Tag Archives: Deflation

The popping of the Chinese bubble?

With all the talk of inflation, China is experiencing a deflation problem. Marketwatch reports:

China is urging major supermarkets to boost vegetable sales and encouraging farmers to bypass middlemen and market produce directly, in a bid to curb a steep slide in prices that is hurting farmers’ incomes, the Ministry of Commerce said in a statement.

Twelve major supermarkets, including Wumart Stores Inc., have agreed to boost sales, the ministry said. The China Daily newspaper said Thursday Wal-Mart Stores Inc. and Carrefour SA are also involved in the effort.

The ministry has also set up a “work group” to maintain prices at a “reasonable” level.

Its statement Wednesday underscores the difficulties the government faces in controlling volatile prices. The impact of an official push last year to raise vegetable output appears to be unraveling now, amid overproduction and clogged distribution lines.

Vegetable prices have fallen 21% in a month and 5.9% from a week ago, the ministry said.

The sharpest declines were seen in green pepper, which fell 20.9% from a week ago, and cabbage, chili pepper and lettuce, which fell 12%, 8.9% and 8.1% respectively.

In contrast, grain, pork, beef, metals and rubber all continued to post small increases of between 0.2% and 1.7% from a week ago.

Last year, the Ministry of Agriculture pushed farmers to raise vegetable acreage by 7% and production by 7.5%, following almost three years of little to no growth in the sector.

The directive was part of wider efforts, including price caps on cooking oil and flour, to curb a surge in food prices.

Worldwide commodity inflation has been driven, in part, by demand from China. Are these price corrections the first sign that the Chinese bubble has popped and that inflation will turn to deflation as Chinese demand evaporates?

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Boston Fed President invents new 1984-style system of economics.

Fed’s Rosengren: Higher gas prices may hurt growth:

Rising energy prices are a concern not that they will lead to higher inflation but that they will subtract from household income and thus weaken the economy, said Eric Rosengren, the president of the Boston Federal Reserve Bank on Friday. Rosengren said the lasting effect on energy prices on overall inflation “has been surprisingly small in recent years.” The surge in oil prices in mid-2008 were followed by significant declines in core inflation, he noted. Rosengren said the Fed’s innovative monetary policy has not been inflationary. “It has been more than two years since the Fed’s balance sheet expanded dramatically. Sine that time core inflation has fallen to something like 50 year lows, he said. Rosengren is not a voting FOMC member this year. He spoke to an event hosted by the Connecticut Mortgage Bankers Association.

Maybe Mr. Rosengren can explain to me how rising oil prices leads to falling household income? Spending money on oil is spending, obviously, not a change in income. I assume he meant that the rising prices eats up a larger portion of household income; in other words, non-discretionary spending rises. But there’s a term for this phenomenon of rising prices: INFLATION.

Trying to give the Fed President the benefit of the doubt, I thought maybe the article was misconstruing what he said. So I searched Google and found his actual words:

My primary concern about rising energy prices is not so much that they will lead to higher inflation, but that they will subtract from household income and thus weaken the economy.

Apparently, we live in a new economic reality. In the new economics, rising prices weaken the economy (by somehow hurting “household income” but I assume he meant income available for discretionary spending) but does not lead to inflation. Get that? I admit, this new economics is confusing so here it is in simple English: rising prices cause deflation or, at the least, disinflation.

We really are living in George Orwell’s 1984. “WAR IS PEACE, FREEDOM IS SLAVERY, and IGNORANCE IS STRENGTH.” And now, INFLATION IS DEFLATION.

Deflation bad for government, not so much for you and me.

According to Marketwatch, Federal Reserve Chairman Ben Bernanke warned against deflation:

He also said the risk of deflation, a steady decline in prices and wages, remained a threat.

He stressed to the Senate panel that deflation would increase debt burdens and lower living standards.

If prices and wages declined at the same rate, how would that hurt us? We’d make less, but our expenses would go down. Yes, it would hurt somebody in debt, but it would help the person holding that debt, i.e. savers.

Now, who would get hurt the most? Who owes the most money of anybody? THE UNITED STATES GOVERNMENT.

What the Federal Reserve fears is the real value of the government’s debt increasing, making it harder to pay back. Furthermore, in a deflationary environment, the Fed would lose its ability to keep rates low and inflate the money supply. How so? Currently, if inflation is about zero, the Fed can keep interest rates near zero as well. But if we have deflation of two percent, the Fed can’t really lower rates below zero, so the inflation adjusted interest rates would be two percent. In effect, the government will be paying a two percent interest rate, increasing its deficit and expanding the debt, and the Fed will lose control of interest rate policy.

Dollar holding steady, so why are commodity prices way up? And where’s the inflation?

The US Dollar Index is up three percent this year. On the surface, it appears as if we have not experienced a Dollar devaluation this year. But that is not so. Looking at the US Dollar Index or the Dollar against other currencies gives you a false sense of what is happening. The Dollar is being devalued, but so it the Euro, Yen, and most other currencies. All currencies are falling together, but that means they aren’t changing against each other.

How is the Dollar doing against other things, like commodities. Most people look at gold and silver as a currency substitute. Adam Smith looked at wheat prices to measure the value of one’s labor. In today’s global economy, oil may be even more important. So how are the metals, oil, and agriculture doing compared to the Dollar?

Gold is up 28 percent so far this year. Silver is up 79 percent. Platinum is up 19 percent. Palladium is up 92 percent. Copper is up 29 percent.
Crude oil is up 12 percent. Wheat is up 91 percent. Corn is up 56 percent. Soybeans are up 32 percent. Cotton is up 97 percent. Sugar is up 40 percent.

No matter how you measure it, commodity prices are up. Another way of looking at it: the Dollar buys less of each of the above items. Inflation or Dollar devaluation. Whatever you call it, it is happening right now.

So why aren’t we feeling the effects of this falling wage rate or, from the other perspective, this inflation? In fact, we are to a small degree. Just ask anybody around you about their financial situation. Times are tough. But why aren’t we feeling it to the extent the statistics imply? Simply because raw materials make up just a small percentage of the total cost of the things we buy. Personal income, whether it be wages, benefits, capital gains, or corporate profits flowing to individuals, makes up 86 percent of GDP. Raw materials is somewhere around 10 percent of GDP. So it should come as no surprise that rising commodity prices have not, for the most part, not found their way into the CPI statistics. In fact, I’d guess that rising health-care costs have been a bigger contributor to inflation than commodities. On the other hand, falling housing prices are keeping inflation in check.

But what if commodity prices not risen so much? What if the Dollar had not been devalued? In that case, we would either see rising wages or deflation. One is seen as good and the other evil, but they are really the same thing. Either we’d earn more and be able to buy more good with our earnings or we’d have the same wages but lower prices would allow us to buy more with our earnings. Just look at how much we’ve benefited from deflation in the technology area. Don’t we all wish other goods would fall in price as well?

While we have inflation in some areas, such as commodities and health care, we have deflation in other areas, such as housing. Even though the Dollar is being devalued in comparison to non-currency money like gold and silver, it is holding steady against other currencies that are devaluing at similar rates. But we’d be much better off if the United States didn’t devalue: we’d benefit from rising wages or falling prices, either of which would enable us to buy more goods. But the government fears deflation, not for our sakes, but for its own. Deflation makes the real value of the government debt rise. Inflation though makes the real value of that debt smaller, enabling the government to hide its incompetence, that is until interest rates rise. If the government doesn’t right its ship soon, inflation or deflation will become a secondary issues. Interest rates will rise and the government won’t be able to hide its debt and deficit with inflation.