The Inflation/Deflation debate seems to be constantly coming up — from clients, institutional accounts, and the media. Let’s look at a few points on this:

Deflation is a fact. It is happening now, it is real, and we see it in the actual data.

Inflation does not exist presently. It is, at best, an opinion. It might happen in the future, or it might not — but it does not exist, at least on a measurable form, presently.

What about deficits? Debt? Overspending? QE/ZIRP/Low rates?

Well, Japan cut rates, wildly overspent, borrowed like loons — and they had a decade plus of deflation, not inflation. We may not be Japan, but they are the 2nd largest economy in the world, and represent an actual economy that behaved, well, the way the US is.

Until the slack in the labor market is reduced — near record low weekly hours, 16% U6 unemployment, etc. — inflation simply is not a threat.

The 10 year Treasury Bond is at record low yields, so bond buyers are looking for more economic softness, not inflation.

The first heads up  about inflation you will see will be when the Bid to Cover ratio of the Treasury Bonds — how many buyers are there relative to bonds for sale at US auction — right now, its oversubscribed 3X. Once buyers start insisting on greater yield, the Treasury department will have to start raising the bond rates they offer — we will know that Bonds are a short, due to impending inflation.

That will be your early inflation warning.

But now? Its nowhere in sight . . . .

Category: Fixed Income/Interest Rates, 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.

74 Responses to “Inflation versus Deflation”

  1. dead hobo says:

    You forget asset inflation due to liquidity in the financial markets. Are commodities really worth today’s prices or would they drop considerably if commodity markets ratcheted down a lot of the financial innovation of recent years, causing a lot of the cash commodities are floating in to go somewhere else? Likewise, how much of today’s stock price is based on corporate performance and how much is just leftover sugar high from the Fed’s last injection of $1.5t directly into financial markets?

  2. rktbrkr says:

    When inflation comes back it will be back with a vengeance

    BR, I have Kohler, GE and Verizon ads rolling all over your site with a vengeance, GE looks like an infomercial

  3. wally says:

    “Until the slack in the labor market is reduced..”

    If those jobs were exported rather than being lost to the recession, the expectations change. The slack may now be permanent, or at least persistent. However, there could be shortages in specialized areas. Workers may not be as interchangeable as they may have been decades ago.

  4. I used to think all this monetary madness would yield inflation. But it hasn’t and it doesn’t appear that it will–anytime soon anyways. Velocity seems to be declining faster than money supply can increase.

    The problem is directly tied to expansive monetary policies throughout the aughts and even before. When the Fed tried to prevent price declines (mostly after 9/11) that structurally should have been happening because of efficiencies in production and lower cost international labor, it effectively instigated the production of vastly more products and services than the economy actually demanded–from houses to cars to widgets from China. Until this oversupply is worked through, more money will not mean inflation. It will perhaps forestall some price declines that should be happening, but all the money in the world wouldn’t make the price of ice increase for an Eskimoe.

    Bill Gross was interviewed by Bloomberg yesterday and pinpointed the real source of deflation–demography–and observed that efforts to spur consumption are just a waste of money in the face of declining demand due to demographic forces. He wondered whether capitalism can survive without population growth. So do I. A summary of the interview can be found here:

    http://www.bloomberg.com/news/2010-07-28/gross-equates-spending-to-lift-consumption-with-flushing-money-down-toilet.html

  5. V says:

    This leaves open the question of what is the signal that triggers buyers to stop purchases of treasuries and insist on a greater yield? Is high inflation something we can ‘foresee’? Seems like quite a chicken-egg scenario. I guess you can only keep an eye on the data to assess when the deleveraging cycle might be beginning to turn.

    I must admit there is something in Hugh Hendrys observation that in prior years investors were unquestioningly snapping up trillions in issuance of synthetic bonds, but now that treasury is doing the same there is ‘concern’ (it’s the bogeyman).

  6. NoKidding says:

    Thanks. Decisive and supported.

  7. Mannwich says:

    Great piece from Gross, Curm. Makes A LOT of sense. All that’s left is asset price stimulation.

  8. Scott Frew says:

    “Deflation is a fact. It is happening now, it is real, and we see it in the actual data.”

    Barry, with all due respect, we have yoy core cpi at + 90 basis points, headline at plus 110 basis points. Now, I’ll support you in all sorts of arguments that cpi is a poor measure of inflation, but it is what is generally used, and the numbers are positive. I understand the sentiment you’re expressing, but deflation, strictly speaking, is not a fact–prices have increased, admittedly at a tiny pace, over the last year.

    Now if you want to accept Jim Grant’s recent formulation, one with which I take no particular issue, then yeah, I might agree that deflation is a fact. “Deflation is a crisis of money and credit, a sympton of which is falling prices.”

    cheers

  9. d4winds says:

    The stipulated event will be no harbinger of inflation but instead will merely be verification that private domestic investment is no longer dead. Look at TIPS spread for inflation indications.

  10. Alaric says:

    BR –

    Disagree with you on the early warning being expressed through the bid to cover ratio on US bonds.

    If the Fed guys US bonds, it can keep the bid to cover ratio high and simply can print money for its purchases (QE).

    Should this happen, you will see first a downward move in the US dollar, to the extent market participants even understand that money supply is increasing —

    Then, as investors understand money supply is increasing / the dollar is depreciating, you may see yields backing up to the extent investors expect higher inflation, since the US imports more than it exports and will be paying for imports in depreciated dollars…..

    Then you may see the worst of both worlds: further decreases to the dollar, further increases in US yields, etc.

    To the extent the public knows that the Fed is using QE, that may only make the dollar depreciation worse….

  11. b_rud says:

    It is a good piece re: Gross’s view, but it paints the demographic picture in the developed world with too broad a brush.

    The U.S. is in a very different demographic situation than both Japan & Europe. Our population is still growing, and there are plenty of skilled, intelligent potential immigrants clammoring to move to the U.S. if only silly H1B visa restrictions were eliminated.

    One of the best things we can do to encourage growth in the U.S. is to allow visas for more of these skilled potential immigrants…

  12. Alaric says:

    BR –

    Regarding your assertion that inflation may not occur in the future —– I believe the Japan analogy is seriously flawed: Japanese debt was sold to the Japanese and as a result they do not have a high level of foreigners who have to keep buying their debt.

    All foreigners have to do is cut down on buying US debt and there may begin to be dollar weakness resulting in ncreased inflation in the US.

    NOTE BR – you were great on calling the housing crisis — part of that was understanding that just because an unsupportable position existed for a long period of time does not mean it will not ‘correct’ or adjust one day.

    I would argue that Inflation in the US has these characteristics — better to have some protection for this event while it is cheap and nobody believes it will happen, but don’t bet the farm because you could be very, very early.

  13. Drip after drip of deflation data

    Forgive me if I am becoming a “leading indicator” bore but these turning points in the cycle are fascinating. The US Conference Board’s index of consumer confidence fell again in July to 50.4 after plunging in June.

    “Concerns about business conditions and the labour market are casting a dark cloud over consumers that is not likely to lift until the job market improves. Given consumers’ heightened level of anxiety, along with their pessimistic income outlook and lackluster job growth, retailers are very likely to face a challenging back-to-school season,” said the Board.

    This follows the fall in the ECRI leading indicator for last week to -10.5, a level that has always been followed by recession in the post-war era. The Economic Cycle Research Institute is careful not to jump the gun, waiting for further confirming data before issuing a formal recession call that would hurt its credibility if proved wrong by events.

    All of this squares with the fall in truck shipments and rail car loadings over recent weeks.

    “What we’re looking at is an invisible wall, which we’ve run into here. Which, essentially, as far as I can see, is a typical pause that occurs in an economic recovery,” said Alan Greenspan earlier this month.

    “I will grant you that this is not a normal economic recovery. We’ve just come out of what I believe is the most extraordinary and virulent global financial crisis that the world has ever seen.”

  14. b_thunder says:

    A historian (not an economist or a trader) Nial Fergusson thinks that the odds are that *you_know_what* will hit the fan almost overnight, maybe literally overnight. If he’s correct, there won’t be enough time to analyze the “bid to cover” ratios, your net worth will sustain a major damage before you can ask “WTF?”

    On a related note, with so many different assets trading in total correlation with each other, with most of the trading seems to be based on strict following the patterns/charts (and chasing in whichever direction the chart is leading) and, finally, with the bulk of trading done by computerized ‘bots at speeds slightly below that of a speed of light, I know I won’t be able to recognize the “seismic shift” from de- to in-flation in time to protect my net worth. I will be too late.

    I do feel like I’m on a Titanic, and although it is very inconvenient, I choose to sleep with a life-preserver on every night, rather than fight for it against a group of larger, stronger, and faster fellow passengers.

  15. globaleyes says:

    EVERYWHERE you look – housing, stocks, labor – markets want to deflate. However, deflation is Bernanke’s numer one concern and enemy. The Fed will do anything to prevent it.

    Best kept secret: debt is deflationary and we’ve been on a debt binge for 45 years. Predicting the future has never been easier!

  16. farmera1 says:

    Deflation/Inflation; we are now in a deflation. The real question is can the FED/government control the deflation without causing a massive inflation. Stay tuned for that one, but be prepared for a massive phase shift. The transition will not be linear, predictable or pleasant.

    Supporting Deflation:
    -M3 is tanking:

    http://www.shadowstats.com/alternate_data/money-supply-charts

    Gross in the linked article makes the case for demographics (maybe the solution is importing more cheap labor) as the key factor in our stagnate economy. Also the case can be made as Gross himself has done in the past that the massive amounts of debt is such a drag that the demand/economy can not be rejuiced as it has in the past. Governmental, personal and corporate debt as a percent of GDP are at record highs surpassing the previous highs from the early 1930s.

    Many things now make the call for the shift to inflation more complicated than it has been in the past:
    -Globalization with its world wide wage arbitrage
    -China and or India etc. driving demand for raw materials
    -Much of our governmental debt is bought overseas. Who knows when this demand will dry up.
    -The dollar could go the way of the passenger pigeon as the world’s reserve currency
    -Deficit spending

    So the answer is no body knows when (or even if) we will shift to inflation or massive inflation. But my approach is to be prepared. Hell Gross is questioning if capitalism can survive our current dilemma. A shift to inflation will probably happen, but as to when, not even a smart economist could say when, and certainly not myself or BR. Expect it happen, but as to when, that’s way to hard to predict.

    ~~~

    BR: Keep in m,ind, money supply is not prices . . . The japanese raised M2 for 15 years

  17. Bruman says:

    It’s clear that the monetary authorities want to avoid deflation at any cost, and will monetize debts as long as they have any power to do so (Congress could conceivably try to revoke the Fed’s discretion, but I don’t see a critical mass of support for that anytime soon).

    So the real question is “why didn’t massive spending and QE prevent deflation.” I think it is because the rest of the world looked like better places to invest, and so the Yen became the carry currency of choice. All that debt and money printing just didn’t end up being invested in the Japanese economy… instead, it went to other productive areas in the Yen carry trade.

    As long as the rest of the world is down for the count, I don’t think we are in great danger of the Japan scenario. Right now, emerging markets are still humming along, but the advantage we still have is that our debt supply is so much bigger that it can’t all go to them in a dollar carry trade. So we are probably good until there seems to be a European recovery and (if it ever happens) a Japanese recovery.

    The biggest problem is that we need to figure out what americans with a high school education can do more productively than anyone else in the world that creates genuine value. We haven’t figured out that structural issue yet. Home medical care is one area, entertainment is another, higher education is another (but not for average american workers), biotech. Clean/Green energy is potentially an area too, although we have a lot of international competition from Europeans and Chinese and Brazilians on that.

  18. Mike in Nola says:

    People have been conditioned to expect inflation and fear deflation when deflation has actually been a normally occurring phenom in American history. It’s part of price discovery; things get overblown and the price has to come back to reality.

    Maybe it’s the steady drumbeat of the Republican-inspired media that Obama is turning us into Zimbabwe (although somehow W didn’t), but one can see here in the comments an unwillingness to accept the possibility of deflation even though we have all witnessed with our own eyes the collapse of house prices over the past several years. It removed trillions of dollars from household balance sheets. Not to mention the deflation in CRE that’s being hidden by extend and pretend. The collapse of the housing bubble is probably the biggest deflationary event since the Great Depression, but people don’t accept it as a deflationary event. Go figure.

    Bubbles usually end in deflation. The Fed only avoided it after the dotcom collapse by blowing a new bubble. They have been trying it again over the past year in equities and even in real estate, but can’t even get even after a trillion $+ injection.

  19. craig k says:

    Inflation takes many forms, one that people are not taking into consideration is “size” of the product, yes the product might be the same price but the size is smaller. Airline prices are up 5% this year not counting the new fees that are being added. With so much money being printed, how can we not be setting up for more inflation. Oh, you folks who believe the government statistics are on another planet. Inflation is on it’s way and deflation is not going to be the problem.

  20. b_rud:
    Why, considering our unemployment situation? To further depress wages?

  21. Greg0658 says:

    Wally – “Workers may not be as interchangeable as they may have been decades ago” .. thats an understatement – pile on debt to learn a trade that may not even exist for you .. maybe time to ___

    generally on this thread – we have this idle cement kiln that could be used to throw bodies into / disperse the ashes to the Gulf to be the next mini oil boom of 20Million10 – but NIMBY …
    better to have war to give people a fighting chance to pervail and be the next big tribe

  22. Alaric says:

    craig k – you have a valid point, however, significant inflation really takes off when future expectations change, which has not occurred yet.

    Will people realize that product size, feature changes, etc is really inflation? Probably not in the short run, but they will realize when the price of a flat screen TV or a gallon of milk goes up 10-25% ……

    At that point, when future expectations change, there will be a problem.

    Perhaps at some point accounting textbooks will have a chapter on accounting in inflationary environments like they did in the mid-1980s………

  23. scharfy says:

    Inflation in the things you need.

    Deflation in the things you have.

  24. Sechel says:

    This is where I think you are wrong.
    1) CPI is not inflation, it’s an index, and because of many biases introduced over the years
    substitution effect, geometric averages, rent equivalent, etc under-reports inflation
    2) Does the decline of housing prices and rents indicate a deflation or an over-supply?

    Everything I buy in the supermarket, fish,meat,olive oil,coffee, pasta has been increasing. The maintenance on my condo has increased, the cost of a haircut has gone up. Union contracts are not dereasing, but going up modestly..I don’t seee this deflation?

  25. Robespierre says:

    For those who think inflation a look at the chart here may change their minds:
    http://housingstory.net/2010/07/28/the-aftermath-of-the-global-housing-bubble-chokes-the-world-banking-system/?source=patrick.net

    I don’t see housing recovering so the only thing left is debt write offs and the magnitude should/would kill any inflation plans the FED may have

  26. Steve Barry says:

    HOLY CRAP…watching CNBC and they have a guest from Goldman named Steven Barry…I am NOT that guy!!!!

    Maybe have to change my handle. I will notify all if I do.

  27. gman says:

    Glenn Beck, Rush, Kudlow, Lusken Heritage & Cato have been saying for years…”hyper-inflation imminent” Every month the cpi stays neg. since its peak in 07…I just rub it in the chicken little faces….

  28. Todd in SM says:

    “The first heads up about inflation you will see will be when the Bid to Cover ratio of the Treasury Bonds — how many buyers are there relative to bonds for sale at US auction — right now, its oversubscribed 3X.”

    BR – could you finish your thought? At what Bid to Cover number do you think it will be time to start thinking about inflation?

    Could you mayeb revise the post? Most interested in what that number is in your mind. As this is an indicator I became familiar with just this year.

  29. flipspiceland says:

    scharfy says it all.

    Inflation doesn’t exist if you don’t measure prices that have risen substantially. If you leave out food, fuel, golf tees, chocolate, ice cream, ho-hos, li’l debbies, twinkies, hershey bars, rollos, fudge cake, and other essentials of course there’s no inflation.

    Like saying if I don’t take my temperature, then I don’t have a fever.

  30. b_rud says:

    Calvin:
    Two (should be fairly obvious) reasons.

    First, as Gross noted, in the long term we need population growth for economic growth.

    Second, and more to your point (your reference to the current unemployment situation is kind of a red herring…), the folks I’m talking about are skilled workers (many with PhDs or some advanced degrees) that companies want to hire but can’t because of visa limits. The visa restrictions merely create structural inefficiency in our jobs market that are only going to hurt potential growth in the long run. The immediate effect may be that when a firm can’t hire the best person for the job, they hire someone who’s merely adequate (of course the effect may also be that they simply choose not to hire anyone…). That would temporarily improve the employment situation, but to our long-term detriment as it creates a less efficient economy with more structural impediments and less innovation.

    Simply put, I’m not saying throw open the gates and let all sorts of low quality workers flood the market to depress minimum wages, I’m saying firms should be allowed to hire whomever they deem best for the job. If firms aren’t hiring, it’s all a moot point and eliminating visa restrictions won’t impact the unemployment picture (workers need a job/offer to get these visas..); but keeping the restrictions in place will lower our speed limit for growth when this whole mess is behind us…

  31. Thor says:

    “With so much money being printed, how can we not be setting up for more inflation.”

    Because even more money has been destroyed. What happened to the trillions of dollars in loan losses for the last few years? Is that still in our money supply?

  32. Thor says:

    “Inflation doesn’t exist if you don’t measure prices that have risen substantially”

    And deflation doesn’t exist if you don’t measure prices that have dropped substantially – like housing, wages, or benefits

  33. DL says:

    There are actually very few people arguing that inflation is present in the “here and now”.

    Nevertheless, one question for thought would be, if you had to go long gold, or short, and hold the position for 12 months, which way would you go?

    Ditto the question for crude oil.

    (Personally, I don’t want to short either one).

  34. Pure-Water says:

    “Until the slack in the labor market is reduced — near record low weekly hours, 16% U6 unemployment, etc. — inflation simply is not a threat.”

    I disagree, you’ve totally ignored the other side of the coin: demand for money or velocity. If velocity picks up, you can absolutely get inflation, regardless of what’s happening in the labor market, money supply or anything else. I’m not saying that’s likely at this time but it certainly a possibility down the road given how large the US debt/deficit figures are.

  35. gremlin says:

    What’s the correct play to have a life preserver in these conditions?

    I would think with deflation I can just sit in cash and dividend stocks,
    but if miss that inflection point I’ll be buying tacos with my net worth
    before I can say “quiero taco bell”.

    “May you live in interesting times” is a very potent curse.

  36. “Simply put, I’m not saying throw open the gates and let all sorts of low quality workers flood the market to depress minimum wages, I’m saying firms should be allowed to hire whomever they deem best for the job. If firms aren’t hiring, it’s all a moot point and eliminating visa restrictions won’t impact the unemployment picture (workers need a job/offer to get these visas..); but keeping the restrictions in place will lower our speed limit for growth when this whole mess is behind us…”

    ~What if the worker deemed “best for the job” happens to be a low-wage seeking emigre? You will know the US economy is toast when we no longer attract the huddled masses to come to our shores seeking a better life. As Gross says (and I’ve been saying all along, but I best be careful lest I break my arm patting my back), economic growth in a developed economy depends on population growth. The native-born American population is barely holding its own (which is much better that Japan or Western Europe or even China). The American economy depends more than ever upon continued immigration. If it means lower wages for all, well, guess what–that’s where we’re headed anyway. Unless we do something stupid like raising tariffs and severely cracking down on immigration. Which might seem to work for awhile in raising wages, but would ultimately destroy our long-term growth prospects.

  37. curbyourrisk says:

    Barry…

    FINALLY we agree on something, BUT……I shuld point out that despite all the asset and good deflation out there, inflation has not gone away. In fact it is very strong…..RISING TAXES, RISING FEES, RISING COSTS FROM THE GOVERNMENT, RISING TOLLS, RISING…… Ya see. Since the government can not reflate the economy, they will take what they need.

    And for ann the knuckle heads out there, lets get this clear. Inflation is NOT risisng prices. Rising prices are a result of inflation. Rising wages is what causes inflation. If you have no pricing power, you can;t have inflation. You need better wages to have pricing power to hold. OUR INFLATION took place from 1990-2005. Only it was not rising corporate wages, but rising WEALTH driven by the banks. People mistook their WEALTH as the ability to live beyond thier means. They borrowed and spent….borrowed and gambled….borrowed and LOST. Assets prices have been reduced, 401k values have gone down and stock portfolio’s have been crushed. What happened to that wealth….it disappeared. What happend to the debt….well….its sitting their starig you in the face….

    Deflation sucks and a depressions are a bitch!

  38. seneca says:

    The government reports that CPI inflation has averaged around 2 percent so far this year. I’m not sure why Ritholtz calls deflation a fact. It’s not in the official data. The unofficial inflation rate reported by John Williams over at Shadow Government Statistics has the true inflation rate averaging around 5% year to date.

    Source:
    http://www.shadowstats.com/

  39. Steve Barry says:

    I am in the camp with the Comstock Boys…check out the link for Total credit per GDP, which is updated in this report.

    http://www.comstockfunds.com/default.aspx?act=Newsletter.aspx&category=SpecialReport&newsletterid=1534&menugroup=Home

  40. zebov says:

    @Robespierre

    Well, now. That’s just depressing.

    As far as inflation/deflation concerns go, I don’t think anyone could sanely argue that there is currently massive price inflation. However, I also don’t think anyone can sanely argue there isn’t a very strong possibility for massive price inflation in the future, should the banks ever decide to do something with their new money besides shove it in reserves.

  41. Mannwich says:

    @Robespierre: So, I guess those other countries had some version (or one on steroids?) of the CRA and Fannie/Freddie as well?

  42. flipspiceland says:

    @Curbyourrisk

    ‘…Rising wages is what causes inflation, sometimes, but lower wages accompanied by a 1.1X or greater rise in credit usage will also do it.

  43. Won’t the first signs of inflation (or I guess more specifically, the bond market blowing up) be when everyone wants to buy bonds (especially the public) as they believe long-term deflation is undeniable and hence don’t care about getting very very low nominal yields?

    By the time bid-cover falls under 1, inflation (or its expectation at least) is likely to be upon us….

  44. Steve Barry says:

    By my calculation, not even counting Fannie/Freddie, SS and Medicare, there is about a $50 Trillion in excess debt globally above what is healthy. That will result is deflation as long as we are all alive. They cannot possibly QE that much money.

  45. Les Lofton says:

    “The first heads up about inflation you will see will be when the Bid to Cover ratio of the Treasury Bonds — how many buyers are there relative to bonds for sale at US auction — right now, its oversubscribed 3X.”

    Translation?

  46. Mannwich says:

    ………..without some sort of other massive blow up, namely a fiat currency or currencies one. Finished it for you, Steve. ;-)

  47. The Window Washer says:

    @Les Lofton

    When people start lending for private growth instead of parking cash.

  48. mbelardes says:

    First reaction, then I’ll read through the comments.

    “Well, Japan cut rates, wildly overspent, borrowed like loons — and they had a decade plus of deflation, not inflation. We may not be Japan, but they are the 2nd largest economy in the world, and represent an actual economy that behaved, well, the way the US is.”

    This is exactly why I oppose the Keynesian “spend our way out because deficits don’t matter” solution. Deficits DO matter when they are huge and you can’t dig your way out of deflation anyway. Imaging if we march to $15 trillion up to $20 trillion in debt and continue to be mired in deflation. Lights out for the US economy. Deflation crushes those heavily in debt.

    What would be smart is to realize our economy is totally fooked in a way that “stimulus” spending will not pull us out of, reduce the deficit for the next decade while letting our economy sort itself out naturally (this doesn’t mean Goverment goes to sleep, just reform all our crap public programs meant to build an economy, like education, and the crap public programs bankrupting us, like Medicare and SSI.), then once our government and economy have effectively rebooted, deficit spend to spur and sustain growth.

    Write off 2010 to 2020 as the decade we sacrificed to salvage the century. Why not go that route? Things only look incredibly bleak to anyone under 30. I’m not worried for myself as I’m educated and have a career, but I can’t even imaging what about 70% of our country has to look forward to. Not good. Take the pain and heal.

  49. Robespierre says:

    Mannwich Says:
    July 29th, 2010 at 1:49 pm

    “@Robespierre: So, I guess those other countries had some version (or one on steroids?) of the CRA and Fannie/Freddie as well?”

    Actually what I was trying to point out was the fact that “assets” have deflated a lot and debt hasn’t. I don’t believe that assets will re-inflate therefore that debt will be written off. Now consider that so far we have had no inflation while having some money destruction… My guess is that as soon as that other debt starts to be written off then deflation will manifest itself more strongly. Also, I see corporations keeping their cash as an indication that they see more value on cash that anything else at this time. So on the deflation/inflation question I’m with Barry and Mish. BTW I don’t believe that CRA caused the RE bubble …

  50. grcvegas says:

    Don’t forget that some folks at the Fed spoke of “opportunistic disinflation” back in 1989!
    http://www.themoneyillusion.com/?p=6391

    And no, the Fed did not have an “easy money” policy in the early 2000′s, and they contributed little to the housing bubble—and most of our Great Recession was due to the deflation from 2008
    http://www.themoneyillusion.com/?p=6322

  51. Sechel says:

    Deficits are like a ticking time bomb with a fuse of uncertain length.

    When the bomb is ready to go off, it’s too late to react. The Keynsian idea of spending is very flawed.
    Add to that the flawed estimate of a multipler greater than 1.0. Greece , Ireland , Spain, Italy can all attest to the problemof deficit spending.

    I also canot accept that anything the government spends on has equal impact on the economy.

  52. Mike in Nola says:

    Robes: you ain’t with me also? :) Well, guess I’m not one of the big boys.

    Curmudge: you got it right about the immigration. One of the big factors in the real growing American economy of the 50′s – 80′s was the baby boom. More people means more demand for everything: housing, schools, services, products. And more workers to pay for social security. That’s over now. We need more people from somewhere and the native born are not producing enough offspring.

    All: as for when the top in bonds occurs, Rosie covered that yesterday and it sounded pretty reasonable:
    Pardon the long quote.
    _______
    But the primary purpose of this comment is to suggest what things may look like when the Great Bull Market in Bonds, which began in 1981 with 30-year Treasury Bonds yielding 15.25%, finally comes to its glorious end.
    For starters, I think it is safe to say that the bull market in bonds will end reasonably close to the point in time that inflation (or deflation) bottoms. This is because we have determined that by far the major economic factor that correlates consistently with the direction of market-determined interest rates, at least for long term Treasury Bonds, is CPI Inflation (headline and core).

    The bond market, like politics, is an emotional issue and not well-liked in general by Wall Street because it has a negative correlation to the stock market most of the time. For a growth bull, the bond is the “enemy”. The economic environment that most favours the long end of the bond market tends to be low or no growth and bonds have traditionally been an asset allocation decision that is bearish on the stock market.
    As a result, fear mongering often takes the place of thoughtful and objective analysis when it comes to bond market commentary. One way or another, the long end of the bond market has continually been characterized as high risk for the last 30 years that it has been outperforming the S&P 500. That’s a little unfair – after all, it is the benchmark risk free asset for funding actuarial liability when taken to the extreme of a 0% Coupon Treasury Strip.
    Let’s move on and make a sensible and objective effort at making a long-term forecast for core CPI Inflation. Based on our analysis, we could well see core inflation receding from around 1% now to near 0% in the next 12-to-24 months, which would imply an ultimate bottom in the long bond yield of 2.5% and 2% for the 10-year T-note. We should add that as long as the Fed funds rate remains at zero, reverting to a normal shaped Treasury curve would generate similar results for the long bond and 10-year note at the point at which the inevitable “bull flattener” reaches its climax. As we saw in Japan, this will take time, but yields at these projected levels will very likely come to fruition in coming years.
    ….
    A “V” shaped recovery has always been off the table from our perspective
    And what about the end of the Great Bull Market in Bonds? It could come pretty soon. You heard right. Long-term Treasury Bond yields could reach a secular bottom in the next couple of years. And what will it look like?
    Well, rates will likely be much lower than anyone expects and, as typically occurs at secular market peaks, the public will probably swear by long bonds at the primary lows in yields. After all, what other safe investment has delivered inflation plus 2% or much better, guaranteed, in the past 30 years? But in order for the public to adore 2.5% yielding long Treasury Bonds, it will first have to believe in stable or modestly deflating core CPI as a long-term forecast. At last count, households still have a near-3% long-run inflation expectation according to the most recent University of Michigan survey.

    The public will also need to be fed up with risk and, judging by the performance of stocks and real estate in recent years, who could blame them? And for the Baby Boomer at 55 or 60, “Gambler’s Ruin” isn’t an option. We can see that they are already voting with their feet as the mutual fund flows clearly indicate – increasingly towards income and away from capital appreciation strategies.

    Finally, the public will probably need to be afraid to be out (of the bond market, that is). That will most likely be due to a “flight to quality” as we continue suffer the secular bear market in stocks and real estate and suffer the economic setbacks of renewed recession sooner than many pundits think.

    One last thought on stocks: Like I said before, bonds are not better than equities. They are different. Every asset class has its time to be the leader. It goes without saying that the best time to allocate to equities is at the point of maximum pessimism and when the market is trading very inexpensively as it was at previous post-war secular bear market bottoms.

    We know that historically, that “moment” has coincided with valuations below 10x on trailing “reported” earnings and dividend yields above 5% as measured by the S&P 500 Index. Note that while many a pundit cites the consensus as being $96 EPS for “operating” earnings for 2011, it is closer to $76 on a true “reported” basis (so apply a 10x or even a 12x multiple on that estimate!).

    We also know that the conventional wisdom is oh, so wrongly linear at inflection points, so not only is the market cheap at these secular lows, but the future is much brighter than generally perceived. Pulling the trigger at that magic moment when bonds have peaked (yields have bottomed) and stocks can’t hurt you anymore, with dividend yields secure at twice the Treasury rate, would be nice. But you never know for sure at the right time, or you think you know for sure but are too early.

    For now, we are not even close. Sentiment toward long bonds and inflation are still extreme and recent survey data show the typical balanced institutional portfolio manager with a 68% allocation towards equities. As for bonds, the yield on 30 year Treasury was recently core CPI plus 3%; 4% for a BBB corporate bond; and a 6% real yield in the BB space. The S&P 500, meanwhile, sports a P/E multiple of close to 15x and the dividend yield is barely over 2%.

  53. NMR says:

    The CPI data doesn’t actually say we’re in deflation…yet. Core CPI is at 0.9% and Ben the other day clearly said we’re not there yet and was a bit mysterious about the tools he had to combat it but claimed he had some. I’m not disputing we’re hovering on the edge of it but we haven’t slipped over yet, apparently, and at the anecdotal level it certainly doesn’t feel like it. Unbelieveably some here are still talking about “inflation.” The ten year T bill is below 3.0 and the 20 year hovering around 4.0, inflation aint problem.

  54. Robespierre says:

    Mike in Nola Says:
    July 29th, 2010 at 3:02 pm

    “Robes: you ain’t with me also? :) Well, guess I’m not one of the big boys.

    Curmudge: you got it right about the immigration. One of the big factors in the real growing American economy of the 50’s – 80’s was the baby boom. More people means more demand for everything: housing, schools, services, products. And more workers to pay for social security. That’s over now. We need more people from somewhere and the native born are not producing enough offspring. ”

    And I’m not with you on this one either :)
    Increases in population just for the sake of it does not guaranty the outcome that you assume. Think of it this way if the economy depends on ever increasing number of people wouldn’t that be a “Ponzi scheme of people” eventually doomed to fail? What we really need is a way to actually increase the wealth of our current population as a whole. That has not happen in years. In my opinion, the outcome of this crises was preordain by the time the credit/debt bubble reached the tipping point. All the measures taken just changes the path to the same destination we saw during the Depression. Sometimes events are way bigger than people are willing to admit.

  55. carleric says:

    Was it Jim Grant who said “the first thing the Fed needs to do is explain why deflation is bad”. Because I carry virtually no debt and deal primarily in cash, lower prices don’t hurt my feelings at all. I understand that the government and the Federal Reserve (they seem like the same to me) want to inflate its debt away but Keynesian econmic policy seems very foolish to me. What exactly do you think the government contributes anyway? They are in the wealth distribution business with most going to themselves. They produce nohing of value, genrate no wealth, intefere with the conduct of privte enterprise and try desperqtely to impose the inflation tax on the resst of us. A pox on them and all Keynesians. Let cretive destruction work its magic. Oh and give green cards out at the border with expiration dtes. Some of those kids are the best employees around qnd are certainly better than the scum standing in the public dole lines whining bout not getting enough.

  56. clipb says:

    i agree with mike in nola, sounds like rosenberg’s breakfast piece. but the big difference between japan and us is the fact that japan’s deficits/borrowing was all domestic. we keep running a multi hundred bn trade deficit every year, will be averaging ~1 trn annual federal deficit from ’08-’18 and much of this money has to come from abroad which may at some point put our currency at risk with commensurate interest rate problems, not a good thing.

  57. Thor says:

    “They produce nohing of value”

    Roads, Bridges, Tanks, Sewers, Fighter Jets, Aircraft Carriers, Street Lights, – as well as the millions of jobs that are required to build them. . .

  58. Mannwich says:

    Neither do I, Robespierre (think that the CRA or Fannie/Freddie were a main driver of the bubble). I was simply being snarky.

  59. zell says:

    Expanding credit is stimulative. Reducing credit is contractionary. Neither directly translate into prices, but do create a condition. If a contraction is so great that it interfers with production you get scarcity driving prices brutally upward till equilibrium is attained.
    Right now we are dealing with a faulty transmission: we are moving forward but not enough to make expressway speed-”the new normal.”
    We are dealing with 2 waves of debt, each in different time dimensions. One is in there here and now which we are generating and is on the books. The other is the legacy debt which we have projected into the future and is a wave that is rapidly coming in our directi0n. When the 2 collide in a few years we are slammed and that’s where Gross’ demographic hurts big.
    A mind is not a terrible thing to waste. We have plenty of intellectual firepower when not misallocated and underpriced. I’m part of the over the hill gang and have heard that one all my adult life.
    BTW: Steve Barry- I did think that other guy was you, but your thoughts quickly cleared that up.
    Bernanke is learning what hubris is all about. I hear the see the autogyrating choppers all over the place.

  60. Porsche87 says:

    Gee, where can I get me some of that there deflation? Here in SD, housing prices are up 13 months straight, rents are flat, gas prices are up, utilities are up (thanks MWD). Stores have found pricing power, so prices are either stagnant or up. Same for autos. With 2 kids in college, tuition and books sure aren’t headed down. And they are trying like mad to get a half cent sales tax added on. If this is deflation, I’m in big trouble trouble when it all turns around!

  61. Greg0658 says:

    thanks Robespierre to Mike in Nola @ 3:24pm

    “They (the Gov) are in the wealth distribution business” .. yes and no They are in the wealth redistribution business .. thats why Kudlow is off-color “control of the government is the best path to prosperity” .. and thanks for the list Thor

    this “We need more people from somewhere” .. trouble is .. an email to Mayor Bloomberg via CNBC this morn

    To:
    Subject: Mr Mayor – some banter back at ya
    Date: Thursday, July 29, 2010 6:31 AM

    Mr Mayor:
    the immigration plan** you suggested is what this country and others* have been doing for decades
    ie: bring your money and your smarts .. hire and create a business inside our shores .. we’ll love you

    the border crossers are the base of the pyramid types .. no money, will pick vegies, mow grass, make beds transport drugs .. live in communes and send the spare money back to the family

    codas:
    * like Canada – I know I checked – this country is going down
    ** to many people making to many problems .. with to few commodities and to few real job needs in a robotic world .. so we make up job titles for our friends or ourselves

  62. scepticus says:

    Bernanke will do a ‘riksbank’ soon.

    If he dips his toe you can be sure the hairy foot will follow on afterwards.

  63. willid3 says:

    Porshe87, i suspect the reason you have some inflation is the economy in SD is one of the very few that is still doing well. you also have among the lowest unemployment rates in the country. that probably has as much to do with their being some inflation. the rest of the country has nothing like any of that. the rest of us are in pitiful shape. unemployment is booming, incomes are tanking, and deflation is here, since people can’t get credit or won’t try as they are to uncomfortable with it (because of that great experiment, which we got this handy dandy recession). that means business can’t really raise prices (though they can cut quantities. for a while till we decide paying more for less doesn’t really work).
    and there is no source of demand on the horizon any time soon, unless them aliens from space land

  64. [...] Markets, Real Estate, S&P 500, Technology, Unemployment – Big Picture blogger Barry Ritholtz addresses the ongoing inflation/deflation debate. “Deflation is a fact. It is happening now, it is [...]

  65. Sunny129 says:

    ‘The biggest problem is that we need to figure out what americans with a high school education can do more productively than anyone else in the world that creates genuine value’

    Send them out for 6 months+ to see/learn how the rest of the World is coping with the change with the resources they have compared to here.

    First thing they will realize that America is NOT the center of the world and the American labor wages, especially in manufacturing is hopelessly uncompetitive if not, delusional!

  66. Porsche87 says:

    Hang in there willid3. Over the years, I’ve noticed San Diego seems to lead a number of trends. Let’s hope this one spreads faster than the others.

  67. obsvr-1 says:

    Steve Barry Says:

    I am in the camp with the Comstock Boys…check out the link for Total credit per GDP, which is updated in this report.

    http://www.comstockfunds.com/default.aspx?act=Newsletter.aspx&category=SpecialReport&newsletterid=1534&menugroup=Home

    —- Reply

    very ugly stuff in those graphs ?

    QUESTION: where did all the money go ? Without showing the asset side the big picture is not complete. What is debt/asset ratio.

    Another graph that would help would be what is the Household Net Income (after taxes) and the following ratios:
    Net Income : GDP
    DEBT : ASSETs (solvency pressure)
    Total Interest (on DEBT) : Net Income (liquidity pressure)

    If the assets decline in value over time then it is certainly a race to insolvency.

    This all gets magnified when there is inflation in commodities (consumables) and deflation in assets ……. deep doo doo.

    ***

    There was a graph in one of the postings which shows Mortgage Debt to Housing Asset value, asset value deflation, but the homeowners still paying mortgage (many on inflated price base).
    http://housingstory.net/2010/07/28/the-aftermath-of-the-global-housing-bubble-chokes-the-world-banking-system/?source=patrick.net

  68. Greg0658 says:

    Kudlow 7:50pmET
    small business entrepreneurs – take on super-corps – ya thats wise – what do we need in this world that does not exist? remember 90% sm bus fail – but that doesn’t mind to a super-corp – feed us – investors take it all in stride – its all good in the inter-connected game … come on immigrants bring us cold fusion – we will set you up here – bring your money and smarts … actually wind generation and a lighter footprint in the igloo/tinyhome would work

    St Louis FED Bullard print more money – why not print more money when the super-corps and banks are flush .. to force their hand to do something with said savings .. money = green scratchy TP if it just sits around – creating deflation not doing anything – except earning interest for them – as deflation for the public requires more debt to stay alive under said conditions

    wrote this on another blog thread:
    A person “Ask not what your country can do for you, but how much it’s going to cost for them to do it”
    B person “‎685.00 for a hammer what do you think ”
    C person ” here’s a novel idea … do it yourself instead of waiting for the government to do it for you. Seems like there used to be a country that was founded on the principle – I think I read about it in a history book someplace”
    Me person “like the days when we rode horses on dirt paths and raised our own chickens and eggs and milk cows turned beef when old .. “those were the days my friend we thought they’d never end” … I’ve been wondering if the Amish are property tax exempt on religious grounds

  69. alfred e says:

    San Diego? Yeah they’re one of two military super-ports on the west coast.

    Factor in the percent of total gov spending there, ultra-wealthy military-industrials living the good life in La Jolla and other coastal burbs, and the not yet toally gone stimulus spending, and they are the DC of the west coast.

    But SD is also one city on the verge of bankruptcy, running out of water, and perhaps the last major US city to be dumping raw sewage into the ocean. Let the residents survive the building storm.

    On the verge of becoming a Tijuana suburb. Except for the gov largess. Which BTW seems to be working. Any safer places or careers out there? Think not. Gov, health care and teaching. That’s about it.

    So it may work. But I think not.

  70. seneca says:

    A pocket of inflation rarely mentioned: local and state taxes are flat or going up but government services are going down. Fewer teachers, police, buses, library hours; less maintenance of parks, roads and infrastructure. When more money buys less, that’s inflation, although I doubt this decline in government services gets picked up by the government’s inflation bean counters (of which there are probably fewer).

  71. Greg0658 says:

    seneca @ 10:27pm .. po-ta-toe / po-tot-toe
    isn’t it deflation of services when you get less for same cash spent .. ie: deflation of creature comforts

    rereading this over and over to post .. its all in how you look at what money is for isn’t it

    ~~~

    BR: Getting less for the same money is inflation — you are actually paying more for the same item. Its the cost, not the quality that deflation measures

  72. obsvr-1 says:

    Greg0658 Says:

    ” here’s a novel idea … do it yourself instead of waiting for the government to do it for you. Seems like there used to be a country that was founded on the principle – I think I read about it in a history book someplace”
    Me person “like the days when we rode horses on dirt paths and raised our own chickens and eggs and milk cows turned beef when old .. “those were the days my friend we thought they’d never end” … I’ve been wondering if the Amish are property tax exempt on religious grounds

    —-
    ha… maybe those Amish have figured it out …

    they live a life they want, nobody is trying to foreclose their farm/house, reposes their cart … inflation/deflation discussion revolves around cow utters. Hey Izekiel how are you doing on that “Green” furnace I just got a tweet order from a little bird

    What do we get, endless stress from chasing our dream on a treadmill of disappointment… get to see 20 min of pharmaceutical or get out of debt or stop the IRS commercials for every hour of content on the flat screen.

    time for another beer

  73. [...] The Big Picture. Inflation versus deflation. “Deflation is a fact. It is happening now, it is real, and we see it in the actual data.” [...]

  74. Stuckintexas says:

    I will concede at the outset that my situation is not typical. My house is paid for, I have no debt, and we have enough in savings to last our remaining years in a normal world. We lived through the last round of rampant inflation and I know that a repeat of that would be difficult to survive. I can’t see how a bit of deflation is a problem for someone in my position. I’m no economist, so I would appreciate some enlightenment. Why is controlled inflation so desirable but controlled deflation so scary?