Flashback January 6, 2020
Ben Bernanke Just Won’t Stop Making a Fool Out of Himself
Former Chairman Bernanke says Fed Has Many Tools to Deter Recession.
Dear Mr. Bernanke
Please do yourself a favor and stop making a fool out of yourself.
For starters, let me point out it was indeed impossible to unwind the Fed’s balance sheet. How far did you get? And what is the Fed doing now?
Secondly, you would not know inflation if if jumped up and spit you in the eye. You and your group-think buddies never consider asset bubbles as inflation.
Economic Challenge to Keynesians
Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.
My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.
BIS Deflation Study
The BIS did a historical study and found routine deflation was not any problem at all.
“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the BIS study.
Deflationary Outcome
The existing bubbles ensure another deflationary outcome.
So prepare for another round of debt deflation, possibly accompanied by a lower CPI especially if one accurately includes home prices instead of rents in the CPI calculation.
Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse
For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?
Supply Shock and a Demand Shock Coming Up
A Supply Shock and a Demand Shock are Coming Up.
Worth Repeating
Well – Not Me
I have been calling for lower and lower yieldsPeople do not understand debt deflation https://t.co/lzrOAq3BPl
— Mike “Mish” Shedlock (@MishGEA) February 27, 2020
Deflation is not really about prices. It’s about the value of debt on the books of banks that cannot be paid back by zombie corporations and individuals.
That is what the Fed fears. It takes lower and lower yields to prevent a debt crash. But it is entirely counterproductive and it does not help the consumer, only the asset holders. Fed (global central bank) policy is to blame.
These are the important point all the inflationistas miss.
Fed Can Blame Itself
Another Half-Point Fed Cut Priced In@dlacalle_IA @biancoresearch @RobinBrooksIIF
The Fed fears deflation, correctly this time
Curiously, the Fed brought this upon themselves, fighting inflation when they should have been worried about asset bubbles.https://t.co/NbtN0OIVnJ
— Mike “Mish” Shedlock (@MishGEA) March 5, 2020
I am not blaming the Fed for the coronavirus and these shocks.
However, I am blaming the Fed for its erroneous inflationary tactics that blew three of the biggest economic bubble in succession: 2000, 2007, 2020.
Bubbles are inherently deflationary.
It’s asset asset bubble deflation that is damaging, not routine price deflation.
When asset bubbles burst, debt deflation results.
Here we go again.
Mike “Mish” Shedlock
Deflation is inevitable as inflation is not sustainable forever due to assets outpacing income. That being said to think deflation can happen without high unemployment and a serious decline in wealth and living standards is naive.
The primary effect of deflation is the destruction of money. Every debt which is defaulted on, destroys money which in turn devalues assets.
Most peoples wealth is calculated on the perceived value of assets such as their homes and the value of the stocks and bonds in their retirement accounts.
Deflation is going to reduce the value of those assets considerably. This will have a ripple effect throughout the entire economy that will leave no one untouched.
Mish – Do you expect more actions like lending facilities and such by the Fed as they did during the great financial crisis ?
Mish, how far out if you had to guess will this asset bubble be deflating in earnest as far as the housing market in the US is concerned? I figure even in a bad scenario it’s probably a year or two before you could really see a significant drop in real estate.
and one thing to keep in mind….this virus is contagious enough its is only going to take a very short time to run its course ..then its back to normal. The bottom will come quick, the recovery….quicker. In the meantime….airlines, cruises, and such are going to get crushed.
Even if you are right about the virus receding quickly, where I disagree is that many small and medium businesses were wiped out. A business takes years to form (capital, human capital, branding, franchise value) so if you wipe them out by shutting the economy they will take years to re-form. So that argues against V-shape. Even worse, the small/medium businesses were wiped out whereas large zombies were re-capitalized with freshly minted dollars – these zombies provide worse quality at higher prices with less productivity. Even worse supply-chains based on just-in-time, no inventory, made in factories long distances away have been proven not to work so we’ll need a build up of inventory and local producers which will increase “cost”.
I agree deflation should have happened in 2008
but what was proven…is that they will not let it occur…
12 years….no deflation….strong economy….
fragile underpinnings…heavily leveraged…still
but deflation wont occur…….
expect even bigger asset and credit bubbles….somehow
Deflation is caused by lack of demand.
In Japan, they have/had deflation because the citizens decided to pay back their enormous real estate debts instead of buying stuff.
We’ll see it with COVID19 because people will only venture out if they have to. Mainly to go to work and for purchasing necessities. Few to none are going to shop at home depot/kohls/target/auto dealerships etc… . And theaters will shudder. Ones with a heavy debt load will be in trouble.
“Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.” So very true. And yet 90% of phd’s in economics believe this absurd premise. I guess they never saw the historical data where prices fell nearly every year before 1913 (creation of the Fed) and the American economy was growing by leaps and bounds most of those years.
DEFLATION IS WAY OVERDUE
Most reasonable economists though already that the first major asset bubble implosion in 1987 would be followed by a severe deflation associated by removal of all the bad debts (not repayable by the borrowers) infesting our economies already at that time.
Only JAPAN (stock market not affected by the 1987 crash elsewhere) qualified for that later on (slightly after 1990) because there were gigantic assets (real estate and stocks) bubbles. There the Interest rate stayed from that event on incredibly low (ten years around one per cent) for the observers. They printed money to preserve all zombie banks and they are still today alive and kicking.
Mish obviously give the right cause of deflation.
However, central bankers like Volcker and the like are long gone and now everything seems to be decided by children in a Disneyland world.
Volcker and many others would have got a hearth attack if someone would propose printing money in order to get negative interest rate. These irresponsable children did it nowadays in Europe.
My feeling is that those Disney land bankers and politics could literally destroy fiat money by giving it away freely to the population. In such case we get an hyperinflation even if deflation should be the economic textbook path because paper money loose all value.
Mish, you wrote
“That is what the Fed fears. It takes lower and lower yields to prevent a debt crash. But it is entirely counterproductive and it does not help the consumer, only the asset holders.”
But isn’t that the point! Since when does the Fed care about consumers? Now asset holders, really large ones, they can offer old Ben Benake a very high paying job. Screw the little people: they’re cannon fodder for the crony capitalist.
Also, I think it is better to distinguish between deflation caused by productivity gains and those from popping bubbles. I know that is what you meant by falling prices but I could argue that popping bubbles also bring prices down. Just look at the market today.
Also I don’t think the Fed has been acting to force consumer prices up. It has always been about the debt. Making more available to keep the party going and making it easy to carry ever greater debt loads. Also it is outright counterfeiting theft of the populous by the powers that be.
But dont worry, Smoking Joe Bidden will fix things up. Just look what a great job he did with his kids!
“Deflation is not really about prices. It’s about the value of debt on the books of banks that cannot be paid back by zombie corporations and individuals.”
I might add that deflation includes a decrease in lending activity; either because people don’t want to borrow, or banks don’t want to lend at any interest rate.
Unfortunately, we see the unfolding of two streams that were slowly developing to this end.
That the two come to rest at the same time is the proof that viruses are indeed the intelligent form of life.
So are you saying deflation and then inflation? I have read you forever and never understood how the printer would ever allow a long permanent deflationary stretch.
I fail see how the fed stands back and let’s the system collapse because of lack of dollars. They have a printing press. If they print enough money to pay back the debt, at some point it will become inflationary. They could pay off bonds, corporate bonds, asset mortgages, car loan or you name it. If it’s debt they could pay it off. They are already doing this in the reverse repo market in a more connected way. Why wouldn’t they do it for everything?
Would that be inflationary?
It’s about time.
There is a lot of younger folks who would like to get on with their lives but are locked out by inflation.
Been watching the housing market inflate for several years now. I could see getting burned buying now or waiting a little longer. Everything seems so f’ed up already and completely unpredictable. The Fed has really shown that they really now how to screw things up…
Why would gold rise in a deflationary environment?
Fear of defaults of debt. Particularly corporate and personal debt.
Fiat peddling central banks do not want a “deflationary environment.” If we still have one, despite their wishes and best efforts, it’s a sign they are no longer in control.
Gold has traditionally done best during times of transitioning between one discredited and failing fiat regime, and the next.
It’s something to bribe the border guards!
Gold does not rise in a deflationary environment. Gold rises in an environment where people are afraid the currency is not stable.
Gold is simply an asset, and all assets are devalued during a deflationary period.
That being said, for some countries, this world depression may threaten the stability of their currency in which case, in those countries, there would be a flight to gold especially in the case of the unavailability of US dollars.
US dollars should experience much more appreciation than gold as the combination of the destruction of money via debt default, and the flight to dollars worldwide will affect the supply of dollars to goods significantly, and in favor of dollars.
Are you a believer that eventually the scales tip the other way and inflation comes with a vengeance?
By the way we are headed for near ZIRP sooner than even I expected b/c Covid-19. Hopefully we get a bump from the waning of the virus by summer and a vaccine in the fall. I’m trying to be optimistic. There will be a large refi boom of all debt at less than 2%. Banks profits are going to get a lot smaller but who cares. They have the Fed to bail them out if they get in trouble.
Debt writeoffs are positive writeoffs on future taxes. This means public debt will blow up even more. It is a vicious cycle. We will be Japan for the next decade until further notice. The Fed will buy assets of all kinds to keep up appearances. Main street is better off buying whatever the Fed buys for now.
Look what a deflationary, 0% environment does to stocks , cf 30 year Nikkei chart… despite BoJ continuously buying the index…. The financial system is a total loss wreckage waiting to fall apart….
“We will be Japan for the next decade until further notice”
Dream on.
Japan has productive companies, productive capital and a productive (if soon dead from old age) workforce.
We’re Argentina. Have been for a long time. Relentlessly working (well not really, more like printing, borrowing, doing makework and consuming….) our way towards 2001.
Mish, do you think bad times are approaching for junk bonds?
Another day another beat down in the yield curve.
Long end outperforming the short end.
Since JoJo missed it twice today so I added this for a third time to this post
“Deflation is not really about prices. It’s about the value of debt on the books of banks that cannot be paid back by zombie corporations and individuals.”
Is a run on the bank deflationary? When banks pay zero, what’s the incentive to keep money in the bank, when it can go down.
Another reason why Gold is in demand. Easier to store than a wad of notes, or store it in one of the bullion vaults.
Where else would you put your money?
Read the end of the sentence. By continuing the theme by Mish: businesses cannot repay loans even at zero rates, and individual are out of jobs, banks are toast.
It will take some time.
Rate cuts are not the answer, magic placebo would be better.
With FDIC “insurance” widespread runs probably won’t happen out of fear of failure. But they could. Negative interest rates, which are looking more and more possible, could as well.
But if runs start happening the PTB will likely at least “temporarily” ban cash withdrawals and in fact might use the runs as the excuse to do what they have wanted for some time now – ban cash permanently. It would be done in the name of preventing “hoarding” but of course that would not be their real goal.
Mish, I don’t understand why the money printing machine would not reinflate the bubble again. Asset prices would nominally stay the same but fall in real terms, would they not? I’ve been following this and other deflation and inflation discussions here, and I’m confused by your stance. Not asking for a justification, but maybe something spelled out for us dummies to ease the confusion .
Tony – JoJo cannot even read what I said today.
“Deflation is not really about prices. It’s about the value of debt on the books of banks that cannot be paid back by zombie corporations and individuals.”
That is what crushed asset prices in 2000-2001, 2007-2009 and starting now.
Over the years I repeatedly said I expect the economy to go in and out of deflation for a number of years.
I also said there will not be much movement in prices as measured by the CPI. We had a small CPI downturn in 2009. I expect another.
All accurate.
Disappointing that JoJo cannot even read what I said today.
How will deflation impact gold prices and gold and silver miner stock prices.
JoJo you just proved you are totally clueless about what deflation is.
Read up or look foolish.
Notice that? The tiny, muffled keening? The first whiff of economic flatulence in the room? These are the harbingers of global economic gluteal clench failure. Prepare for explosive decompression!
You were crowing deflation for a long time years ago. Never came of anything as I recall.
Sorry, you are wrong.
I’ve been here for 6 years and Mish has said no such thing. What he has said that when asset bubbles (finally) burst there will deflation.
Question for Jo Jo. And I ask with all due respect. How do you define deflation? And are you talking about debt deflation or commodity deflation? The two are not the same thing.
Mish nailed this in 2006-2007 which is one of the reasons he has so many followers. The deflation he called for in debt valuations was removed by a $5 trillion Fed balance sheet which re-flated all of those debt valuations.
The average man on the street actually thinks the Fed is fighting the good fight for him or her. Clueless idiots.