Thursday, November 20, 2008

The "D" Word? There's Not Enough Buying Goin' On...

Cianfrocca brings it up at RedStates.

Yesterday, the Bureau of Labor Statistics reported that the overall level of consumer prices declined by about 1% in October. The so-called “core inflation rate” declined by 0.1%, the first such decline in more than twenty-five years

The problem of deflation in the economy is not a one-month phenomenon. Financial assets (stocks and bonds other than US Treasury bonds) and real estate values have been falling for more than a year now.

The problem with deflation is that it makes the real cost of being in debt far harder to bear. Now you’ve heard me and many others go on and on in recent months about how hard it is for consumers and businesses to get a loan. That speaks to disruptions in the supply of credit, and also to the increased cost of credit intermediation.

Stop for a second and think of the implications of the red-highlighted sentence above for the State of Wisconsin, whose debt is, ah, monstrous. Yah, Californicate's situation is worse. So what?

And he mentions something that I have been discussing with Shoebox.

But one of the dark clouds in my mind over the last several days has been the other side of the equation. What if some (or much) of the current slowdown in credit formation is due to weak demand for credit?

The Big Three's problem is not just white- and blue-collar labor costs. It is, rather, that people are NOT BUYING CARS. Industry sales-numbers tell us that auto purchases will be one-third less this year than last.


...if deflation turns out to be real and sustained? The next danger signal you’d see is a decline in wages. Now we’re already seeing something like that as unemployment ticks up. That’s basically normal for a recession. But what if people who keep their jobs start getting smaller raises, not getting incentive pay, get fewer hours to work, or indeed have to take reductions in pay?

Now you get to the scary part of deflation, because deflation bites everyone that owes money. And millions of Americans have mortgages and student loans on which they pay a fixed amount every month. If your compensation falls (through unemployment, underemployment, or wage reductions), then all of a sudden your mortgage is a lot less affordable, and you’re closer to the point at which you start having to decide whether to buy food, clothing or fuel in any given month

That, folks, is a no-brainer. Debt repayment will come last, clothing second-last, and food will be first (along with certain medications--but not ALL medications.)

Liquor may move up towards the top, too...

"Fixing it" may not be too easy, either.

Financial-market participants and investment professionals have learned a very hard lesson about risk, that they won’t ever want to repeat. Everyone who went through this will be very wary about taking risk for the rest of their careers. And that’s why there is a near-permanent deflationary undertow in the world’s financial system.

Cianfrocca mentions Japan as the "anti-model" of repairing the system. But he does NOT mention a very, very significant difference between Japan and the US: population growth. Japan's population is NOT growing, and hasn't been for several years (we've mentioned it.)

At least the US has the population-growth asset. Not from the WASP crowd, nor from whites (or blacks) in general--but from illegal immigration!

Hmmmmmm, again....

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