Maurice, here's an interesting exchange from another thread I've just read. Maybe I find it interesting because it conforms with some of the things I'm thinking, but from people who know it better than I <g> :
Message 17798353
Deferred inflation, no. Money Supply is the actual Money Supply (say M1) x Monetary velocity (the number of times it changes hands in a year) say
Mv.
If Demand (M1 x Mv) is greater than the supply of goods you have inflation. If M1 x Mv is less than the supply of goods you have deflation. If Mv
declines, the supposed answer is to increase M1. The deflationary bubble problem is this - you can have insufficient demand in most sectors while at
the same time excess demand in some sectors leading to a price bubble.
Most economists believe the Fed's increase in M1 in response to a decline in Mv due to the Asia debt implosion stabilized demand and prices in total.
If Mv picked up, the Fed would need to decrease M1 to maintain stability.
More specifically the Fed actions resulted in a deflation in imported goods offset by inflation in locally produced services. But it also appeared to feed a
bubble in financial assets (stocks) spurred on in part by an economy growing faster than it otherwise could have without the deflationary drag of Asia.
As Asia stabilized post Jan 2000, the Fed reduced M1 causing a contraction of the stock bubble. It then continued expanding M1 to continue
counter-acting the secular deflation and bring about a "soft landing". It appears the excess funds are primarily now entering real estate assets.
Greenspan has commented that this is not a problem as the entire increase in real estate value is currently being recycled from home valuation to
consumer spending through increased lending. So far so good.
However, the flow of demand into real estate can be reversed as suddenly as from stocks - but in this case leaving the lending unsupported by
adequate underlying assets. As Mv can change quickly with consumer and business confidence, the Fed is walking a tight-rope.
Message 17805619
Excellent analysis. Am a urban/economic geographer by training and a minor partner in a hi-tech software consulting business in Austin TX (Market
Answers LLC). Lots of coursework dealing with US regional booms and busts since the 1800's, demographic cycles, etc. Started watching the stock
market when my hubbie dumped his semiconductor /telecom portfolio in my lap right before the July 96 low, continued watching through the
devaluation of the Thai baht in fall, 1997 immediately followed by the outflow of money from Brazil and other Latin American countries, continued
watching still though the Oct 98 fiasco with Long Term Capital Management in which the feds bailed out several very large US companies because they
were too large to let fail.
Am now seeing stuff in my homemeade charts that is NOT matched by anything I saw on the previous downs. What has been becoming clear is that
several of the previous downs were subcycles in a longer (and scarier) "master" cycle that began with the currency speculation and devaluations starting
with the Thai baht. Yours is the first explanation I've seen after several weeks of looking that explains multiple phenomena, not just one piece of the
puzzle.
Some additional comments of my own that you might have some additional insights on follow: 1) the deflation experienced by some countries (e.g.,
Australia and S. Korea, now starting to describe themselves as "reflating" ) was "balanced" by the horrendous inflation in the US tech sector. This was
presented in the US media at the time as indicating higher productivity in the US. I read an article in the Financial Times by Barry Reilly some time ago
that said that Enron was the tip of the iceberg on US book-cooking and that so many US corporations would ultimately be found to have done similar
overstatements that US economists wil be forced to backward- revise productivity estimates in a downward direction. (Basically his argument was that
massive book-cooking at the corporate level throws national measurements that rely on those books off to a corresponding degree). 2) Some regions
and groups in the US experienced the inflation you mentioned(example A-- techy-regions like Austin which used to rank behind Dallas and Houston in
average household income, but now lead the other cities by a wide margin; example B-- massive increases in salaries for know-little 20-somethings
here in Austin who moved here from California and other places and expected to/insisted upon experiencing immediately upon college graduation the
same kind of financial success it took their "Happy Days"-Generation parents 20 years to achieve). However, the deflation was not limited to regions
and groups outside the US, but included some inside the US-- midwestern farm areas (buying tractors at inflated Year 2000 prices but selling corn at
deflated prices not seen since the 1960's) and what remains of the steel belts. 3) Biggest degree of income inequality inside the US since the 1920's. 4)
Formerly middle-class families building mansion-size houses on tiny lots-- a pattern also seen in midwestern cities before the 1929 bust and also before
(what I think was) a railroad-speculation related bust in/about the 1870's. Any comments?
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Due to farm price-supports, a legacy of the 1930s, the deflation in agricultural prices has not caused the same financial destruction as it did from 1924
forward. But you are correct that as happened 75 years ago deflation first hits raw material prices (wheat, oil, etc). This raises profit margins for
businesses and increases the standard of living for workers in other industries.
Deflation later spreads to the rest of the economy and wages. It's interesting to note that during the Great Depression real estate rents fell 36% while
real estate prices fell 69%. I learned many stories from my Grandparents about Los Angeles during those years. They purchased a home (which had
sold a couple of years before for $6,500) for $500. It will be interesting to see if the Fed following Keynsian solutions can minimize this sort of outcome
this time around.
Another interesting problem was the large number of people who killed themselves in order for their families to receive their Life Insurance proceeds. A
significant number of Life companies failed due to the accelerated payment of benefits - coupled with investment losses.
As for the dubious great productivity gains of the 1990s - I agree with you that I find it hard to believe that anyone takes this seriously. Even in the
minutes from private meetings, Greenspan seemed to truly believe these figures. But of course the most recent minutes are from meetings five years ago.
I would have to assume his level of skepticism is significantly greater today. I would hate to think the Chairman of the Fed is as idiotic as a Larry
Kudlow - a man who in a previous life must have set economic policy for the Weimar Republic. I can't believe that babbling imbecile is taken seriously
by anyone. |
