Mish Misses It
June 10, 2009 – 9:53 am
The problem with listening to mainstay economic blogger “Mike Mish Shedlock” make his deflation argument isn’t that he doesn’t know what he’s talking about — it’s that you don’t. To most of us “Joe six packs,” inflation means a six pack costs more and deflation means it costs less, we don’t care why. But smart guys speak of it as a monetary event, i.e. it’s an increase in the amount of money in the economy. But it can get a lot more complicated than that, and Mish says so himself:
Inflation has at least 8 distinctly different definitions that I can readily find, and probably a whole lot more that I have not yet found.
Commonly Used Definitions
- Decline in purchasing power of the currency held
- Rising prices in general (essentially the same as #1 although some might disagree)
- Rising consumer prices (CPI)
- Rising producer prices (PPI)
- Rising prices due to expansion of money supply
- Rising prices due to expansion of money supply and credit
- Expansion of money supply
- Expansion of money supply and credit
Four of those definitions refer to money supply. That brings up another issue. When one refers to “money supply” are they talking about M1, M2, MZM, Money AMS (Austrian Money Supply), or simply the amount of money they have in their bank account or wallet at the time of the conversation? Definitions 5 and 6 refer to “rising prices” yet fail to distinguish between consumer prices, producer prices, or simply prices in general. It seems we could easily add a lot more definitions.
Whew, see what problems smart guys have just trying to figure out which way prices for a six pack are going? That’s no knock; it’s just the kinda thing that naturally happens when you think a lot about what to say, before you say it – an unshared characteristic between Mish and me. But Mish does tell you and tell you very clearly what inflation is to him. And unlike Krugman, who parses parts without saying so, Mish sticks to his guns:
That leaves us with a choice between the following:
- Inflation is best described as a net expansion of money supply and credit.expansion of money supply
Although Japan was rapidly printing money, a destruction of credit was happening at a far greater pace. There was an overall contraction of credit in Japan for close to 5 consecutive years.
In the meantime I am sticking with my story right now. The Fed is clearly not printing, and marked to market destruction of capital and credit is happening at a stunning rate. That combination equals deflation regardless of what the price of commodities is.
It would prove broadly dollar positive and commodity and equity negative. I wrote a couple of weeks ago that the Fed might be forced into a premature rate hike to defend its credibility, and the bond vigilantes are demanding a clear exit strategy from the emergency actions taken last Autumn. Bond markets globally are following suit; even German 10 years are above 3.7% and 2 years above 1.7%.
When future chroniclers describe the late 20th century and early 21st century global inflation now about to renew, the rise of Asia will be an even bigger causation than the massive money expansion set in motion over a quarter of a century by the U.S. Federal Reserve. And this will be true even though Chairman Ben Bernanke has been pouring trillions of dollars into the bail-out of a reckless and metastasized U.S. financial system.
In a nutshell, the rise of Asia – approaching 60% of the earth’s population and on the cusp of a plurality of world wealth- is realigning global economics and political power. The history of such great realignments is inflationary.
Well it has happened, there has been a major gold default by a short seller on the COMEX! The event is undeniable to all but the flattest earth theorists. The default was by Deutsch Bank on delivery of850,000 ounces of physical gold, but was covered up by the ECB which bailed out DB disguised as a sale of 35.5 tons of the yellow flaky stuff. Bailout in drag, that’s a well worn ploy that just don’t play like it used to. The elites, the shafters of the universe, are out of tricks and outed, but lets see how it plays.
A short list of banks facing the firing squad is already known, details for Hat Trick Letter members. Some detailed speculation will be devoted to the June HTL reports, since too controversial. This will be an evolving story, with new chapters soon written. The executions will be sudden. The missing US-UK levers will be immediate. Since last autumn, the global powers have aligned against Wall Street, even if the central bankers have supported it. If one wants to destroy a building, then weaken its pillars, cut a few support beams, then rush in a crowd of people, and wait for a turbulent storm. In the case of the COMEX, the wicked players will crowd the corrupted building.
If Mish says that the moves on Comex are market moves he is dead wrong, however in your deflation\inflation debate you mention prices on food and gas. Mish does not deny that prices on these are going up what he does say is that if you use a price criteria, more things significant are going down. If I remember the argument it goes like this "how many tanks of gas at $4 will it take to make up for the $100K drop in the price of your home? In addition even though we see inflation in necessities like gas people's salaries are being cut and people are being laid off. His argument is that those that can pass on the added cost to the consumer are doing so but their are not many who can do so. I'm not Mish so I can not really make his points but I believe his arguments do take into account increases in food prices
fosnock:
The problem I have with that argument is that homes aren't bought outright -- they're financed.
In fact, what happens with a home purchase is nothing like what happens with the purchase of a cup of coffee or a tank of gas, both of which you actually own (and even consume) once you make the initial purchase.
By contrast, you don't "own" the home in even remotely the same sense -- the bank has a lien on it. You're really just renting it from the bank the vast majority of the time -- a great deal for the banks, since it's up to you to maintain and keep the property updated.
Yes, I realize you will own the home "outright" if you stick around for long enough, but that isn't what usually happens. Usually, houses are "traded out" or "traded up", for simply another house, and another financialized, renting-from-the-bank arrangement.
This is nothing like a cup of coffee.
So in my view (one which I've posted on Mish's site), "financialized" items should be out of the CPI, except for perhaps an "average debt service" component (mortgage payments would be included).
In fact, with that view, the owners-equivalent-rent housing component of the CPI actually makes more sense than nominal home prices. But Mish swaps in the Case-Shiller index for OER and calls it "fixed" -- neglecting all the other major distortions in the CPI that go the other direction (inflationary).
Very convenient.
Hi Aaron,
Great post. Good to see you blogging out and about...
Say, my problem with Mish has to do with the difference between
credit and money. Mish will say, that all the loaning of credit
is not the same as money, because it has to be paid back. Sure,
that would be nice, but does anyone really believe that the
vast sums are anything but a gift? I say, <<credit becomes
money when there is no expectation of repayment>>. To me
this is the essence of my problem with Mish. It will take the
market a while to realize this though -- its our Wiley E Coyote
moment!
This is a great topic, and I hope to see more traffic on it from
serious folks.
Cheers, Matt C
Hmm, I always thought Mish equated credit and money too much. In other words, collapsing credit markets don't mean we are having monetary deflation (which is when consumer prices tend to go down).
By the way, I didn't write the article -- our stock Bank-Implode writer, Tony, did.
Perhaps it's time to bring up the "I" word. Incompetence in the big players in government, starting with Greenspan. The great worry now is that government hasn't got a plan, maybe not even a clue. That's right they are winging it. The future of each & every one of us hangs on this & they are making it up as they go. If they do have a plan they don't have enough guts or honesty to share it with us citizens. The problems we can deal with but the erosion of trust in government could well finish the country. Our Business model has failed. The alternate models, Socialism & Communism, failed decades ago. Let's salvadge something from Marx. His key insight was that modern technological societies are inherently unstable. His draconian solution, seize everything, has been discredited. So has the watered down version, Socialism. What do we do now? Right, Left & sideways are not working; society is coming apart at the seams, everything is at stake. Preserving the status quo is not an option either. As W.S. Burroughs said, "The most dangerous thing is to stand still." Printing & throwing money at the rich smacks of Fascism & that is the only real action that has been taken. The basic unfairness of that approach has added greatly to the strain on society. In my opinion this is a foolish & reckless game started by Bush & continued (God knows why) by Obama. If real crisis hits, either hyperinflation or deflation, you can count on the people to take it to the streets. At that point America's enemies, who are many, will act. After that happens all bets are off. The only solution I can think of is to disempower the Eliteists (screw ups have no right to be elite) & get the country back on the road to fairness & consensus.
What's coming is Inflationary Depression. And it will be worse than the deflationary depression of the Great Depression. Our grandparents had the skills to live in a deflationary environment in the absence of money. As as society, we lack the skill set. We'll have plenty of money. It just won't have much purchasing power.
I think I could get by even in a bad Depression. Lived nearly 15 years dirt poor in a little trailer by a lake. Had a good job for nearly 10 years now & saved every extra penny. Nothing in stocks or real estate. I'm a veteran so all I have to do is live near a good VA hospital to get health care. Also into survivalism; self defense, growing food, preventing diseases, civil defense, community co-operation, etc. Not everybody has lost survival skills but truly 99% have. Looking to have a new trailer & lake on standby; good luck to the rest of you.
"Bankers Are Scum." Paraphrased beliefs of Andrew Jackson.
Dear Aaron,
I do like coffee, and the prospect of coffee hyper-inflation is frightening. But I know just how frightening because I'm in the first-home-buyers' market in Australia, where the bubble just keeps growing. This weekend a single-fronted (about 20' wide), two bedroom, whether-board 19th century workman's cottage on almost no land in a gentrified former urban slum in Melbourne sold for $US575,000. So with easy credit (here banks lend with impunity backed by government guarantees and manipulated interest rates, all the time petrified that their MBS might find true value if they stop their recklessness) and mindless buyers who still believe here that "home prices NEVER fall" (sound familiar), the absurdity continues.
FINANCE is a two edge sword. Absurdly undervalued long-term loans allow absurd asset price inflation because you can always take a longer loan. In Japan round 1990, 100-year loans were becoming common. So yes, it can make asset price inflation less of a pain day-to-day, but is far more efficient at destroying wealth than a $500 cup of coffee. I just wouldn't buy a $500 cup of coffee and no-one would lend me the money to do so. Indeed a $500 cup of coffee would only happen during a wage-price break-out where the $500 represented a similar fraction of my wage as it does now at $3. Let's face it, $500 coffees (and other essentials) could only reach those prices with wages not far behind - currency devaluation in other words. Alternatively this could happen with massive under-supply/ over-demand and wide-spread starvation (not so much for coffee), where only the super-wealthy could afford basic provisions.
I guessing you might have bought your house when houses were roughly on the historic trend line. In the last decade I've seen homes go from 3x average wages to 10x average wages in my country. I do feel this inflation, regardless of finance. Moreover, the down-side with finance is super-toxic; if I buy now I am guaranteed negative-equity and a life-time stuck in whatever hovel I can currently afford. It makes home-ownership an insanity. I'd sooner pay $500 for a coffee!
Regards
Ziggy