http://globaleconomicanalysis.blogspot.com/2011/08/yes-virginia-us-back-in-deflation.html
Hyperinflationits have now blown it twice. First, they insisted hyperinflation would happen before deflation. They were wrong. Then, during the QE2 inspired equities and commodities ramp, they said the same thing. They were wrong again.
Prior to the Great Financial Crisis I had a bet with "Heli-Ben", a staunch hyperinflationist who insisted we would hyperinflation before deflation. I won the bet but have not yet received my prize, a "crying towel" from "Heli-Ben".
By any rational measure, and certainly by my definition, the US went into a period of deflation lasting at least a year. Deflation ended in March of 2009.
In the wake of QE II hyperinflationists again started preaching about hyperinflationary crashes. Once again, and with increasing intensity, we heard things like ...
I could assign names to the above list, but I won't.
Two well-known hyperinflationists confidently predicted hyperinflation would start this year. A third said 2011 or 2012 giving himself extra time to be proven wrong.
My position all along was that the US would go in and out of deflation over a period of years, just like Japan.
I am claiming my "crying towel" prize for the second time. The US is now undeniably back in deflation. If "Heli-Ben" does not submit a "crying towel" his word is as good as his economic theories, which is to say worthless.
Definition of Terms
Before discussing terms one must define them. I have on numerous occasions defined mine, and my definition was the basis for the bet.
Inflation
Inflation is a net increase in money supply and credit, with credit marked-to-market.
Deflation
Deflation is a net decrease in money supply and credit, with credit marked-to-market.
Hyperinflation
Complete loss of faith in currency.
The first two definitions have nothing to do with prices per se, the third does (by implication of currency becoming worthless).
Price Myopia
Many if not most economists, especially Keynesians, think of inflation in terms of prices.
In contrast, Austrian-minded economists generally have definitions similar to mine except most of them fail to properly include credit in their analysis. Austrians in general look at money supply alone, and that is a huge mistake.
Role of Credit in Inflation
Failure to include credit in the definition of inflation and the analysis of economic activity causes many problems. Credit influences consumer prices, jobs creation, and asset prices. The mark-to-market value of credit influences the ability and willingness of banks to lend.
People tell me all the time, "all I care about is prices". If they really mean it, they are fools. Without credit expansion there is little hiring. Without hiring and money to pay for things, consumers cannot pay back loans and asset prices in general, crash.
Trillions of dollars in debt-inflated (thus imaginary) wealth have been wiped out in housing and the stock market because of falling credit, loss of jobs, and inability to service debt. Many homes fell in price from $500,000 to $200,000 (or equivalent percentages).
This is far more important than the price of gasoline hitting $4 or the price of carrots rising 50% to $2 a bunch. Yet, inflationists constantly fret about prices, ignoring far more important credit conditions.
Price myopia has other problems. Both Greenspan and Bernanke ignored an explosion of credit that fueled housing. Thus, a focus on prices induced errors on the way up and on the way down.
Fed Ignorance
The massive bubbles in credit and housing, were a direct consequence of Fed ignorance. Bernanke failed to see a recession and a housing bubble that would have been obvious to anyone using a proper definition of inflation.
I cannot tell someone what their definition should be, I can only point out the complete foolishness of concern over prices vs. rapid expansion or contraction of credit and credit marked-to market.
===
When I wrote "Humpty Dumpty on Inflation", the U.S. was unquestionably in a period of deflation. However, I also clearly pointed out "Every deflationist on the planet understands inflation will be back at some point and the Fed will attempt to do everything it can to avoid it."
In retrospect, the word "every" in the above sentence is too strong.
Regardless, I explicitly pointed out deflation was not permanent while also stating on numerous occasions that the US would be back in deflation, and indeed we are.
In "Humpty Dumpty" I listed conditions (symptoms) one would expect to see in deflation, as follows.
Symptoms of Deflation
Scorecard
When you go to a doctor for diagnosis of an illness, the first thing the doctor inquires about is symptoms. So let's do just that for the second time.
Let's take those 15 conditions one would expect to see in deflation and see how many apply.
1- Falling Credit Marked-to-Market
The mark-to-market value of credit on the balance sheets of banks and financial institutions is the hardest of the 15 items to measure. Indeed, the mark-to-market value of credit cannot be directly measured at all.
The reason is banks do not mark-to-market assets unless those assets are worth more than they paid for them. The Fed, FDIC, and FASB (Financial Accounting Standards Board) lets banks get away with just that. Mark-to-Market rule enforcement has been postponed twice. Moreover, banks hide non-performing loans off the balance sheet in SIVs and by other tactics.
However, one can easily impute the direction of of the value of credit on the balance sheets of banks and financial institutions by watching prices of bank shares.
In 2008 shares of financial corporations plunged. In March 2009, financial assets valuations soared. That action kept up for longer than I expected.
However, early this year, bank stocks started showing weakness (long before the rest of the market), then crashed in the last couple weeks.
====
12 - Banks Hoarding Cash
I wrote about banks hoarding cash and paying negative interest rates on deposits on August 4, 2011 in Bank of New York Mellon to Slap Fees on Big Deposits Following "Global Dash For Cash"; When was Hyperinflation Supposed to Start?
Excess reserves is another measure of willingness to lend.
Excess Reserves
Excess Reserve Money-Multiplier Theory is Fatally Flawed
Some have written these "excess reserves" are waiting in the wings to cause massive inflation.
It did not happen nor will it. Simply put, the excess-reserve money-multiplier theory is potty.
Banks do not lend just because they have reserves. Indeed reserves do not enter the equation at all. Rather, banks lend as long as they are not capital impaired and as long as they have good credit risks willing to borrow.
In this case, banks are capital impaired, and there are too few credit-worthy clients who want to borrow. The result is banks do not lend and money sits as excess reserves.
Hyperinflationits have now blown it twice. First, they insisted hyperinflation would happen before deflation. They were wrong. Then, during the QE2 inspired equities and commodities ramp, they said the same thing. They were wrong again.
Prior to the Great Financial Crisis I had a bet with "Heli-Ben", a staunch hyperinflationist who insisted we would hyperinflation before deflation. I won the bet but have not yet received my prize, a "crying towel" from "Heli-Ben".
By any rational measure, and certainly by my definition, the US went into a period of deflation lasting at least a year. Deflation ended in March of 2009.
In the wake of QE II hyperinflationists again started preaching about hyperinflationary crashes. Once again, and with increasing intensity, we heard things like ...
- The US is Zimbabwe
- No food available at any price
- Oil is going to $200, then $400
- Excess reserves will pour into the economy causing massive inflation
- No one will be willing to hold US dollars
- Treasury rates are going to the moon
- The US dollar is going to zero
I could assign names to the above list, but I won't.
Two well-known hyperinflationists confidently predicted hyperinflation would start this year. A third said 2011 or 2012 giving himself extra time to be proven wrong.
My position all along was that the US would go in and out of deflation over a period of years, just like Japan.
I am claiming my "crying towel" prize for the second time. The US is now undeniably back in deflation. If "Heli-Ben" does not submit a "crying towel" his word is as good as his economic theories, which is to say worthless.
Definition of Terms
Before discussing terms one must define them. I have on numerous occasions defined mine, and my definition was the basis for the bet.
Inflation
Inflation is a net increase in money supply and credit, with credit marked-to-market.
Deflation
Deflation is a net decrease in money supply and credit, with credit marked-to-market.
Hyperinflation
Complete loss of faith in currency.
The first two definitions have nothing to do with prices per se, the third does (by implication of currency becoming worthless).
Price Myopia
Many if not most economists, especially Keynesians, think of inflation in terms of prices.
In contrast, Austrian-minded economists generally have definitions similar to mine except most of them fail to properly include credit in their analysis. Austrians in general look at money supply alone, and that is a huge mistake.
Role of Credit in Inflation
Failure to include credit in the definition of inflation and the analysis of economic activity causes many problems. Credit influences consumer prices, jobs creation, and asset prices. The mark-to-market value of credit influences the ability and willingness of banks to lend.
People tell me all the time, "all I care about is prices". If they really mean it, they are fools. Without credit expansion there is little hiring. Without hiring and money to pay for things, consumers cannot pay back loans and asset prices in general, crash.
Trillions of dollars in debt-inflated (thus imaginary) wealth have been wiped out in housing and the stock market because of falling credit, loss of jobs, and inability to service debt. Many homes fell in price from $500,000 to $200,000 (or equivalent percentages).
This is far more important than the price of gasoline hitting $4 or the price of carrots rising 50% to $2 a bunch. Yet, inflationists constantly fret about prices, ignoring far more important credit conditions.
Price myopia has other problems. Both Greenspan and Bernanke ignored an explosion of credit that fueled housing. Thus, a focus on prices induced errors on the way up and on the way down.
Fed Ignorance
The massive bubbles in credit and housing, were a direct consequence of Fed ignorance. Bernanke failed to see a recession and a housing bubble that would have been obvious to anyone using a proper definition of inflation.
I cannot tell someone what their definition should be, I can only point out the complete foolishness of concern over prices vs. rapid expansion or contraction of credit and credit marked-to market.
===
When I wrote "Humpty Dumpty on Inflation", the U.S. was unquestionably in a period of deflation. However, I also clearly pointed out "Every deflationist on the planet understands inflation will be back at some point and the Fed will attempt to do everything it can to avoid it."
In retrospect, the word "every" in the above sentence is too strong.
Regardless, I explicitly pointed out deflation was not permanent while also stating on numerous occasions that the US would be back in deflation, and indeed we are.
In "Humpty Dumpty" I listed conditions (symptoms) one would expect to see in deflation, as follows.
Symptoms of Deflation
- Falling Credit Marked-to-Market
- Falling Treasury Yields
- Falling Home Prices
- Rising Corporate Bond Yields
- Rising Dollar
- Falling Commodity Prices
- Falling Consumer Prices
- Rising Unemployment
- Negative GDP
- Falling Stock Market
- Spiking Base Money Supply
- Banks Hoarding Cash
- Rising Savings Rate
- Purchasing Power of Gold Rises
- Rising Number of Bank Failures
Scorecard
When you go to a doctor for diagnosis of an illness, the first thing the doctor inquires about is symptoms. So let's do just that for the second time.
Let's take those 15 conditions one would expect to see in deflation and see how many apply.
1- Falling Credit Marked-to-Market
The mark-to-market value of credit on the balance sheets of banks and financial institutions is the hardest of the 15 items to measure. Indeed, the mark-to-market value of credit cannot be directly measured at all.
The reason is banks do not mark-to-market assets unless those assets are worth more than they paid for them. The Fed, FDIC, and FASB (Financial Accounting Standards Board) lets banks get away with just that. Mark-to-Market rule enforcement has been postponed twice. Moreover, banks hide non-performing loans off the balance sheet in SIVs and by other tactics.
However, one can easily impute the direction of of the value of credit on the balance sheets of banks and financial institutions by watching prices of bank shares.
In 2008 shares of financial corporations plunged. In March 2009, financial assets valuations soared. That action kept up for longer than I expected.
However, early this year, bank stocks started showing weakness (long before the rest of the market), then crashed in the last couple weeks.
====
12 - Banks Hoarding Cash
I wrote about banks hoarding cash and paying negative interest rates on deposits on August 4, 2011 in Bank of New York Mellon to Slap Fees on Big Deposits Following "Global Dash For Cash"; When was Hyperinflation Supposed to Start?
Excess reserves is another measure of willingness to lend.
Excess Reserves
Excess Reserve Money-Multiplier Theory is Fatally Flawed
Some have written these "excess reserves" are waiting in the wings to cause massive inflation.
It did not happen nor will it. Simply put, the excess-reserve money-multiplier theory is potty.
Banks do not lend just because they have reserves. Indeed reserves do not enter the equation at all. Rather, banks lend as long as they are not capital impaired and as long as they have good credit risks willing to borrow.
In this case, banks are capital impaired, and there are too few credit-worthy clients who want to borrow. The result is banks do not lend and money sits as excess reserves.
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