Oct 222015
 October 22, 2015  Posted by at 9:38 am Finance Tagged with: , , , , , , ,

LIFE Freedom in peril 1941

Whenever we at the Automatic Earth explain, as we must have done at least a hundred times in our existence, that, and why, we refuse to define inflation and deflation as rising or falling prices (only), we always get a lot of comments and reactions implying that people either don’t understand why, or they think it’s silly to use a definition that nobody else seems to use.

-More or less- recent events, though, show us once more why we’re right to insist on inflation being defined in terms of the interaction of money-plus-credit supply with money velocity (aka spending). We’re right because the price rises/falls we see today are but a delayed, lagging, consequence of what deflation truly is, they are not deflation itself. Deflation itself has long begun, but because of confusing -if not conflicting- definitions, hardly a soul recognizes it for what it is.

Moreover, the role the money supply plays in that interaction gets smaller, fast, as debt, in the guise of overindebtedness, forces various players in the global economy, from consumers to companies to governments, to cut down on spending, and heavily. We are as we speak witnessing a momentous debt deleveraging, or debt deflation, in real time, even if prices don’t yet reflect that. Consumer prices truly are but lagging indicators.

The overarching problem with all this is that if you look just at -consumer- price movements to define inflation or deflation, you will find it impossible to understand what goes on. First, if you wait until prices fall to recognize deflation, you will tend to ignore the deflationary moves that are already underway but have not yet caused prices to drop. Second, when prices finally start falling, you will have missed out on the reason why they do, because that reason has started to build way before a price fall.

A different, but useful, way to define -debt- deflation comes from Andrew Sheng and Xiao Geng in a September 24 piece at Project Syndicate, China in the Debt-Deflation Trap:

The debt-deflation cycle begins with an imbalance or displacement, which fuels excessive exuberance, over-borrowing, and speculative trading, and ends in bust, with procyclical liquidation of excess capacity and debt causing price deflation, unemployment, and economic stagnation.

That’s of course just an expensive way of saying that after a debt bubble must come a hangover. And how anyone can even attempt to deny we’re in a gigantic debt bubble is hard to understand. Our entire economic system is propped up, if not built up, by debt.

The mention of the excess capacity that has been constructed is useful, but we’re not happy with ‘price deflation’, since that threatens to confuse people’s understanding, the same way terms like ‘consumer deflation’ or ‘wage inflation’ do.

Central banks can postpone the deflation of a gigantic debt bubble like the one we’re in, but only temporarily and at a huge cost. And it looks like we’ve now reached the point where they’re essentially powerless to do anything more, or else. We are inclined to point to August 24 as a pivotal point in this, the China crash where people lost faith in the Chinese central bank, but it doesn’t really matter, it would have happened anyway.

And today we’re up to our necks in deflation, and nobody seems to notice, or call it that. Likely because they’re all waiting for CPI consumer prices to fall.

But when you see that Chinese producer prices are down 5.9%, in the 43rd straight month of declines, and Chinese imports are down 20% (with Japan imports off 11%), don’t you hear a bell ringing? What does it take? If the dramatic fall in oil prices hasn’t done it either, how about steel? How about the tragedy British steel has been thrown in, how about the demise of Sinosteel even as China is dumping steel on world markets like there’s no tomorrow?

How about the reversal of funds that once flowed into emerging markets and are now flowing right back out?

Or how about major global banks, all of whom see their profits and earnings deplete, and many of whom are laying off staff by the thousands?

Wait, how about global wealth down by 5% since 2008 despite all the QE and ZIRP policies? And global trade off by -8.4% YoY?!

Here’s from Tyler Durden last week:

Credit Suisse’s latest global wealth outlook shows that dollar strength led to the first decline in total global wealth (which fell by $12.4 trillion to $250.1 trillion) since 2007-2008.

[..] from HSBC: “We are already in a global USD recession. Global trade is also declining at an alarming pace. According to the latest data available in June the year on year change is -8.4%. To find periods of equivalent declines we only really find recessionary periods. This is an interesting point. On one metric we are already in a recession. [..] global GDP expressed in US dollars is already negative to the tune of $1,37 trillion or -3.4%.

How about companies like Walmart and Glencore, just two of the many large entities that have large troubles? These are not individual cases, they are part of a global trend: deflation. As evidence also by the increase in US corporate downgrades and defaults:

Moody’s issued 108 credit-rating downgrades for U.S. nonfinancial companies, compared with just 40 upgrades. That’s the most downgrades in a two-month period since May and June 2009, the tail end of the last U.S. recession. Standard & Poor’s downgraded U.S. companies 297 times in the first nine months of the year…

Everything and everyone is overindebted. All of the above stats, and a million more, point to the beginning of a deleveraging of that debt, something that curiously enough hasn’t happened at all since the 2007/8 crisis. On the contrary, a massive amount of additional debt has been added to a global system already drowning in it. China alone added $20-15 trillion, and that kept up appearances.

But now China’s slowing down everywhere but in its official GDP numbers. And unless we build a base on the moon, there is no other country or region left that can take the place of China in propping up western debt extravaganza. This will come down.

The only way a system that looks like this could be kept running is by issuing more debt. But even that couldn’t keep it going forever. We all understand this. We just don’t know the correct terminology for what’s happening. Which is that debt that has been inflated to such extreme proportions, must lead to deflation, and do so in spectacular fashion.

As long as politicians and media keep talking about disinflation and central bank inflation targets, and all they talk actually about is consumer prices, we will all fail to acknowledge what’s happening right before our very eyes. That is, the system is imploding. Deflating. Deleveraging. And before that is done, there can and will be no recovery. Indeed, this current trend has a very long way to go down.

So far down that you will have a very hard time recognizing the world, and its economic system, on the other side of the process. But then again, you have a hard time recognizing the world for what it is on this side as well.

Home Forums Everything’s Deflating And Nobody Seems To Notice

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    LIFE Freedom in peril 1941 Whenever we at the Automatic Earth explain, as we must have done at least a hundred times in our existence, that, and why,
    [See the full post at: Everything’s Deflating And Nobody Seems To Notice]


    It staggers me that you have to keep explaining this. If inflation/deflation are actual things, then prices cannot be part of the definition. Prices change for any number of reasons, a new, vastly more efficient buggy-whip production method drives down prices a productivity per wage $ increases, a new buggy whip mine opens, and prices fall again, causing most of the others to close so prices rise, then along comes the gas powered car and people stop buying buggies and whip prices tumble again; none of that has anything to do with monetary shenanigans yet all of them cause price changes, what the hell is so difficult?

    If all that business is done on capital derived from savings, the economic and financial effects will be different from doing it on debt. At some point debt gets so big that the price of money either falls or the ability toi pay the interest vanishes. So money-creators reduce the price of debt till if falls below zero. Now those who have saved are getting caned for their prudence and remove money from the system, either by using it to pay off their own debt or by converting it into land, gold, paintings, whatever they think will hold “value”, however they define it, or they take it out in cash and stick it under their pillows. But once they have paid off their debt and/or stuffed their mattress with it they have effectively extinguished money, deflating the financial system. defaulting on debt does the same thing. Good grief its not rocket science.


    7 years of bureaucratic obfuscation later;

    Subjective definitions of financial terms aside, there are really only two ultimate choices here for the creators of the debt based currency to extinguish unsustainable debt. Default or devalue.

    All else is just noise,,, Bread and Circuses, as it were. The Fed is a political animal and will follow the path of least political resistance in the end.


    A deflationist here might be selling farmland, tools, precious metals, houses,,,most anything “real,” in order to buy them all back at half price in future. He also might be tempted to hoard Federal Reserve IOU dollar debt instruments.

    The Half-Life of the Dollar

    OTOH, looking at history, it isn’t likely the Dow goes back to 1000 as in the late 70’s, or a home to $5000 as in the early 60’s, or a new Chevy to $2400 as in 1973. Nickel beer? 25 cent burger?

    Default or devalue. Place your bets.


    To clarify, Default extinguishes TPTB. Devaluation preserves TPTB a bit longer, so they may live to fight another day, or buy time to strip the copper wiring from the house of cards before it falls.

    Why, again, are they called TPTB?

    Of course, in the real end, the Fed, along with it’s currency will be gone. At that point, we are all where we are, then.


    “A deflationist here might be selling farmland, tools, precious metals, houses,,,most anything “real,” in order to buy them all back at half price in future. He also might be tempted to hoard Federal Reserve IOU dollar debt instruments.”

    A deflationist would not be looking at selling and then buying back stuff for cheaper unless (s)he has a lot of debt on it. Farmland owned outright is the greatest treasure provided it’s productive. Tools are..tools. Once you got them, why sell? Gold is good, but only if (s)he can hold it for 10-20 years. ‘Hoarding’ Treasuries works short term.


    “…we’re right to insist on inflation being defined in terms of the interaction of money-plus-credit supply with money velocity (aka spending).”

    Here a portion of one sentence describes the interaction of 3 factors –a rare feat. It’s hard to wrap one’s mind around 3 factors inter-relating, as a definition. Wonderful how these few words clarify the dynamic. We’re taught to think reductively. So it’s easy for TPTB to hide what’s really going on, perhaps even from themselves.

    What I don’t understand is why we can’t just “reset” the economy. After all, it’s a construct serving TPTB. A debt jubilee, anyone? I’m for default. Sure it would be disruptive, and some who richly deserve a haircut will get one. And the whole economy will shrink, as it’s doing anyway. Yes, that would mean de-population, which will happen anyway. People are willing to die for a cause they care about. As one example, end-of-life hospice is becoming popular because people would rather die sooner and keep their dignity. People can be policed (mentally & physically) only in so far as they are willing to be policed. In other words we have the power. Let’s keep the social inheritance, our institutions that serve us well, and jettison the rest in a new spirit of valuing the commons.


    Trying to explain this to people who don’t share our focus is like talking to the wall. We must remember than the owners are masters of word games, constantly using them and creating them in ways that promote thought confusion. Just another tool in the control armamentarium. Hoarding laddered short-term Treasuries plus personal cash is optimum at this point. Loss of after-tax principal in a severe deflation should be strenuously avoided. Just as central banks tend to aggressively buy gold when they should be selling, they also sell Treasuries when they should be holding. There is going to be much demand for short-term Treasuries, which may exceed supply. That is why the 2 year FRN Treasuries, which adjust periodically to reflect current market rates, should also be laddered and part of your Treasury portfolio. World debt that has been built up to such staggering proportions is the antithesis of good, self-liquidating, prudent debt. Monstrous debt defaults await us.


    daisychain asks “What I don’t understand is why we can’t just ‘reset’ the economy.” Indeed we can, and indeed we will. What is a dollar? Nothing but an idea in your head, backed up by a few electrons. We can reset the entire world financial system, and we will. But the trigger will likely be involuntary. A reset is a short term catastrophe to people up to their eyeballs in debt because they will lose their jobs and risk losing just about everything they have. A reset is both a short term and long term catastrophe for the 1% because they are heavily invested in the system and the owners of all that debt, as well as asset prices that are inflated because of the existence of all that debt. The 1% will try to scare the hell out of the debt slaves and trick them into saving the system.

    The only people who want to reset the system are those who are less dependent on it: people out of debt, people who have pulled their savings out of the system. This is actually a very tiny minority and will certainly remain so until calamity strikes.


    Doesn’t a jubilee mean those in debt would be relieved of it? Yes, those holding debt would lose –the ones well-resourced already. If it were a mass planned event, people would have time to dis the banks, which wouldn’t be reliable in such a scenario. Not rocket science to build new ones.

    Debt is a sacred cow. The back of my hand to that foot on our necks. Varoufakis in Europe has emboldened me to think we can take the reins of the chariot we’ve built together and make something good and useful of it. Rather than waiting with gritted teeth for calamity. Demolition is an expensive chunk of a construction project. Gravity helps, but it’s a deliberate process.


    IMO much of the problem with the deflation definition issue is that the velocity argument (which I understand) is eventually, with a lag, going to usually translate into some sort of real world, recognizable event for the everyman who thinks of just “prices” for things like his house.

    Great example, Nicole herself said it best in this quote which really resonated with Cory:

    “One of the attractive features about selling now is that you lock in today’s property price in cash – cash that will then go ten times as far as you ever imagined it would in a few years (provided you don’t manage to lose it in a bank run). You would then be able to afford a great property – perhaps large enough for yourself and your extended family – and still have money left over for taxes and necessities.” Nicole Foss, Jan 2009


    It is only when you have a lot more of these “rubber hits the road” real world realization events when people will quit debating the TAE definition. If anyone is still alive by then, they will likely all see the things the way TAE does.



    I don’t really understand the significance of the apparent global USD “recession”. Is it significant? In what way?


    Well, the linked article wasn’t sure how significant USD recession is and noone here seems to know so I guess it’s just an interesting observation.

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