Awesome chart from, David Leonhardt’s column today:



courtesy of NYT


Finding Good News in Falling Prices
NYT, December 16, 2008

Category: Federal Reserve, Inflation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

64 Responses to “Chart of the Day: Deflation”

  1. wally says:

    Since there is clearly no wage pricing power, I’d say this is true deflation, not price decreases. I also think the Fed is far too panicky about it – we need a certain amount to deflate the bubble. We should accept that and then move forward.

  2. MAL says:

    More misleading statistics from the government: underestimates inflation; overestimates deflation. I am not saying that there are not deflationary forces, but this “view” gives the Treasury and the Fed the “analytical justification” to issue debt and “create” money/new credit. The big question: will the Fed mop up excess liquidity fast enough or will we repeat this scenario yet again. Each time we go through a downturn, the Fed has to push rates lower and lower for their to be effective monetary policy because the US government and Fed are unwilling to allow the market reach an equilibrium clearing price, that would just be “too painful.”

  3. JohnnyVee says:

    The question is: Is the disease worse than the cure?

  4. karen says:

    SRS just made a new low on the year… how’s that for your evidence of deflation. : )
    and, yes, i’m being facetious!!!

  5. Pat G. says:

    The data points used to compile the 1930 CPI number and the weights each were given are far different from the way today’s CPI number is calculated. Besides, this is a BLS number and we know that they can’t help themselves from “spinning” numbers especially on the government’s behalf.

  6. Mannwich says:

    @karen: The only rationale for SRS trading down day after day is that the market expects a commercial real estate bailout at some point. Can the Feds literally bail out everyone and NOT have there be an negative unintended (or maybe it IS intended?) consequences? I mean, can they just print as much money as they want and everything will be just fine? How is that possible?

  7. ottovbvs says:

    Both Krugman and Mankiw are proposing the Fed engineers modest inflation to get out of it’s problems:

  8. dig1 says:

    did anybody see this,

    Listen, I don’t like Kudlow but boy, I busted out laughing when the guy slipped and said, “why would i buy them if they are going to go lower?” …. sorry if it’s a bit off-topic

  9. dig1 says:


    6:04 on the video

  10. DL says:

    Mannwich @ 1:14

    “…can they just print as much money as they want and everything will be just fine?”

    Bernanke’s term ends in January 2010. The real sh*t isn’t going to hit the fan until after that.

  11. Mannwich says:

    I hear you, DL. Believe me, I do, but I actually think the sh*t’s going to also hit the fan in ’09 as well. ’10 may be worse though. I’ll agree with you on that one. We are in fantasy land now.

  12. batmando says:

    As Jeff asks,
    “The only rationale for SRS trading down day after day is that the market expects a commercial real estate bailout at some point…. I mean, can they just print as much money as they want and everything will be just fine? ”

    What would the mechanism be for a RE buy-up?

  13. Mannwich says:

    Believe me when I say I’m not one of these paranoid conspiracy-theorist types, but I’m really starting to think that everything is now rigged and manipulated. At this point, why not think that? Am I insane for thinking this?

  14. Grindstone Financial says:

    Here comes the rally? Auto Bailout? Commercial Real Estate? Santa saves the day?

    Off topic – I’ve been in a number of retail outlets this week. Wow, I’m stunned at the spending. It’s hard to gauge how it measures up to past years, but my goodness to the naked eye it looks like a lot of people spending a lot of money ….. The US consumer likes to spend in December.

  15. DL says:

    batmando @ 1:41

    What would the mechanism be for a RE buy-up?

    Bernanke could simply buy up (or backstop) commercial real estate-backed loans from banks. (That may have happened to some extent already).

  16. karen says:

    Jeff, you mean you didn’t know:



    I was so pleased to see this is big, bold, black and white in Barry’s link today because it’s been what i’ve been saying for years and how i’ve survivied.

  17. Winston Munn says:

    In a risky environment, the reward for lending is a higher return; however, the Fed’s response is to force rates lower, killing the incentive to lend.

    The new banking business model: Borrow short and hoard long.

  18. Mannwich says:

    @karen: Thanks for the reminder. I respect your insights. I’m still going to hang in there. Once this rally ends, we will head much lower than before. Of course, you’ll probably still win the bet, but that’s OK.

  19. sinomania says:

    Anecdotal evidence from southern California: we’re not benefiting much from this ‘deflation’ – grocery items still rising and way up from where they were even 6 months ago, utilities all up, particularly natural gas and water. Sure gas is down to unheard of levels ($1.69 a gallon!! in my li’l town). Did a little shopping and found prices still high compared to start of year and only good prices at stores that are liquidating (Mervyn’s, etc.). Eating out prices way up too.

  20. karen says:

    Only in the USSA. Is this surreal? 1984? Are we really supposed to swallow this?

    WASHINGTON (Dow Jones)–Securities and Exchange Commission Chairman Christopher Cox said he is very troubled that the SEC never investigated the investment business of Bernard Madoff, even though solid evidence of an alleged vast fraud had been brought to the agency over a long period.

    Speaking to reporters Wednesday, Cox said that what concerns him the most is “the fact that over the period of several years, nearly a decade, credible information was brought to the agency but at no point was it referred to the commission for a proper investigation.”

    Cox, who has called for a probe of the matter by the agency’s Inspector General, said that the investigation will bring to light whether the failing was because of systemic problems at the agency, or a one-off lapse in the agency’s oversight role.

    He stressed that there was “no reason to believe” information about the alleged multibillion dollar fraud was suppressed by any SEC staff. He stressed that the SEC’s staff was “extraordinarily professional,” saying, “I’m enormously proud of them.

    -Jessica Holzer, Dow Jones Newswires; 202-862-9228;

  21. Mannwich says:

    @karen: Confidence ain’t coming back to our system any time soon. The so-called Capitalists are destroying Capitalism. Sickening on so many levels.

    And to answer your question: yes, we ARE supposed to swallow it.

  22. E says:

    SRS and all of the other double ETFs are engineered to go down over the long term, no matter the underlying index move.

    For examples, check out how both DIG and DUG are down big this year:

    Or how about SKF and UYG both being down:

    Heads you lose, tails you lose

  23. wunsacon says:

    Mannwich, when did this “manipulation” start? Focusing on just the last 6 years, the manipulation was at its greatest when brokers were creating phony mortgage applications and bankers were taking out CDS’s from capital-challenged-yet-’AAA’-rated CDS underwriters in order to book 30 years of profits in one year. That was the manipulation that not enough people noticed until late 2007 and then finally this September. But, it took 3-5 years for various corporations to be punished. (Alas, the insiders are gone with the loot. And there just haven’t been enough lawsuits by the SEC and even by private bagholders.)

    *Today’s* manipulation of “free money” is transparent by comparison.

    I lost a nontrivial sum shorting within the past 2 weeks but have since embraced the bull. At least until 950 or the next Steve-Barry-enriching plunge (at which point my weak hands will shake and my weak stomache will kvetch)…

    4-5 weeks ago, someone here suggested HQS and FEED, I think. Thank you, whoever you are. They made up for the pummeling I received at the hands of shorting QLD. (I have GOT to read some *#&%% technical books. I f***** suck.)

  24. wunsacon says:

    @ Karen

    >> Only in the USSA. Is this surreal?

    Been away so long?? You hardly knew the place??

  25. karen says:

    srs, it must be a forced liquidation… something…. it’s so radical i may put an order in just to see if i can get a fill.

  26. Mannwich says:

    @wunsacon: I hear you (and karen). I’ve always realized there were elements that have been rigged but my main point is I now think that EVERYTHING, meaning the whole kit and kabootle (sp?) might now be rigged. That, to me, is a scary thought and I’m quite sure I’m not the only one who’s had that passing thought once, twice, or maybe thrice over the past few months.

  27. karen says:

    srs, now i’m thinking it must be related to options expiration…

  28. Mr. Obvious says:


    My wife told her mother to go easy this year on the kids’ gifts. She saw what she bought and said “I told you not to spend that much money.” Her mother told her that she spent the same as last year, but got twice as much.

    I noticed the same thing with my purchases…my dollar went, literally, twice as far this year. I had not noticed until I was wrapping gifts and realized how many boxes there were to wrap (an example: I bought some stuff online at Victoria’s Secret. Everything I bought was already at least 30% off. On top of that, I got two items thrown in for free. On top of that, I had an online coupon for another 20% off. On top of that, free shipping.).

    COSTCO’s earnings report confirms this, really. In NOV their flat screen TV sales were up 50%, but earnings from those sales were only up 3%.

    Consumers are buying, but I don’t think that the sales volume will be similarly represented in the earnings.

  29. danm says:

    For the last little while you’ve been showing these numbers but have not been commenting… What’s up with that?

  30. Mannwich says:

    @Mr. Obvious: The American consumer buys to “medicate” oneself. Our culture is sick. It’s no different than any other addiction, except maybe this one costs more in the end (credit card interest and fees)……

  31. wunsacon says:

    Scary thoughts, indeed. I’m scared out of my wits but also kinda enthusiastic every morning. Just like Barry expressed, I ask “WTF is going to happen today?” September feels like sooo long ago.

    Whenever things stabilize finally (’09? ’10?), I’ll have to turn to basejumping, I guess, to get a thrill.

  32. Steve Barry says:

    That’s because we are in a depression.

  33. Steve Barry says:

    Anyone know what % of US equities are owned by foreigners? If I were them, I’d be selling the way the dollar is tanking.

  34. Steve Barry says:

    I imagine the ECB will have to follow the fed shortly…a race to “smoldering crater”

  35. Todd says:

    Just don’t forget to take you Zoloft,Prozac, Paxil or [insert drug of choice] every morning and you’ll do just fine.

    This rally came in earlier and faster than I thought. I need to modify some of my expectations on the time scale side. Expectations are getting priced in faster than the results will be in way faster.

    It’s definitely a Manic Market.

  36. Steve Barry says:

    In 4 days, if the rally continues, the 21 day MA on put call will be near 2 1/2 year lows

  37. Winston Munn says:

    “That’s because we are in a depression”

    A short and shallow, V-shaped depression if I understand CNBC correctly.

  38. Steve Barry says:

    Winston..I see an I-shaped Depression…unfortunately, the bottom is near absolute zero.

  39. Itiswhatitis says:

    Basically creating a big treasury bubble isn’t the way to go. Once it blows during the next credit inflation phase, hard objects will surge and “price inflation” will surge as they do. Though the actual money supply will hardly move as the expansion barely registers.

    Stupid idiots.

  40. karen says:

    Sorry to be a broken record, but the news wires keep repeating this!!! I didn’t believe it the first time, and I won’t believe it ever!

    UPDATE 1-No proof of SEC staff wrongdoing in Madoff case-CoxFont size: A | A | A
    3:09 PM ET 12/17/08 | Reuters
    WASHINGTON, Dec 17 (Reuters) – The chairman of the U.S. Securities and Exchange Commission said on Wednesday there was no evidence SEC staff did anything wrong as the agency seeks to figure out why it missed warnings that Bernard Madoff’s investment firm was allegedly a massive fraud.

    Amid accusations it failed to act on crucial tips that may have uncovered the alleged fraud earlier, Chairman Christopher Cox asked the SEC’s internal watchdog to investigate the agency’s conduct.

    But Cox made it clear on Wednesday that there was no proof SEC staff acted improperly.

  41. Mannwich says:

    @karen: How exactly does he know this ALREADY? Amazing. Do people really believe this?

  42. babycondor says:

    Does anyone else see a strong resemblance between Bernie Madoff and Junior Soprano (season II, “House Arrest”)?

  43. Bruce N Tennessee says:


    You and I agree on the theme song by Dire Straits…the Money for Nothing and Chicks for Free…

    I found out AIG now has a new theme song;

    Please marry me Ben
    I got the wedding bell blues….

    These guys can’t live without Ben, just can’t live without him…

    AIG Writedowns May Rise $30 Billion on Swaps Not in U.S. Rescue

    They are like the guest when you have a party that just won’t go home….

  44. 10 cc says:

    Anybody else get something like this from their CC company (in this case, a bank)…

    “The Prime Rate used for calculating the Standard APR for Purchases will be no less than 6% regardless of changes to the Prime Rate. This will result in an increase to your APR for Purchases.”
    (italics mine)

    Yeah, that ZIRP is really going to be a boost for the consumer as banks pass on those lower rates for credit.

  45. Mannwich says:

    @10 cc: Welfare for Wall Street and a sh!t sandwich for the rest of us.

  46. Pat G. says:

    karen @ 2.02

    Interesting link! I liked it.

  47. Winston..I see an I-shaped Depression…unfortunately, the bottom is near absolute zero.

    I’m long on liquid helium.

  48. DL says:

    Steve Barry @ 3:01

    A bit of a dichotomy between index options buyers and equity options buyers.

    The index option buyers are positively euphoric (although the other guys are not all that far behind).

  49. leftback says:

    Shit day for me, can’t win em all… still long VLO/COP/GDX etc..
    On a positive note one of my uranium miners is up big today.

  50. Steve Barry says:

    Great day for shorts…market drops as does put/call 10 and 21 day MA.

  51. Mannwich says:

    Once we hit the next big leg up, this sucker’s going to sell off big-time. There’s no real confidence in this market. The house of cards is going to come down in honor of Mr. Madoff.

  52. Steve Barry says:

    and VIX fell too…oh great day

  53. CPJ13 says:

    Anyone here have any insight on SRS? karen?? I have 25 Jan contracts worth zero from trying to average down. I’ve already written ‘em off mentally but seriously, what gives?? I’m really scratching my head here.

  54. CPJ13 says:

    … on almost 2.5x volume…

  55. leftback says:

    @CPJ13: Don’t trade against the primary trend. Which right now is up.
    I tried it as well yesterday, with the financials, and got stopped out for a loss.

    REITs are benefitting from lower interest rates and the idea of “inflating away” debt (ha!!).
    There will be another great re-entry point for SRS but right now it’s a falling knife.

    I think you can be pretty sure that this bear market is not over, however.
    The VIX is about to find support at 50, so it may not be too long before we see more volatility.

  56. leftback says:

    Bernie Madoff has a new ankle bracelet, and a curfew… tough justice…

  57. karen says:

    cpj13… it’s the freakiest thing i’ve seen this year… and we’ve seen a lot! i keep thinking a liquidation, or options expiration shenanigans… what we do know is reits will die in 2009… city after city is awash in vacant commercial space with more to coming down the pipe… since when did fundamentals mean anything in the stock market? i guess that’s our answer for now.

  58. constantnormal says:

    @ Wally — “Since there is clearly no wage pricing power, I’d say this is true deflation, not price decreases. I also think the Fed is far too panicky about it – we need a certain amount to deflate the bubble. We should accept that and then move forward.”

    I believe that the reason the Fed is panicky is that they don’t think they will be able to reverse it.

    Whereas controlling inflation is merely a matter of 1) stop printing money and 2) crank up rates to punish those with inflationary expectations; there is no strategy that I know of to encourage people who are too scared and shell-shocked to take risks and spend more than they absolutely have to.

    That is the danger in deflation — it is a feedback loop without a way to short-circuit it. One must endure and somehow support the masses of sheeple, so that they will eventually, over time, come to lose their fear and become (a little) adventuresome with their money again. That can take a pretty long time, and more resources than any nation possesses.

    In the Great Depression, there was the decade of debt write-downs and pay-downs, in an environment of crushing unemployment and gloom, despite numerous public jobs programs to defeat the unemployment (which did do that job, but did not restore confidence). Then there was WWII, where people earned a strong measure of confidence after defeating a military power that had pretty much whomped the rest of the planet.

    Nobody knows which of these things, or indeed, if all of these things together allowed the Great Depression to finally end, with people focussing on other concerns than the dismal economy. Depressions can (and have) gone on a lot longer than a decade. I read somewhere that the collapse of the South Sea bubble around 1720 put England into a depression that lasted about 65 years.

    Widespread confidence is a lot harder to create than the emotional climate needed to stop inflation. So central bankers everywhere always err on the side of inflation, rather than deflation. Because once deflation sets in, nobody knows for sure how to turn it around.

    So be afraid. Be VERY afraid, and hope like hell that Bernanke can print enough money, and hand it to the people instead of the bankers, so that we can have inflation. Don’t ever wish for even a little taste of deflation, ’cause a little taste can wind up drowning you in it.

  59. constantnormal says:

    @ leftback — If I were Bernie Madoff, I wouldn’t be going out much, as I suspect that there are folks out there that he owes a few hundred million to that have the resources to track his ankle bracelet. People that don’t have our good-natured acceptance of being defrauded of that kind of money.

    If I had to go anywhere, I would have somebody else drive my car away, and assuming it did not explode upon starting, steal a random temporary vehicle (the additional criminal charges are trivial to what he already faces), and come back to transport me to wherever I wanted (and was allowed) to go.

  60. CPJ13 says:

    I’m just amazed. SPX down 1% today, SRS down 11% just before the close. Usually they’re relatively inverse; SRS doesn’t out-gain the SPX in the same direction. Like you said, this is purely price action not fundamentals.

    I bought my positions from 125 all the way down to 85, looking back over the past year and figuring a combination of technical levels and fundamentals would send it back up. Like a rookie, I’m now “all in and praying”. Can’t fight the Fed. Or whatever other market forces other than reality are at work here.

    Boston is FULL of empty buildings. Space for rent. Vacant. Space for lease. It’s very unsettling to see so much space available in previously prime locations… These are all non recourse loans that were underwritten on forward looking, proforma-based 1.10-1.25 DSCR’s and they’re going to default. Those bondholders are going to get slaughtered. Are people expecting a bailout of the CMBS market too?

    How many mistakes are you supposed to make on the way to success? 1,000? 1,000,000? This market’s getting me there in a hurry… my mistake quota, not the success.

  61. Then there was WWII, where people earned a strong measure of confidence after defeating a military power that had pretty much whomped the rest of the planet.

    Not just confidence, but opportunity: the rest of the industrialized world had been bombed flat or was in major hock with war debt. The US was sitting pretty behind its liquid ramparts, and more than ready to take advantage of the situation. Not to mention that 2/5 of the world’s population (China, India) basically decided to sit out global competition until the 1990s.

    We’re starting to look an awful lot like Britain in 1948-9.. And China’s looking an awful lot like the promising, energetic bastard child of America and Singapore…

  62. scorpio says:

    i almost felt bad that i was left out of the whole Bernie Madoff mess. but then i remembered that i’m a US taxpayer and i’ve got Ben Bernanke as my financial advisor. he’s the people’s Bernie Madoff

  63. Anonymous says:

    Why is this chart so different from

    Check the data after WW2 and in 1980 etc.