Do you call that "deflation"?

I sure as hell don't call it metalworking...or anything related...

Vaughn

Iggy,

I enjoyed filling my tank for less that 20 bucks (small car), then I went into the big grocery store and noticed my savings had been grabbed by cost increases in food.

Btw, how is a quart of no-name motor oil priced at 2.89 a quart with gas is down to 2.22 in my area?

Wes

I just had my best year ever at the roadside market, and a terrible year at wholesale. The cause was the same in both cases. Retail groceries raised the price of apples over 50% from last year. I kept price the same on commodity apples and raised 10% on premium varieties for both wholesale and retail. Thus my roadside price was way below the grocery and customers noticed. Grocery sales died and took the wholesale with it. There was no good reason for the groceries to take that large increase.

I bet the same thing is happening in a lot of other areas.

karl

Good question. I think that deflation has not yet materialized.

That's the third month in a row that inflation has dropped, Iggy. And if you're worried about deflation (quite a few of the world's economists are, for reasons I'm sure you understand), the price of gasoline dropping from $3.50 to $2.20 (it's $2.21 today here in NJ) is enough to set off alarm bells.

We aren't there yet, but what economists are looking for now is signs that we're going into something like Japan's "lost decade," the 1990s. With the overnight rate at 1%, the Fed is out of gas and out of tools, except for the weaker ones of lowering longer-term rates. If there's a further drop, printing money and creating make-work jobs are the only tools left. And if companies still don't want to borrow after that, as happened in Japan, we're in for a hell of a bad ride.

Cheap gas may feel good now. It's certainly a relief. But to economists, it's a sign of real danger ahead. Once deflation takes hold, there are no remedies. You just have to wait it out -- typically, for around a decade.

Whoever is president, the likelihood is high that he'll have to pull out the stops with fiscal measures the likes of which we haven't seen for decades -- and this, in an extremely unfavorable environment for further deficit spending.

Brace yourself. We'd better hope that things turn up late in the first quarter, as some business leaders think will happen. Otherwise, deflation will drive us into a dead-man spiral.

-- Ed Huntress

Not to quibble but its disinflation when the rate of increase slows. Deflation is where the actual value of money increases.

Right. I'm not saying we have deflation, only that the rate of inflation is dropping pretty consistently, despite the inflationary effects of higher oil prices this year. And the danger is that it will cross the line and become deflation, should the downtrend continue.

-- Ed Huntress

I don't normally reply to political posts, especially in NGs where they do not belong, but I will make an exception to this one. I sincerely worry about our country when the people that elect our leaders are so massively uninformed. The population's exposure to a biased media and the media's propensity to edit by exclusion world news frightens the hell out of me. Of course, you say, I am talking about somebody else, that could not be me. Well, boys and girls, it is you. The person in the mirror you see in the morning. I refuse to label Americans as ignorant or stupid, as most of the rest of the word does, because it is far from the truth. However, if you do not feel insulted by the rhetoric spewed from the mouth of both candidates, you should be and it is indicative of the level of understanding in the general population.

Please do your own simple arithmetic. There is no such thing as a free lunch. Everything has a cost, please ask yourself where the money will come from for the advertised programs being spouted and if you determine that there are no funds for these things, no matter how noble and righteous they may be, you must NOT trust anything else the candidate says. We are already in a terrible state with massive national, corporate and personal debt. If you think the sub-prime mortgage thing is big, think about personal credit card debt. It is even bigger. Remember, no man is truly free, if he is in debt. What are you going to do about it. Don't look somewhere else. Look in the mirror. Put a plan together and vote responsibly. Steve

We are in a huge deflation. The CPI and other "inflation" indexes are political inventions with little attachment to reality in sign, magnitude, or timing.

Trillions and trillions in bubbled debt and stock market valuation, which was money or its liquid equivalent in the minds of its owners, has literally disappeared. The money supply has shrunk by an enormous proportion, beyond any government ability to counteract. Market prices a few months ago were based on paying with paper pyramid assets that have vanished.

Petroleum is a very sensitive commodity to such conditions. One day it is buried in the Arabian sands, a few weeks later it is sloshing in your automobile tank. It is also a monetary vehicle as a financial commodity, so its price also reflects its usage as a short-term money substitute/equivalent. That's why prices have fallen by half from the summer, as I predicted, reflecting the current massive money supply deflation.

Groceries are not sensitive, they lag by months. Between producers, wholesalers, and retailers, groceries are still priced from last summer's conditions, as if gasoline were still $4.50/gallon.

A lot of retail stainless products are selling as if nickel were still $25/lb, which is a pointless price lag. Look at the 5-year chart here; it sums up the old bubble and the current deflation quite graphically:

Why is that a worry? My simplistic view is that the market is working. I remember, quite fondly, where gas hit $0.999 a gallon not so long ago. No one cried for a bail out of big oil like we just did for banking.

I think the growth model is dangerous. It implies we need more to market to. Remember when zero population growth was an item of interest?

When you look at our numbers as far as consumpution, we and the world would be better off if there were fewer Americans, Canadians, and Europeans.

A world of 2 Billion would be far richer. And we waste time talking about global warming.

Some things need deflating.

Wes

-- "Additionally as a security officer, I carry a gun to protect government officials but my life isn't worth protecting at home in their eyes." Dick Anthony Heller

If you took all of Gates money, it would be 200 a head one time. He is the richest man in America.

The numbers do not work. Obama is a Hope Hustler, nothing more cynical than offering hope to people that will not be significantly better off after the election.

The bailout, well that one at 850B across 300M heads is 2833 bucks per person.

The Social Security IOU's make the bail out look like chump change. Obama is selling hope to desperate people and CAN NOT come though on his election promises. The money isn't there to grab and sustain the promises.

I'd love it if someone could make my world better but Obama can't. McCain will have to live within reality even though he has made a few promises. It is an election, stuff gets said, pay attention to what can be done and pick your candidate.

As a Libertarian leaning Conservative, endorsing McCain gives me heart burn. But that is the lay of the land this cycle.

Wes

-- "Additionally as a security officer, I carry a gun to protect government officials but my life isn't worth protecting at home in their eyes." Dick Anthony Heller

That's a good question, and I should really let Iggy or George give you a good explanation, but here's an oversimplified version that may make the point.

Lower prices that result from improved productivity, or from new mineral discoveries or even an "adjustment" to inflated prices are good things, by themselves. But lower prices that accompany a declining economy are deflationary -- the same thing costs less, even though its cost of production hasn't (yet) dropped. At a certain tipping point, the downward pressure on prices becomes self-perpetuating. And, unlike inflation, there are no monetary actions that can stop it. Once it's locked in, there are no fiscal actions that can stop it either. You wind up in a spiral that has to work itself out over time. Japan just went through 10 years of it, roughly. During the Great Depression, the whole world went through 10 years of it.

To explain why it happens, let me offer this simplistic example: Say that commerical banks need a 4-point spread to make money. In other words, they have to charge 4% more for loans than the interest they pay to depositors. Now say there is an economic contraction, and manufacturers and service businesses are downsizing to adjust to declining markets. They don't want capital for expansion and they couldn't pay the interest if they wanted it. So banks drop their rates to try to keep loans moving, because that's how they make their money. When it hits around 4%, government officials, bankers, investors, and corporations start sweating. If it hits 2%, you're in a dive. Think about that 4% spread: Even if banks pull in their horns and batten down the hatches, they can't live on less than 3%. So, what can they afford to pay to depositors? Negative 1%. In other words, for the bank to stay in business, it has to *charge* depositors 1% for them to accept depositors' money.

Of course, they then have no depositors. This is a kind of equilibrium, because they don't have many borrowers, either. In Japan in the early '90s, banks dropped their loan rates to 0% interest (with some government help, of course) and they still couldn't give out loans. There was no growth in the economy and nobody wanted their stinking money.

You probably notice that, in these circumstances, stuffing your money under your mattress produces a higher return than depositing it in a bank. This is very bad ju-ju. Your investment choices boil down to Serta Perfect Sleeper or Sealy Posturepedic.

Nobody's going anywhere. Banks are dead in the water, industry keeps cutting wages, prices keep dropping, and the economy is as dead as a road-killed 'possum. If the Fed has already dropped their overnight rate below 1% and banks still don't want money, then the Fed has lost control of the monetary system. There is nothing more they can do.

At this point Congress takes over and tries desperately to prime the pump (expect this to happen within six months from now). They'll pump money into infrastructure projects, and then into any make-work they can come up ith -- think CCC Camps and the Writer's Project, circa 1933. But if they've waited too long, all this will do is debase the currency. They can cause some inflation this way but no real economic growth.

Anyway, the point is NOT that deflation is likely -- it's extremely rare and unlikely. The point is that once you pass that tipping point, and the economy is trending down with no turnaround in sight (think, like right now), you're in deep doo-doo. There are no monetary or fiscal tools left to stop it. When the Fed's overnight rate drops below 1%, you're at the end of the rope. And that's why it scares the living bejesus out of government treasury people, bankers, and businesspeople. And it should scare all of us.

BTW, the overnight rate just dropped to 1%.

-- Ed Huntress

Now iirc, Japan was suffering from overstated property values. IOW, they had the same bubble we are in currently. I hope you are not telling me that if there is an unreality in the market we need to keep that unreality going.

I see what is happening as a correction. Yes, it may not be pretty but we can't keep a sham going forever and our chickens have come home to roost.

I think you made a good case that we are screwed and that is the framework I'm working with. Hunker down, reduce expenses, smile at the bosses and hang on to the job as long as I can. If I loose the job, start immediately looking for a new one because 52 weeks of unemployment isn't going to last as long as the downturn.

Recently my plant laid off permanently 16 people, that is something that the plant has never done, corporate management is sure that for the foreseeable future those jobs are gone and a temporary layoff would have given those people false hope.

Getting back to my original point, the growth model isn't working. This isn't an empty country with huge resources to exploit. The export market isn't as big as it once was. We need to figure out how to live within the reality that the growth model is getting just as tapped out as the oil patch.

Wes

-- "Additionally as a security officer, I carry a gun to protect government officials but my life isn't worth protecting at home in their eyes." Dick Anthony Heller

Haha! That's another good point. There are some really good economists around who are saying that our economy is now dependent upon bubbles, that the whole house of cards depends upon irrationally inflated valuations, and that we're lurching from one bubble to the next.

But they were saying that six months to a year ago. Their assumption was that it would take an economic collapse to wring the inflated value out of assets (securities, not physical assets), and they didn't see that kind of collapse coming. Now, maybe they'll re-calculate and say that it's possible for us to have a real economy again, after we shuck off another trillion or two in inflated values.

I don't have any idea, but they make a good case.

This all makes sense. A point made frequently in the popular economic literature is that we're in uncharted territory. Undergraduate economics (which is all that most of us here know) is the economics of slowly changing systems, in which irrational behavior can only depart a certain distance from the realities of an economy before there's a sharp and sudden correction, and the correction is subject only to limited interventions.

This is a huge correction, and the interventions are extreme. The people in charge of keeping things from imploding -- Treasury and the Fed -- are now operating in territory in which the irrational components themselves are what they're trying to correct. The underlying fundamentals are so out of whack that they aren't the ones driving the economy. And there is little experience in economics of dealing (successfully, at least) with such huge departures from fundamental realities.

Normal corrections now, says the govenment, would cause the economy to implode. Ten years from now the conservative economists will say that it was the government intervention itself that caused all the trouble. They'll probably be wrong, as they were when they said such things about the Great Depression, but they can live in a fantasy world of economic models that never have to be tried out in reality.

Sorry if that sounds airy-fairy and abstract, but, given where we are, I think you can see things from that perspective. The "corrections" you're talking about will happen; the question is whether anyone can effect a soft landing.

There are non-growth models of economics, untested and hotly debated, that are promoted by the green/sustainable/leftish crowd. There are fundamental issues with such models that upend some of the precepts of capitalism itself. If I were a student now I'd be interested in studying them.

But back for a moment to deflation -- do you follow the basic idea? Growth models or not, that's the way the system works now. Slowdowns can be handled. Declining prices are not necessarily bad. But put the two together, and pass a tipping point of low interest rates with negative growth, and you're in a deflationary spiral. And those scare economists far more than inflationary spirals do.

-- Ed Huntress

as long as

once was. We

getting just as

=================== IMNSHO the problem is a proliferation of "zombie" financial organizations [and per several other threads almost all major American corporations when the sources of their incomes are now financial organizations that do something else on the side].

Japan had and still has this problem. We [the US] are rapidly creating huge numbers of corporate "living dead." This appears to be the result of the refusal to admit failure and move on.

Just a suggestion -- if a "for profit" corporation domiciled in the US has more than 10 million $US in claimed assets [not equity

-- assets], or employs more than 1,000 people, but fails to generate any US taxable income for 5 consecutive years, they should be placed in involuntary chapter 11 [reorganization] with

This would have "solved" the Detroit automaker problem.

------------------- Major error appears to be the confusion between the Wall Street Casino and the "real economy."

While I don't count myself amoungst the g/s/l crowd, I do think they have some valid points. The question is when they are going to start making sense to a sizable majority of the population.

I wonder how traditional things like home sales are going to far when the boombers start dying off. How a drawdown of investments will affect the market as they pull out funds to live on. In addition to the current mess, I already had worries about the next

I'm still trying to wrap my head around it but I do see sense in what you are saying. I have a feeling this Christmas season is going to be hard on retailers since they typically make most of their profits during the holliday season. Credit card companies have pulled down limits on credit cards and hiked interest rates to reduce exposure and I have a feeling there are more people this year that are scaling down purchases for the holiday season.

I was really hoping to avoid living in interesting times. ;

Wes

Yup, it will be bad. You may want to blame it all on republicans but dems have their hands in this though I'm sure Waxman will stay away from it. A hint, to help you out, the Waxman hasn't managed to pin this on a republican. That should tell you something.

Obama has made promises he can not come through on. If he wins, there is going to be a lot of anger when the people living on false hope figure out they were lied to.

There is nothing more cynical and cruel than what Obama has offered the desperate people in our society. He promises much and can provide little or nothing.

Wes

-- "Additionally as a security officer, I carry a gun to protect government officials but my life isn't worth protecting at home in their eyes." Dick Anthony Heller

George Bush is the person in whom the Right placed its blind faith, the one they glorified and held up as the ultimate standard-bearer of what they believe in. And now he -- and they -- lay in shambles and disgrace. No matter what metric one uses, it's difficult to overstate what a profound failure the Bush presidency is, and everyone -- including Bush -- knows that. The most important aspect of this Tuesday's election is to finalize their humiliating repudiation and to bury them for what they've done.

HTH