The Deflation Scare
Does this graph show deflation?
No and yes.
That Google-trends graph shows an inflationary use of the word deflation in search terms and news references.
My personal theory about what the Fed and the Treasury are trying to engineer is this:
- Push the claim that the U.S. is on the border of or in deflation
- Use that claim to propose serious inflationary measures
- Inflate the U.S. out of its debt
Alan Greenspan used a similar deflation-scare scheme to reignite the debt-driven economy in the last half of 2002 to justify a lower Fed rate at 1% and to keep it there for much too long time. The media helped a lot in that by generating "deflation" talk. Greenspan's policy ignited the housing bubble and led to serious commodity inflation.
While the housing bubble grew and commodity prices exploded, the government and the attached media did their best to obfuscate that the money supply expanded too fast and created serious price-inflation. That was often observable in the reporting when the Bureau of Labor Statistics released the monthly consumer price index (CPI).
When the CPI went up, the media emphasized "core-inflation", the consumer price increase which neglects "volatile" oil and food prices. Now as the relative high inflation decreases a bit, and just like back in late 2002, the media emphasis is on the "headline inflation" number.
CNN Money in July 2007: Inflation tame in June
Government's key measure in line with expectations, despite higher food prices.
NEW YORK (CNNMoney.com) -- Prices paid by consumers rose in June, but when food and energy prices were stripped out the government's key inflation measure was in line with Wall Street expectations.
CNN Money yesterday: Consumer prices in record decline
Inflation falls by a record 1% in October, worrying economists that falling prices will become a disturbing trend.
NEW YORK (CNNMoney.com) -- Consumer prices fell by a record amount in October, another worrisome sign about the contracting economy, the government reported Wednesday.
Only the 16th paragraph of the current piece mentions core inflation, which was - 0.1% compared to last month prices, but the word "deflation" occurs nine times.
In July 2007 the year- over-year consumer price increase, which was downplayed as 'tame' by CNN, was 2.7%. The October 2008 y-o-y price increase, that now is used as a deflation scare, was 3.7%, coming down from a high of 5.6% just four month ago. In other words, inflation is still too high. There is no price-deflation (yet).
While inflation was on its way up, CNN played it down. As it is now decreasing a bit, but still high, CNN talks of deflation. (I use CNN simply as an example here. All mainstream media do just the same.)
Edward Harrison at RGE Monitor provides graphs of the y-o-y CPI and concludes:
From where I sit, this information reinforces the idea that falling oil prices are going to bring down inflation for some time to come as comparisons to year ago levels will continue to be favorable. However, there has not been a similar move in underlying core inflation as yet. Consumer price deflation is a completely oil-relate phenomenon to date.
Again what I see going on here is an engineered campaign to talk of deflation where inflation is only decreasing from too high levels.
The Fed, in my theory, will then uses this deflation-scare to lower the Fed rate to zero and to adopt "unusual" measures like quantitative easing which is the method the Bank of Japan used to prop up the bankrupt Japanese banking system.
Indeed the chief economist of the Bank of America is already urging for such measures:
The Federal Reserve should buy mortgage securities in the open market to loosen up the mortgage market, said Mickey Levy, the chief economist at Bank of America on Wednesday. The move would be a form of so-called "quantitative easing" undertaken by the Bank of Japan in the early 2000s to fight deflation. Under this approach, the Fed would ignore its normal policy of targeting short-term interest rates. The idea appears to be on the Fed's radar screen. Earlier Wednesday, Fed vice chairman Donald Kohn said quantitative easing measures were under review at the central bank as normal contingency planning.
Japan used such measures because it saw a bit of real deflation. It really had a falling consumer price index. The deflation was good for consumers. Prices fell stronger than wages, giving the people more money in real terms.
But the U.S. has yet to see any deflation. Using the Japanese policies while there is still serious inflation in the U.S. economic system will lead to higher inflation, possibly much higher inflation.
For all the above I'll stick to my theory for now.
But there are other theories on what that powers-that-be are engineering here. Dude, where's the Dharma? (via BP) muses about The TARP Fund? and Empire.
His theory:
- The p-t-b want to save the U.S. empire status at all cost
- The US-dollar as the vehicle of empire is therefore not allowed to fall as it should
- Inflation would help out of the current crisis but tank the dollar
- The p-t-b prop up the U.S. dollar via the TARP and Fed lending
- Thereby the p-t-b are engineering a deflation which will lead to a depression but save the empire.
Dude expands on that here.
It is an interesting (possible?) theory, but too far fetched for me. But it would explain the secrecy around the use of the TARP money and the trillions of mysterious Fed lending.
Anyway, how do you interpret what is happening now?
Posted by b on November 20, 2008 at 17:49 UTC | Permalink
It does indeed smell rotten when they change the goal posts. As you mention, "core inflation" was the operative word when we were getting slammed by high food and fuel costs. Now the operative word is simply "inflation." Interestingly enough, "core inflation" has been clicking along at a steady pace of 2.2-2.5%, October data being at the low end. At this point overall inflation seems to be almost optimal.
http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&series_id=CUUR0000SA0L1E&output_view=pct_12mths
What's getting ignored here is the fed's other mission, which is full employment. Why are they Fed and the media hyperventilating about the decline in food and fuel costs, while largely ignoring unemployment? Is it because widespread unemployment is a secondary issue to over-leveraged corporations and financial institutions? The obvious solution to any deflationary tendencies is full employment.
Printing more money does not solve anything.
Posted by: JohnH | Nov 20 2008 19:17 utc | 2
@JohnH - The obvious solution to any deflationary tendencies is full employment.
Yep, if there really were deflation, which I doubt. The best method to fight deflation would be to increase wages. Give people who earn little more money and they will spend it. Creating demand and higher prices. Instead pushing money into banks who then do nothing with it is supposed to be a solution. Lunatic.
The corporates have set up a situation where no matter what happens it's a "crisis" that requires more corporate giveaways, tax cuts, subsidies, whatever. If prices go down, that's "deflation", a serious problem. If prices go up, that's "inflation", also a serious problem (but it's never called inflation if corporate profits or real estate go up, for some reason that's not considered inflationary). If prices stay the same, then that's "stagnation", also a problem. No matter what happens it's a problem and a "crisis", and of course the only solution is to give the corporates more money. And worse, the majority of so-called "economists" have bought into this nonsense.
Posted by: mike | Nov 20 2008 20:24 utc | 4
Any techie with an ounce of control systems analysis under their belts will advise that you can't build an economic rocket control system by studying past contrails, as Fed seems determined to do. Yaw, roll, pitch and repeat, i-t-s g-e-t-t-i-n-g b-u-m-p-y!
Sigh.
The average American's credit score comes in around 678, according to credit raters.
GMAC said it would only make loans to buyers who had credit scores of at least 700.
Therefore, the majority of American taxpayers can't avail themselves of a GMAC loan.
GMAC applied to become a bank holding company today, a move that could allow it
to glom a piece of Treasury's $700 billion ***welfare tax dole*** rescue package.
GMAC is partly owned by Cerberus C.M. fund, whose CEO gets $18,000,000 a year.
Obama's Chief of Staff lashed Congress today, urging passage of a comprehensive
health care bill that will fund, but not solve, the broken US medical system, a move
viewed not so much as a cave-in to liberals, as a way to keep homeless off the street,
warehousing an estimated 4 to 5 million Americans likely evicted from their homes,
since the mortgage broker-holding banks haven't renegotiated more than 10% of late
mortgages, even as Congress doled out $250B of taxpayer's savings to brokers.
Shares of Revlon soared on the news, as Congress looks for other pigs to poke.
Posted by: Shari Ah | Nov 20 2008 20:24 utc | 5
Don't know much about the deflation scare, but here is something that managed to scare me. Genuine horror scenario found via the European Tribune.
(snip)
It is a truly great irony that the world’s banks could end up being saved not by governments, but by the synthetic CDO time bomb that they set ticking with their own questionable practices during the credit boom.Alternatively, the triggering of default on the trillions of dollars worth of synthetic CDOs that were sold before 2007 could be a disaster that tips the world from recession into depression. Nobody knows, but it won’t be a small event.
(snip)
I'd rather not excerpt more than that. It needs to be read in full.
Posted by: Alamet | Nov 21 2008 0:22 utc | 6
I don't have anything to add b, it is exactly right that there is a media campaign to convince us Americans that there is a deflation problem, when there is not.
Posted by: dekurilater | Nov 21 2008 4:20 utc | 7
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imbecile that i am, b - these posts are very instructive for me, thanks
Posted by: remembereringgiap | Nov 20 2008 18:38 utc | 1