News & Analysis
Is It a Deflationary Depression?
Drip after drip of deflation data ... Today's release on manufacturing activity by the Richmond Fed is pretty ghastly, as you would expect given that the effects of fiscal stimulus are now wearing off at an accelerating pace – before the happy handover to the private sector is safely consummated – and given that the structural East-West imbalances that lay behind the global crisis are getting worse again ... This follows yesterday's horrendous fall in the Texas business activity index from the Dallas Fed, which fell from -4 in June to -21 in July. "Thirty-one percent of firms reported a worsening of activity, up from 22 percent in June," said the bank. Texas New Orders were -9.6 in July, -8.2 in June, and +15.8 in May. Capacity Utilization was -0.6 in July, +2.7 in June, and +18.7 in May. This of course is why Fed chair Ben Bernanke has been giving strong hints of QE2 (helicopters again) if necessary. – UK Telegraph
Dominant Social Theme: A deflationary depression coming at ya.
Free-Market Analysis: The Telegraph has been very good at diagnosing deflationary trends in the larger economy, and we have agreed with this analysis because it seems obvious. What is noteworthy, however, is that prices keep going down, as the Telegraph analyzes above, even though there are numerous proclamations that the "recession" is over.
In fact as much as we find the economic analysis of the Telegraph to be intriguing, the emphasis on deflation and the central banking response inevitably gives rise to a kind elitist dominant social theme: "If only central bankers would respond diligently and with the right monetary formula, all would be well or at least better."
Of course this theme plays right into the larger meme of central bankers as a kind of priesthood tending to a monetary Godhead. It is a secular religion, encouraged by the bankers themselves, that a technocratic elite can "manage" the economy to a monetary Nirvana. History and present day events of course show that bankers can do no such thing. But the meme will be continually trotted out, especially during times when central banking is seen as evidently and obviously failing.
What the Telegraph warns us about is a deflationary depression, which the Telegraph believes is the worst of all possible worlds. Various writers at the Telegraph then express their preferences for immediate and vigorous activity by central bankers to rev up the printing presses so as to prevent additional price deflation. Central bankers are in charge, according to this reading of economic history. But are they really? As we have pointed out in the past it is possible to see falling prices in another context as the inevitable outcome of a crack-up boom.
This is an Austrian free-market analysis. Such analysis perceives central banks as over-printing money, which fools people into believing that the economy is better than it really is. Thus, businesspeople over-expand and consumers splurge. Eventually the larger market realizes the reality of what is occurring and stocks pull back (often crash) and a "recession" sets in.
The crash and subsequent retrenchment have been worse than normal, as evidenced by the sharpness of the decline in 2008-2009, and its lingering effects. This, too, is entirely to be expected given that the current economic crisis is the end-result of decades of monetary stimulation starting at least as far back as the early 1980s. In fact, Western economies are bollixed up because constant monetary stimulation makes it very difficult for anyone to know what economies would actually look like – or how they would function – without it.
Even the words themselves are suspect. While there are formal definitions delineating the differences between a recession and depression, they do not get at the cause of the problem from our point of view. Recessions occur because central banks print additional money when the economy starts to slow. By printing a lot of additional money, central bankers can ease the economy into a "soft landing. "
But a "soft landing" is actually counterproductive because the larger economy is never allowed to wring out distortions. This is of major importance because if businesses are not allowed to fail and are always supported by monetary stimulation (and now bailouts) then price discovery ceases to work. Once price recovery doesn't work, lending stops because banks and other lenders don't know whom to lend to. The economy tends to freeze and the velocity of money diminishes.
That's where we are today, in our humble opinion. Because of constant monetary stimulation, the larger economy never had a chance to wring out excesses. Eventually there must be a much larger bust. According to this definition, smaller busts are times when bankers are successful in reflating, but larger busts (the Great Depression, the 1970s crises and now the Great Recession of the 2000s) are indicative of epochs when monetary stimulation doesn't do the trick.
Within this context, it is certainly understandable that prices head downward as they are doing now. The question one must grapple with – especially if one is an investor who wants to understand such things – is whether central bankers can do anything to reflate during a "larger bust." We've indicated in past articles that the unwinding and diminishing prices are probably inevitable and that when central bankers print money during such times they are simply raising the odds of price inflation down the road.
We have little doubt that at some point, price deflation (deleveraging) will come to an end. Central banks will do everything in their power to prevent the natural unwinding of economies, thus storing up additional trouble for the next business cycle. Additionally, by making banks and certain other entities "too big to fail," the powers-that-be have added another level of confusion that further obscures economic indicators and increases the difficulty of normal price discovery.
From our point of view, these are all natural processes stemming from the determination of central bankers to use fiat money, which is inevitably prone to exaggerated booms and busts. The use of fiat money also makes figuring out what is going on economically very difficult. It even obscures the issue of what money actually is.
By constantly injecting money into the system and by not allowing businesses to fail, central banks further distort the business cycle. In this case, the distortion in the economy is very great and the central banking response has been proportionately greater, thus ensuring that the Great Recession will stretch out in length. Eventually, once prices have normalized, there will be some sort of "recovery." But because bankers have already baked "inflation" into the cake by printing so much money, price inflation will inevitably be generated by any recovery, causing bankers to raise rates, etc.
The above is a purely monetary approach to depressions, recessions, deflation and inflation. Ordinarily, economists like to speak about supply and demand and business factors influencing the economy. But in fiat-money economies, we would argue that there is little that matters beyond what is being accomplished monetarily. The ability to print money at will is such a powerful activity that it virtually overwhelms most if not all other business-cycle influences.
There is little from our point of view that central bankers can do to "cure" an initial downward spiral in prices in the context of a major crack-up such as the one the West is currently undergoing. It is a most normal part of the business-cycle. The idea that central bankers can "manage" the economy or even salvage it through money printing and bailouts gives the modern banking community more power than it actually has. The only power that central banking really gives to bankers is the power to inflate – a clumsy one at that. Central bankers can also retard the unwinding process of an economy by trying to inflate yet again and by promulgating "too big to fail" policies.
Since central banks have taken an unfortunately proactive approach (as they always do) this Great Recession will be even longer and more painful than it would have been otherwise. Prices will continue to fall and banks and other entities will be reluctant to lend until the distortions wring themselves out of the economy. Then, as activity picks up, prices will rise rapidly as central banks have already printed and attempted to circulate an overabundance of money. The question that will be asked in the meantime (though never in the mainstream media) is whether people will continue to tolerate the system as it is or demand changes.
Conclusion: The bankers already have a fallback plan, of course. They will apparently suggest a kind of IMF money, and insist that such new money will ameliorate past problems. The dollar (and perhaps the euro) may be sacrificed to popular wrath and a basket of currencies implemented as a new world money. But what won't be pointed out, were this scenario somehow to take place, is that the Anglo-American axis controls the IMF as thoroughly as it currently controls the dollar. Thus a change to IMF SDRs won't really be much of a change at all, were it to happen. What is really necessary at this juncture is the emergence of a private gold and silver standard. Perhaps one will emerge spontaneously. These are strange times, so perhaps it is possible.
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Posted by Carl on 07/31/10 02:10 PM
The polity and economic reality drive the degree of catastrophe.
I don't think what we're having here qualifies as a disagreement.
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Posted by Carl on 07/30/10 12:30 PM
Daily Bell: "OK, and what are the differences?"
A still functioning industrial base.
Higher savings rate.
Almost nonexistant credit card industry.
More cash in the system.
Less debt.
Smaller government.
Less regulation.
More freedom.
One earner families.
Glass-Steagall.
Economic wiggle room.
etc., etc., etc.............
The differences in circumstances are tremendous while the similarities are primarily superficial.
For a better comparative perspective: Click to view link
Reply from The Daily Bell
Obviously we disagree. The 1970s are separated from the 2000s not by a system of polity but by a degree of catastrophe. Still, we thank you for being responsive and presenting your argument along with a link.
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Posted by Carl on 07/30/10 11:57 AM
Daily Bell: "Perhaps you don't remember the 1970s " especially in the US?"
Yes I do remember the 70s that's why I stated what I did. While the 70s held their own set of extenuating circumstances that led to high unemployment, stagnant wage growth and high inflation, (primarily due to neoliberal, ideological driven policies that fostered the onset of the destruction of our industrial base and the U.S.'s ability to earn its way in the world), a comparison between then and now, is anecdotal and superficial at best.
I would suggest that one would be far better served in forming their evaluations by examining the economic 'differences' between than and now than they would by limiting their view to the similarities.
Reply from The Daily Bell
OK, and what are the differences?
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Posted by Charly on 07/29/10 10:40 PM
It appears that that link has been hijacked,Click to view linkems to be a lot of that going around on the net these days.
Try going to
Click to view link
and then pull up the july 28th letter. Hope that works.
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Posted by Charly on 07/29/10 10:28 PM
Well, real estate was / is a deflating of an over inflated balloon, that burst due to fraud.
Everything I buy regularly over the last 3 years has gone up 10% to 25% a year. Oh, one other item has deflated,...my social security checks.
Bob Chapman at "The International Forecaster", has much to say about all this, and Goldman Sucks, on a weekly basis at:
Click to view link
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Posted by Charles Pasley on 07/29/10 12:55 PM
I am the main purchaser for our household, and I haven't seen any prices, except for gasoline, going down here in southern Virginia. Groceries, electricity, and health insurance premiums have all skyrocketed for my wife and me during the past two years. Only books and gasoline have come close to maintaining even prices, so if there is price deflation, I have yet to see it!
Reply from The Daily Bell
Real estate.
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Posted by Carl on 07/29/10 11:35 AM
"But there was huge price inflation in the later 1970s in America during an economic era similar to this one. We suspect that this cycle will eventually correspond to what happened then. This means there are one or two legs to go and another perhaps five years before the cycle turns once more."
The only thing similar between 1970s U.S. economy and 2010 U.S. economy, it the term "U.S. economy". You may as well be trying to compare a lemon with a watermelon as to compare the two. What's similar, the $57 Trillion in debt? Or maybe it's our industrial earning capacity? How about the 100s of trillions in exotic financial instruments that are dangling like the Sword of Damocles over 'our' Financial District's head, by a fraying thread.
We don't have an economy, we have a debt driven, makeshift busywork clusterf**k posing as an economy and unless you believe that the credit markets are going to suddenly unlock and start flooding the U.S. debt slaves with even more credit, there is nothing about it that will give "high inflation" legs.
And before anyone starts in on 'price pull' generated inflation; if the people can't earn or borrow credit to support rising prices, all price pull will accomplish is a faster disintegration of our makeshift busywork clusterf**k of an economy.
Reply from The Daily Bell
Perhaps you don't remember the 1970s - especially in the US?
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Posted by MGN on 07/29/10 07:27 AM
Very well written and on the money facts. Maybe when the craziness of all the government games begin to stall out they will mail us cancelled checks for all the nonexsisting things they are buying us.They can send us self addressed boxes with pictures of gold and silver and we can send them our real coins in return so that the wizard of fiat will remain happy.
When the game ends whatever you have is yours.Accumulate what you know is valuable and you will have power over them. Play a hard tough outlasting game of survival. Better times will come after you starve them out.
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Posted by AmanfromMars on 07/29/10 02:29 AM
"The question that will be asked in the meantime (though never in the mainstream media) is whether people will continue to tolerate the system as it is or demand changes."
Whatever would be the good reason for retaining a system which is catastrophically failed and demonstrably failing spectacularly fueled by a lack of intelligence in bankers, who now wouldn't know a good investment opportunity even if it was presented to them, which is surely what the Daily Bell has just said in the article.
And that is where the problem lies .... right at the head of the system with central banking in a mental block and a Bind and being bankrupt of original ideas, and yet would think themselves to be worthy sagacious paymasters and remote proxy vetting agents for those floating original ideas on the Markets ....... which of course would be to be using completely different intelligence to that which has failed everyone so badly and madly, and thus will it naturally assume an absolute and presumptive overall control with new players seeing an altogether different future ...... which, by the way, is only natural and to be fully expected, as to imagine that anything remains the same is to be delusional and is an insane block on progress and industry and economy.
Fortunately though, are the necessary remedial steps well into their stealthy actions, for SMART Intelligence Services do not need or wait on Protocols and Permissions to Decide to Act Unilaterally and Universally with Stormy Tempestuous Clouds Covering and Hosting New Programming in Advanced Operating Systems.
Such Systems as would it be not here, the time or the place to expand upon, but which are trailled and trialled in anothher phorm for others to consider, here ..... Posted by: amanfromMars | 07/29/10 | 12:46 am | .... Click to view link
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Posted by Chris F on 07/29/10 01:21 AM
What I don't get is how they plan to get people to accept the IMF SDRs on faith. The dollar was once on the gold standard and people were use to it, so when the gold standard was dropped people continued to use the dollar. When the dollar gets dropped as the world's reserve currency, isn't that going to cause a big drop in the value of the dollar? Won't that be a huge problem, not only for the bankster elite but also for the Federal Government? It seems to me that they are just stirring up a hornet's nest of trouble with not much of a viable plan to execute when the dollar goes bust.
Reply from The Daily Bell
We don't get it either. We don't believe it will work.
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Posted by Philip Mccormack on 07/29/10 12:37 AM
When one looks at "Too big to Fail" and reads Fekete's recent article."There is no real gold market any more. Goldman Sucks is playing with itself. Most trades are bogus, sales as well as purchases. Leases ditto. What Goldman Sucks couldn't get away in a falling market, it can in a rising one."
Perhaps this was the major reason for the bailout. "Gold bidding for dollars can be kept alive on a life support system. Indefinitely?" Thus enabling the fiat money system (with the cover up of backwardation) to continue for a long time. And of course we don't know how large the profit margin is for Goldman, and how it fits in to a deflationary depression. DB, what is your take on this situation? Happy days ...
Reply from The Daily Bell
We tend to look at these issues within a business cycle that is playing itself out now and has years to run. Within this context gold and silver seem headed inexorably higher. But hey what do we know?
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Posted by Bionic Mosquito on 07/29/10 12:31 AM
Deflation of what? CPI? No way. Won't happen and even in the deflationist's darling Japan, hasn't happened. Look at Japanese CPI -- a few years of negative change, but not more than negative 1% or 2%, many years of positive 0% or 1%.
In the era of central banks and fiat money, CPI deflation will not happen because they fool us into thinking CPI is the "target," in an attempt to distract us from the theft. As long as CPI is tame, the banks will feel politically safe to pump. And they will pump...to try to protect asset prices, at which I think they will fail because the market always wins eventually.
Deflation of asset prices? Eventually, most likely where fiat most distorts market activity. Liquid equity markets, nonsensical financial-created derivative instruments, etc. Likely to effect gold less than other assets, because the lower the CPI the more money pumping -- see my first comment above -- this will cause continued fear of holding fiat currency.
Deflation where government most distorts economic activity? Likely, yes. Higher education, public employee compensation and pensions, U.S. real estate, etc.
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Posted by Rolland Carpenter on 07/28/10 07:05 PM
The two plus trillion dollar surplus in Social Security is gone! Pooof! Two plus trillion has been given, yes given, to those "Too Big to Fail". This will not be recovered, beyond one or two percent in taxes, fines and TARP repayments. During this same period of financial manipulation fraud, two or three trillion has been added to America's national debt. Social Security "contributions" were sold as a secure retirement fund. Now, only the billionaires will be paid--and they paid nothing into the "insurance" they collected.
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Posted by Liberty666 on 07/28/10 05:05 PM
Weimar republic had an inflation problem, you needed a wheelbarrow full of money just to buy a potato.
Reply from The Daily Bell
We never denied it. It is a cautionary tale, especially given what is going on today. But it is difficult to compare the Republic to the larger West itself. Like comparing a mouse to an elephant. Nonetheless, there are some similarities and monetary price inflation is not necessarily ameliorated by size.
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Posted by TMoore on 07/28/10 04:44 PM
Price discovery. On this, much depends.
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Posted by Snowman on 07/28/10 03:04 PM
@ Daily Bell
Cite: Obviously the private market moved to take over the public market. Or to be more precise, the Red Shield moved to refine the mercantilist banking art around the world. This much is obvious. But the problem is not Jewish. The problem lies not with banking. The problem lies not with Wall Street or even the City. The problem does not even lie with the Talmud. The problem lies with unholy public/private alliance between state and industry in which industry uses the color of law for its own benefit. It is a systemic problem.
Could it be that an internal connection of all the "non problems" listed could be the systemic problem?
Reply from The Daily Bell
What!
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Posted by Edward Ulysses Cate on 07/28/10 02:25 PM
To understand my earlier comment as it relates to this article, here's a more realistic version of the article's conclusion:
Conclusion: The bankers already have a fallback plan, of course. They will apparently suggest a kind of IMF promise [money], and insist that such new promises [money] will ameliorate past problems [of previous promises]. The US promise [dollar] and perhaps the EU promise [euro] may be sacrificed to popular wrath and a basket of other promises [currencies] implemented as a new world promise [money].
Deflation could occur simply because folks have less ability to trade due to what's stolen from them. A Dow 10,000 doesn't mean any more than a Dow 1,000 if everything else is priced 10 times more. In 1968, my gallon of gas cost 25 cents. Now it costs at least $2.50. But my labor is said not to be worth 10 times as much as I did in 1968. The same amount [1/8 ounce] of silver buys a gallon today as it did back in 1968. But in promise money, my 1968 quarter [1/4 dollar] only buys a tenth of a gallon. The difference was stolen, pilfered over time, like rats pilfering corn from a silo.
Central bankers, along with key institutional bankers, know exactly what they're doing, and have for hundreds of years. After all, ScotiaMocatta (precious metals), founded in 1671, and Barclays Bank, founded in 1690, are still key players. They really don't want you to understand "promises."
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Posted by Ed Waggoner Sr. on 07/28/10 02:21 PM
Very good. But, we differ in a small way. "What is really necessary at this juncture is the emergence of a private gold and silver standard. Perhaps one will emerge spontaneously. These are strange times, so perhaps it is possible."
I don't believe in a gold and silver "standard" if by the use of the word "standard" you mean fiat paper and ink currency backed by gold and silver. It seem to me that neither government nor private banks or even state banks can be trusted to print and manage fiat paper and ink currency.
Let's say that Jack writes a check to Bob to purchase a used car. Bob will deposit the check in his bank, gold will be transfered from Jack's account to Bob's account. What is of capital importance is that the check is canceled and is no longer in circulation. No increase in the supply of money in circulation, consequently, no inflation.
Reply from The Daily Bell
It is an endless debate. To a degree, we are partial to Selgin, White, Fekete, et. al. And to the free-market itself.
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Posted by Richard Daughty on 07/28/10 01:56 PM
Bravo! Put as well as I have ever heard it put, and perhaps as well as it can be put!
Reply from The Daily Bell
Ah, such kind words from the Mogambo Master, Wreaker of Havoc and Perdition on All Economic Churls and Falsehoods Everywhere All the Time. We are ever so humbled and pleased.
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Posted by Kevin Fisher on 07/28/10 01:18 PM
To stay on the Deflation topic specifically, most of the "Press" I read about in alternative circles is almost universally calling for hyper-inflation and the ascendancy of gold and silver as investment mediums.
I am constantly seeing headlines saying "Now that gold is down a little, this is a great time to buy" and "Gold to hit $2, 3 or 5,000 per ounce" take you pick of the upper number. Now that I have been studying the work of Robert Prechter at Click to view link and studied the historical charts that they use to back up their position, a deflation has already arrived, just as predicted, and the facts of history show that in a true deflation ALL asset classes go down, including gold and silver.
So I ask all of the people rushing to buy various commodities at these inflated prices to do a little reading by someone other than a gold bug. A great place to start would be Prechter's book "Conquer the Crash". It was a turning point in my thinking about the markets.
A case in point is the gross misuse of the term "printing money" and comparisons to Wiemar Germany hyper-inflation. Credit expansion, which is what has been occurring, is not the same as printing money and has a different set of effects, or a different timing of effects, both of which are ruinous of course.
Reply from The Daily Bell
Credit expansion is not "circulating money," if you want to use Austrian definitions. Money has not yet started to circulate. But it will in time, if the system does not disintegrate first. The Wiemer hyper-inflation is not necessarily a good example of anything as it was a tiny region with odd circumstances. But there was huge price inflation in the later 1970s in America during an economic era similar to this one. We suspect that this cycle will eventually correspond to what happened then. This means there are one or two legs to go and another perhaps five years before the cycle turns once more.
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