What cycle are we in?

[notsheigetz]

Prosperity, Inflation, Recession, Deflation

I think we can pretty much rule out Prosperity but what of the other 3? Beats the heck out of me?

Are these unusual times or is there anything cyclical about it?

[MediumTex]

Prosperity, Inflation, Recession, Deflation

I think we can pretty much rule out Prosperity but what of the other 3? Are these unusual times or is there anything cyclical about it?

I think that we are in a period of structural deflation, which would also typically be accompanied by a steadily contracting economy.

However, the Fed has taken a series of bold actions to counter this structural deflation with inflationary sparks intended to get the economy moving in the opposite direction (i.e., back to the steady inflation that a fiat money system is, in part, premised upon).

Thus, we have sort of a broad secular deflationary trend with a series of cyclical inflationary trends overlaid.  The way that you can tell the inflationary trends are cyclical is that each of them simply leads to more economic weakness and renewed deflationary conditions (see each spurt of inflation since 2008 for examples of this), rather than the inflationary spiral that the Fed seems to be hoping for.

Lots of cross-currents going on right now, which is what one would anticipate when the economy encounters a set of deflationary forces with a central bank that is bent on inflation.

If I told you that the country went into an economic depression in 2008 and that people were just slow to actually comprehend what was happening and I showed you this chart, what would you say?



What does that chart say about inflationary expectations?  If there are no inflationary expectations, then there isn't much expectation of an expanding economy either (which tends to become self-reinforcing and self-fulfilling).

[melveyr]

I think one should see the economy through the use of quadrants. The x axis spans from recession(-) to high growth(+). The y axis spans from deflation(-) to inflation(+).

Using this framework I think we are right about at (0,0) 

[Tortoise]

I think one should see the economy through the use of quadrants. The x axis spans from recession(-) to high growth(+). The y axis spans from deflation(-) to inflation(+).

Using this framework I think we are right about at (0,0) 

+1 regarding the quadrant concept. People often forget that we can have inflationary prosperity, deflationary prosperity, inflationary recession, or deflationary recession. Examples of all four of these have occurred in the past.

What does that chart say about inflationary expectations?  If there are no inflationary expectations, then there isn't much expectation of an expanding economy either (which tends to become self-reinforcing and self-fulfilling).

Zero nominal interest rates would seem to imply zero inflation and zero inflationary expectations, yet we do in fact have inflation. (Refer to the recent discussions here on negative real interest rates.) If it's possible to have negative real interest rates, then the concept of using nominal interest rates as a gauge of inflation seems somewhat flawed to me.

My cost of living has been steadily rising over the years: food, fuel, and rent have all been going up, despite T-bills paying zero interest. So if we are in a "deflationary environment," I just don't see where the deflation is. If this so-called deflation doesn't reduce what I have to pay every month, what does it mean to me?

[melveyr]

I think one should see the economy through the use of quadrants. The x axis spans from recession(-) to high growth(+). The y axis spans from deflation(-) to inflation(+).

Using this framework I think we are right about at (0,0) 

+1 regarding the quadrant concept. People often forget that we can have inflationary prosperity, deflationary prosperity, inflationary recession, or deflationary recession. Examples of all four of these have occurred in the past.

What does that chart say about inflationary expectations?  If there are no inflationary expectations, then there isn't much expectation of an expanding economy either (which tends to become self-reinforcing and self-fulfilling).

Zero nominal interest rates would seem to imply zero inflation and zero inflationary expectations, yet we do in fact have inflation. (Refer to the recent discussions here on negative real interest rates.) If it's possible to have negative real interest rates, then the concept of using nominal interest rates as a gauge of inflation seems somewhat flawed to me.

My cost of living has been steadily rising over the years: food, fuel, and rent have all been going up, despite T-bills paying zero interest. So if we are in a "deflationary environment," I just don't see where the deflation is. If this so-called deflation doesn't reduce what I have to pay every month, what does it mean to me?

Yeah I think Harry Browne didn't emphasize the quadrant as much as he could have, it is more accurate.

[MediumTex]

My cost of living has been steadily rising over the years: food, fuel, and rent have all been going up, despite T-bills paying zero interest. So if we are in a "deflationary environment," I just don't see where the deflation is. If this so-called deflation doesn't reduce what I have to pay every month, what does it mean to me?

Here is where I have seen deflation in my personal situation:

1. Falling interest rates have allowed me to refinance my home several times in recent years so that I am now paying $400 a month less per month for the same house.

2. Falling interest rates have also allowed me to reduce my automobile finance costs by purchasing vehicles at basically 0% interest.  This saves me about $50 per month.

3. Falling natural gas prices (which is what one would expect in the wake of a drilling boom) have translated into a reduction of my monthly natural gas and electricity bills by $150 per month (it went from about $340 to about $190).

4. Although I haven't purchased a house in recent years, if I had wanted to in my area I could have saved about $40,000-$80,000 compared to what the same house cost a few years ago.

It's true that I am paying more now for many things than I was a few years ago (food, healthcare and concert tickets, to name a few), but overall my monthly expenses have gone down because my savings on big ticket items (house, cars and utilities especially) have been so large.

That's just my situation.

[MediumTex]

I think one should see the economy through the use of quadrants. The x axis spans from recession(-) to high growth(+). The y axis spans from deflation(-) to inflation(+).

Using this framework I think we are right about at (0,0) 

That's a good way of thinking about it.

Great stuff from melveyr, as usual.

[BearBones]

Here is where I have seen deflation in my personal situation...

That's just my situation.

What you are largely saying is that the credit market has seen deflation, right? But most of the world does not live on credit. I find rising prices of staple goods in the setting of such deflationary forces quite ominous.

[MediumTex]

Here is where I have seen deflation in my personal situation...

That's just my situation.

What you are largely saying is that the credit market has seen deflation, right? But most of the world does not live on credit. I find rising prices of staple goods in the setting of such deflationary forces quite ominous.

Virtually all U.S. households rely for credit for their first and second largest purchases (home and auto).

Wouldn't that mean that a large part of our world does live on credit, and thus benefits from deflation in the credit markets?

[BearBones]

Virtually all U.S. households rely for credit for their first and second largest purchases (home and auto).
Wouldn't that mean that a large part of our world does live on credit, and thus benefits from deflation in the credit markets?

Our world in the US, perhaps, but not the world. Would be interesting to know if falling interest rates have translated into a net decrease in cost of living for most Americans. I bet not. Do you or anyone on the forum have any good data on that?

[Tortoise]

Virtually all U.S. households rely for credit for their first and second largest purchases (home and auto).

Wouldn't that mean that a large part of our world does live on credit, and thus benefits from deflation in the credit markets?

Point taken regarding the autos, but it's probably a bit of a stretch to say that "virtually all" U.S. households own their own home. Most do, but it's historically been between 60 and 70%, definitely not close to 100%.

And in fact, less than half of the minority households in the U.S. own their home. So it appears that the mortgage deflation we're experiencing is probably disproportionately benefiting whites and Asians (predominantly homeowners) while minorities like African Americans and Latinos (mostly renters) benefit much less by it. Furthermore, non-Asian minorities tend to earn less than whites and Asians, so the inflation in food, fuel, and rent hits them harder.

[stone]

I guess anything bought on the global market could be getting more expensive whilst at the same time things with prices based on local wages could be deflating.

[Tortoise]

I guess anything bought on the global market could be getting more expensive whilst at the same time things with prices based on local wages could be deflating.

Yes, and I think this discussion highlights the fact that inflation and deflation rarely affect all segments of the population in the same way. Some people can be experiencing deflation while others are experiencing inflation. Taking the average over the whole population and saying "the economy" is experiencing net deflation or inflation hides all of those important (and often large!) differences.

As usual, reality is a bit less uniform and mathematically precise than the macroeconomists would have us believe.

[BearBones]

I guess anything bought on the global market could be getting more expensive whilst at the same time things with prices based on local wages could be deflating.

Although some things have remained relatively stable (e.g., utilities), I have seen very few things actually decrease in price (other than credit), even if based on local wages. Here is a glimpse of my little world (one based on 0 debt):
Taxes increased
Medical insurance increased
College tuition increased
Gas prices increased
Food increased
Cell phone increased
Time spend to earn $1... increased!

As I said earlier, I find this inflationary phenomenon in the face of such deflationary market forces pretty ominous. Wonder what would be my costs if unemployment were 4%?

[MediumTex]

I guess anything bought on the global market could be getting more expensive whilst at the same time things with prices based on local wages could be deflating.

Although some things have remained relatively stable (e.g., utilities), I have seen very few things actually decrease in price (other than credit), even if based on local wages. Here is a glimpse of my little world (one based on 0 debt):
Taxes increased

With the payroll tax cut over the last two years, the federal income tax rates remaining the same, and property taxes falling due to declining property values, my overall tax bill has gone down in recent years.

The last couple of years have also allowed full depreciation of certain types of business equipment if purchased during those years, which has also translated into an overall lower tax bill for me.

Starting with the Bush tax cuts in 2001, I have not seen any inflation in my taxes in many years (other than just because I earned more money and thus paid more taxes than when I earned less money).

[BearBones]

Starting with the Bush tax cuts in 2001, I have not seen any inflation in my taxes in many years (other than just because I earned more money and thus paid more taxes than when I earned less money).

Ah, just wait until those book proceeds come roll in, growing ever exponentially. May push the vast majority of your income into the highest of brackets. 

[MediumTex]

Starting with the Bush tax cuts in 2001, I have not seen any inflation in my taxes in many years (other than just because I earned more money and thus paid more taxes than when I earned less money).

Ah, just wait until those book proceeds come roll in, growing ever exponentially. May push the vast majority of your income into the highest of brackets. 

That's a good one.  I laughed out loud.

This whole PP thing for me is truly a hobby, which makes it a lot more fun than it would be if I was relying on it to make a living.  Also, when something is a hobby you can sort of go where it takes you (i.e., there is no bottom line to watch), which is part of what makes it fun.

I was talking with someone who works in the financial services industry and the person asked me what the angle was with the book, what we were selling, and who we were working with.  I told the person we weren't working with anyone and didn't have an angle other than just really being fascinated by the intricacies and internal order of the strategy.  It took the person a bit to comprehend what I was saying, which surprised me a little. 

We're certainly not the first people to write a book based solely upon fascination with a topic, but maybe with financial books it's more common to write them for the primary purpose of making money.

[Gumby]

Virtually all U.S. households rely for credit for their first and second largest purchases (home and auto).
Wouldn't that mean that a large part of our world does live on credit, and thus benefits from deflation in the credit markets?

Our world in the US, perhaps, but not the world. Would be interesting to know if falling interest rates have translated into a net decrease in cost of living for most Americans. I bet not. Do you or anyone on the forum have any good data on that?

All money in the US (except coins) comes from some public debt and the rest if the money supply is overwhelmingly comprosed of private credit (roughly $55 trillion). Most of the civilized world uses debt-based money, and I'd be very surprised if most of the world's money did not come from private credit. Otherwise it would be from huge public debts. (It typically has to come from one or the other).

Keep in mind that businesses are constantly utilizing private credit markets to pay employees. Most money market funds and bank statements are just forms of private credit.

Credit markets make the world go 'round. If credit markets froze up, there wouldn't be very much money available. That's why we hold Treasuries!

[stone]

BearBones

As I said earlier, I find this inflationary phenomenon in the face of such deflationary market forces pretty ominous. Wonder what would be my costs if unemployment were 4%?

The curious thing might be that things bought on the global market might actually go down in USD terms if the USA became more prosperous and productive. I guess offshoring so many jobs has contributed to the (gentle) slide of the USD which is what the recent inflation is I guess.

[sophie]

I guess anything bought on the global market could be getting more expensive whilst at the same time things with prices based on local wages could be deflating.

Although some things have remained relatively stable (e.g., utilities), I have seen very few things actually decrease in price (other than credit), even if based on local wages. Here is a glimpse of my little world (one based on 0 debt):
Taxes increased
Medical insurance increased
College tuition increased
Gas prices increased
Food increased
Cell phone increased
Time spend to earn $1... increased!

I laughed at that last line.  Is it all the time you have to spend wrestling with EHRs and "meaningful use" codes?

I'm not sure there's one systemic event that's driving inflation, because there are different causes for each of those price increases:

Medical insurance - obesity epidemic plus more stuff we don't need to go into right now
Gas prices - peak oil if you believe in that, more likely what's happening in Iran
Food prices - gas price increase, unusual weather over the past year
Taxes increased - increased unemployment plus increased benefit obligations ==> increased local taxes (mine have gone up 30% since 2008)
Tuition increased - reduction in endowments from the 2008 debacle and past decade of poor stock market performance, reductions in federal grants due to budget cuts

Cell phone prices - Sounds like you're staying with one carrier...if you're willing to look at alternatives, you might reduce your cell phone bill.  I've thought about going with a basic pay as you go cell phone, plus an ipad mini with a minimal data plan ($15/month).  Smartphones make terrible telephones anyway.

[BearBones]

I laughed at that last line.  Is it all the time you have to spend wrestling with EHRs and "meaningful use" codes?

I figured you'd be the one to pick up on that one. 

Taxes increased - increased unemployment plus increased benefit obligations ==> increased local taxes (mine have gone up 30% since 2008)

Damn!

Cell phone prices - Sounds like you're staying with one carrier...if you're willing to look at alternatives, you might reduce your cell phone bill.  I've thought about going with a basic pay as you go cell phone, plus an ipad mini with a minimal data plan ($15/month).  Smartphones make terrible telephones anyway.

Very good advice. Thanks.