30 July 2010

Dee Feat is in Dee Flation, Part 3

Some of you may have read my earlier posts, Dee Feat is in Dee Flation (since this is posted various places, I'm too lazy to have to maintain multiple links, check 19 May and 15 July on this site to refresh your memory). Perhaps not. Today's NY Times has two articles in the business section, one about an inflation hawk who has had the scales fall from his eyes, and the other about why this recession is, in fact, different (and thus more dangerous). Since the Times is an acquired taste, this time I'll do some quoting in the event that some of you Dear Readers don't want to spend time at such a communist rag.

I'll, briefly, reiterate the point of view of myself, and the Saltwater Economists. It's the distribution, stupid does about sum it up. From historical evidence, going back to the beginning of industrial societies, economic depressions are always preceded, and motivated, by large shifts in wealth and income from the many to the few. The rich get richer and the poor have kids. The logic of why this course of events is always inevitable can be stated very simply: as one gains wealth and income, less of that income is needed for sustenance. Since the rich spend a lower proportion of their income, $1,000,000 in one household generates (multiplies) less economic activity than $10,000 in 100 households.

As income concentrates, demand for goods diminishes, and likewise prices and consumption of these goods. Lowered production leads to lower employment and wages. This is deflation. Japan is *still* stuck in that mire going on 20 years. It's the distribution, stupid. It is a downward spiral to hell. What makes it worse for the USofA is that, thanks to idiots like Reagan and the Bushies, a much higher proportion of our economy is now dedicated not to producing stuff for us, but financial manipulations that aren't consumable by most folks. We are further from a self-sufficient society than at any time in our history. Mark that.

Now for some review of what was written today in the Times.

The Fed article tells us how a traditional inflation hawk, James Bullard, has finally realized that what we face is deflation. The article doesn't say that Mr. Bullard has reached his epiphany based on distributional considerations, alas. But he has changed his mind.

"On Thursday, James Bullard, president of the Federal Reserve Bank of St. Louis, warned that the Fed's policies were putting the economy at risk of becoming 'enmeshed in a Japanese-style deflationary outcome within the next several years.'"

The article closes with:
"The outcome could be an 'unintended steady state' like Japan's slow-growth economy. 'The U.S. is closer to a Japan-style outcome today than at any time in recent history,' he wrote."

In the course of the article, the other side is noted, in particular Thomas Hoenig of Kansas City Fed who has the temerity to compare this situation with the 2003 bad recovery and fears of deflation then, which didn't happen. Well, deflation didn't happen then because the housing bubble was on its way, and folks were spending the equity in their houses in substitute for stagnant wages. Some people do love to lie by omission. Hoenig is classic.

The second article, which references the authors of a book whose title is delicious, "This Time Is Different", largely debunks the nonsense of the inflation hawks mentioned in the Fed article. Whether the juxtaposition is coincidence? Not likely.

"Earlier this year, some economists projected stronger growth rates in part because they were looking at recessions in the early 1990s and the early 1980s. The problem with such analogies is that the latest recession was precipitated by a financial crash rather than more cyclical boom-and-bust factors."

Well, yeah. This is the mistake (well, willful ignorance) made by the Fed's inflation hawks. They likely took a course in business cycles whilst undergraduates, and assume that such is the only and entire story. This Great Recession really is different, at least since 1929 or 1873. Cyclical expansion/contraction is driven by imbalances in real economic activity. The Great Recession was caused by financial manipulations not connected to the real economy, except that one tentacle: your house. Rather than a macro-economic failure, it was a micro-economic failure which metastisized.

For the first time, a Real Pundit gets it right (that I've seen):
"Many Wall Street economists and investors have 'been too willing to see this as a normal cyclical event distorted by some crazy things going on in housing,' said Ian Shepherdson, chief United States economist at High Frequency Economics, 'whereas this was almost entirely driven by what was going on in the financial markets and houses.'"

Back on 12 April and 12 May I wrote that housing is not an investment. It's just a place to hang your hat. The fact that you, or your parents more likely, saw ridiculous appreciation in a 2 bedroom ranch is not a given. Unless, and until, most folks get more income, there can be no growth. Remember, one more millionaire has little effect on growth. 100 poor folks with another $10,000 makes a whole lot growth. They spend that money on pizzas and clothes and used cars. The mechanics at the used car dealers get more hours, or more mechanics. They spend more. And so on, round and round. It is a virtuous circle of growth. Much nicer than a death spiral of deflation. Pray the Thought Leaders in Washington get some sense.

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