Severe deflation? What deflation?

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Rule # 1 you never 'Own' your home, you lease it from the goverment. Try not paying realestate taxes and see how long you live in it. With State and county goverment going bankrupt with the mounting long term expenses of pensions, teachers pay, and overstaffed departments the homeowners are on the hook for the money.

Im sure they are thinking up ways to tax the retirees living in motor homes as well as the homeless living under bridges.

John

Orange County Florida Schools are looking to trim their expenses. The latest has caused lots of comments. They are considering eliminating all sports, at all three levels. Some of the parents would rather cancel classes than sports.

We have developed an uncompetative public servant class that thinks they are entitled to ever higher welfare payments in the form of their paychecks. Dave

Is this a rhetorical question? d8-)

If not, the short answer is because no one has succeeded in modeling human behavior. The models, with few exceptions, are predicated on the idea that people make their economic decisions rationally. The future will belong to those who can model our irrational behavior, which often is the decisive part.

Too much data, too many algorithms, too little knowledge.

The scientific method has been applied in spades. Mathematical modeling of the economy is what made Paul Sameulson famous, and that sold something like four million of his books. It's also the basis of the elaborate risk equations that the former physicists, now financial modelers, used to show that the financial collapse we're going through couldn't possibly happen.

My son (a college junior majoring in economics) tried to explain to me the other day what actual economic events can be modeled by the third derivative in a calculus equation. My eyes rolled back in my head. That way lies madness.

Rational projections that correctly predict events, and that contradict the projections made by economists and governments before the fact, are usually projections initially rejected but then recalled after the fact. It's a form of crystal-ball gazing, which works better if you already know the outcome before predicting it. d8-)

Nifty, but ultimately, very elaborate madness, like most models surrounding general equilibrium theory.

-- Ed Huntress

It can get ugly out there when unemployment creeps up over 20%. The communists were having a field day, too.

-- Ed Huntress

Those models would probably work except for the Greed and incompetence factor.

It seems that the best investment today is a handfull of lottery tickets :)

John

The new year will bring on the worst unemployment numbers with many of the chain stores down sizing or going completely out of business. This not only puts a lot of sales people on the street but the commercial real estate is going to take a hit too with all the supporting labor. As Betty Davis said "Fasten your seat belts, it's going to be a bumpy night."

Another part of the real estate market will take a beating when the employees of wall street hit the unemployment lines. I don't know what everyone else is looking at but I always made it a habit to read the employment listings in the local papers. Lately there are none. A year ago they were three pages long. It kind of tells you something.

I have work extending out to Feb. but who knows after that. Most of all the stuff we do is for basic industry which is the last to slow down and in slack times they try to do their major maintenance which is where we have a part. All my machines are paid for but my worry is the companies are pushing out their payments further than normal. If things get that bad there are always a couple of deer hanging around in the back cornfield behind the shop and there is a potato farmer down the road so I have my meat and potatoes. :)

John

Ed, you are missing my point. I will appreciate it if you re-read my original post. My point was that the decline in prices that occurred (which I do not dispute) can be fully attributed to the fall of commodity prices such as oil and steel. The reason is that the CPI with oil excluded (core CPI) did not actually fall. Such a fall of commodity prices (from 150/barrel to 35/barrel) cannot be expected to continue at the same pace due to laws of mathematics and lessening of the share of oil and steel expenses in the cost structure.

Therefore, the previous fall in prices, that happened for above reasons, cannot continue to work the same way.

Igor

I'll dust off my squirrel and 'possum recipes if necessary. d8-)

-- Ed Huntress

OK, I reread it.

Commodities are not directly reflected in the CPI, Iggy. Oil shows up because oil products are sold to consumers, and the consumer products quite quickly reflect the price of crude, but steel, for example, does not. That's a producer price, and steel was off 13% from October to November (unadjusted).

The "talking heads" you mentioned aren't tuned into the relationships but the financial press is, and they're warning about price deflations. If you look at the producer price index (PPI):

Those price drops show the trend that is working its way through the pipeline to consumer goods, although consumer prices don't usually swing as greatly as producer prices.

So you're correct when you say that the CPI doesn't clearly show a uniform deflationary trend -- yet. But consumer prices that are tied to goods with little processing from the commodities, such as oil, are leading indicators. And some prices in both the consumer and producer indexes don't give a good picture of what's happening in that segment. They often lag, and there is other information to show what's coming.

For example, machine tool sales are holding up (0.5% increase for November) and prices have just started to decline. But projections, such as the one by Gardner Publications, show machine tool sales volume falling off a cliff in January, followed by a likely price decline, which is the long historic pattern. There is leading information available for these things, such as purchasing agents' budget and purchase-plan reports, that take a while to show up in sales and prices.

OK, so you're saying that the dollar amounts are limited at zero dollars. That's true enough, but the fact that another $20 would bring them close to the bottom, approaching production and shipping costs in the less-efficient fields, and that the price bottom is therefore limited to some value well above that, doesn't tell us directly what economic effect it will have. Prices will be driven by demand and further price reductions could only come from further reductions in demand, which, in itself, tells us that economic activity in general is winding 'way down. Regardless of what happens to oil at that point, the deflationary pressure on prices across the board will increase in a way that's reflected in the demand for oil.

-- Ed Huntress

----------- Good observations.

The huge run-up and abrupt fall in oil prices with no significant change in the supply, and only minimal changes in the demand should indicate the role that speculation/manipulation played.

I for one would like to know who the players were that bought the oil futures at 150$/bbl and how they are paying for them. I feel that at least some of the TARP 700 billion is going to "rescue" these players (or at least their lenders).

The same thing is true of the food futures.

Unka' George [George McDuffee]

------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?

Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).

=========== Indeed.

I had always thought that the commercial real estate backed CDOs or possibly the credit card receivables backed CDOs would be the next bomb to explode.

It now appears the next ones up on the "hit list" are the "private equity" buyout groups, e.g. KKR, Cerberus, etc. Not only have their assets tanked, these were highly leveraged, and the loans are now coming due with no hope of refinance or roll-over. Look for the buy-strip-flip crowd to show up in Washington with a tin cup any day now.

The Brit pub Financial Times says

----------

Investors who over-committed during the boom, when cash flowed back fast from buy-outs, are struggling to meet commitments as the flow of cash dries up.

Any debt with a credit spread in excess of 1,000 basis points [10% over prime in finance-speak -- UG] is considered distressed with a high expectation the company will default within the next three years. They analysed the credit spreads of 328 portfolio companies in November and found that about 60 per cent of buy-out debt was trading at distressed levels.

==>?This suggests almost 50 per cent of these companies could default during the next three years. With profits deteriorating that number could grow,? Mr Liechtenstein said.

On Sat, 20 Dec 2008 16:37:07 -0500, the infamous snipped-for-privacy@nowhere.com scrawled the following:

Speaking of forms of welfare, watch this important video:

-- It is pretty hard to tell what does bring happiness; poverty and wealth have both failed. -- Kin Hubbard

What's the correct oven temp for an 16 lb. housecat?

Stuffed or not? 325 deg for stuffed. 350 if not stuffed. Brown it first at

-- Ed Huntress

I sat last week with a guy I've gotten to know pretty well over the years who has spent his entire life in the oil business George. We had a couple of drinks over dinner and a discussed of our brave new world. He told me, almost in tears, that he'll be delivering oil in January for 38.00 and change. The world is litterally awash in oil right now due to a pretty big drop in demand. The Saudis are renting tankers, filling the things and then parking them because they are out of storage space and customers for their stuff.

What made you think demand hadn't changed much? It has cratered as far as the producers, foriegn or domestic, are concerned.

JC

I mentioned a year or so ago that it would be a good idea to keep an eye out for another Father Coughlin.

You guys also might have missed it but Northern Command got a little over one active duty division assigned last month. The WH issued a statement at the time to the effect that the force would be fucussed on NBC response but it's hard to see how the TOE of a light armored division fits that bill. I mean, you wouldn't respond to an anthrax ooutbreak woth main battle tanks or Bradley's. You can't take a 20mm chain gun to a bug.

JC

========= Another question of semantics.

I don't think of a 1 to 2 or even 5% drop in usage as a *STEEP* decline, and for sure shouldn't cause a fall from 150$US/bbl to less that 40$US/bbl.

Any hard numbers on what the actual usage is now and was during the height of the petro bubble? Even better if this is or can be broken out by sector, e.g. personal vehicles, truck road transport, ships, trains, planes, petrochemicals, heating, electrical generation, etc.

By a strange coincidence the urgent need for repeated US refinery shut downs for turn-arounds and updates seems to have disappeared now that the gasoline/diesel prices have dropped.

The least that can be done is to "name and shame" the individuals and institutions responsible.

Unka' George [George McDuffee]

------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?

Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).

Oil and energy has a strange property. The supply and demand curves are very inelastic in the short run (inelastic means supply or demand hardly change with price).

Think of it as, no matter what the price of oil, you still have to drive your car to work, or, if you were an oil man, no matter what price of oil, you still have to pump your oil well.

So a small change in demand or supply can bring about a big change in price.

In the long run, however, supply and demand are very elastic. For example you can replace a big truck with a small car, but that takes time, hence "long run".

So, a 5% drop in demand for oil can cause tanking of oil prices, indeed, it is not a small change in the context of short term oil price eqiulibrium.