It's official...the total credit market is now larger than any other time in history. Yes, even larger than 2008. Here's the Z.1 Credit report issued by the Fed this morning:
http://www.federalreserve.gov/releases/ ... /z1r-4.pdf
Total credit market as of 2011, Q1 sits at $52.6T. Previous peak in 2008 at $52.4T. As usual, government has outspent the contraction in the household and financial sectors. Also notable is that corporate debt has been increasing as well.
Added to the credit market expansion is the near vertical rise in the monetary base since 2008, including massive expansions within the last few months. M1 & M2 are expanding at a tepid, but consistent rate. M3 is a good measure of the shadow banking system and looks to be steadily rising. Austrian measures of money supply (TMS) are going through the roof.
It's safe to say we have not seen any comprehensive form of deflation for the last year. But who can say what lies ahead? It feels like we're truly at a crossroads in many areas. If the government cuts spending in any meaningful way, I'd expect another contraction as the household & financial sectors continue their deleveraging. If municipalities start going bankrupt and defaulting without some form of Fed/Treasury backstop, it'll be another blow to expansion and highly deflationary.
On the other hand, I give much credence to Rothbard and TMS. Considering Keynesian price inflation metrics are 18-24 months behind today's policy decisions, it makes you wonder how well The Bernank and company will perform when it matters most. I don't see much Volker in him...which I guess for now might be a good thing for debtors. It seems like we're dancing on a razor's edge at the moment. Very eerie.
What deflation?
Moderator: Global Moderator
Re: What deflation?
The basic formula, IMHO is still: No rising wages = no inflationary spiral.
Since I know that there will be no sustained wage increases in the U.S. any time soon as a result of offshoring jobs and a high level of structural unemployment due to decades of misallocated capital, I am not concerned about price inflation doing anything except creating another recession as people run out of money to pay the higher prices, which will set the stage for lower prices as demand collapses.
It should be fun to watch.
***
If looking for deflation, the housing market is probably going to be the easiest place to find it.
Since I know that there will be no sustained wage increases in the U.S. any time soon as a result of offshoring jobs and a high level of structural unemployment due to decades of misallocated capital, I am not concerned about price inflation doing anything except creating another recession as people run out of money to pay the higher prices, which will set the stage for lower prices as demand collapses.
It should be fun to watch.
***
If looking for deflation, the housing market is probably going to be the easiest place to find it.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
A: “Not unless round is funny.”
Re: What deflation?
MT,
I agree with you, but where actual dollars aren't spent "credit" dollars can make spending possible, anyway. I thought that credit was contracting, not expanding. But if it is expanding people can still spend money they don't really have to pay higher prices.
I agree with you, but where actual dollars aren't spent "credit" dollars can make spending possible, anyway. I thought that credit was contracting, not expanding. But if it is expanding people can still spend money they don't really have to pay higher prices.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: What deflation?
moda,
Sure, if credit is actually expanding in the private sector. What I understand Wonk to be saying, though, is that overall credit is expanding because the government/Fed is extending credit at a slightly greater pace than the private sector is contracting it.
I think that the consumer has burned his hand on the easy credit stove for the last time for a while. I think we are seeing the early stages of a secular trend away from consumer credit.
Consumers will still borrow to buy things, of course, but this business of borrowing $5,000 more than my household income this year, $8,000 more than my income next year, $11,000 more than my income the following year...I think that stuff is behind us (which is good, but it still shows up as contracting credit).
Sure, if credit is actually expanding in the private sector. What I understand Wonk to be saying, though, is that overall credit is expanding because the government/Fed is extending credit at a slightly greater pace than the private sector is contracting it.
I think that the consumer has burned his hand on the easy credit stove for the last time for a while. I think we are seeing the early stages of a secular trend away from consumer credit.
Consumers will still borrow to buy things, of course, but this business of borrowing $5,000 more than my household income this year, $8,000 more than my income next year, $11,000 more than my income the following year...I think that stuff is behind us (which is good, but it still shows up as contracting credit).
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
A: “Not unless round is funny.”
Re: What deflation?
I see. Agreed. I didn't read into his post enough.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: What deflation?
But rising wages are not possible without expansion of money and credit, no? What would happen if the U.S. government decided to go all out and deficit spend $10T annually instead of $2.5T?MediumTex wrote: The basic formula, IMHO is still: No rising wages = no inflationary spiral.
The good (and bad) news for U.S. workers is that wages have been rising in export-dominant countries due to U.S. monetary inflation for some time. Good in that U.S. jobs become more competitive. Bad in that imports become more costly for U.S. consumers.
I think the real wildcard is the external debt held by foreign officials. It's been declining slightly for the last 5 months--which is a new phenomenon. If that trend continues, it signals foreign divestment of treasuries--which eventually means higher domestic inflation whether wages are rising or not.
True, housing is a deflationary force within a net inflationary environment at the moment. What I'm most interested in is what happens when housing finds its fundamental floor. Can The Fed drain liquidity fast enough?MediumTex wrote: If looking for deflation, the housing market is probably going to be the easiest place to find it.
That said, I still think the chances are good that there'll be another deflationary shock. It seems very "2008" at the moment. There are plenty of entities that could blow up. At that point it becomes a decision of how much backstopping The Fed is prepared to do to keep the party going.
Re: What deflation?
09/11 Update:
Z1 Credit (Q2) was released today. Looks like a net contraction of about $100B. The household sector was mainly flat--it was the financial sector that took the biggest hit: -$250B. For anyone interested in the credit market, this is the report to look at: http://www.federalreserve.gov/releases/ ... /z1r-4.pdf
TIC data also released today. External debt has remained largely flat for 10 months. That's unprecedented and means foreigners (especially foreign central banks) are not reinvesting trade surpluses into the U.S. treasury market like before. I don't know if this is a line in the sand or an anomaly, but it's worth watching: http://www.treasury.gov/resource-center ... ts/mfh.txt
Side note:
If the EU crumbles over Greece/Spain/Italy, that's very deflationary for the U.S. The dollar would be pushed much higher as European currencies devalue--much akin to 1930's abandonment of the gold standard. Back then, Europe devalued before the U.S. and subsequently started growth faster as well. In such a scenario, U.S. exports would get smoked.
It's a race to debase ladies and gents. Who's gonna win?
Z1 Credit (Q2) was released today. Looks like a net contraction of about $100B. The household sector was mainly flat--it was the financial sector that took the biggest hit: -$250B. For anyone interested in the credit market, this is the report to look at: http://www.federalreserve.gov/releases/ ... /z1r-4.pdf
TIC data also released today. External debt has remained largely flat for 10 months. That's unprecedented and means foreigners (especially foreign central banks) are not reinvesting trade surpluses into the U.S. treasury market like before. I don't know if this is a line in the sand or an anomaly, but it's worth watching: http://www.treasury.gov/resource-center ... ts/mfh.txt
Side note:
If the EU crumbles over Greece/Spain/Italy, that's very deflationary for the U.S. The dollar would be pushed much higher as European currencies devalue--much akin to 1930's abandonment of the gold standard. Back then, Europe devalued before the U.S. and subsequently started growth faster as well. In such a scenario, U.S. exports would get smoked.
It's a race to debase ladies and gents. Who's gonna win?
Re: What deflation?
I should have added that the current real interest rate is -3.7%, another doozy. The fact that you can borrow 0pt, 10yr money (3.25%) at less than the current rate of inflation (3.8%) blows my mind.
Re: What deflation?
Wonk,
That's the rate of inflation (if I'm not mistaken) over the past year, not the rate of expected future inflation.
Further, when commdities are driving the inflation, and little else, rarely are interest rates going to keep up, especially in an economy as sick as ours. There's just too little demand for loanable funds and too much supply in the form of families trying to save now.
I really don't think we're going to see another year of 3.8% inflation. I also think that most of it will come in the form of commodity inflation, which gives people few safe options to earn a real return without getting into some scary speculation.
That's the rate of inflation (if I'm not mistaken) over the past year, not the rate of expected future inflation.
Further, when commdities are driving the inflation, and little else, rarely are interest rates going to keep up, especially in an economy as sick as ours. There's just too little demand for loanable funds and too much supply in the form of families trying to save now.
I really don't think we're going to see another year of 3.8% inflation. I also think that most of it will come in the form of commodity inflation, which gives people few safe options to earn a real return without getting into some scary speculation.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: What deflation?
12/9 Credit Update:
http://www.federalreserve.gov/releases/ ... ent/z1.pdf
I don't visit Zerhohedge or Mish much anymore because of the predetermined view of how financial markets are working(or not). Statistics on both sides of the inflation/deflation issue can be fit to "prove" the opinion of the writer. Overall I'm somewhat agnostic on this debate, but tend to think the financial powers will have a massive incentive to perpetuate the expansion of money and credit one way or another.
The story within the story in these releases (for me, at least) is the fact that the household sector is not deleveraging much at all--especially relative to the financial sector. Total credit expanded at a tepid 2% rate in the last year and about 1% overall since the previous peak in 2008, so we don't have deflation in the total credit market at the moment. However, since 2008 financial sector credit has contracted 20%, while household sector credit has contracted about 4.5%--both offset by the dramatic rise in federal government credit (+60%). IMO, the overall perception in the financial media is about how important consumer credit is to the economy and price stability. But from what I can see, the deflation story is not told by the consumer as much as it is by the financial sector and the federal government's willingness to provide a net expansion in credit to the overall market.
http://www.federalreserve.gov/releases/ ... ent/z1.pdf
I don't visit Zerhohedge or Mish much anymore because of the predetermined view of how financial markets are working(or not). Statistics on both sides of the inflation/deflation issue can be fit to "prove" the opinion of the writer. Overall I'm somewhat agnostic on this debate, but tend to think the financial powers will have a massive incentive to perpetuate the expansion of money and credit one way or another.
The story within the story in these releases (for me, at least) is the fact that the household sector is not deleveraging much at all--especially relative to the financial sector. Total credit expanded at a tepid 2% rate in the last year and about 1% overall since the previous peak in 2008, so we don't have deflation in the total credit market at the moment. However, since 2008 financial sector credit has contracted 20%, while household sector credit has contracted about 4.5%--both offset by the dramatic rise in federal government credit (+60%). IMO, the overall perception in the financial media is about how important consumer credit is to the economy and price stability. But from what I can see, the deflation story is not told by the consumer as much as it is by the financial sector and the federal government's willingness to provide a net expansion in credit to the overall market.
Re: What deflation?
I don't see how anything but deflation can be in the cards as both the financial system and the consumer are in the multi-year process of deleveraging. It's funny - John Corzine testified before congress that no, MF global wasn't nearly as badly leveraged as 40:1, as some news media outlets reported - it was only leveraged a conservative 37.5:1 under his watch... It would almost be comedy if it wasn't so tragic.
If 37.5:1 is considered a conservative form of leverage for the financial sector, there is nothing in the future except massive deleveraging and deflation. I have never seen a historical example of debt to asset ratios that high that didn't involve a hard crash.
Perhaps the consumer isn't deleveraging yet because the Fed has been doing everything possible to make sure they continue to get easy credit at almost zero borrowing costs. 0% APR financing for new cars, 3.625% for 15 year home mortgages, appraisers are still cooking the books to make everyone look like they have 80% LTV numbers. You won't see the consumer deleverage until the alcohol at this party runs out, and right now, Uncle Ben just cracked open another keg of Fed moonshine...
If 37.5:1 is considered a conservative form of leverage for the financial sector, there is nothing in the future except massive deleveraging and deflation. I have never seen a historical example of debt to asset ratios that high that didn't involve a hard crash.
Perhaps the consumer isn't deleveraging yet because the Fed has been doing everything possible to make sure they continue to get easy credit at almost zero borrowing costs. 0% APR financing for new cars, 3.625% for 15 year home mortgages, appraisers are still cooking the books to make everyone look like they have 80% LTV numbers. You won't see the consumer deleverage until the alcohol at this party runs out, and right now, Uncle Ben just cracked open another keg of Fed moonshine...
"I came here for financial advice, but I've ended up with a bunch of shave soaps and apparently am about to start eating sardines. Not that I'm complaining, of course." -ZedThou