Ben Bernanke and I are almost the same age. In this age of public confessions, I have one. Ben Bernanke and I are dinosaurs. Ben and I went to school during the 60s and 70s. During that period inflation was the major economic problem. In 1973, the Arab oil embargo kicked inflation into high gear, and wages soared. It was not until Paul Volcker pushed interest rates to nose bleed levels did the Great Inflation subside. Mr. Bernanke seeks to solve 2010 problems with remedies that may have worked in 1973. Since he is fighting the last war, I do not think he will be successful.
The New Reality
That was then. We need to look at now:
- Consumers are Deleveraging - That means people are paying their debts, leaving less for discretionary purchases. Deleveraging is emblematic of a solvency problem, not liquidity. Adding liquidity through QE2 (quantitative easing) does not remedy the solvency issue.
- Demographic Trends – As the large number of Baby Boomers near retirement the trend shifts from spending to savings. In a zero interest rate environment savings become vital.
- Global Overcapacity – Overcapacity exists in key industries such as electronics, autos and steel.
- Depressed Housing Prices – Housing prices remain depressed, removing a major asset which consumers borrowed against to enable personal spending.
- High Unemployment – With so many people looking for work, employers feel little wage pressure (except for awarding large Wall Street bonuses).
- Price Deflation – We see free or cheaper goods and services. Can’t afford a movie ticket? Choose from free movies on broadcast television or the internet. Don’t want to spend money on a personal seat license, tickets and parking for an NFL football game? Stay home and watch it on television. Want to see your favorite Broadway show? Wait for the tickets to be half price at TKTS.
- The Internet as a Deflationary Force – From the time I began blogging and said the internet was a deflationary force, its impact has only intensified. Amazon and other online sellers are only exacerbating the decline in commercial real estate values.
- Endless Amounts of Commercial and Industrial Space – The confluence of the depression in the FIRE (finance, insurance, real estate) economy; manufacturing and service jobs being moved offshore and the rise of online retailing has depressed the commercial and industrial real estate market. A short trip around my relatively prosperous hometown reveals vacancies in everything from retail, apartment, warehousing, office, medical and manufacturing space. New for sale and for lease signs seem to sprout up each week.
Rosenberg and Deflation
One thesis espoused in this blog is that we have inflation in everything we need (gasoline, basic foodstuffs) and deflation in everything we do not need (plasma televisions, vacation homes). David Rosenberg debunks the fear mongering of inflationists. See Rosenberg Still Sees Deflation Despite Consistent Speculative “Limit Up” Opens in Pretty Much Everything
Despite a speculative equity market binge, a weakening U.S. dollar, an economy that seemingly avoided a double-dip recession last quarter, and a renewed boom in commodity prices, what continues to prove elusive in this questionable recovery is pricing power in the broad retail sector.
How apropos it was for Ben Bernanke to utter the word “deflation”, not once, but twice, in his Boston speech this morning. Because fifteen minutes later, the September consumer price index data were released and showed a goose-egg — that is 0% — on the key core CPI measure (which excludes food & energy), for the second month in a row. In the past, this has happened but 7% of the time, so it is a rare enough…event to at least mention.
The headline rate of inflation, despite everything that has been thrown at it in terms of unprecedented monetary, fiscal and bailout stimulus, sits at 1.1% today. The core rate, proven to be the key driver for bond yields, which is why it is a focal point, is now running at a mere 0.8% year-over-year rate, the lowest since March 1961 when Ben Bernanke was in grade school.
While QE1 may have worked in terms of bringing mortgage and corporate spreads out of orbit and preventing an all-out contraction in the money supply, it has not managed to stop the economy from sputtering, the unemployment rate from remaining near 10%, and underlying inflation from grinding lower. Consider for a moment that when the Fed first hinted at QE1 in December 2008, the jobless rate was 7.4% and the core inflation rate was 1.8%. See Rosenberg Still Sees Deflation Despite Consistent Speculative “Limit Up” Opens in Pretty Much Everything
Rosenberg supports the thesis that inflation in discretionary purchases has declined or remain unchanged.
While commodity prices have been firming of late with the downdraft in the dollar, what is key is that we are seeing discernible deflationary trends evolve in many segments of the service sector. Movies, personal care services, hotels, delivery services, and education all deflated last month — education deflated at its fastest pace ever…
Moreover, despite what the price of cotton is doing, clothing prices are still in decline, and other “goods” such as furniture, appliances, audio-video equipment, motor vehicles and home improvement all posted price declines last month as well. See Rosenberg Still Sees Deflation Despite Consistent Speculative “Limit Up” Opens in Pretty Much Everything
The Last Voyage of QE2
Ben Bernanke is determined to institute a second round of quantitative easing (QE2) through direct purchases of Treasury securities. The goal is to induce inflation, but the evidence clearly does not support that outcome. Good luck, Dr. Bernanke.
loading...
