I received an email this morning from a reader quoting Mish Shedlock's excellent blog:
I could not agree more with the quote (sort of). If you have been reading my blog for a while I have made my position quite clear on U.S. housing values.
Here comes the rub. We keep hearing this inflation vs deflation argument as if these 2 were natural phenomenon, like changing weather patterns. Inflation and deflation do NOT exist in nature. They exist in the context of an economy, and are driven by the monetary and fiscal policies of the various national governments.
In REAL terms, all of the above quote is true, though to a great deal less of an extent than was the case 2 years ago (Florida home prices are down 50% in 2 years. They may still be overleveraged, nut the median family income can now afford the median family home. This was not the case in 2005). What about NOMINAL terms? Clearly the Fed and Treasury are trying to reinflate - is there no possibility that they will be successful?
Let's say, for SILLY argument's sake, that the government passes a law that all wages are to be increased by 50% TOMORROW (stay with me, I am going somewhere). Of course this would drive wage/price inflation up 50% but would not move the NOMINAL balance on mortgages. This would destroy the value of savings, but would make housing relatively cheap and UNLEVERAGED very, very quickly.
The Mad Scientist mentioned that a new stimulus package, say a check for $5,000 instead of $600, would also do the trick.
As you can see it really isn't that hard to reinflate. The question is how BLATANT the government wants to be in its efforts toward currency debasement and inflation. If TPTB are NOT enthusiastic in their inflation mission, well, the Deflationists may well prove correct. At the moment, my money is on the Inflationists eventual victory. As always, I will reserve the right to change my position and bet the other way.
Now, of course the government agencies will not do anything so blatant, the impacts on our trade partners, the currency markets, etc... would be catastrophic. But the currency debasement/wage price inflation strategy is awfully tempting for TPTB. The debate between the inflationists and the deflationists is over how successful the government will be in their attempt to reinflate. The Deflationsists continue to point to Japan as their model. I think the argument is specious, at BEST, but I won't deny the probability of Deflation is some number greater than ZERO. Japan is a very difficult comparison to the U.S. on many levels, too many to list here.
More soon.
Mentatt (at) yahoo (d0t) com
2 comments:
What the Great Depression and Japan showed most importantly is that it is VERY tough to fight a deflation. Everything we all tried (and we tried everything) did not work: lower interest rates, public building projects, government employment, etc. It didn't work. People have no money at this economic stage, the credit cards are maxxed, and the banks are too afraid to lend. The cash sits. Now, over time, we are going to run out of everything "stored up," and will have to start buying again to survive. At that point, we are hoping, the inflation will kick in (especially with energy), and then you and we will be on the right side of thinking. Housing has another 15% down to go historically. But for now, if you can hold onto your job or govt. checks, deflation is great! :)
I think there's a problem of terminology here. Inflation is the devaluation of money (compared to the Real World). Deflation is a reduction of activity in the marketplace, i.e. the speed of money circulating in the economy. Therefore you can print loads of money and have both inflation (the money devalues) and deflation(although there's more money about, no-one wants to spend it). Hence stagflation.
Governments and central banks like to think and say they're in control, but we are again being reminded that their model simply doesn't work the way they think it does. In my opinion we are watching the first stages of the complete collapse of fractional banking.
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