Yet more economics
In my predictions post I said short term deflation followed by a serious inflation spike - almost but not quite kapoom. Were it not for my predicted war with Iran I'd have pegged it a bit differently, and I'd like to get down that bit of comment as well.
I think we're getting ready to enter a deflationary cycle. Now I need to define again - deflation is when the used/usable money supply contracts. It's tied to prices declining as they compete for those scarcer dollars. As I've described before, there's a chicken-egg debate between economic schools as to whether the declining prices is cause or effect. Me, I think it can be started by either.
Now we've been in an inflationary cycle - more money into the system causing higher prices chasing the money causing more money to enter the system... But that's about to stop - heck, it might have stopped already and we're coasting over the hump. BUT... the higher prices only work if the consumer has more money to spend. For most inflationary cycles of history the money injection is from wages. For the past decade, however, we've been experiencing the injection via credit -- mostly through home loans.
Now, however, home sales are about to stop. Well, go into severe curtailment. There are a lot of reasons, but they boil down to people suddenly having a LOT of their income tied up in paying for houses that aren't selling like they were. And that, combined with some 'necessities' increasing in price are what are triggering the upcoming deflation.
Waitaminute - RISING prices triggering deflation? Yep. Remember that the prices can go up as long as income leads or keeps up. But wages are flat and credit's basically going to stop. So here's the way the trigger works.
I have a bunch of stuff on which I can spend money. As the price goes up I have to quit buying some of that stuff - and while I cut everything a bit, I cut necessities the least. Multiply me by a LOT of people no longer buying stuff and it starts hitting the companies selling things. They will try several things to try and get us back, but eventually someone will reduce prices -- and that'll succeed, which pulls more price declines, and so on and so forth. Eventually this turns around because businesses don't like making less than they did before. So every so often they test the market, and sooner or later the people have enough extra money that they succeed - and eventually enough do that to end the deflation (and maybe even reverse into inflation).
The problem is that in our current mentality deflation is a bad thing. Actually it's not just our mentality, it's our society. We're a debtor nation. Worse, our NATION is a debtor nation. As I've discussed before, deflations are bad for the borrower and good for the lender as the effective money transferred is larger than the nominal money. Making things worse, any deflationary period is also a depression - most of GDP is due to consumers purchasing, and as already pointed out deflations are triggered by sales declining. Which means that all things being equal our government prefers inflation to deflation.
So if everything were left alone, we'd see a longish period of deflation till income (cash or credit) once more balanced expenses. I'm not good at guessing but I can't see less than a year of this - with a long side of a decade. Ugliness indeed. And it's what we're looking at if the government can't inject more money.
The deflationists don't think money can be injected. After all, more credit can't be pushed, and wages have an intermediate step of getting the companies to pass it along instead of absorbing it as profits. So how, they ask, are we going to inject more money.
There are three possibilities. The first for you readers is my prediction - war. Now it could be done with an internal major project. And believe it or not I think that in the long run this would be the ideal fix -- pick a HUGE project that requires thousands (even hundreds of thousands) of employees over several years to accomplish, and pay them with new money. The Tennessee Valley project revisited. There are several very good opportunities for this - in fact, I think I'll write another post about them. But that's because I don't see them happening. Of course, the war isn't intended to solve that problem, it's due to other issues that are far less noble. But it's got the potential to work as well -- IF (and it's a big if) enough of the United States gets involved in receiving money from the government trough. If it's another 'war on the cheap', it's no help at all.
The second possibility for injecting money is to make more credit palatable. Most of the means of doing this are variations of 'debt relief acts' - credits or waivers or forced reductions or some such which have all been used in the past with varying degrees of success.
The third method is one I dread the most, and amounts to some sort of con game with taxes. My specific example of this is the FairTax (HR25) on which I've written enough already. While terrible for everyone in the long run, the immediate effect of its implementation would be to increase the size of everyone's takehome pay by a large amount. (It just leaves by way of sales tax - it and more, but again I've ranted long enough.)
The point is, while all the reasonable pointers are for deflation, the government would prefer inflation and has the means to force inflation for a little bit longer. Thus my prediction: deflation for a few months followed by severe inflation.
I think we're getting ready to enter a deflationary cycle. Now I need to define again - deflation is when the used/usable money supply contracts. It's tied to prices declining as they compete for those scarcer dollars. As I've described before, there's a chicken-egg debate between economic schools as to whether the declining prices is cause or effect. Me, I think it can be started by either.
Now we've been in an inflationary cycle - more money into the system causing higher prices chasing the money causing more money to enter the system... But that's about to stop - heck, it might have stopped already and we're coasting over the hump. BUT... the higher prices only work if the consumer has more money to spend. For most inflationary cycles of history the money injection is from wages. For the past decade, however, we've been experiencing the injection via credit -- mostly through home loans.
Now, however, home sales are about to stop. Well, go into severe curtailment. There are a lot of reasons, but they boil down to people suddenly having a LOT of their income tied up in paying for houses that aren't selling like they were. And that, combined with some 'necessities' increasing in price are what are triggering the upcoming deflation.
Waitaminute - RISING prices triggering deflation? Yep. Remember that the prices can go up as long as income leads or keeps up. But wages are flat and credit's basically going to stop. So here's the way the trigger works.
I have a bunch of stuff on which I can spend money. As the price goes up I have to quit buying some of that stuff - and while I cut everything a bit, I cut necessities the least. Multiply me by a LOT of people no longer buying stuff and it starts hitting the companies selling things. They will try several things to try and get us back, but eventually someone will reduce prices -- and that'll succeed, which pulls more price declines, and so on and so forth. Eventually this turns around because businesses don't like making less than they did before. So every so often they test the market, and sooner or later the people have enough extra money that they succeed - and eventually enough do that to end the deflation (and maybe even reverse into inflation).
The problem is that in our current mentality deflation is a bad thing. Actually it's not just our mentality, it's our society. We're a debtor nation. Worse, our NATION is a debtor nation. As I've discussed before, deflations are bad for the borrower and good for the lender as the effective money transferred is larger than the nominal money. Making things worse, any deflationary period is also a depression - most of GDP is due to consumers purchasing, and as already pointed out deflations are triggered by sales declining. Which means that all things being equal our government prefers inflation to deflation.
So if everything were left alone, we'd see a longish period of deflation till income (cash or credit) once more balanced expenses. I'm not good at guessing but I can't see less than a year of this - with a long side of a decade. Ugliness indeed. And it's what we're looking at if the government can't inject more money.
The deflationists don't think money can be injected. After all, more credit can't be pushed, and wages have an intermediate step of getting the companies to pass it along instead of absorbing it as profits. So how, they ask, are we going to inject more money.
There are three possibilities. The first for you readers is my prediction - war. Now it could be done with an internal major project. And believe it or not I think that in the long run this would be the ideal fix -- pick a HUGE project that requires thousands (even hundreds of thousands) of employees over several years to accomplish, and pay them with new money. The Tennessee Valley project revisited. There are several very good opportunities for this - in fact, I think I'll write another post about them. But that's because I don't see them happening. Of course, the war isn't intended to solve that problem, it's due to other issues that are far less noble. But it's got the potential to work as well -- IF (and it's a big if) enough of the United States gets involved in receiving money from the government trough. If it's another 'war on the cheap', it's no help at all.
The second possibility for injecting money is to make more credit palatable. Most of the means of doing this are variations of 'debt relief acts' - credits or waivers or forced reductions or some such which have all been used in the past with varying degrees of success.
The third method is one I dread the most, and amounts to some sort of con game with taxes. My specific example of this is the FairTax (HR25) on which I've written enough already. While terrible for everyone in the long run, the immediate effect of its implementation would be to increase the size of everyone's takehome pay by a large amount. (It just leaves by way of sales tax - it and more, but again I've ranted long enough.)
The point is, while all the reasonable pointers are for deflation, the government would prefer inflation and has the means to force inflation for a little bit longer. Thus my prediction: deflation for a few months followed by severe inflation.
posted by Kirk at 3:56 PM
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