Re: Report: biggest decline in prices since the Great Depression

[David Farber <dave () farber net>]

Begin forwarded message:

From: Steven Schear <schear.steve () googlemail com>
Date: January 23, 2009 11:49:36 AM EST
To: David Farber <dave () farber net>
Subject: Fwd: [Dewayne-Net] Report: biggest decline in prices since  
the Great  Depression

--------- Forwarded message ----------
From: Steven Schear <schear.steve () googlemail com>
Date: Fri, Jan 23, 2009 at 8:43 AM


> Report: biggest decline in prices since the Great Depression
> by New Deal
> Fri Jan 16, 2009 at 05:52:47 AM PST
> <http://www.dailykos.com/storyonly/2009/1/16/81223/5999/707/684745>
>
>   In the next 60-90 days, we will know whether or not we have  
> started the
> first full-fledged deflationary wage-price spiral in over 70 years.  
> If that
> happens, it will make the entire crisis up until now feel like a  
> walk in the
> park.

Yep, all those pipe dreams of living on credit and paying back loans
with cheaper future dollars just went up in smoke.

>        This morning the BLS reported that Consumer prices in  
> December fell
> ( - 1.0 %) on a non - seasonally adjusted basis.  Inflation for the  
> entire
> year 2008 was +0.1%!  (meaning I have officially won my bet wtih  
> Bonddad).
> In the last 5 months, prices have fallen ( -  4.4 %), or at an  
> annual rate
> of ( - 11.0%)!

A better CPI measure is the Case-Shiller CPI.

"Owners' Equivalent Rent" (OER) is the largest component in the
government measure of the Consumer Price Index (CPI). OER is a process
in which the BEA estimates what it would cost if owners were to rent
the homes they own from themselves. Probably not a valid pricing
barometer.

By ignoring housing prices, BLS' CPI massively understated inflation
for years and is only now coming to terms with its analytic errors.

The following chart shows what happens If one substitutes the
Case-Shiller housing index for Owners' Equivalent Rent in the CPI:
http://tinyurl.com/bzxbb5

In spite of massive cuts in the Fed Funds Rate to zero, real interest
rates are still positive by 3.1%!

>   Yesterday, the Producer Price Index showed the first annual  
> decline since
> 1950. In the last 5 months of the year, producer prices fell  
> (-8.2%), the
> biggest collapse since the Great Depression.  The day before that,  
> import
> prices fell the most in its 26 year history.
>
>   This is the worst deflation since the Great Depression.  To make  
> matters
> worse, in addition to losing nearly 2 million jobs in the last 4  
> months, we
> may be on the cusp of a wage-price deflationary spiral as there are
> increasing reports of companies imposing wage cuts on their workers.

Clearly, its not in anyone's interests to have run-away deflation or
inflation. However, the given wisdom that a constant, small, amount of
inflation is tolerable or even beneficial is IMHO nothing but
propaganda disbursed by those who stand to benefit by it. Some
economists maintain that without the ability to centrally control the
monetary supply and interests rates no modern economy can exist.
However, during the 19th century, when America was undergoing its
westward expansion and massive nation-building, there was no Federal
Reserve Bank, interest rates were primarily set by the markets, the
dollar was still partly backed by gold (in fact, gold coins circulated
widely) and inflation was almost zero over decade time intervals
(according to Alan Greenspan).

The lack of inter-generational memory
(http://en.wikipedia.org/wiki/Kondratiev_wave) and economic
group-think is behind our economic troubles. For thousands of years
money based on gold has kept money values and banking systems
relatively stable but such a basis acts as a restraint on the
politically powerful, the foolish, the greedy and the corrupt and so
its been abandoned. Time to get rid of the Fed and back to basics.
There is certainly enough gold to back the money supply worldwide
though the price of gold would sky-rocket.

I've been promoting widely a relatively new blog, Mishe's Global
Economic Blogspot, that's been a god-send to investors and citizens
trying to make some sense from the untimely, inaccurate, incomplete
and intentionally misleading data that routinely issues from
government and big business. It was just honored by Time Magazine as a
top independent financial blog:
http://www.time.com/time/business/article/0,8599,1873144-1,00.html

Steve




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