Everytime I walk into a grocery store, I see prices going up so I have a hard time believing your statement. All the bubble items like houses and cars are deflating, but basic necessities are inflating.
Inflation is allways a net expansion in the money supply (money and credit). That's all. Prices can skyrocket, or plummet for other reasons as well, but it is from somthing called supply and demand, not some other definition of inflation. There are two reasons for prices. Money supply (deflation and inflation) and 2)supply/demand factors (short supply/over supply). The net of both 1 and 2 influence price. It is possible to have higher prices on a particular commodity during deflation for supply demand reasons. Great post Buylowsellhi.
Don't forget exchange rate as a factor influencing supply, it's going to be very important if Bernanke decides to counter deflation even further by pumping out free money for everyone. More money creation with no underlying economic backing directly influences the exchange rate if the other countries aren't creating fictional reserves of their own currencies. Bernanke could double the money supply and use it to fund all the small businesses he wants. There may not be any inflation since it'll just counter deflationary forces, but it'll destroy the US dollar, double the size of the gov. debt, double the cost of imports and commodities, ruin any firms/banks with positive foreign FX exposure.. If the US wasn't the owner of the world's reserve currency, this recession would no doubt have crippled the US on the international stage.
How can there be no inflation and , at the same time, a decrease in purchasing power of currency (as stated above)?? I am using a standard definition of the word... In economics, inflation or price inflation is a rise in the general level of prices of goods and services over a period of time. ... en.wikipedia.org/wiki/Inflation Origins Inflation originally referred to the debasement of the currency. When gold was used as currency, gold coins could be collected by the government , melted down, mixed with other metals such as silver, copper or lead, and reissued at the same nominal value. By diluting the gold with other metals, the government could increase the total number of coins issued without also needing to increase the amount of gold used to make them. When the cost of each coin is lowered in this way, the government profits from an increase in seigniorage.[9] This practice would increase the money supply but at the same time lower the relative value of each coin. As the relative value of the coins decrease, consumers would need more coins to exchange for the same goods and services. These goods and services would experience a price increase as the value of each coin is reduced.[10] By the nineteenth century, economists categorized three separate factors that cause a rise or fall in the price of goods: a change in the value or resource costs of the good, a change in the price of money which then was usually a fluctuation in metallic content in the currency, and currency depreciation resulting from an increased supply of currency relative to the quantity of redeemable metal backing the currency. Following the proliferation of private bank note currency printed during the American Civil War, the term "inflation" started to appear as a direct reference to the currency depreciation that occurred as the quantity of redeemable bank notes outstripped the quantity of metal available for their redemption. The term inflation then referred to the devaluation of the currency, and not to a rise in the price of goods.[11] This relationship between the over-supply of bank notes and a resulting depreciation in their value was noted by earlier classical economists such as David Hume and David Ricardo, who would go on to examine and debate to what effect a currency devaluation (later termed monetary inflation) has on the price of goods (later termed price inflation, and eventually just inflation).[12]
It's all relative. Many countries we trade heavily with (i.e. these days that insinuates import much from) have debased currencies, also. As I've said, and I think the M1 and M2 charts bear it out, money being injected into the system is primarily flowing into banks, to recapitalize their balance sheets, and to backstop loans and instruments such as RMBSs and CDSs, and is not making its way to the consumer or small business. In fact, just the opposite is true. Money, in the form of loans and otherwise, is being sucked away from the consumer and small business (think of hard to access bank loans, dropping equity in house and property values, and dropping values in machinery and inventory values).
Flow of Funds Report Offers Hard Evidence of Deflation http://globaleconomicanalysis.blogspot.com/2009/06/flow-of-funds-report-offers-hard.html I am not sure if this was his intent, but recent analysis of the Flow of Funds Report by Martin Weiss eloquently makes the case for deflation. In New, Hard Evidence of Continuing Debt Collapse! Martin Weiss Writes ... While most pundits are still grasping at anecdotal âgreen shootsâ to celebrate the beginning of a ârecovery,â the hard data just released by the Federal Reserve reveals a continuing collapse of unprecedented dimensions. Itâs all in the Fedâs Flow of Funds Report for the first quarter of 2009, which Iâve posted on our website with the key numbers in a red box for all those who would like to see the evidence. First and foremost, the Fedâs numbers demonstrate, beyond a shadow of a doubt, that the credit market meltdown, which struck with full force after the Lehman Brothers failure last September, actually got a lot worse in the first quarter of this year. click on chart for sharper image Open Market Paper: Instead of growing as it had in almost every prior quarter in history, it collapsed at the annual rate of $662.5 billion. (See line 2.) Banks lending: Credit markets [collapsed] at the astonishing pace of $856.4 billion per year, their biggest cutback of all time (line 7). Nonbank lending: (line 8) pulled out at the annual rate of $468 billion, also the worst on record. Mortgage lenders: (line 9) pulled out for a third straight month. (Their worst on record was in the prior quarter.) Consumers: (line 10) were shoved out of the market for credit at the annual pace of $90.7 billion, the worst on record. The ONLY major player still borrowing money in big amounts was the United States Treasury Department (line 3), sopping up $1,442.8 billion of the credit available â and leaving LESS than nothing for the private sector as a whole. Bottom line: The first quarter brought the greatest credit collapse of all time. Excluding public sector borrowing (by the Treasury, government agencies, states, and municipalities), private sector credit was reduced at a mindboggling pace of $1,851.2 billion per year! And even if you include all the government borrowing, the overall debt pyramid in America shrunk at an annual rate of $255.3 billion (line 1)! Did they make any headway in stopping the ABS collapse? None whatsoever! The total outstanding in this sector (page 34 line 3) fell at an annual pace of $623.4 billion in the first quarter, the WORST ON RECORD! U.S. security brokers and dealers were smashed (page 36 line 3). Brokers were forced to reduce their total investments at the breakneck annual pace of $1,159.2 billion in the first quarter, after an even hastier retreat in the prior quarter! Government agencies got killed (page 43 line 6). Households dumped their Ginnie Maes, Fannie Maes, Freddie Macs, and other government-agency or GSE securities like never before in history, unloading them at the go-to-hell annual clip of $1,395.7 billion. Change In Household Net Worth click on chart for sharper image "In U.S. households alone, the losses have been massive: massive: $1.39 trillion in the third and fourth quarters of 2007 (not shown on page 105) ⦠a gigantic $10.89 trillion in 2008 ⦠$1.33 trillion in the first quarter of 2009 ⦠$13.87 trillion in all, by far the worst of all time." There are many other lines Martin highlighted. Click on the report (the first link above) and see for yourself just how bad things are. Martin states "Bottom line: The first quarter brought the greatest credit collapse of all time." But not only did he state it, he proved it. Moreover, I can prove banks aren't lending. Reserve Balances with Federal Reserve Banks To say this situation is unprecedented does not do justice to the word. Hyperinflation, or even strong inflation predictions in the near term look rather silly in the face of this data unless one is only looking at the printing and not the destruction in credit. OK treasury yields have been soaring, but that is belief in green shoots, a rebound from ridiculous levels, and massive supply of treasuries. And in case you did not notice, government bond yields have been soaring the world over, not just in the US. Bear in mind my definition of deflation includes marked to market values of bank credit. It's very difficult to get a handle on Marked to Market anything as the Fed is still fighting rules that would mandate it. However, we do know there is still a mountain of things hidden off balance sheets in SIVs (Citigroup alone has $800 billion and what that is really worth is anyone's guess). Furthermore massive credit card losses are on the way as unemployment rises, and of course we cannot forget the upcoming crisis in Alt-A and Pay Option ARM mortgages. Think consumers are about to go on a spending spree after a massive $13.87 trillion collapse in net worth? Think banks are going to start lending with this employment picture and household debt? I don't and boomer demographics makes the situation even worse. Don't forget the bleak employment picture. There is no source of jobs. Those who get hyperinflation out of this picture must be reading the playbook in Bizarro World because it sure is not the playbook here
Sprstpd, I can certainly understand your sense of disbelief. I can see that some things are getting more expensive, however I believe that we are on the cusp of a major decline in the costs of goods and a glut of supply. Your statement made me question my perceptions, but here's a link to support my observations on beginnings of declining food prices: http://www.philly.com/inquirer/business/20090618_Local_food_prices_down__energy_up.html Perhaps the most classic example of a contrarian indicator that I've seen is the issuance of the "Forever" stamp by the U.S. post office. I got so excited to see these come out because it always so irritating to me to have keep penny stamps around for when the rate went up. I immediately went out and bought $100 worth of stamps. Looking back on it now, I feel like the last trader to step in a buy on the ask! OVVO, thank you for the great link on the enlightening flow of funds report! And good trading to you all!
............................................................................... Thank you for your excellent post.... The govt. has taken the surfacial view of hoping to lever expensed funds by enabling failed banks to stay in a lever position....because the view without a lever is to say the least a very bleak one.... The govt. lever is a non-sustainable add on.... What has to happen is a sustainable approach such as structural tax changes as being one of the most important....etc....etc... Levering a sustainable approach is the answer.... which to this day ....has not been addressed....
I posted this in the other thread but here it is as well: I've determined that the ability of banks to create credit out of thin air ultimately provides the impetus for the banks to use any marketing technique at their disposal to increase lending due to negligible or zero real cost. This is how the housing asset market inflated to unsustainable levels. Mortgages were predominately financed by peoples' savings prior to 1980 and therefore housing prices could not grow much faster than the rate of the economy. When banks entered the housing market with full force, house prices began escalating out of control as lending surged, boosting demand, which resulted in higher house prices and therefore a false safety net of "collateral" to inspire further lending of money created out of thin air. This unsustainable system was further compounded since banks began selling (bad) loans off their balance sheets, freeing up "capital" to be magically created and re-directed to the burgeoning housing market at zero absolute cost should the bubble burst. Of course, this only pushed the housing bubble out further and further to levels absolutely obscene relative to the growth of the economy and peoples' purchasing power. Long story short, the ability for banks to create money has been abused and we were forewarned by the constitution's creators as well as Keynes among other economists as to the dangers of allowing private institutions to create money. Only the government should have the capability of creating money and only through a nationalized bank. Guess which is the only state with a surplus and with a gdp that has not exploded since the credit crunch? North Dakota -- The only state with a nationalized bank. http://www.huffingtonpost.com/ellen...a_b_207806.html Great site with more info on banks and money: http://www.webofdebt.com/articles/dollar-deception.php