Most of those in the inflation camp seem to think that a Japanese style deflation can not happen here.
Some might even be pointing at today’s PPI numbers as proof:
U.S. Jan. core PPI up 0.8%, most in 6 years forexstreet.com
In addition to the PPI, another argument the inflation camp has used is the fact that the Japan is predominantly a nation of savers while the US is a predominantly nation of spenders. OTOH I have long believed that fact will eventually make deflation all the much worse here. All we know at this point is that the current consumption trend in the US is not sustainable. US savings can not stay at 0% and we can not keep spending 70-80% of the world’s savings for perpetuity.
Unfortunately all we know right now is that the pattern WILL change, we just do not know when. Perhaps today’s PPI numbers force Greenspan to hike one time too many to contain the inflation he purposely created. With today’s numbers, there will no doubt be people mocking those of us in the deflation camp. Now is precisely when people should be worried about deflation if for no other reason than virtually no one thinks it is possible (save for a few wayward souls like Heinz and I - Anyone else?)
In 2004 Greenspan declared victory over deflation. For someone wrong at every major economic turn in his entire career and bewildered at what the 10-yr treasury was telling him just yesterday, I often wonder why anyone should take this man seriously. Put me in the camp that we would have been far better off letting the market set interest rates rather than the FED. Greenspan has taken every problem and compounded it. As a direct result of Greenspan fighting the inevitable consumer led recession, he not only permitted but encouraged US consumers to create an unsustainable mountain of debt. Unfortunately that debt just can not be inflated away unless and until we have job creation and wage growth. Neither of those has happened yet and this far into a “recovery” neither of those will happen either. We might be able to print away US gov't debt, but without wage and job creation, consumer debt is a far, far bigger problem that can not be inflated away!
Roach talks about the “success” of the FED in fighting deflation today in Global: Post-Bubble Pitfalls -- Yet Another Lesson from Japan
morganstanley.com
“On the surface, the Fed’s success looks stunning. But keep in mind that this initial period of resilience is not all that dissimilar from that experienced in Japan in the immediate aftermath of the bursting of its equity bubble in the early 1990s. “
“Ironically, the US probably has more to lose from a consumer capitulation than Japan. In large part, that’s because the excesses of America’s consumer culture dwarf the role of the Japanese consumer. The US buying binge of recent years was sufficient to boost consumption to a record 71% of real GDP in early 2003 — a sharp breakout from the 25-year trend of 67% that prevailed over the 1975–2000 period. By contrast, the Japanese consumption share has hovered at only around 55% of GDP since 1990. Japan knows very little of the rampant consumerism that has dominated America’s post-bubble experience. That could well come back to haunt a US consumer who is far more overextended than the Japanese counterpart.”
No doubt Greenspan feels right now that he defeated the K-Cycle. IMO all he accomplished is building a bigger mountain of debt that needs to be deflated a’la Japan. When consumers and housing give up, I believe we will find that “deflation fighting” in the US will have as much success as deflation fighting did in Japan. Show me wage and job growth and I will buy sustainable inflation. Otherwise, the parallels to Japan are many and should not be overlooked. We seem have ended round one (corporate spending pullback) successfully. Pundits are declaring victory in round two (defeating a recession). The real battle begins with round three (pullback in consumer spending). Bring it on before Greenspan makes matters worse once again.
Michael Shedlock |
