Inflation and the chicken and the egg dilemma

[doodle]

Interesting article that argues that inflation is followed by rising wages not caused by them. The ultimate chicken and egg dilemma

Link to article http://www.huffingtonpost.com/michael-p ... 51140.html

[6 Iron]

Doodle, thanks for the link. I thought that was a very interesting perspective, and am curious what our resident deflationists might think about it.

[MediumTex]

Michael Pento is a gold bull who has a surprisingly simplistic view of the mechanics of inflation.

He completely overlooks the velocity of money factor, the secular household deleveraging trend, and the lid on domestic wages that offshoring has created.

There is no doubt that we will get some inflation, part of which we are seeing right now.  The question is whether this will ignite a wage/price spiral (even though real wages may be falling compared to inflation, as they did in the 1970s), OR will we see demand destruction in the face of rising prices, which would push the economy back into recession (as we saw in 2008).  My bet is that we will see the latter.

Michael Pento is always entertaining on the money shows, though.  He's like a mafia-style gangster economist. 

[doodle]

Deleted

[AdamA]

Michael Pento is a gold bull who has a surprisingly simplistic view of the mechanics of inflation.

Michael works for Peter Schiff at Europacific. 

Worse than his simplistic view of inflation is his refusal or inability to acknowledge the deflationary side of the debate. 

People who make such confident, simplistic predictions are almost always wrong.

[doodle]

True, maybe his argument is simplistic but the inflation trend is very well established over the last 100 years and the fed seems hellbent on preventing deflation. I think that if you print enough money eventually you will get less purchasing power......I can't really see the difference between devaluation and inflation. In fact the major instances of hyperinflation that I know of were a result of loss of confidence in the banking system and fiat money brought about by reckless printing of fiat money.

The only force that I think contains bernanke is the large voting senior population which would be harmed by high inflation. This group would rather see a deflationary environment and could potentially have the political clout to contain more stimulative QE printing.

[doodle]

Thank you Clive. Those numbers are quite amazing if you ask me! The trend from 1800 to 1900 seems very flat and stable compared to the last 100 years.

In fact they actually look slightly deflationary.

[BearBones]

This inflation vs deflation argument has been argued on this forum before. Could it be that both sides are right? For that which is financed through debt, particularly non-necessities such as mortgages and autos, there could be deflation because slack was taken out in the last decade of low interest rates and because unemployment is currently so high. For necessities purchased with cash, particularly those which depend on finite natural resources (e.g., oil) or inexpensive overseas labor (e.g., china), there will be inflation.

Anyone buy into this argument?

[Wonk]

This inflation vs deflation argument has been argued on this forum before. Could it be that both sides are right? For that which is financed through debt, particularly non-necessities such as mortgages and autos, there could be deflation because slack was taken out in the last decade of low interest rates and because unemployment is currently so high. For necessities purchased with cash, particularly those which depend on finite natural resources (e.g., oil) or inexpensive overseas labor (e.g., china), there will be inflation.

Anyone buy into this argument?

Yes, exactly.  The money supply has expanded in order to compensate for the destruction in net credit.  The consumer credit market only accounts for 25% of the total credit market.  As long as the remaining 75% of the credit market does not contract and the Fed can continue to expand money stock at >2% annually, it looks like inflation will be in the positive.

Things people need and pay for in cash have gone up.  Things people want and generally buy on credit have gone down.  Net-net it's almost canceled out as a whole--but certainly not deflationary as of this point.  I might be in the minority, but I think we can have a stagflationary environment without high inflation.  I think we're experiencing stagflation in the 2-3% range already.

This is one of the reasons the muni bond market will not default en masse.  It would be deflationary so it will be backstopped, whether anyone admits it publicly or not.  A few defaults are ok, but at some point they become "too big to fail."

[Tortoise]

The only force that I think contains bernanke is the large voting senior population which would be harmed by high inflation. This group would rather see a deflationary environment and could potentially have the political clout to contain more stimulative QE printing.

Actually, I get the impression that most people don't understand that inflation is caused by expansions in credit and the money supply.  Politicians take advantage of this general ignorance regarding the monetary system when they propose politically advantageous "solutions" to inflation like windfall profits taxes, price controls, and (after the price controls start to create shortages) rationing.

The effect of taxes on people's wallets is immediate and highly visible, which is why politicians prefer to avoid raising them unless they have no other choice.  The effect of inflation on people's wallets often takes years to become evident, and even when it does, most people attribute their loss of purchasing power to the mysterious, impersonal force of "rising prices" rather than the politicians' monetary shenanigans--just the way the politicians like it.

The tide is starting to turn as more people learn about central banks and how fiat currencies work, but I still get the impression that it's only a minority of the voting public that really understands.

[Pkg Man]

Using 25% weighting to the 'fixed' gold prices, 25% allocation to UK FTAS stock price gains combined with actual dividend yield after 1868, but an assumed 5% dividend yield for 1800 to 1868, 50% weighting into undated 2.5% treasury




Gold prices came from http://measuringworth.com/datasets/gold/result.php that go back to 1257

I stopped the chart in the 1940's as after that the historical values switched from GB Pound to US Dollars

After uploading the image I noticed that the years are slightly adrift. That big dip in the red (real) line coincided with WW1 era (1914 to 1920) when inflation soared from an 0.66 index value to a 1.72 value (160% rise over 5 or 6 years). So whilst the nominal PP was relatively stable, the real value declined from 82 down to 40 over that period.

Pretty cool website Clive.  Thanks for sharing. 

[AdamA]

True, maybe his argument is simplistic but the inflation trend is very well established over the last 100 years and the fed seems hellbent on preventing deflation.

That's true, but there's a big difference between 2-3% annual inflation, on average, and a hyperinflationary spiral. 

The trend may be toward inflation long term, but we could certainly have a long stretch of intermittent deflation.

[moda0306]

A couple of my thoughts on inflation that may have been shot around this thread already:

1) A lot fo the leveraged assets (homes) have an expected inflation built into their pricing when people took out a loan to buy it. When the reality of this mis-pricing (when compared to other goods) finally shows up, no low interest rate will make a $300k house that should be $200k an attractive buy.  This puts huge strains on peoples' balance sheets that causes them not to want to take on more debt, even if its non-housing.  Debt IS money.

2) Money, as it would affect the economy, isn't just "printed by the fed" just as bullets aren't just shot by our police and military.  When I agree to lend money that I intend to save (aka, not consume) to someone who DOES intent to consume with those $$, that really changes the direction that the money I have is being used towards (MT's "velocity of money").  The fed can print all it wants, but if there is a mass-reprioritization towards saving (an easy spiral to get into (paradox of thrift)) it's hard for the fed to get the new money into the economy via credit.

If you look at excess reserves of banks, there are tons of it... but money has to work its way out into the economy to create inflation... and at a faster rate than money is being "destroyed" by people paying down their mortgage, credit card, etc and businesses paying down their debts as well.  These excess reserves represent the string the fed's trying to push on.  It'd be like if the treasury mailed you $10,000 to stimulate the economy and you used it to go buy an i-bond or something.

One last thing, the commodity surge of late (before the quasi-collapse) could very well be an effect of scarcity in the face of growing/recovering emerging markets.  I am still digesting how much of the commodity inflation we've seen is fed-induced, but I think we all have to acknowledge that with more people becoming middle class around the world and shrinking resource supplies, regardless of monetary policy, commodity prices will try to rise as billions of impoverished rice farmers become factory workers and start buying scooters and riding trains & busses or (gasp) start driving cars.

My thoughts... I'd love to hear some holes poked in them.

So basically, I agree with the "both are happening" people that say the general price level of commodities will rise or stay uncomfortably high while leveraged assets and the affected industries deflate.

I really stew about housing though, because if lumber, copper, steel, asphalt, etc become more scarce, a bunch of foreclosures end up with permanent damage, and land-use regulations make sprawl expensive (as it probably should be), maybe those forces will naturally keep housing up higher than what I'd otherwise imagine.

[TBV]

A couple of my thoughts on inflation that may have been shot around this thread already:

1) A lot fo the leveraged assets (homes) have an expected inflation built into their pricing when people took out a loan to buy it. When the reality of this mis-pricing (when compared to other goods) finally shows up, no low interest rate will make a $300k house that should be $200k an attractive buy.  This puts huge strains on peoples' balance sheets that causes them not to want to take on more debt, even if its non-housing.  Debt IS money.

2) Money, as it would affect the economy, isn't just "printed by the fed" just as bullets aren't just shot by our police and military.  When I agree to lend money that I intend to save (aka, not consume) to someone who DOES intent to consume with those $$, that really changes the direction that the money I have is being used towards (MT's "velocity of money").  The fed can print all it wants, but if there is a mass-reprioritization towards saving (an easy spiral to get into (paradox of thrift)) it's hard for the fed to get the new money into the economy via credit.

If you look at excess reserves of banks, there are tons of it... but money has to work its way out into the economy to create inflation... and at a faster rate than money is being "destroyed" by people paying down their mortgage, credit card, etc and businesses paying down their debts as well.  These excess reserves represent the string the fed's trying to push on.  It'd be like if the treasury mailed you $10,000 to stimulate the economy and you used it to go buy an i-bond or something.

One last thing, the commodity surge of late (before the quasi-collapse) could very well be an effect of scarcity in the face of growing/recovering emerging markets.  I am still digesting how much of the commodity inflation we've seen is fed-induced, but I think we all have to acknowledge that with more people becoming middle class around the world and shrinking resource supplies, regardless of monetary policy, commodity prices will try to rise as billions of impoverished rice farmers become factory workers and start buying scooters and riding trains & busses or (gasp) start driving cars.

My thoughts... I'd love to hear some holes poked in them.

So basically, I agree with the "both are happening" people that say the general price level of commodities will rise or stay uncomfortably high while leveraged assets and the affected industries deflate.

I really stew about housing though, because if lumber, copper, steel, asphalt, etc become more scarce, a bunch of foreclosures end up with permanent damage, and land-use regulations make sprawl expensive (as it probably should be), maybe those forces will naturally keep housing up higher than what I'd otherwise imagine.

There are times, like in 2005-06 when a worldwide construction boom affects prices for things like concrete and other building materials.  However, for the most part the housing market is highly localized because demand is local, housing is immobile, and local credit/tax arrangements influence demand in a big way. Commodities, on the other hand, are traded globally and in many cases (like oil) have a worldwide price that trumps local supply/demand factors.

[moda0306]

TBV,

What are the implications of what you are saying in terms of inflation vs deflation?

Housing may be local, but that doesn't change the fact that there are millions of balance-sheet constrained consumers out there, and just because it's their home/mortgage ratio (and battered 401(k)) that are constraining their balance sheets doesn't mean that it won't affect their purchasing habits (copper for bathroom remodel, steel for a new car, gas for the vacation (and fuel for all other consumable items).

I simply think we're seeing a splitting of scarcity... labor is becoming much less scarce... in that what used to be rice farmers are now finding their government will pay for their retraining to working in a factory... and commodities are becoming more scarce... for obvious reasons.

That splitting of scarcity is going to make things seem very stagflationary to Joe Six-pack, regardless of monetary policy, I think.