A Tidbit from Dave Rosenberg on Inflation

Discussion in 'Economics' started by PAPA ROACH, Jun 17, 2009.

  1. For all those inflation bugs-

    Not when you are in a liquidity trap, which is where we are. The problem with
    the Fed's monetary experiment is that the money supply boost is still not
    circulating through the economy but rather sitting on bank balance sheets. At
    least there's no delinquency risk with net free reserves.
    Paul Krugman uses some great historical examples in his Monday column in the
    NYT (Stay the Course). Between 1929 and 1939, the monetary base doubled
    (and the dollar devalued) and yet prices deflated 19%. In fact, despite seven
    years of New Deal stimulus and rampant FDR incursion into the economy, the
    1930s ended with the unemployment rate at 15%, the CPI declining at a 2%
    annual rate and the level of GDP still below its 1929 peak. Between 1997 and
    2003, Japan's monetary base surged 85% — deflation pressures remained
    intact. We just do not believe it is still appreciated that when the economy slips
    into a deleveraging phase, which by its nature involves asset liquidation, debt
    repayment and rising private sector savings rates, it takes years before the
    economy makes the transition to the next up-cycle and only then with massive
    amounts of fiscal and monetary stimulus.

    From Braekfast with Dave, today.
  2. Sorry to disappoint you, but the above makes too much sense to garner much attention on ET. Would you instead have posted some ridiculous hyperinflation paranoia tidbits from Peter Schiff or Marc Faber you'd have 50 replies within the hour :cool:
  3. Outstanding commentary.

    I'm not just saying this because it meshes with my views, either.

    We're going to see much more deflation as the U.S. consumer absolutely hunkers down.

    I honestly don't think we've seen anything yet.

    Carpooling, bus riding, house/apartment sharing - it's all coming to be, not just conjecture.

    Given the massive over-consumption of the last decade, a return to normative values of consumption would have stung a lot....a return to 'scared mode' where consumers are truly clamping down?

    Let the pain train begin. Retailers will drop like flies (this has already begun, too).

    Sorry (for you) if you confuse my realism for pessimism.
  4. Way to go! Compare us to a nation with lots of manufacturing and also to ourselves back when we were a manufacturing nation and on the gold standard at the same time. Its comparing horseshoes and hand grenades....Both are made of metal, you can throw both of them about the same distance, but just because the horseshoe didnt blow up doesnt mean the hand grenade wont.
  5. This analysis, while being technically commendable, fails to incorporate the asset-inflationary aspects of the Fed's activities.

    A comment on this very blogpost describes what I'm saying more succinctly than I probably would:


    "I think it is important, as others have mentioned in these comments, to differentiate between goods inflation and asset price inflation. For those who operate strictly in the debt market, asset inflation is of significantly less practical importance because the focus is on real rate spreads on credit, which are defined relative to CPI.

    For investors in broader asset markets, inflation definitions take on greater practical importance. One way of looking at inflation is too many dollars chasing fewer goods. Another definition involves too many dollars chasing too little productivity investment. This can be quantified by a measure called the Marshallian K.

    Without going into too much detail, Marshallian K is the ratio of growth in the monetary base relative to growth in GDP. If companies can not achieve a positive return on investment in projects that expand economic output (due to overcapacity), but the money supply is expanding anyway, the excess dollars will find their way to asset markets and push asset prices higher. This is a useful definition of asset price inflation.

    Eventually, the wealth effect of asset price inflation may cause consumers to borrow against their wealth for current spending, and this will push the price of goods higher. In this way, asset price inflation can cause CPI inflation even in the absence of real productivity growth, or real growth in GDP per capita.

    Comments welcome.

  6. You earn credibility when you make calls 5 to 10 years in advance that have proven to be extraordinary in forcasting what the future holds.

    Like this article by Marc Faber from 2001:

    Go for gold to beat the coming currency crisis!


    Or this article from Marc Faber from 2000:

    Will oil hit $100 per barrel?


    The deflationists can have their day in the sun when in 3 years time a new BMW costs less then 10.000$ and on top you get the window wipers for free.

    Not before.
  7. LOL
  8. You do realize he means $10,000 right?

    That's how they write it in foreign countries...
  9. Daal


    Rosenberg seems to be a member of the free lunch school of economics when it comes to deflation. If the fed were to finance a $100T tax cut, universal health care and two wars that would not be inflationary according to him. Forget about paying off your debt, lets just wait for the Fed to repay everyone's debt and delever the economy overnight with a printing press. No one will need to work, all americans will sit at home and get a $100K check signed by the NY Fed for the rest of their lives, that would not be inflationary according to him
    #10     Jun 17, 2009