Paul Kasriel on Deflation and Japan
I was fortunate enough last week to exchange a series of emails with Paul Kasriel about deflation, Japan, etc . I also had a followup phone conversation.
I will post a link at the end. But first let’s recap the debate to date to see just here people stand.
GST
Mish, I have yet to hear any logic from you concerning Japan.
Mish
GST that is a lie.
There is no other way to put it.
Let me rephrase it so that it is correct
"Mish, I have yet to hear any logic from you concerning Japan that I agree with."
I have on at least a dozen occasions addressed the issue, you just do not accept the answer. And I am not about to rehash it in detail either. I will offer one point and that point is the enormous consumer debt in the US vs Japan. That is a huge deflationary pressure in the backdrop of falling wages and outsourcing.
I consider that to be a statement of fact.
You fail to see the logic in it and that is of course your right but please stop repeating lies that you have made before that you have yet to hear any logic from me in regards to Japan.
Just because you personally fail to see or even understand what I am saying does NOT mean I have failed to address the issue as your statement implies.
Message 23080078
GST
<I will offer one point and that point is the enormous consumer debt in the US vs Japan. That is a huge deflationary pressure in the backdrop of falling wages and outsourcing>
Japan had a huge net personal savings position -- in the ten trillion dollar range -- and little if any consumer debt, yet they slipped into deflation. No country on earth has experienced more outsourcing than Japan which is now tied at the hip to China and to a lesser extent other countries in south east Asia. Time after time you completely miss the mark and then try to go to perpetuate this myth than the experience of Japan is similar to our own situation when it is the exact polar opposite of our situation.
The US is very vulnerable to recession at this point, although even that is not a given. On the other hand, a Japan style deflation could not possibly be further from reality. Japan went into deflation while its consumers were sitting on their wallets with their pockets absolutely stuffed with trillions in cash and no consumer debt. Deal with reality -- not fantasy.
Message 23080146
Mish
Japan went into deflation while its consumers were sitting on their wallets with their pockets absolutely stuffed with trillions in cash and no consumer debt. Deal with reality -- not fantasy.
The REALITY of the situation is that Japan managed to go into deflation IN SPITE OF consumers sitting on cash.
The REALITY of the situation that you refuse to see is that an overhang of debt with no way possible to pay it back in an environment of maxed out consumers and falling wages and anemic job growth (soon to be negative) is an enormous deflationary overhang.
1) From the perspective of looming bankruptcies, foreclosures, etc
2) From the perspective that those that do survive will have to pay back that debt at a time when housing and the stock market is declining and wages are stagnating at best
GST that is THE REALITY and you simply have your head in the sand over it. The REALITY is the very thing you trump as why Japan is different makes matters worse from a deflationary overhang point of view.
That is REALITY!
Now please deal with it rather than your fantasies.
Message 23080338
GST
Once again you categorically fail to support your contention that we are headed for a Japan style deflation. Japan did not go into deflation 'despite' their huge cash position as you contend. Japan went into deflation in part because of their huge cash position. You have never once drawn anything like a parallel between the US and Japan and yet you continue to pretend that you have.
Message 23080477
Mish
GST you are pretending you understand economics.
That unfortunately is the bottom line.
Message 23080626
GST
Mish, you use Japan as an example of what will happen to us without ever once demonstrating even the tiniest glimmer of understanding of the economic forces that were at work in Japan, and by extension you do not seem to grasp the forces at work in the US -- not even close. Economies like ours are heavily tilted towards inflation for powerful reasons -- you fail to address these reasons but seek to pass yourself off as knowing how inflation and deflation operate. Our foreign indebtness and lack of savings make inflation all but inevitable. When you say that I don't understand economics it sounds very much like you are trying to divert attention from the very serious shortcomings in your ability to grasp even the basics of the situation we are in.
Message 23080705
LongIslandGuy (to GST)
I'm proud to be the first to recommend that post.
Message 23080812
GST to Westpacific
<”A deflationary collapse requires two special factors to be present”>
1. A strong or desirable currency that people are content to hold;
2. An inability by monetary authorities to create new money at will.
Precisely correct.
Message 23083201
Mish to GST
Precisely correct?
It happened twice already.
Once in Japan and once in the US.
Thus it is precisely incorrect.
The Japanese central bank created money at will and dropped interest rates to 0% to boot. It just did not go anywhere productive.
People may not realize it but exactly the same thing happened in the great depression. Monetary policy was actually very loose by the Fed but capital destruction happened at a pace that dwarfed it. During the great depression the Fed injected huge sums of base money. That is a fact. It simply did not matter.
That is exactly what happens when asset booms collapse and I might point out we are in the midst of a collapsing asset boom in housing right now. That is a fact.
I believe it will spread to the stock market eventually and I also believe that enormous amounts of job losses will result. Those are beliefs but let's review the facts.
1) We are in an asset based bubble
2) The housing bubble has started to collapse
3) Consumers are deep in debt
4) The fact that consumers are so deep in debt, especially in an environment so heavily dependent on housing and consumer spending at a time of global wage arbitrage and outsourcing of labor makes deflation all the more likely. Yes deflation is made far more likely because of that consumer debt.
By arguing against point 4) "deflation is made far more likely because of consumer debt." you are arguing against simple economic facts. Period. Furthermore, US consumer debt increases the deflationary pressures relative to Japan at the start of Japan's deflation. Again, that is a simple economic fact.
You persist in arguing with simple economic facts.
Message 23086765
Zeus
Mish you are so far off the mark with your economic thoughts they are useless!!
Message 23086291
John Vosilla to Mark Johnson
'I agree with you regarding odds of deflation.
The 1929 moment was back in 2000/2001 after bursting of the biggest stock market bubble in history.'
And don't forget the even bigger 1929 moment during the RTC days of the early 90's when commercial real estate nationwide plunged 60-70%, the most heavily populated areas of the northeast and California home prices plunged 30%, credit conditions were extremely tight and our collapsing banking system was on the verge of insolvency..
Message 23087027
Mish
Credit conditions by the Fed were far from tight during the great depression. But yes, you are correct that banks were in a world of hurt due to plunging asset prices like real estate and the stock market. This is of course exactly what happened in 1929 and again in Japan. In fact I have frequently talked about it. Just because the Fed is willing to slash rates does not mean banks will be willing to lend, or consumers or corporations willing to borrow.
We are in an enormous asset bubble right now, and if a serious downturn gets going, 1% interest rates will not save it. Oddly enough neither you or GST seems to understand that it the expansion of consumer credit which created the asset bubble in housing and the debt bubble in consumer spending that makes deflation all the more likely. In other words you have reality twisted 180 degrees. Again, I am speaking simple economic facts that you dismiss.
Message 23087044
LongIslandGuy
Meanwhile you still fail to admit that you and the bears have been predicting deflation since 1998.
You guys had charts overlapping the 2000 bear market with the 1929, the Nikkei versus the Nasdaq, etc. You totally disregard that economic policy was TOTALLY different in the 30's, given the gold-standard, Smoot-Hawley, lack of automatic stabilizers, etc.
You totally disregard that the structure of the Japanese economy and banking system is far different than ours. You disregard financial innovation such as securitization, globalization, free capital markets. You disregard demographic differences, CHINA/India, and the fact that during Japan's funk, capital LEFT Japan for higher returns elsewhere. Could that have been part of the problem, Mish?
Meanwhile, every one of your contentions is disproven.
Never in your wildest dreams did you think housing could gain 100% while the market fell 50%. And it's beyond your intelligence to believe the market can gain 100% while housing falls 20%.
All the while, the general macro-economy can hum.
Why? Because the Fed has infinite ability to inflate in a world where the major economies run policy that is even more absurd than our own.
Message 23087183
Mish
Well Long Island Guy I most assuredly was not predicting doom and gloom in 1998. In fact I paid off a significant portion of our house in 2000 because of Rambus. Unfortunately I did not sell it all.
Furthermore I have been not been on a deflationary kick or probably even mentioned the word deflation until 2003-2004 so once again you like John Vosilla keep distorting my position beyond recognition. I really do not care what Prechter has said or done but I have on numerous occasions stated why he was wrong and in fact over 20 years too early and that has to do with K-cycles.
I will admit that I was bearish on the stock market far too long during the rebound, but I will also say that I called the exact top within a month of the housing peak and the exact bottom of the US$ in 2005 within a week, when it went on a year long rally. I have also been correct about gold. I only made a single housing top call and I nailed the peak (June of 2005). If you want to say it was July or August then please feel free to moan.
As for the Fed having "infinite ability to inflate in a world where the major economies run policy that is even more absurd than our own" once again it is clear that you do not understand economic reality. The Fed does NOT have "infinite ability to inflate" (not in practice). The Fed is constrained by the willingness of consumers to borrow and banks to lend just as they always have throughout history.
You are of course arguing that It's Different This Time citing "financial innovation such as securitization, globalization, free capital markets". No, LongIslandGuy it is NOT different this time. "Financial Innovations" (good god you now sound like Greenspan) temporarily extended the length and magnitude of the current bubble no more no less. It is ironic that those "innovations" you are lauding will be the very thing that causes the next crash to be all the more severe. Furthermore you cite globalization when that is yet another factor (global wage arbitrage and outsourcing) that are 100% without a doubt adding to deflationary pressures. Once again you and others are 180 degrees from reality when it comes to simple economic facts.
Message 23087255
GST
No wonder you never make any sense -- your 'ideas' are a like ten watt bulb trying to illuminate a football field -- the results are very dim indeed. The US finances its dollar requirements with foreign borrowing -- anybody so dumb as to not admit the impact of this on the value of the dollar is sitting in the dark wearing sunglasses. Our mounting debts and our means of financing them have everything to do with the ultimate reckoning of the value of the dollar, which in turn have everything to do with persistent changes in price levels -- what people call inflation and deflation.
Message 23087370
Mish
Once again you have no idea of economic reality.
Inflation starts with expansion of money and credit.
Inflation ends when the central bank is no longer able or willing to extend credit and/or when consumers and businesses are no longer willing to borrow because further expansion and /or speculation no longer makes any economic sense.
That too is a simple economic fact.
Message 23087403
GST
Oh Mish, you define inflation as an expansion of money supply -- now you want to say that an expansion of money supply starts with an expansion of money supply -- you are indeed a clown.
<Inflation starts with expansion of money and credit.>
Message 23087462
LongIslandGuy to Mish
Globalization leading to the world's demise? I suggest you brush the cobwebs off your Econ 101 book and look up David Ricardo and Alfred Marshall.
Now if you'll excuse me, I'm going to drive my Made in America $350/month BMW to Macy's to pick up my Made in India $50 Cashmere sweater.
God Bless the USA.
Message 23088246
Mish
Once again you put attempt to put words in my mouth I never said.
Globalization is a GOOD thing. It lowers prices and increases competition and productivity. Those are good things.
Both globalization and productivity gains masked the inflationary expansion of money in the 90's by the Greenspan Fed. That is the correct way of looking at things and masked is indeed the correct word, which is something I have been saying for a long time. Once again those are simple economic facts.
I am in favor of globalization and you can not find a single time I have ever said otherwise. But I am not in favor of reckless increases in money supply and credit. As hard as it may be for you, I suggest you understand my position instead of spreading lies about it.
Message 23088466
Mish
The debate raged on and on and on.
But I am stopping the nonsense right here, right now, right at the pinnacle of absurdity.
To GST, LongIslandGuy, John Vosilla, and Zeus who have finally taunted me into getting some comments from a well respected economist.
I want to thank you for goading me into doing something I should have done a long time ago
It was indeed this incessant taunting by the above that I decided to see if I could get Paul Kasriel at the Northern Trust to chime in on what happened in Japan, what may happen in the US, and whether or not the debt overhang in the US makes deflation more likely as I contend than GST, John, LIG, Zeus, and 16 people in total (if not more) seem to believe as well.
Note too that Kasriel also says what inflation is and what it isn’t (and it isn’t about prices).
First a few snips from our phone conversation (yes this was reviewed and approved by Kasriel – my entire article was)
Mish: Would you say that consumer debt in the US as opposed to the lack of consumer debt in Japan increases the deflationary pressures on the US economy?
Kasriel: Yes, absolutely. The latest figures that I have show that banks' exposure to the mortgage market is at 62% of their total earnings assets, an all time high. If a prolonged housing bust ensues, banks could be in big trouble.
Mish: What if Bernanke cuts interest rates to 1 percent?
Kasriel: In a sustained housing bust that causes banks to take a big hit to their capital it simply will not matter. This is essentially what happened recently in Japan and also in the US during the great depression.
….
….
….
Mish: Does that mean you believe that inflation is a monetary phenomenon related to increases in money supply and credit as opposed to rising prices?
Kasriel: Yes, and that is exactly why Greenspan was so lucky. Inflation was masked by the factors we just mentioned.
Mish: I am very glad you said the word "masked". I have used that word for quite some time but most just do not get it.
What is the second way Greenspan was fortunate?
Kasriel: When the Fed slashed interest rates to 1%, the U.S. banking system was capitalized well enough to be willing and able to relend the cheap credit it was being offered by the Fed. This stimulated housing. Housing provided jobs. With jobs and with rising real estate prices people felt confident to borrow and banks felt comfortable to lend.
I will also point out that Kasriel used the term “price inflation” at one point clearly making a distinction between prices and inflation (a monetary event)
Without further ado here is the full article:
Interview with Paul Kasriel
globaleconomicanalysis.blogspot.com
Mish
Now if GST, John, LongIslandGuy, or Zeus can find an economist willing to rebut this key point……….
Mish: Would you say that consumer debt in the US as opposed to the lack of consumer debt in Japan increases the deflationary pressures on the US economy?
Kasriel: Yes, absolutely. The latest figures that I have show that banks' exposure to the mortgage market is at 62% of their total earnings assets, an all time high. If a prolonged housing bust ensues, banks could be in big trouble.
then I am willing to listen. If not it should be now clear who understands the economics of this situation and who does not.
GST, John, LongIslandGuy, and Zeus …. Not a single one of you understands the economic reality of the situation. That’s a proven fact.
If you think you can find an economist as well respected as Paul Kasriel to rebut that article, then please be my guest. Good luck trying.
Otherwise it was fun but the debate is now over. Well I actually mean to say that the debate SHOULD be over. But I have little doubt you four will continue to spout economic nonsense that deflation “cant happen here because of our debt” when the reality is that debt (especially mortgage related debt and consumer debt as I have said dozens of time) makes deflation all the more likely. Believe what you want boys but I will take my lessons from a real economist, and a nationally respected one at that.
Mish |
