Any comments on this line of thought?
In response to someone that suggested today's rate cut would take care of deflation worries I replied:
Will it get rid of deflation worries?
Well it might get rid of the worries but I doubt it gets rid of deflation.
I expect salaries to continue to drop (for computer programmers and technical people ect due to loss of jobs to India).
I expect China to deliver goods at a better rate to us than any US made company can.
I expect housing prices to drop.
I expect unemployment to go up.
With more unemployed, there will be fewer demands for goods so prices will have to drop to new bargain levels. Consumers have pulling back and will continue to do so. This puts deflationary pressures on prices across the board.
Autos - What's next if 0 0 0 for 4 years does not do it?
0 0 0 + price incentives perhaps?
Hmmm Let's see - Housing down, Salaries flat to down, employment down, China doing whatever it must do to give customers a bargain, consumers out of work spending less, and what next for autos?
Fearless Forecast: DEFLATION continues
OTOH
Insurance UP
Property taxes UP
Medical expenses UP
Benefits DOWN
I see the WORST of both worlds here.
The fact that we saw a .50 reduction here says there is a serious serious problem somewhere.
Probably in the banking sector with JPM C or a whole bunch of them.
My odds of out and out depression increased to .25 now.
M
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This reply from DD
Well, I'll take the other side of that bet. Deflation is a relativistic monetary thing, so although the stock market is still overpriced for the fundamentals and you listed a nice bunch of recession worries, they are somewhat independent phenomena. You can have deflation with growth, and inflation with recession; it all depends on how the money supply (and its international flow) is being managed, and I honestly believe that this last cut in the federal funds rate will do it for inflation, albeit through the currency exchange markets instead of through increased lending. :)
Cheers,
Daniel Dauenhauer
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This reply from Plunger on my comment:
I see the WORST of both worlds here.
Mish
Exactly. The end of the permanent current account deficit means Americans have to stop consuming more than they produce. Real living standards have to fall. It's happening. Aggregate loan volume has to stop rising, so there's no spending power left for the imports.
The interesting, and frightening, thing is how much the economy will have to cntract in order to close the current account gap, let alone switch to a surplus.
The marginal propensity to import is apparently 30% in the private sector. The CAD is 5% of GDP. So to close the gap, incomes need to decline by 5% / 30%, that's a 16.6% decline.
But it gets worse. The government (let's guess at 50% of the economy) is not going to downsize, so all the correction has to come from the private sector. It has to decline 33%. No kidding, this is the necessary adjustment.
Somehow I think the electorate will reward the politician who cheats on the foreign debt holders in some way and keeps the pretence of "prosperity" and "success" going. I wonder how it will happen? The Fed surely may really and truly try and generate rising inflation. What will Bush do?
My bet is on a foreign withholding tax on US securities' interest, effecively reducing the interest rate to foreigners retrospectively. But it will raise interest costs domestically.
Plunger. |
