‘Flations and the Fate of the Little Guy

Deflation, Inflation, Stagflation maybe Biflation or Agflation (or both!)… all the ‘flations (as Bill Bonner puts it) are up for grabs though the real tussle appears to be over those who believe the general price level is in decline versus those expecting prices to abruptly start (or continue) to rise.

Whether the result is a dollar buying more things or dramatically less, these two groups are united by the fact they both see a pretty dire future and worse yet… they may simply be independently dwelling on two different aspects that will together materialize in sequence from this sorry economic period, one leading to the next.

How is the little guy supposed to navigate these troubled times? Should he move his nest egg to stocks, gold, assets like real estate or stay in cash? Should he borrow or save? Should he spend? What if he doesn’t even have a nest egg?

Despite this being the “Summer of Recovery” the typical American household is likely more than a bit unnerved, cautious and looking for a little guidance.

Unfortunately for them though, all the “experts” they had grown to rely on in the past (even if just just tangentially through the thick filter of the traditional media) like the Federal Reserve Chairman, various popular economists, business leaders and an ever shrinking list of credible political figures, haven’t a clue where the economy is going next all imposters having totally missed the severity of this period in the first place.

Yes… things are turning out to be quite the crap-shoot… Could this be an indication that the final day of reckoning is upon us?

Watching the government writhe in an epic display of populous-bile spewing partisan retching while academic and professional forecasters bury their heads in past trends presumably searching for clues from the 1930s and individual “investors” desperately seek out the next yield fix no matter the complexity of the “investment” or level of speculation has me thinking we are getting close.

At the very least these issues are receiving more popular attention as witnessed by yesterday’s On Point episode titled “Deflation Fears: U.S. as Japan?” featuring a lineup of David Wessel, Frederic Mishkin, David Resler and Dave Scott.

Notice that though the show is in itself fairly interesting, it was most revealing in exposing how poor the visibility is even for the supposed “experts”.

In times like these possibly its best to throw aside the rubes, quacks and charlatans of modernity and turn to the ancients for advice… What would Ben Franklin Say? Or the truly ancient Aesop?

Have the “great part of the miseries of mankind [been] brought upon them by false estimates they have made of the value of things”?

Have Americans lived as the Grasshopper and not the Ants? Do we deserve the Grasshopper’s fate?

The Dangerous Road to Deflation

The latest quarterly FHFA home price indices are out and are indicating that the overwhelming trend seen in the nation’s housing markets is still one of deflation.

It’s important to consider that these indices are formulated off of mortgage data primarily supplied by Fannie and Freddie so these trends reflect the dynamics seen for homes purchased with conforming loans.

In the past, when there was a robust private Jumbo loan market, the differences in pricing trends for conventional versus jumbo might have been notable.

Now though, with conforming loan limits ranging between $417,000 and $729,750 in most areas (with some areas reaching even as high as $938,250) and large market shares for both Fannie and Freddie, it’s safe to say that these trends can be taken more generally.

One of the most interesting things revealed by perusing the state indices is to see how many states are only just now engaged in some of the worst of the price declines.

Whereas states like Massachusetts, Nevada, Michigan and Rhode Island peaked out between late 2005 and early 2006, many states like Wyoming, Texas and Alaska are only just now starting show significant price declines.

Further, although many states have been reeling for years under the weight of steadily falling home prices, most are still facing a continued downward trend in prices despite the government tax gimmicks and historically low interest rates.

Looking at Pennsylvania, you can see that the state’s housing market didn’t turn truly deflationary until Q3 2008 when prices dropped nearly 1% on a year-over-year basis.

Today, Pennsylvania is experiencing the worst of the decline to date with prices losing over 1% since just last quarter (i.e. Q4 2009), 4.31% since last year and 5.59% since the peak set in Q1 2008.

Long Cycles and a Century of Expansion, Contraction and Rates

Looking at the nonfinancial commercial paper rate juxtapose recessions and depressions from the late 1800s to today provides a fascinating view of long economic cycles as well as potentially holds some important perspective and clues to the economic climate going forward and the conundrum the Federal Reserve and all of us are now in.

First, for a quarterly series stretching back more than 100 years (relatively ancient times as far as macro-data is concerned) , this series is surprisingly well synched with recessions and depressions.

The general pattern typically sees rates climbing through expansions and crashing during recessions and depressions.

From a long cycle point of view, we can see that in the decades preceding the Great Depression successive recessions brought the rate down to successively lower lows finally reaching an ultimate low of .56% in the belly of the Great Depression.

All told, the rate stayed below 1% for 12 years during the depression period of the 30s and 40s before beginning a long up trend after World War II.

The rate then proceeded to trend up for better than 30 years reaching a striking 16.27% crescendo in the early 80s that pitted the Fed against inflation in an epic battle.

Looking at the period of the last 30 years you can see that, similarly to the period preceding the Great Depression, rates have trended down with each successive recession reaching what must surely be nearly the ultimate low.

The pattern has a notably deflationary look to it.

The Fed has, more or less, reached the zero bound, the lowest rates on record and a level not seen since the 30s and 40s.

Are we stuck here as we were during the Great Depression? Are we better than a decade away from any form of re-inflation? Will the next inflationary period be an epic generational trend building to a crescendo dwarfing all prior?

On The Stamp: Food Stamp Participation July 2009

As a logical consequence of the prolonged economic downturn it appears that participation in the federal food stamp program is on the rise.

In fact, household participation has been climbing so steadily that it has far surpassed the last peak set as a result of the immediate fallout following hurricane Katrina.

The latest data released by the Department of Agriculture shows that, on a year-over-year basis, household participation has increased a whopping 24.55% while individual participation, as a ratio of the overall population, has increased 22.32%.

The July results confirm that participation is continuing to climb dramatically, likely as a result of the recent jump in total unemployment, driving the nominal benefit costs up an astounding 61.46% on a year-over-year basis to $4,779,393,213 for the month.

Looking at the last chart that plots the total unemployment rate (unemployment rate of all traditionally unemployed workers plus all marginally attached and part time workers) and the population adjusted individual program participation rate normalized since 2005, one can plainly see that program participation would be expected to continue its surge.

The Great Unwind

Inflation or deflation… stag-flation, stag-deflation … hyper-inflation… possibly even hyper-deflation… or maybe just a bout of frisky-flation?

Never has it been so hard for the consensus to agree on the coming trend in prices but given the circumstances, it should come as no surprise.

While the “invisible hand” has been working overtime to right the ship, deflating the system of fictional value made possible only through the dynamics of a multi-decades long credit fueled speculative mania, our federal government will stop at nothing to attempt to prevent such an adjustment and its disastrous political consequences.

As it stands, the consensus expects that the feds will win this struggle with many citing the “power” of the printing press, our now more advanced knowledge of Keynesian chicanery as well as the caliber and quality of the stewardship within the Administration, the Treasury and the Federal Reserve.

Yet, in this classic “man versus nature” match-up, man must come out the definitive loser lest he stands unchallenged to invent his own future not of hard earned progress but through fraudulent planning, gimmicks and manipulation.

But will he ultimately lose to inflation, deflation or both?

Although in the long term there could be a mixture of both, deflation appears to be the larger overarching force.

First, with the mania now long gone, consider that homes were easily the single largest asset that most Americans have ever had an opportunity to speculate in.

Likely many millions of American will never again in their lifetime EVER be allowed access to the level of debt that they had at their disposal in 2005-2006.

This means that they are likely permanently sidelined in terms of consumption... they will never again be able to over-consume to the degree seen in 2005.

At the same time, it’s more than likely also true that a massive natural deflationary force will be coming from aging Boomers reverting to a more net-seller and net-liquidator posture as they struggle through their “retirement” years and especially in light of falling home prices.

This appears to be a classic trap of sorts… the unwinding of major assets, contraction of credit, aging population and a perpetual decline in consumption.

Add in declining wages and structurally high unemployment and the outcome becomes clear.

What is less clear is how hard the feds will try to prevent the inevitable.

Going The Way of The Cordwainer

After a brief stay in what can only be described as a micro-Versailles (…14 foot beamed ceilings, floor to ceiling carved panel, stone and marble fireplaces, gigantic draped and shuttered windows that open out to a bustling square filled with shops and restaurants) in a prosperous and lively section of Bordeaux, I’m now sitting in the lobby of a hotel across the street from a large old vineyard, another of my wife’s family’s properties, located in a small village just outside of Nantes.

This has me thinking that although most of the American Melting Pot’s immigrants likely had good reason to come to the U.S., those that completely cut ties with the old country left behind some damn nice real estate.

I suppose an extended stay in France (or any country in Europe for that matter) provides an opportunity to reflect and to make valuable comparisons to the U.S. … It’s not like this is some remote or exotic corner of the world… We’re nearly all cut from the same cloth… There’s even a large statue of Thomas Jefferson situated on a bank of the Seine… and of course, we have Lady Liberty looking out over New York harbor.

One principle that has clearly been over applied in the U.S. is “Economy of Scale”.

It seems… from the vantage point of a tiny village economy nestled within the Loire-Atlantique (or from Paris for that matter)… that in the U.S. we have cheapened everything, squeezing not just the cost but the value out of nearly all that we consume.

Worse yet… this squeezing of value didn’t just cheapen products and services but labor too.

We have killed the artisan, the tradesman, the handicraft, the small local entrepreneur… about the only local business that appears completely free from franchise forces or a big box pummeling are funeral homes and even for them repeat business is pitiful.

Think of our shoes… I wonder if Americans of the early 1900s could imagine a future in which there would not only be no cordwainers or cobblers but a world where cheap rubber slippers called “Crocks” would be all the rage… you wear them rain or shine and when they get funky… into the dumper.

We threw away our shoes and our cordwainers and cobblers too…

Cheapening a product or service is usually considered an inflationary process because consumers generally pay the same amount for an inferior product…. effectively paying more.

But I can’t help thinking that our many decades long foray into mass production represents a massive deflationary force whereby the value of all things have steadily seeped into the ether along with the production skills and even the knowledge that better things ever existed.

Theoretically, the things we own are all independent stores of value, exchangeable for some amount of something else … like cash, gold or food … yet it appears that all the standardization and mass production and distribution are now giving way to a twisted version of “Moore’s Law” where products are so continually cheapened as to be almost immediately rendered as worthless once taken from the store or the box.

Here in this little village (… or Paris for that matter), the people have less stuff… there’s no doubt about that… but what does that say for their quality of life?

Is a higher standard of living (for everyone) simply having more stuff or more value?