – the most important of all these commodities (due to their massive contribution to inflation) – rose by 0.2% last month. Contributing to a massive 14.8% increase when taken at an annualised rate over the past three months. Compare that to 7.6% annualised increase in the three months after August and you’ll see the percentage increase almost double.

Okay, so this is all very dry – what does it mean? Well, in another article I did a while back, I pointed out that speculators have moved from the housing sector and have started pushing up the prices of key commodities. What we see in these figures is evidence that energy prices are climbing even higher even faster. The fact that they’ve doubled their percentage increase in the past three months is very significant. Of course, this probably reflects the cold weather, but I wouldn’t discount the fact that speculators have their filthy hands in this proverbial cookie jar too.

At the same time, general or ‘core’ inflation continues to rise very slowly – even falling-off completely in some sectors.

It seems to me that biflation is still on the cards – and its being caused, in part at least, by the very same criminals that gave us the housing crash and the financial disaster (see above article for details on how this has taken place). This Christmas the Yanks will be spending more – and not just on presents!

This could have major consequences for the world economy. The US economy – as everyone knows – is the world’s main consumption base. As I pointed out in this article, biflation could seriously damage this dynamic. I’m tired of typing – not to mention semi-incoherent from painkillers I got the other day from the doc – so forgive me for quoting myself on the reasons for this:

[Biflation would be] a serious problem because general deflation will savage businesses – especially small businesses – and cause major unemployment. At the same time the unemployed, the underemployed and those being paid less wages, will find it increasingly difficult to pay for the essentials – food and fuel. This would be nothing short of a nightmare scenario.

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"Why would I bother investing money in jobs when I can just rob food from working people?"

Pursue the Truth and she will come to you. Recently, I’ve been doing some articles that – I’ll be frank – I wasn’t sure how they all tied together. But enlightenment comes to the those who wait – and through a recent email correspondence with Marshall Auerback – a commentator I’ve praised on here often before and who I’d like to thank for taking the time and having the patience to respond to my queries – I’m slowly beginning to see the light.

Some time ago I did an article on the possibility that the US Federal Reserve’s Quantitative Easing policies might lead to a stock market bubble. Just to remind everyone, Quantitative Easing – or ‘QE’ – is the policy of, well, printing more money in order to try to get the economy working. In my previous article I argued that, since the real economy was in the doldrums, much of this money would probably go to fuel speculative bubbles – stock market bubbles, that sort of thing – which would, in turn, lead to more financial crises.

Now, the other day I did an article on deflation in the US. There I tried to show how what was occurring was not the simple deflation – that is, the reduction of prices – that we would expect in an economic environment where penniless consumers are buying less. Instead, we were seeing what has come to be called ‘biflation’ – that is: a rise in the prices of essentials, like fuel and food and a simultaneous decline in the prices of housing, cars and luxury items. Biflation, in essence, is when inflation and deflation take place at the same time – but in different economic sectors.

At first, I didn’t see the connection between biflation and the speculation encouraged by the Fed’s QE project – but now my eyes have been opened. Auerback argues that the speculation that is being fueled by QE is taking place in… you guessed it: commodities markets!

In the past, Wall Street didn’t involve itself in the commodities market – but after the passing of the Commodities Futures Modernization Act of 2000 under Clinton and his dodgy economic advisers (many who, like Robert Rubin and Larry Summers still hold power and wield influence in Obama’s Washington) the commodities game was opened up to investors.

Remember the spike in oil prices a few years back – around 2008 or so? Yeah, that was because Wall Street, as the housing bubble burst in front of their eyes, began to move into the commodities game. And – as is so often the case – you ended up paying at the pump!

Auerback argues that the same thing is occuring today. Now that speculators have access to plenty of freshly minted cash – thanks to the Fed’s QE project – they have an almost unlimited ability to push up commodity prices. Mike Masters, in an email exchange with Auerback, puts it as such:

Because there is already much more capital available in the world than hard commodities, and also because money can effectively be created in a nearly infinite way; speculators, without limits, and with determination, can increase the price of consumable commodities, like food stuffs or energy.

Wrap a bow around it then – we’re done. The increase in commodities prices we are seeing are due to the same greedy bastard speculators who caused the last meltdown. Indeed, in my last article I quoted from Zerohedge, who were saying the same thing – I don’t know how I missed it:

The price increase of commodities is caused by the increased money flow (via loose monetary policy) chasing them. On the other hand, the growth of economy is tempered with high unemployment and decreasing purchasing power. This has resulted in a greater amount of money directed toward essential items (inflation) and away from non-essential items and things required credit to buy such as house and cars (deflation). [My emphasis]

See that “increased money flow (via loose monetary policy)”? That’s QE – “loose monetary policy” is QE.

As I pointed out in the article on biflation this is disastrous. This means that while deflation in non-essentials, cars and housing will savage these industries, leading to protracted and sustained unemployment, inflation in the essentials will make it all the more expensive to buy those things that we need day-to-day – put simply: as more people hit the dole (and as governments reduce said dole), it will become more difficult for the recipients to afford essential items like fuel and food.

In that article, I wrote that I was unsure what to do about this. I wrote that my gut instinct was that we should pursue expansionary government policies that promote employment (Keynesian policies). I can now confirm that my gut instinct was right.

In order to understand why Keynesian policies – also known as fiscal policies – are the way to go, we must first understand the distinction between monetary and fiscal policy.

QE is monetary policy. The idea is that central banks print money, investors catch hold of the new money and begin pumping it into factories and other such ventures that employ people. This, in turn, gets the employment-rate back up and the economy recovers. As we have seen, this is not what happens at all. Instead what we get is more speculation, more bubbles and biflation.

Now, fiscal policy is altogether different. The idea here is that governments spend more money themselves. They cut out the middleman – in this case, the would be investor who is, instead, gambling on the stock market and, ultimately, nicking your grub – and invest in jobs directly. The key here, beyond everything else, is to get people back to work.

There are immeasurable obstacles to this. Business hates the idea, because they see the productive sector as their ‘turf’ – which I’ve discussed here. In Ireland too – as I never tire of pointing out – we would rely on the European Central Bank if we were to undertake such a project – and they’re being irrational assholes at the moment.

There’s a million and one other obstacles, but let’s keep this simple: the world needs a new Keynesianism – and if we don’t get it, the consequences will be dire. This needs more public attention. The media needs to stop focusing on government deficits and balanced budgets and get real. If they don’t we’re all dead!

UPDATE: Although it doesn’t significantly alter the substance of this article, I feel that I should point out that food prices in Ireland have actually fallen slightly. That article states that this is due to falling costs – and I think there’s every reason to believe that this has to do with our subsidised agricultural sector being relatively insulated from external markets. The article, however, does seem to point to broadly biflationary pressures in the overall economy, with mortgage repayments and fuel prices (both essentials) remaining high. We can grow potatoes, but not oil, I guess…

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I’ve been saying for a while now that Ireland was on the brink of a debt deflation crisis – similar in many respects to the one faced by the US during the Great Depression. That’s an overhang of debt, coupled with major internal deflation. The results? Ugly.

Well, it would seem that while the US may not be in the same situation as us, they too are facing possible deflation.

For a long time it was wondered whether the ‘disinflation’ – that is, a fall in inflation without the chronic spiraling of prices characteristic of deflation (disinflation is often seen as the forerunner to deflation) – in the US was only in the housing sector; but not so, it would seem.

What does this mean? Well, it seems to indicate that consumers in the US are buying less – no huge surprise there. The danger, of course, is that this fall in demand becomes a deflationary spiral – which is what happened in the Great Depression. This would savage demand in the States – and, the States being the world’s largest consumers, this would have major consequences for the world economy (I’ll remind readers that the US absorb around 20% of Irish exports).

What’s even worse is that this crisis could manifest itself as ‘biflation‘. Biflation occurs when there is inflation in one part of the economy and deflation in another. So, for example, food or fuel prices might be going up, while the prices of general products might be deflating.

Quoting from ZeroHedge, here’s how it works:

The price increase of commodities is caused by the increased money flow (via loose monetary policy) chasing them. On the other hand, the growth of economy is tempered with high unemployment and decreasing purchasing power. This has resulted in a greater amount of money directed toward essential items (inflation) and away from non-essential items and things required credit to buy such as house and cars (deflation).

Is Biflation occuring?

This is a serious problem because general deflation will savage businesses – especially small businesses – and cause major unemployment. At the same time the unemployed, the underemployed and those being paid less wages, will find it increasingly difficult to pay for the essentials – food and fuel. This would be nothing short of a nightmare scenario.

Biflation is a rather new concept that deals with what appears to be a new problem, the term itself was coined by the economist  F. Osborne Brown in 2003 – and that makes it all the scarier because, like stagflation in the 1970s, if it does occur we won’t know how to deal with it…

Let’s just hope the US get their house in order.

Now a question: could it happen in Ireland?

I think it certainly could. The issue here is that commodity-based assets inflate – so, the prices of food, energy and the essentials go up – as people continue to purchase them; at the same time debt-based assets deflate – and in there we can place just about everything that used to bought on credit (so, the prices of most consumer products and also homes etc plummet) – as people no longer have access to the credit to buy them.

The solution? I’m really not sure. Leave that with me. My gut instinct would be an immediate rise in living-standards and employment – but would the policies required to pursue those goals increase inflation? I’m not sure…

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An artists interpretation of an inflationistas darkest nightmare

There’s something about wheelbarrows of money that gets people spooked. What’s weird is that it gets people spooked even when there is quite literally no chance of it happening.

The great psychologist Sigmund Freud once distinguished between what he called ‘realistic anxiety’ and ‘neurotic anxiety’. The former, he contended, was tied to the ‘fight or flight’ response and was generated when the human organism was encountered with something that might pose a threat. The latter, on the other hand, seemed to arise spontaneously – indeed, there didn’t seem to be any external threat… and even in the cases that there was an external threat, the threat would be greatly exaggerated and a phobia would result.

Freud claimed that ‘realistic anxiety’ was a perfectly rational evolutionary mechanism – but he said that ‘neurotic anxiety’ was a different kettle of fish altogether. He said that ‘neurotic anxiety’ was completely unrealistic and arose out of a persons innermost fantasies and dreams – it was a means of organising their rather neurotically disorganised world. Because these people were not able to organise their lives properly, their minds would resort to elaborate ‘defence mechanisms’ that led to the generation of neurotic anxiety.

Something similar can be said of the inflationistas today. I’m not saying that they are mentally ill – but that their theories are cognitively dissonant to today’s world… and the result is that a sort of neurotic anxiety is generated regarding inflation. This neurotic anxiety has come to a head since the Fed (usually an ominous and untrustworthy institution among inflationistas) announced it’s latest Quantitative Easing policy. The inflationistas claim that, by printing more money, the Fed is going to cause inflation.

This is exactly what the inflationistas were claiming after the US announced its stimulus package back in ’08. And yet, inflation has yet to become a problem for the US economy.

 

But still, the facts seem to elude these people. Why?

Well, I did an article some time ago on the gold standard which drew some flak from certain ideological corners. There I argued that those who propagate the idea that we need a return to the gold standard are not merely wrong, but even slightly delusional. I contended that they were motivated by emotions rather than reason when they made this argument. I noted that they used it, time and again, as a strawman – or rather a stuffed-bear – that they could cuddle up to if they were ever confronted with economic reality.

Believe it or not, many of those harping on about inflation today are the very same as those that harped on about the gold standard yesterday – and about the evils of the Fed the day before that. Starting to see a pattern?

Yup, theirs is not a set of economic theories – much less a series of economic observations… theirs is an ideology in the strong sense of the term. And while gold represents all that is glittering, solid and true for these people – inflation manifests one of their worst fears.

Why? Well, I think it has to do with the idea of having your currency ‘debauched’ (what would old Siggy have to say about this interesting use of language, I wonder?). Simply examine the language that surrounds the ‘debates’ surrounding inflation and monetary policy: ‘hard currency’, ‘weak currency’, ‘valuelessness’ etc. I think that this all touches on some rather crude insecurities. Any virile citizen would surely want a ‘hard currency’, one that didn’t bend to the will of the market and, ultimately, flop like one of Dali’s clocks.

There’s an issue of strength here – one that cuts right to the heart of the inflation ‘debate’. Ultimately, this debate tends to degenerate into a shouting match that resembles a hawkish Republican accusing a Democrat of weakness in the face of Communism or Terrorism. The hapless Democrat tries to explain that the real world is more complicated than all this – but the Republican simply cannot fathom this… for him this Pinko is simply weak. And weakness is nothing if not a crime…

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