Signs of Deflation

[wayneL]

It seems incredibley to talk about deflation when the problem seems to be inflation at the moment... and it is MUCH higher in real terms to the average schmuck, than the reported CPI BS.

But there has been some solid cases put forward for a deflationary episode in the imminent recession.

Inflation is regarded by economic purists as the increase in money supply, measured by M-something or other. If so, then a contraction in money supply must be deflation... right?

Well read this:

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/08/19/cnusecon119.xml

So from henceforth springs a thread further signs of deflation.

Discuss

 

[dhukka]

Finally people are catching on. I've been writing about deflation being the bigger issue for the best part of a year.

December 16th 2007 Inflation of Deflation?

March 19th 2008 Ron Insana on Deflation

Whilst we tend to get caught up with the day to day machinations of the market and the economy it's a good idea to reflect on the underlying macro forces at play here.

We have come to the end of a massive credit bubble that has inflated a range of asset classes. The bubble has been pricked and asset prices are deflating.

The Fed are doing their best to reflate but of course they are only making the inevitable deflationary process take longer. Hence one of the reasons why I said 10 months ago that Fed rate cuts were largely irrelevant.

Just compare the trillions lost in the past 12 months from US households balance sheets in terms of real estate and stocks compared to the paltry gains in wages and personal consumption and you can see clearly that US households are experiencing deflation.

 

[dhukka]

Interesting article on deflation from Naked Capitalism. Below are a couple of excerpts, click on the link for the full article, which is well worth a read:

More Evidence of Sharp Contraction in Money Supply (Not for the Fainthearted)

Paul Kasriel, chief economist at Northern Trust, says lending by US commercial banks contracted at an annual rate of 9.14pc in the 13 weeks to June 18, the most violent reversal since the data series began in 1973. M2 money fell at a rate of 0.37pc...

Leigh Skene from Lombard Street Research said the lending conditions in the US were now the worst since the Great Depression. "Credit liquidation has begun," he said.

Data compiled by Lombard Street Research shows that the M3 ''broad money" aggregates fell by almost $50bn (£26.8bn) in July, the biggest one-month fall since modern records began in 1959.

"Monthly data for July show that the broad money growth has almost collapsed," said Gabriel Stein, the group's leading monetary economist.

On a three-month basis, the M3 growth rate has fallen from almost 19pc earlier this year to just 2.1pc (annualised) for the period from May to July. This is below the rate of inflation, implying a shrinkage in real terms.

The growth in bank loans has turned negative to a halt since March.

"It's obviously worrying. People either can't borrow, or don't want to borrow even if they can," said Mr Stein.

Monetarists say it is the sharpness of the drop that is most disturbing, rather than the absolute level. Moves of this speed are extremely rare....

Monetarists insist that shifts in M3 are a lead indicator of asset prices moves, typically six months or so ahead. If so, the latest collapse points to a grim autumn for Wall Street and for the American property market. As a rule of thumb, the data gives a one-year advance signal on economic growth, and a two-year signal on future inflation.

"There are always short-term blips but over the long run M3 has repeatedly shown itself good leading indicator," said Mr Stein...

M3 surged after the onset of the credit crunch, but this was chiefly a distortion caused by the near total paralysis in parts of the American commercial paper market. Borrowers were forced to take out bank loans instead. The commercial paper market has yet to recover

 

[Uncle Festivus]

The 'system' - Inflation - Stagflation - Deflation - Deflationary recession/depression.

Where are we now??

 

[dhukka]

The 'system' - Inflation - Stagflation - Deflation - Deflationary recession/depression.

Where are we now??

We're in Stagflation on the way to deflation. Great quote from Minyanville's Kevin Depew yesterday on the PPI number:

The important thing to take away from this from a forecasting sense is the implied deflationary pressures that continue to build. The spread is now at its greatest point, a new high, which means that despite the "inflation" in the headline, there is an inability to pass through costs. Marry that inability to pass through costs with ongoing housing price deflation, the balance sheet restructuring going on with banks, the reduction in credit availability to both Wall Street and Main Street and you can begin to understand how the obsessive focus on inflation is like a weird obsessive focus on the sun setting in your rear view mirror while you drive straight over a cliff.

 

[Buddy]

We’ll all be rooned," said Hanrahan
In accents most forlorn
Outside the church ere Mass began
One frosty Sunday morn.
......................

"It’s lookin’ crook," said Daniel Croke;
"Bedad, it’s cruke, me lad
For never since the banks went broke
Has seasons been so bad."

OK dhukka, we'll all be rooned?????
So, what if you had say 1/2 mill in cash, 1/4 mill in shares, 3/4 mill in super. How would you protect it.

 

[dhukka]

We’ll all be rooned," said Hanrahan
In accents most forlorn
Outside the church ere Mass began
One frosty Sunday morn.
......................

"It’s lookin’ crook," said Daniel Croke;
"Bedad, it’s cruke, me lad
For never since the banks went broke
Has seasons been so bad."

OK dhukka, we'll all be rooned?????
So, what if you had say 1/2 mill in cash, 1/4 mill in shares, 3/4 mill in super. How would you protect it.

Well I don't think I'll be ruined. For some reason people seem to assume that because I point out things that could negatively affect the economy and the stockmarket that I must be forecasting the end of the world. If the economy goes into a deflationary recession and drags asset prices down I will become extremely bullish.