"We had just turned up a big rock on Friday" - Bill Bonner
Under it was a slimy, repulsive animal with an empty, deflated head and a puffy, deflated body. It is neither fish nor fowl...neither the deflation of America in the '30s nor Japan in the '90s...but not your typical inflation, either. Instead, it has the worst characteristics of each, mixed together in some terrible mutant shape so horrible to look at, we just couldn't bear it - at least, not while we were still on vacation.
We dropped the stone immediately.
But now it is a new week, a new month, and our holiday is over. So we return to work with a hoe in our hand - ready to bruise the head of the serpent should it get out of line.
And what an odd beast it is!
Last week, GDP figures for the last quarter were revised to over 4%. Alan Greenspan appeared in public and said the U.S. was on the road to sustained growth. Stocks went nowhere, but they didn't have to; they were already at boom-time levels.
If it were true that the U.S. economy really was headed towards another impressive growth spurt, you might expect a spurt in employment, interest rates and consumer prices, too. Or to put it another way, investors should prepare for inflation; that is what you usually get when you juice up the economy with easy money.
But this weird thing in front of us looks very different from a typical inflation cycle.
Some prices are up sharply. The cost of shipping, for example, has risen 550% since 2001. It takes a long time to build a ship, and with the new Asian trade, it appears that there aren't enough of them. But the prices of the goods shipped are not necessarily going up. Commodities on their way to China have gone up...but the finished goods coming out of Chinese factories have actually gone down.
House prices, too, are up sharply. But rents are going down...for an obvious reason: rising house prices have encouraged production of homes and apartments.
And while we are supposedly a year and a half into a recovery, employment still hasn't bounced back...and bonds still act as though the economy were in a slump.
"January's mass layoffs set record," reports the Kansas City Star.
Consumers may have reached the limit of their ability to add new debt and new expenses. We know we have said this before...but we are bound to be right sooner or later. And when consumers can no longer spend what they don't have...prices on what they don't need are likely to fall, not rise. Plus, about a quarter of factory capacity in America is still unused. So, there is a long way to go before supply limitations force price increases.
Prices that are rising seem to be doing so either because of unique circumstances - such as shipping - or because the dollar is falling. The dollar may fall much further...which will put up energy costs. But this is not the inflation of an 'overheating' business cycle. This is the inflation of a falling dollar...which could get worse as the U.S. economy goes into a prolonged Japanese-style slump.
What can we call it? Rising prices and falling ones too...inflating prices in the midst of a recession...? What name can we give this hideous new beast? Aha...let's call it INDEFLATION, a period in which American consumers watch their costs of living go up...even as their economy collapses.
More on indeflation tomorrow...
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