Still Life: Piece of Beef - Claude Monet, 1864
So, equities have continued their slow but steady march upward since I last wrote about the economy. Inflation hasn’t really made an appearance as some forcasters would have had you believe. I found myself almost agreeing with David Brooks today:
Here’s one way to look at the politics of our era: We’ve moved from The Age of Leverage to The Great Unwinding.
For about a generation, the U.S. surfed on a growing wave of debt. The ratio of debt-to-personal-disposable income was 55 percent in 1960. Since then, it has more than doubled, reaching 133 percent in 2007. Total credit market debt — throwing in corporate, financial and other borrowing — has risen apace, surging from 143 percent of G.D.P. in 1951 to 350 percent of G.D.P. last year.
Charts that mark these trends are truly horrifying. There is a steady level of debt through most of the 20th century, until the mid-1980s. Then there is a steep accelerating rise to today’s epic levels.
Of course, I don’t agree with his assertion that the “crisis response more or less worked” – and even if it did, the crass immorality of the entire operation makes it impossible for me to say it was a good thing, even if TARP turned out to be less of a disaster than it could have been.
This article from New York Magazine about the “Downturnaround” is full of insights.
Like Gary Shilling, I think that (monetary) deflation is going to be the state of affairs over the coming years.
But Shilling has long understood deflation as the basic and mostly benign operating condition of the highly competitive, technologically innovative U.S. economy, alleviated only by “shooting wars,” like Vietnam, when government spending tips the economy into inflation. We shouldn’t be so frightened of deflation, he says; it merely requires us to recalibrate our ideas about certain things, like that real estate automatically appreciates in value. The recent market collapse has certainly helped many of us understand that.
Mish from Global Economic Analysis rebutted Peter Schiff’s inflationary thesis in detail in 2007:
Ultimately the Fed will be constrained by ZIRP (Zero Interest Rate Policy), just as Japan was. Given massive overcapacity in housing, commercial real estate, restaurants, nails salons, etc there is simply no reason for businesses to want to expand business. Nor is there any reason for banks to be willing to extend credit to all but the most credit worthy borrowers. Rising defaults may even impair capacity to the point many banks are unwilling or unable to lend at all. The only reason expansion got as carried away as it did is the psychology at the time suggested residential and commercial property would forever rise. That psychology changed. More on psychology in a bit as it is a key factor.
Liquidity from the Fed is in reality nothing more than a loan. Liquidity is not the same as free money and the Fed will not be giving away the latter. Furthermore, liquidity is a coward. In the face of rising defaults spreading to commercial real estate, home equity loans, and even credit cards, the Fed’s attempts to add liquidity will go straight down the drain.
…
Although Japan was rapidly printing money, a destruction of credit was happening at a far greater pace. There was an overall contraction of credit in Japan for close to 5 consecutive years. Property values plunged for 18 consecutive years. The stock market plunged from 40,000 to 7,000. Cash was hoarded and the velocity of money collapsed. Those are classic symptoms of deflation that a proper definition incorporating both money supply and credit would readily catch. Those looking at consumer prices or monetary injections by the bank of Japan were far off the mark.
I don’t think that the consumption-based economy is ever going to recover. I feel irritated whenever I hear or read commentary complaining about housing prices dropping or remaining stagnant. The entire crazed HELOC-and-credit-card financed boom is not coming back, and I suppose that’s bad news for the commercial banks that make their bones on mortgages. Despite this, I don’t believe that companies and people will just sit around twiddling their thumbs over the next few years.
It mostly comes down to how much the governmenet fucks things up. So far, the promised regulations of the securities industry have not gone through. I doubt they will, if only because the Democrats are going to need those campaign contributions going forward.
At some point, the Federal government is going to come to a California-style crossroads. Although ideas for new taxes have been floated, I doubt many of them will stick – especially the VAT proposal. Any new taxes that are imposed will just provide a massive boost to the Republicans, especially as jobs-creation programs prove to be hilarious failures over time.
Instead, federal programs and pay will be shaved like cheese on a grater. Either that, or the US goes to crazy town and defaults or hyper-inflates – but I really doubt either will happen. Nothing else makes sense, barring a shocking technological breakthrough followed by abnormally high growth.
