it’s toxic to ALL freedoms and ANY capitalism for starters. The slave state is buying those of low character in America and the dim here pander to our gravediggers…
I’m trying to figure out the likely *sequence* of deflationary events in China and in the US. I would imagine that in China, the first part of the economy to show lowered asset values will be real estate, because that’s been in a bubble. After that, the command economy will disrupt normal supply-and-demand mechanisms because, as you’ve wisely pointed out, ‘you can’t push a string’. So their economy might descend in multiple ways, and maybe all at the same time. But in the US, I don’t know which prices will decline first. Maybe we need to have a recession for several quarters first, then layoffs, then rents coming down, then discretionary goods (clothing, sporting goods, etc.) lowering prices, with lower prices on food maybe not coming until a year after the first signs of deflation. During the Great Depression, the economy collapsed into 30%+ unemployment and deflation pretty quickly, but our economy is much different now. There’s unemployment insurance, welfare, bailouts, etc. So I don’t know what the sequence of events in the evolution of a deflationary era would look like now. I’ll bet you have the best insight into this of anyone, Cassandra Kust.
Deflation is difficult to identify except in hindsight. Deflation happens when prices fall and keep falling. They don't have to fall dramatically in any particular time frame, they just have to fall.
Japan gives us an interesting exemplar of how the deflationary scenario unfolds in a modern economy. In 1989 and 1990, the BoJ tightened and shrank the money supply to corral inflation that was rising after Japan signed off on the Plaza Accords in the mid-1980s. This stopped consumer price inflation, but the consumer price index itself first flatlined over the next several years and then in 1997 began trending down--prices declined broadly across the economy.
While consumer price deflation has largely ended, the Japanese economy has struggled to regain any noticeable growth momentum, even after the "Abenomics" experiment.
Will this be the scenario that unfolds in the US over the next several quarters and even years? It is far too soon to tell, although there a signs that we may be seeing deflationary forces begin to influence the US economy.
Probably the best indicator--and even at that it is only a trailing indicator--is to look for signs the Consumer Price Index itself has hit a plateau.
Another indicator will be if Real GDP growth exceeds nominal GDP growth. Because Real GDP is GDP after the effects of inflation have been factored out, in the usual inflationary economic environment, Real GDP is generally below nominal GDP, and the same for growth. If Real GDP growth exceeds nominal GDP growth, as that is the inverse of the normal relationship under prevailing conditions of inflation, that would mean the economy is in a period of deflation.
Again, Japan gives us a model for this, as the GDP chart linked above shows.
Useful information! I didn’t know about the relationship between Real GDP and nominal GDP. Thanks!
A deflationary era for the US might ‘feel’ like a Depression. What’s rattling around in the back of my mind are these unknown factors: years of quantitative easing; astronomical levels of national debt; trillions of dollars in derivatives and credit swaps. Sounds like the proverbial recipe for disaster.
Someday they may be calling you the economic Oracle of Delphi, not theCassandra, Mr. Kust.
Oh wait! I did see these graphs in your ‘Abenomics’ post on June 6. I actually printed that one out, to easily find in the event that the Fed makes the same mistakes that Japan made. I just re-read it now; I wanted to more fully grasp these details on liquidity traps and money velocity, but I’ve been too sleep-deprived to get back to it until now (new kitty, who’s a sweetie but who’s completely nocturnal!) Anyway, yes, I think the Fed is going to overshoot or wrongly time something or generally muck it up, and I appreciate your efforts in letting us know their errors.
Oracle of Delphi? Hell, I'll be satisfied with a simple "dude knows his stuff"!
(Thanks, btw!)
If the past few years demonstrate anything it is that we should not be too quick to quantify the precise impacts of QE on the economy, other than to say "not good."
Because money velocity tanked in 2008 and again in 2020 even as the Fed was goosing the money supply, consumer price inflation took time to materialize (asset price inflation, which shows up in financial markets, has in fact been the primary engine of price appreciation in equity markets since 2008). Consumer price inflation did not emerge until 2021, after multiple rounds of direct-to-consumer stimulus payments in an economic environment characterized by ruptured supply chains on a global scale. The resulting upticks in money velocity have powered the consumer price inflation we've seen since 2021 (Friedman does not explicitly say so in his discussions of inflation as a monetary phenomenon, but I suspect that money velocity increase is a more influential driver of consumer price inflation than money supply growth, something that many nominally Friedmanite monetarists tend to overlook).
Extending that thought process a bit further, debt levels are not an immediate economic destabilizer so much as they are a drag on economic activity: the higher the debt level, the higher the debt service--nationally, commercially, and per capita. Every dollar directed at debt service is a dollar directed away from both investment and consumption--the two main engines of economic growth. High debt levels thus retard economic potential for the duration that the debts remain unresolved.
Swaps are best thought of as a vial of economic nitro glycerin. On any given day, they pose no threat to the economy. However, when the right combination of interest rate rises and money supply decreases is reached, the resulting financial explosion can be devastating to financial markets. Given even Main Street's reliance on credit financing for daily operations, this has the capacity to disrupt even non-financial economic activity. In other words, swaps are never a problem until suddenly they are, and when they are, they are a problem of apocalyptic magnitude. That is a lesson the world has not learned from the 2007-2009 GFC.
Consequently, US debt levels are not so much an immediate problem for the economy as they are a restraint on potential solutions for countering deflationary forces being expressed in various economic sectors. When grappling with the need to find such solutions, however, in every perspective besides the purely academic that quickly becomes a distinction without much difference.
Wow - some of this data is just astounding. Profits down more than 20% in first four months, and 23 trillion dollars of debt, with no way out? And yet the World Bank is projecting growth this year? Are they spinning the data for political purpose, or are they deliberately putting on rose-colored glasses and trying to convince each other that everything is a workers’ paradise? Idiots.
The deflation scenario is getting really interesting. Speculative question: what kind of time span is likely before the deflation starts impacting the US - six months, a year, two years? (I know, it can probably only be a guess at this point.)
With oil prices continuing to sag and the CPI at a 2-year low, there is a distinct possibility we are already seeing deflationary forces becoming influential.
The tell will be if prices stabilize or if they keep on falling.
I just came from the grocery store, and prices are still climbing on certain benchmark products I keep track of. There’s something of a lag between wholesale prices and the retail prices, so I will watch to see if prices start to fall next week and next month. I’m wondering if there is a reliable correlation between how *fast* prices drop and how *far* they will drop. I suppose not. We haven’t had real deflation since the 1930s, so who knows the pattern of unraveling. It will be interesting to see how people react, though.
It’s marxism… it has a global track record…
it’s toxic to ALL freedoms and ANY capitalism for starters. The slave state is buying those of low character in America and the dim here pander to our gravediggers…
I’m trying to figure out the likely *sequence* of deflationary events in China and in the US. I would imagine that in China, the first part of the economy to show lowered asset values will be real estate, because that’s been in a bubble. After that, the command economy will disrupt normal supply-and-demand mechanisms because, as you’ve wisely pointed out, ‘you can’t push a string’. So their economy might descend in multiple ways, and maybe all at the same time. But in the US, I don’t know which prices will decline first. Maybe we need to have a recession for several quarters first, then layoffs, then rents coming down, then discretionary goods (clothing, sporting goods, etc.) lowering prices, with lower prices on food maybe not coming until a year after the first signs of deflation. During the Great Depression, the economy collapsed into 30%+ unemployment and deflation pretty quickly, but our economy is much different now. There’s unemployment insurance, welfare, bailouts, etc. So I don’t know what the sequence of events in the evolution of a deflationary era would look like now. I’ll bet you have the best insight into this of anyone, Cassandra Kust.
Deflation is difficult to identify except in hindsight. Deflation happens when prices fall and keep falling. They don't have to fall dramatically in any particular time frame, they just have to fall.
Japan gives us an interesting exemplar of how the deflationary scenario unfolds in a modern economy. In 1989 and 1990, the BoJ tightened and shrank the money supply to corral inflation that was rising after Japan signed off on the Plaza Accords in the mid-1980s. This stopped consumer price inflation, but the consumer price index itself first flatlined over the next several years and then in 1997 began trending down--prices declined broadly across the economy.
https://fred.stlouisfed.org/graph/?g=167Pn
While consumer price deflation has largely ended, the Japanese economy has struggled to regain any noticeable growth momentum, even after the "Abenomics" experiment.
https://fred.stlouisfed.org/graph/?g=167PW
Will this be the scenario that unfolds in the US over the next several quarters and even years? It is far too soon to tell, although there a signs that we may be seeing deflationary forces begin to influence the US economy.
Probably the best indicator--and even at that it is only a trailing indicator--is to look for signs the Consumer Price Index itself has hit a plateau.
Another indicator will be if Real GDP growth exceeds nominal GDP growth. Because Real GDP is GDP after the effects of inflation have been factored out, in the usual inflationary economic environment, Real GDP is generally below nominal GDP, and the same for growth. If Real GDP growth exceeds nominal GDP growth, as that is the inverse of the normal relationship under prevailing conditions of inflation, that would mean the economy is in a period of deflation.
Again, Japan gives us a model for this, as the GDP chart linked above shows.
Useful information! I didn’t know about the relationship between Real GDP and nominal GDP. Thanks!
A deflationary era for the US might ‘feel’ like a Depression. What’s rattling around in the back of my mind are these unknown factors: years of quantitative easing; astronomical levels of national debt; trillions of dollars in derivatives and credit swaps. Sounds like the proverbial recipe for disaster.
Someday they may be calling you the economic Oracle of Delphi, not theCassandra, Mr. Kust.
Oh wait! I did see these graphs in your ‘Abenomics’ post on June 6. I actually printed that one out, to easily find in the event that the Fed makes the same mistakes that Japan made. I just re-read it now; I wanted to more fully grasp these details on liquidity traps and money velocity, but I’ve been too sleep-deprived to get back to it until now (new kitty, who’s a sweetie but who’s completely nocturnal!) Anyway, yes, I think the Fed is going to overshoot or wrongly time something or generally muck it up, and I appreciate your efforts in letting us know their errors.
Oracle of Delphi? Hell, I'll be satisfied with a simple "dude knows his stuff"!
(Thanks, btw!)
If the past few years demonstrate anything it is that we should not be too quick to quantify the precise impacts of QE on the economy, other than to say "not good."
Because money velocity tanked in 2008 and again in 2020 even as the Fed was goosing the money supply, consumer price inflation took time to materialize (asset price inflation, which shows up in financial markets, has in fact been the primary engine of price appreciation in equity markets since 2008). Consumer price inflation did not emerge until 2021, after multiple rounds of direct-to-consumer stimulus payments in an economic environment characterized by ruptured supply chains on a global scale. The resulting upticks in money velocity have powered the consumer price inflation we've seen since 2021 (Friedman does not explicitly say so in his discussions of inflation as a monetary phenomenon, but I suspect that money velocity increase is a more influential driver of consumer price inflation than money supply growth, something that many nominally Friedmanite monetarists tend to overlook).
Extending that thought process a bit further, debt levels are not an immediate economic destabilizer so much as they are a drag on economic activity: the higher the debt level, the higher the debt service--nationally, commercially, and per capita. Every dollar directed at debt service is a dollar directed away from both investment and consumption--the two main engines of economic growth. High debt levels thus retard economic potential for the duration that the debts remain unresolved.
Swaps are best thought of as a vial of economic nitro glycerin. On any given day, they pose no threat to the economy. However, when the right combination of interest rate rises and money supply decreases is reached, the resulting financial explosion can be devastating to financial markets. Given even Main Street's reliance on credit financing for daily operations, this has the capacity to disrupt even non-financial economic activity. In other words, swaps are never a problem until suddenly they are, and when they are, they are a problem of apocalyptic magnitude. That is a lesson the world has not learned from the 2007-2009 GFC.
Consequently, US debt levels are not so much an immediate problem for the economy as they are a restraint on potential solutions for countering deflationary forces being expressed in various economic sectors. When grappling with the need to find such solutions, however, in every perspective besides the purely academic that quickly becomes a distinction without much difference.
Wow - some of this data is just astounding. Profits down more than 20% in first four months, and 23 trillion dollars of debt, with no way out? And yet the World Bank is projecting growth this year? Are they spinning the data for political purpose, or are they deliberately putting on rose-colored glasses and trying to convince each other that everything is a workers’ paradise? Idiots.
The deflation scenario is getting really interesting. Speculative question: what kind of time span is likely before the deflation starts impacting the US - six months, a year, two years? (I know, it can probably only be a guess at this point.)
With oil prices continuing to sag and the CPI at a 2-year low, there is a distinct possibility we are already seeing deflationary forces becoming influential.
The tell will be if prices stabilize or if they keep on falling.
I just came from the grocery store, and prices are still climbing on certain benchmark products I keep track of. There’s something of a lag between wholesale prices and the retail prices, so I will watch to see if prices start to fall next week and next month. I’m wondering if there is a reliable correlation between how *fast* prices drop and how *far* they will drop. I suppose not. We haven’t had real deflation since the 1930s, so who knows the pattern of unraveling. It will be interesting to see how people react, though.
"When everything is heading south there can be no thought of economic recovery by definition."
-Peter Nayland Kust