[Loki]

$this->bbcode_second_pass_quote('pstarr', 'I')t's always a tough call Pops. A bunch of people have come and gone from this place mis-timing the apocalypse. You know them well. Many predicted hyper-inflation, bank runs, gold bugs to beat the bank. I was never one. If I've had a single mantra (I've repeated it endlessly) it's been deflation. Here's something from 2007:

$this->bbcode_second_pass_quote('', 'P')ostby pstarr » Sun Feb 11, 2007 11:20 pm

Thuja, if you believe the future is going to be just like the present with smaller cars and less restaurant choices then I couldn't agree more.

Now on the other hand, a relentless 5% year-to-year petroleum decline and economic implosion might be in the cards. For those who have the resources, getting the hell out of dodge might be a worthwhile plan. I certainly would not discourage anyone. I don't know why you are?

Quite frankly and for the most part I actually agree with you. The rural life is not going to happen for most people. There isn't the land out they for people to relocate to. It's owned by the landlords and they will not look kindly on folks redistributing themselves.

I think most people will be content with their little pleasures--a bunk in a barracks, a wool overcoat, slippers, a bowl of slop in the morning and a plate of mush for dinner.
Yikes!

[Loki]

The "receding tide of oil price" is a symptom of actual deflation in parts of the world (much of Europe, Japan) and disinflation in others (especially China). It isn't foreshadowing anything. It's here, now.

[Pops]

$this->bbcode_second_pass_quote('Loki', 'T')he "receding tide of oil price" is a symptom of actual deflation in parts of the world (much of Europe, Japan) and disinflation in others (especially China). It isn't foreshadowing anything. It's here, now.

[evilgenius]

Well, I haven't seen wages going up. And therein lies the tale. In America real wages haven't gone up since the 70's. Without that input to lubricate demand the rise in demand, seen since that time, has had to come from borrowing and other things, like technological advancement and productivity gains. The income inequality everyone is fashionably talking about these days hasn't helped any with this either. How many TV's or digital this's or that's can one rich person buy compared to a few hundred more well off workers, if the ratio of executive pay to worker pay had remained the same over the given period rather than pitched over so poorly for the worker?

This isn't to say that capitalism is the problem. I think it's obvious in today's world that the alternative's lack of proper incentives was a key reason for its downfall. So why shouldn't executives receive such outlandish pay? Isn't that simply the just incentive they require in order to perform at a level that produces such growth? I mean, the backers of the income inequality may rightly point out that since worker pay hasn't gone up the growth must be due to executive management practices.

I think the backers of income inequality would say that executive compensation is just desserts. I would argue that it's not. Instead it is meat and potatoes. Which is to say that there are real consequences to pay for not paying people properly. In spite of all the micro-economic arguments against it, paying people improperly, in aggregate, comes with a huge risk of deflation. It's only a risk, not a certainty. Worker/consumer borrowing along with productivity gains and technological improvements can, and did, rush into the gap. That doesn't mean that there isn't a systemic flaw in capitalism's corporate model, however.

The maximization of shareholder value is an idea that has crept into capitalistic thinking over recent decades. Along with this has come certain fundamentally aggressive assaults upon the idea of the corporation as a "going concern". Chief amongst these might be things like the compartmentalization of departments as if they were separate functioning businesses, such that accounting departments become shorted extensively because they are not a "revenue generating" production center. Add to this the advantage that larger shareholding interests have over smaller, and less able to earn income aside from selling their stake, interests and you have the recipe for a real problem. The managers run the ships these days, not the capitalists. And the managers can dictate their own pay. There is no way for the average investor to stop this, aside from selling.

Combine the inherent structural problems of modern day capitalism with the obvious purchasing of political power and you have a recipe for 2007. George Bush was quite happy to pump up home ownership to unheard of levels in order to get re-elected. Certainly the people behind Bush wanted it for their own purposes. And the executives of corporations wanted it because it very heavily slanted worker response to low pay into borrowing rather than any kind of organized push back for higher wages. Greenspan was very happy to accommodate him. Greenspan was always able to cite higher wages as an inflationary risk, and therefore as something to shut down as soon as it appeared. Remember his rhetoric before the dotcom bubble burst? In the absence of higher pay, which was shut down by the parties already mentioned, he was able to keep the spigot flowing under Bush. Does anybody remember how many people wondered when a rate hike that never came was going to come under Greenspan in the run up to the crash of 2007? Many did wonder, and yet the hike never materialized. The housing orgy was not nearly as banker run and routed as most people want to popularize. Largely, it was politically driven.

Now, in the midst of this fragile recovery, worker wages still haven't gone up. Demand isn't going to rise unless people have something to spend. Borrowing, in the manner of the run up to the crash, can no longer be expected to fill the gap. In the absence of demand prices have to fall.

[Pops]

Come on Pete, I've said it 3 or 4 times, dis-inflation is just falling core prices, could be from over production, increasing efficiency, strengthening currency, whatever.

Deflation is falling demand, shrinking money supply, lower wages, less economic activity, lower "velocity" of money. Deflationary spiral is when falling prices become expected and buyers hold on to their money because lower prices tomorrow are expected and turns into a self perpetuating cycle because demand continues to fall.

[basil_hayden]

Then we're not in deflation, we're in disinflation. Oil, which is needed for everything else, is cheaper now, so everything else might get cheaper too. Zero thought to holding onto my money because it might be worth more in the future, that's freaking foolish because I know inflation is the real driver slowly devaluing my currency and buying power.

And when oil goes up, and prices go up because of it, it's not inflation, it's "stuff costs more because the input costs more".

[Pops]

Right, expected inflation at some low rate means people expect things to get better and want to take advantage now and because (whether they know it or not) cash will be cheaper in the future so they borrow. Demand rises, ditto production, ditto profits, ditto wages: life is good, it is eternal growth.

Deflation is the expectation that things are going to get worse. People don't buy and they don't borrow because they know cash will be tighter tomorrow and not looser. They hoard cash and food, they make alternate plans and preparations and try to be resilient and self-sufficient because they can't rely on "things" to get better -

sounds like my 5 Rules For PO Prep huh?

That is because I've always said deflation will be the result of PO. But dramatically falling oil prices are not the signal. It won't be falling desire for energy (half of demand), but falling "ability to pay" (the other half of demand) that will be the signal and there is no indication that has happened over the last few months to the extent the price drop would indicate.

The current speculator led rout may be a recurring theme but don't expect it to be THE signal of PO, at least not without a low spare capacity number. Low spare capacity, unmet demand and a falling average price.

[AgentR11]

I will just poke my counter argument in here, and remind all, that there is absolutely NOTHING the Fed fears more than deflation. And for good or ill, they really can do something very, very drastic about it. I will grant though, that falling energy prices are a slightly different issue, because they are falling as a result of rising supply and conservation, or at least would be seen that way by a traditional model. That's not really deflation, that's just overproduction, and proper supply vs demand price balance. If that reduced energy price then feeds into a couple cents reduction in the price of a gallon of milk; that again is not real deflation, that is simply real costs falling, and reflected in the retail price.

If *demand* for milk had fallen though, producing a drop in price, that would be deflation in the proper sense.

So, I'm kinda iffy on whether the fed will go ballistic over a quarter or two of slipping overall prices in response to reduced energy costs. I think they'll hold their powder and let the bet ride till end of 2015 before they get worried. If oil locks in at say, $40, holds, and retail goods prices continue to fall; then look for the Fed to come out swinging with nukes in both hands.

[Pops]

Pete, we agree on all those definitions.

$this->bbcode_second_pass_quote('pstarr', 'H')ow do you measure a "falling ability to pay"? Other than by reduce demand?

[Pops]

...

On the other hand:

$this->bbcode_second_pass_quote('', 'A')n inflation gauge closely watched by Federal Reserve officials has fallen to the lowest level in more than 14 years, extending a decline that investors and analysts say could complicate the central bank's plan to raise interest rates this year.

The five-year forward five-year break-even rate, which measures annual inflation currently expected by investors between 2020 and 2025, tumbled to 1.8648% on Tuesday.


That is the lowest level since Dec. 22, 2000, said Jonathan Rick, interest rate derivatives strategist at Crédit Agricole in New York, and below the 2% inflation that Fed officials have set as the ideal level for annual price increases.

The decline is noteworthy because many analysts and traders believe that officials will be loath to raise interest rates, tightening financial conditions, when the economy is showing signs of softness.

Expectations that the Fed will in 2015 raise U.S. short-term rates for the first time since 2006 have driven a sharp rally in the U.S. dollar, as investors around the globe purchase U.S. assets in expectations that returns here will rise along with interest rates.

But Friday's U.S. jobs report showed wages declined last month, even as the economy added more jobs than economists expected. The report underscored concerns about amid gathering deflationary forces around the globe.



Read more: http://www.nasdaq.com/article/closely-w ... z3ONNYfWYD

[ralfy]

Perhaps one may lead to the other:

https://en.wikipedia.org/wiki/Disinflat ... _deflation

[dolanbaker]

$this->bbcode_second_pass_quote('pstarr', 'T')he worst problem with deflation is mortgages. You expect to pay them off. Now you never will. because while the payment remains the same, your salary decreases (money is more valuable, so you are paid less)

get out of debt now.

[evilgenius]

$this->bbcode_second_pass_quote('dolanbaker', '')$this->bbcode_second_pass_quote('pstarr', 'T')he worst problem with deflation is mortgages. You expect to pay them off. Now you never will. because while the payment remains the same, your salary decreases (money is more valuable, so you are paid less)

get out of debt now.

[Loki]

$this->bbcode_second_pass_quote('pstarr', 'A')ll right Mr. Brainiac, what is the role of debt in a deflationary economy?

[Loki]

$this->bbcode_second_pass_quote('Pops', '')$this->bbcode_second_pass_quote('Loki', 'T')he "receding tide of oil price" is a symptom of actual deflation in parts of the world (much of Europe, Japan) and disinflation in others (especially China). It isn't foreshadowing anything. It's here, now.