Very Deflationary Outcome Has Begun: Blame the Fed

Mish

The Fed blew three economic bubbles in succession. A deflationary bust has started.

Flashback January 6, 2020

Ben Bernanke Just Won't Stop Making a Fool Out of Himself

Former Chairman Bernanke says Fed Has Many Tools to Deter Recession.

Dear Mr. Bernanke

Please do yourself a favor and stop making a fool out of yourself.

For starters, let me point out it was indeed impossible to unwind the Fed's balance sheet. How far did you get? And what is the Fed doing now?

Secondly, you would not know inflation if if jumped up and spit you in the eye. You and your group-think buddies never consider asset bubbles as inflation.

Economic Challenge to Keynesians

Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.

My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.

BIS Deflation Study

The BIS did a historical study and found routine deflation was not any problem at all.

“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the BIS study.

Deflationary Outcome

The existing bubbles ensure another deflationary outcome.

So prepare for another round of debt deflation, possibly accompanied by a lower CPI especially if one accurately includes home prices instead of rents in the CPI calculation.

Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse

For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?

Supply Shock and a Demand Shock Coming Up

A Supply Shock and a Demand Shock are Coming Up.

Worth Repeating

Deflation is not really about prices. It's about the value of debt on the books of banks that cannot be paid back by zombie corporations and individuals.

That is what the Fed fears. It takes lower and lower yields to prevent a debt crash. But it is entirely counterproductive and it does not help the consumer, only the asset holders. Fed (global central bank) policy is to blame.

These are the important point all the inflationistas miss.

Fed Can Blame Itself

I am not blaming the Fed for the coronavirus and these shocks.

However, I am blaming the Fed for its erroneous inflationary tactics that blew three of the biggest economic bubble in succession: 2000, 2007, 2020.

Bubbles are inherently deflationary.

It’s asset asset bubble deflation that is damaging, not routine price deflation.

When asset bubbles burst, debt deflation results.

Here we go again.

Mike "Mish" Shedlock

Comments (53)
No. 1-23
Jojo
Jojo

You were crowing deflation for a long time years ago. Never came of anything as I recall.

Zardoz
Zardoz

Notice that? The tiny, muffled keening? The first whiff of economic flatulence in the room? These are the harbingers of global economic gluteal clench failure. Prepare for explosive decompression!

Mish
Mish

Editor

JoJo you just proved you are totally clueless about what deflation is.

Read up or look foolish.

Mish
Mish

Editor

Tony - JoJo cannot even read what I said today.

"Deflation is not really about prices. It's about the value of debt on the books of banks that cannot be paid back by zombie corporations and individuals."

That is what crushed asset prices in 2000-2001, 2007-2009 and starting now.

Over the years I repeatedly said I expect the economy to go in and out of deflation for a number of years.

I also said there will not be much movement in prices as measured by the CPI. We had a small CPI downturn in 2009. I expect another.

All accurate.

Disappointing that JoJo cannot even read what I said today.

Mish
Mish

Editor

Since JoJo missed it twice today so I added this for a third time to this post

"Deflation is not really about prices. It's about the value of debt on the books of banks that cannot be paid back by zombie corporations and individuals."

Tony Bennett
Tony Bennett

Another day another beat down in the yield curve.

Long end outperforming the short end.

bradw2k
bradw2k

Mish, do you think bad times are approaching for junk bonds?

Casual_Observer
Casual_Observer

Debt writeoffs are positive writeoffs on future taxes. This means public debt will blow up even more. It is a vicious cycle. We will be Japan for the next decade until further notice. The Fed will buy assets of all kinds to keep up appearances. Main street is better off buying whatever the Fed buys for now.

Casual_Observer
Casual_Observer

By the way we are headed for near ZIRP sooner than even I expected b/c Covid-19. Hopefully we get a bump from the waning of the virus by summer and a vaccine in the fall. I'm trying to be optimistic. There will be a large refi boom of all debt at less than 2%. Banks profits are going to get a lot smaller but who cares. They have the Fed to bail them out if they get in trouble.

rum_runner
rum_runner

Why would gold rise in a deflationary environment?

magoomba
magoomba

It's about time.
There is a lot of younger folks who would like to get on with their lives but are locked out by inflation.

Maximus_Minimus
Maximus_Minimus

Unfortunately, we see the unfolding of two streams that were slowly developing to this end.

  1. The virus that was popping up since the first bird to human diseases occurred as SARS-1, and proved to be a false alarm, and was quickly forgotten.
  2. The monetary conditions that had no clear end, and required an answer as to what the endgame to all monetary madness was. A clean break was clearly coming.
    That the two come to rest at the same time is the proof that viruses are indeed the intelligent form of life.
Six000mileyear
Six000mileyear

"Deflation is not really about prices. It's about the value of debt on the books of banks that cannot be paid back by zombie corporations and individuals."

I might add that deflation includes a decrease in lending activity; either because people don't want to borrow, or banks don't want to lend at any interest rate.

truthseeker
truthseeker

So what happens when things get so bad for the banks that the Fed is forced to push 100 billion a day into the repo market as liquidity really begins to evaporate in such a panic fashion?

crazyworld
crazyworld

DEFLATION IS WAY OVERDUE

Most reasonable economists though already that the first major asset bubble implosion in 1987 would be followed by a severe deflation associated by removal of all the bad debts (not repayable by the borrowers) infesting our economies already at that time.
Only JAPAN (stock market not affected by the 1987 crash elsewhere) qualified for that later on (slightly after 1990) because there were gigantic assets (real estate and stocks) bubbles. There the Interest rate stayed from that event on incredibly low (ten years around one per cent) for the observers. They printed money to preserve all zombie banks and they are still today alive and kicking.
Mish obviously give the right cause of deflation.
However, central bankers like Volcker and the like are long gone and now everything seems to be decided by children in a Disneyland world.
Volcker and many others would have got a hearth attack if someone would propose printing money in order to get negative interest rate. These irresponsable children did it nowadays in Europe.
My feeling is that those Disney land bankers and politics could literally destroy fiat money by giving it away freely to the population. In such case we get an hyperinflation even if deflation should be the economic textbook path because paper money loose all value.

johnmiller2577
johnmiller2577

"Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them." So very true. And yet 90% of phd's in economics believe this absurd premise. I guess they never saw the historical data where prices fell nearly every year before 1913 (creation of the Fed) and the American economy was growing by leaps and bounds most of those years.

KidHorn
KidHorn

Deflation is caused by lack of demand.

In Japan, they have/had deflation because the citizens decided to pay back their enormous real estate debts instead of buying stuff.

We'll see it with COVID19 because people will only venture out if they have to. Mainly to go to work and for purchasing necessities. Few to none are going to shop at home depot/kohls/target/auto dealerships etc... . And theaters will shudder. Ones with a heavy debt load will be in trouble.

MudB
MudB

I agree deflation should have happened in 2008
but what was proven...is that they will not let it occur...
12 years....no deflation....strong economy....
fragile underpinnings...heavily leveraged...still

but deflation wont occur.......

MudB
MudB

and one thing to keep in mind....this virus is contagious enough its is only going to take a very short time to run its course ..then its back to normal. The bottom will come quick, the recovery....quicker. In the meantime....airlines, cruises, and such are going to get crushed.

Abombs
Abombs

Mish, how far out if you had to guess will this asset bubble be deflating in earnest as far as the housing market in the US is concerned? I figure even in a bad scenario it's probably a year or two before you could really see a significant drop in real estate.

Casual_Observer
Casual_Observer

Mish - Do you expect more actions like lending facilities and such by the Fed as they did during the great financial crisis ?

Jdog1
Jdog1

Deflation is inevitable as inflation is not sustainable forever due to assets outpacing income. That being said to think deflation can happen without high unemployment and a serious decline in wealth and living standards is naive.
The primary effect of deflation is the destruction of money. Every debt which is defaulted on, destroys money which in turn devalues assets.
Most peoples wealth is calculated on the perceived value of assets such as their homes and the value of the stocks and bonds in their retirement accounts.
Deflation is going to reduce the value of those assets considerably. This will have a ripple effect throughout the entire economy that will leave no one untouched.


Global Economics

FEATURED
COMMUNITY