5. Inflastagdeflation
If you spend any meaningful time reading up ontoday's economic views, you will find three prevailing idées fixes. Here they are, in order of dominance:
A. Inflation is understated. General price level measurements are being manipulated, or are failing,or are simply false; we are facing a dramatic buildup in inflationarypressures. Look at what you are spending each month on food and gasprices - the argument goes, both of these are showing increases withsecular tailwinds, so focusing on "core" inflation that excludes foodand energy is neglecting the most important inflation story of the past30 years.
B. Inflation is yesterday's story. What we are experiencing now is stagflation. Wages and incomes are stagnant, housing is slowing, the consumer is onthe brink, which is why we continue to see deflation in things wewant (cf. Best Buy (BBY), Circuit City (CC)) even as things we need(cf. food, energy, education) show inflation, and growth is slowing byvirtue of the fact that producers have no pricing power in acredit-fueled (as opposed to organic) growth environment.
C. Inflation? What inflation? Housing prices are deflating. Consumers are cutting back. Producers have no pricing power. Intel (INTC) just slashed chip prices by 50%. Ryanair (RYAAY) just today cut prices on 3,000,000 seats. Vodafone (VOD) just announced a round of price cuts. Even in "hot growth" areas such as India aluminum makers are cutting prices... for the fifth time this year. Consumers are lowing their appetite for debt. Gas prices and food costs are up, but those are consumer taxes that ultimately lead to more deflation.
- So, are we experiencing inflation, stagflation or deflation? The truest answer is, "Yes, we are."
- It would be nice to paint a black and white scenario the way economic textbooks do with, say, the 1970s period in America.
- Looking back, it all seems so simple now, doesn't it?
- PaulVolcker assumed Fed Chairmanship in 1979, limited growth of moneysupply, and reduced inflation from a peak of 13-some-odd-percent tobelow three-and-a-half percent in a matter of a little less than twoyears.
- Of course, if you actually experienced that time, the story isn't quite as simple as the textbooks make it appear.
- Remember the tractor-blockade of the Eccles Building?
- Remember deregulation of federally chartered Savings and Loans?
- And hey, what about those high interest rates of the early 80s as part of the Volcker inflation-fighting regime, and the increased loan growth and lending to real estate speculators despite it all?
- Well, things are always more complicated than what we'd like.
- So,where that leaves us today is smack in the middle ofinflastagdeflation... with only the last remaining vestiges of thiscredit cycle allowing us to cling, somewhat desperately, precariously,to the "inflastag" part of the story.
- Why is the "inflastag" part of the story so important?
- Well,we know that deflation incentivizes savings and postpones spendingsince prices will be lower and purchasing power greater in the future.
- Thisdepressed spending and increased savings weakens the economy further,especially an economy three-quarters supported by consumption.
- Mostimportantly, we will one day find, is that deflation worsens ourdebt-servicing burden because our debts remain fixed in dollarterms, even as our wages and incomes fall, and the future value ofthose repaid dollars increase.
- Wehave a tendency to underestimate the unfolding of long-term eventssince we can only grasp them in terms of historical recounts thatreveal them in neat bullet points - like these - and quickly summarizedand digestible tidbits.
- Meanwhile,next time you come across an economic viewpoint that decries thefailure of policy makers to account for headline inflation, or one thatblasts the lack of economic growth apart from credit demand andavailability, or one that looks at producer price cuts and wonders howin the world someone can claim we are living in an inflationary time,you can quickly agree... with each of them.
