Deflation still winning the day

As fast as the Federal Reserve and US government have shoveled money into the Wall Street machinery, it has been disappearing even faster.

The evidence is contained in the falling prices of:

  • Houses
  • Stocks
  • Most bonds
  • Commodities
  • A rising dollar

The problem with deflation is that it is a certified bummer. Falling asset prices mean a negative "wealth effect," which depresses both additional borrowing and spending by consumers. Less consumer spending means falling revenues and falling profits, and then falling employment.

Fewer workers means less spending, which just creates the conditions for fewer workers. And so it goes.

Right now we should probably admit to ourselves that entrusting the bailout to a deep-cover Wall Street insider was a bad idea. At the very least, we should admit that the steps taken so far are not working.

I mean, just look at these articles:

GM's Skid Quickens as Crunch Raises Bankruptcy Threat
Only federal aid can prevent a collapse of the biggest U.S. automaker, analysts including Buckingham Research Group's Joseph Amaturo said before the shares tumbled today for a fifth straight day. Reorganizing in court protection also may not be possible, because the credit crunch has dried up financing.

"Strategic bankruptcy is not an option for GM,'' said Mark Oline, a credit analyst with Fitch Inc. in Chicago. "This is an issue of operating or not operating.''

The prospect of a forced liquidation raises the stakes for GM's quest for new federal borrowing after saying on Nov. 7 it may run out of operating cash as soon as year's end. GM had $16.2 billion on hand as of Sept. 30, down from $21 billion at the end of June, and needs $11 billion to pay its monthly bills.

"A bankruptcy wouldn't address our immediate liquidity concerns,'' said Renee Rashid-Merem, a spokeswoman for Detroit- based GM. "It's not an option for GM because it creates more problems than it solves.''

Postal Service Looks To Cut 40,000 Jobs In First Layoff In History
SHREVEPORT, LA (KSLA) - "We lost 2 billion dollars and like any other business we have to stay afloat." And to keep from sinking, the United States Postal Service is considering cutting thousands of jobs nationwide. Lavelle Pepper with the post office in Shreveport says they too are feeling the affects of the same disease hitting the country... a struggling economy. "We employ about 685,000 people. If we do layoffs it would include clerks, carriers, mail handlers across all crafts."

Pepper says the postal service is looking to eliminate 40,000 jobs nationwide.

Mall Owner Is Warning of Default
Ailing mall owner General Growth Properties Inc. warned Monday in a government filing that its failure to refinance or extend $1 billion in debt due this month could trigger default on billions of dollars in debt and its ability to continue operations would be in "substantial doubt."

And so on and so forth.

The government bailouts are now being applied to the banking industry, the financial services industry, the insurance industry , the auto industry, and probably soon the mall industry.

But all the bailouts can do is keep an ailing company afloat for a while longer; it cannot fix the problem, which is that the vaunted US consumer has finally run out of steam.

Her's a very interesting post by djhester1940 in a very interesting forum thread (link) on this site asking for anecdotes from the retail side of things:

Last night I was speaking to a neighbor who is a mechanic for a large Ford dealer here in San Antonio. He told me that the normal sales volume for new cars was around 200 cars per month and somewhere in the neighborhood of 400 used cars per month. Last month, October, they sold a total of five cars. To me this sounds serious.

Hmmmm...from 600 cars to 5 cars. Yes, I would say that qualifies as "serious".

I am collecting other anecdotes from the retail space, which are all confirming the most aggressive slow-down in activity in anybody's experience.

If you have any anecdotes to share, please post them over in the forum. I find tremendous value in the "on the ground" data, because I am sure it paints a more useful picture than the high-level official data.

This is a companion discussion topic for the original entry at


I know you don’t have a crystal ball, but the hot question around here and elsewhere on the Internet seems to be "how long will deflation continue until inflation wins out?"

I think I recall in your last Martenson Report that you said something like 6-12 months, but I could have misinterpreted.

What are the chances of a ten-year, Japan-style period of deflation in the US? What’s your best guess for how long deflation might last?

EDIT: somehow the above comment was posted twice. Move along, move along… nothing to see here.

With all respect to Chis, there is no way inflation takes over in 6-12 months.
In order to believe that you would need to believe that you would need to believe:

  • The economy will rebound
  • The unemployment rate will fall - significantly
  • Consumer confidence will be restored
  • Housing prices will stop sliding (remember, still another 4+ years to go there...)
  • Wall Street and corporations will unwind their toxic assets
We could go on, theres dozens of other preconditions that together will signal inflation. What are the odds of that happening within the year? Zero, zip, zilch, nada. In fact, the Fed's actions are having the exact opposite effect - they are helping to prolong this deflationary period by propping up failing banks, the home market, and now the auto businesses.
Mish had a good graph yesterday on why all the people pointing at the gigantic increases in money supply do not understand what they are talking about. Worth a read.

I’m reading Mish’s notes on deflation and, as he himself points out, they are in stark contrast to Peter Schif’s.
I’m not done processing the information, but yes, I’d say now is deflation, I’m not certain Mish is correct in ruling out inflation quite so fast…

GM is tanking because no one is buying cars. So we bail them out. Still no one will be buying cars. I don’t see what this gains us.

How about the government tells GM they will buy (bailout money) worth of electric or plug-in hybrid cars. Or solar panels, or windmills, or something that will do us some good.

I read Mish’s blog regularly. I also read many other blogs published by people who believe inflation will win out in the relatively near future. Frankly, Mish’s arguments are more convincing and that’s why I’m here asking this question.

Sounds like you think deflation will last several years (i.e. more than five), correct?

According to Peter Schiff, once people start fleeing the dollar, that’s when inflation, rather hyperinflation will begin. It’s hard to time it. Look how fast things happened in Iceland. Once it happens, head for the exits.

People thought the Great Depression was just going to be a recession that lasted a year. The Japanese lost a decade battling deflation. Hard to judge these things when we are just beginning them, but in general, I’m a believer in a long-term depression.
Deflation can’t be over until housing prices stop falling. No amount of Government intervention, lender forgiveness,or monetary printing is going to stop them from returning to their historical averages. Based on the 8 year runnup from 1998 to early 2006 that means we have another 5+ years to go. After that…it’s too early to judge…the Japanese entered a deflationary period with savings, we didn’t.

If deflation lasts a while, what are good strategies to hedge? Are there any good strategies for a deflationary environment?

Chris, I am suprised you have fallen into the trap of believing inflation or deflation is actually measured by rising or falling prices.

In order to declare whether deflation is winning then we need confirmation that the actual money supply has firmly turned negative. If it hasn’t then there is every chance these falling prices will turn around, possibly very quickly.

Please review these charts of reconstructed M3 that includes recent Fed activities and the monetary base M0 (narrow money)

No. You can have an inflationary environment because of an imploding currency without any of the conditions that jgreco listed being met. For an example, look at Iceland.

A friend of mine is a server at a restaurant, good location, average ticket perhaps $20. Restaurant has been there for 20 years. Average saturday night take used to be about $6000. Now it’s around $3500.

I read Mish’s insights but also a variey of others. Have a look around iTulip and Ka-Poom Theory regarding inflation/deflation debate.

No Deflation, Disinflation then lots of Inflation. This one goes back to 2006 but, there are quite a number of threads on how it won’t be a return to the Great depression (straight up deflation).




You aren’t seriously comparing Iceland, a tiny island nation who took on debts over 10x it’s GDP, to the United States with the world’s reserve currency…

Gov’t launches new loan aid effort

Government, mortgage industry announce assistance effort for Fannie Mae, Freddie Mac loans


Do you think this will help. If that is true the banks will "help" ~1 million homeowners to not default. AFAIK the total foreclosures for 2007 were ~1.2 million, so this seems like a big chunk.

Or it is too late ?

What is the change in the banks balance sheets if some home-loans are not in foreclosure but instead renegoriated on lower payments ??


Yes jgreco, an implosion of the US dollar is, as judged by fundamentals, inevitable. The only reason it may not happen has nothing to do with reserve currency status or any economic arguments, but with the US’s ability to coerce, due to its possession of all the guns and all the nukes. Ultimately that is what lends value to the dollar.

Maybe someone alreday wrote this but hyperinflation, “Weimar style”, occurs when the goverment is broke. Then it starts to print money and that is the end of that countrys currency. Mabye USD will stand some Bernanke printing but just for a breif period.

I’ve seen many predictions for a bottom in the housing market closer to 2012. Median prices in California are already down 40%+. There’s nothing to say that the collapse will take the same number of years as the run-up. It’s happening a lot faster right now.

What about Iceland? They’re experiencing inflation and a currency collapse in the midst of still declining real estate values, rising unemployment, decreasing consumer confidence, etc. I’m not comparing Iceland and the US directly, just saying that this is an example that contradicts what you said above about certain factors needing to be in place for inflation to occur.

By the way, despite the argument we are carrying on on the strength/weakeness of the dollar. I will agree with you that the deflationary environment is what we have ahead of us. We will continue to have a bull market in bonds. A reversal in the interest rate trend will wipe out the (paper) capital that the banks are trying to accumulate. Banks don’t need to lend, they just make more money in bonds. A prolongation of the bull market in bonds is also the intent of the large bond speculators some of which are the biggest international banks and their owners. That is their will, so that is what will happen. This is a carbon copy of the situation during the Great Depression.The same trend in interest rates will wipe out the capital of the productive sector, this is, after all the source of the real capital accumulated by the banks in this environment.

Banks don’t create wealth, they just siphon it off the true producers (agriculture and manufacturers), much as they have been doing since the early 80’s when the interest rates started dropping relentlessly. This is the spiral of death, and the mechanism by which depression is the end result of deflation. The wiping out of the productive sector has been going on for all this time, it is just that now the characteristics are becoming just too obvious, much like the impoverishment of the american population during the same period. The banks (thus the government), want to preserve the preeminence of the financial sector at all costs, hence everyone else will be wiped out. Depression follows deflation, and that is what we have ahead very likely.