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EScroogeJr (< 20)

inflation is very real



February 06, 2008 – Comments (11)

Some folks like Nouriel Roubini claim that if the economy does slip into a recession, then there will be no inflation. I'm afraid that they are dramatically wrong.

What are the arguments of proponents of "stagdeflation"? They think that recession will lower the demand for all products from oil to lead-painted Chinese toys. To quote Roubini, "a fall in US and global aggregate demand, a slack in labor markets and a sharp fall in commodity prices following the US recession and the global slowdown will sharply reduce inflationary forces ahead, both in the US and across the world". Let's see if this is really likely to happen.

Food. Here the demand is growing exponentially.You have 1 billion Chinese and 1 billion Indians who are finally beginning to eat decent food and many of whom are finally begining to eat. A US recession is not going to change that. If these countries recouple and lose a whole one percent of GDP growth, then maybe the exponent will change, say from 1.09 to 1.08, but it is still an exponential dependence. Besides, last year's increases have not yet worked their way into the system, meat and dairy products have to get more expensive even if grain prices stay fixed.

Oil. The story is largely the same. With or without recession, the number of cars will still be increasing exponentially, and our foreign friends Ahmadinejad, Putin and Chavez will remain no less friendly in 2008 than they were in 2007. Sure, our Chinese friends will supply increasing amounts of photovoltaic cells, but it will take at least 5 years before solar energy really begins to displace fossil fuels.

Manufactured goods. Yes, Walmart and the likes will go their part of the way, but the salaries of Chinese workers will still increase another 10% and the yuan will appreciate another 5%. I don't see much potential for the imports to become cheaper than they are now.

Health care. Not really discretionary. Recession or no recession, when your tooth aches, you drive to the dentist's, pledging to hand over your soul and the keys from your house if necessary. The population is getting older, and again, as you get closer to the grave, your health expences grow exponentially, not linearly. Even if Hillary cracks down on HMOs (far less likely than HMOs cracking down on Hillary), the effects will not be felt until 2010.

Housing. Rents are going to increase, they have to increase in order for the government to fulfill its social contract with homeowners. Growing population and declining construction is the sure recipe for increasing rental rates. Until property values grow another 50%, state goverments are not going to issue more permits just because more people are sleeping under the bridges. Even when more permits are issued, it will take another two years before the new houses are built. Meanwhile, every year 3 million new people are injected into the system, and the entire new inventory of rental vacancies (investment homes converted to rental properties) has been used up last year. I am hard-pressed to project rent increases below 5% this year and below 10% next year.

Money supply. Bush wants a budget deficit of $400 Bln, which in case of a recession will turn out to be an underestimate. The money will come from the printing press. That's a 6% increase in M2 supply if the 400 Bln lent to the government is the only new money that Bernanke is going to print. However, he is likely going to print much more. Where else will the banks get the money to refinance all those mortgages?

So, do you still agree with Roubini's opinion that "Inflation will soon become the last of the problems of central banks as a severe global growth slowdown gets underway."? My take is that we're going to have a 5% inflation in the conservative scenario, 6% in the realistic scenario and 7% or more in the pessimistic scenario, and these numbers may need to be revised upward if the recession which the market has taken for granted fails to materialize.


11 Comments – Post Your Own

#1) On February 06, 2008 at 7:02 PM, joeykid13 wrote:

Yes, Ebby inflation is real.  I am absolutely confounded!  When the market corrected a minor 370 yesterday...I actually heard someone on CNBC calling for an interim FED rate cut in response to this minor market correction.  The entire financial community would throw away any prospect of a good future for one really good day.  I am so fed up with the shortsightedness of the investment community, that i am actually looking for alternative ways to grow my personal wealth.  At this point, a lemonade stand has a far more promising future than the US stock market...freshly squeezed, mind you.

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#2) On February 06, 2008 at 7:08 PM, dwot (29.45) wrote:

First problem here is you are mixing up "inflation" with "price increases."  Inflation is the money supply increasing.  It usually leads to increased prices.

Previous expansion of the money supply has not worked its way through the economy to balance out.  There will be some price increases and some price declines, but the money is contracting, which is deflation.

I don't see rents going up.  I see more people sharing to reduce costs and that will put downward pressure on rents.  Also, some of the owners of those 18 million empty US homes are going to try and reduce losses by renting. 

I think Roubini has a very good picture of how things will carry out.  

There will probably more price increases in the shorter term, but margins will be squeezed as nothing but limited necessities ends up with pricing power.  If there is an excess of a necessity it will not likely be going.  People are going to do without because they are either working on debt reduction, or they have no choice because they have no access to credit anymore.

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#3) On February 06, 2008 at 7:45 PM, abitare (29.62) wrote:

Concur, with dwot...again

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#4) On February 06, 2008 at 8:15 PM, EScroogeJr (< 20) wrote:


I'm afraid I must respectfully disagree with you on most counts.

1. "  Inflation is the money supply increasing"

Inflation is defined as price increases. It is often confused with money supply because the two usually go together, but in fact, money supply is only one mechanism of inflation. Inflation can also happen when the same amount of money is circulating through the system at a faster rate.  

2. "Previous expansion of the money supply has not worked its way through the economy"

If that is true, and I suspect it is, it should only reinforce my point. It's not healthy to print money when you have some delayed inflation to begin with.

3. "but the money is contracting, which is deflation."

What's your source of information? Look at this link for M2 supply data. It shows 5.8% increase last year. 

4.  " see more people sharing to reduce costs"

30 mln rental units (rough estimation), about 30 mln renting households. 3 mln new people, who are not homeowners, being added each year. Zero elasticity of demand, the one guy left out on the street will pay anything for a shelter. Sharing can work only to certain degree, and in case of co-op apartments, basements of private houses and 2 families living in a 1-family house won't even be allowed. Rest assured that housing inspectors will step up their activity to prevent renters from cutting their costs.

5. " Also, some of the owners of those 18 million empty US homes"

18 million???

6. "are going to try and reduce losses by renting"

Everybody who wanted this steam of income has already rented his place out. Why lose $10000 by keeping a rental unit empty for an entire year? 

7. "I think Roubini has a very good picture of how things will carry out"

Roubini is an economist with a remarkable track record. Today, every housing bear is daydreaming about getting a house at the price of that year when Roubini called a top.

8. "People are going to do without because they are either working on debt reduction"

You must be kidding. American people working on debt reduction? Please take me to America! 

9. "or they have no choice because they have no access to credit anymore"

Look at refinancing activity, look at HEWs. Any signs of decreased access to credit?  No signs so far, right?

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#5) On February 06, 2008 at 8:59 PM, dog1350 (72.41) wrote:

Try reading Peter Schiff on inflation.



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#6) On February 07, 2008 at 3:50 AM, DemonDoug (30.70) wrote:

dwot, i suggest going to itulip for explanations of why we will have inflation.  For once, I agree with escrooge that inflation is coming and it's not going to get better.

I do disagree on rent though - rents are not going to go up due to a "social contract with homeowners."  Rents in the SF Bay area are still significantly less today than they were 8 years ago.  Rents are completely based on income, and with inflation in consumer goods and food, and further with higher unemployment, there is no room for rents to rise.  Rents rise when there are many jobs in areas where there is high demand for housing.  Also, all of your figures for rent and housing are completely fabricated, give a reference if you have hard evidence.  San Diego and Los Angeles, for example, have had steady or actual loss of population in the past 5 years.

I agree with the rest of your points though... Chinese exports have been getting much more expensive as the Chinese government have been scaling back subsidies for exporters, healthcare and commodities are going to go up as more easy credit floods the system, M2 (and M3 if you go to is also rising, the rest of your analysis is spot on.

Escrooge, I might even like you if you would just open your eyes to the housing crash that is happening right now man. :) 

As far as the vacant homes, dwot is right, and just to show you that I back up what I say, here are the facts:  There are 2+ million homes for sale that are vacant.  There are estimated to be about 18 million vacant homes total.  Most of these are assumed to be homes that were bought as a vacation home or for investment to sell, but are not put on the market.

Wake up and smell the bust EScrooge. "A record 2.18 million homes sat vacant and available for sale in the fourth quarter, according to the report, up from 2.07 million in the third quarter and the 2.1 million a year earlier."

Schiff I believe is also in the inflation camp, and he is correct. 

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#7) On February 07, 2008 at 5:03 AM, EScroogeJr (< 20) wrote:


A summer cabin in the forests of Main, a trailer standing in a subdivision zoned "recreational" or an RV parked next to your house is not a rental property. I'm talking about houses that one can actually rent out. If we have so many empty rental properties as you think, then how do you explain the 1% increase in rents in 2007 in the midst of what you call a bubble burst? 

As to, I am actually of two minds about M3. When they announced they'd stop providing this aggregate becuase it cost them too much to gather this statistics, I felt they definitely must be hiding some ugly inflationary activity. But then, when I looked up the definition of M3, I had to admit to myself that I can't see any obvious link between M3 and inflation. But I still feel there is something fishy about it, even though my limited understanding of economics does not allow me to identify what it is that they are trying to hide. 

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#8) On February 08, 2008 at 2:00 PM, TDRH (96.58) wrote:

Inflation-at least how our government measures it puts a great deal of weight on  rent of primary residence, and owner's equivalent rent of primary residence.

Consumer Price Indexes for Rent and Rental Equivalence (source=

Rents are a function of supply and demand, but both rental of primary residence, and owner equivalent rents are used in  are used in the calculation.   Home prices in general are decreasing, but at the same time, with the disappearance of alternative financing, and resetting of ARM's the real cost of the monthly mortgage primium for homes is increasing for the consumer.  As prices continue to fall to equilibrium with real incomes this will continue to be part of the inflationary pressures affecting consumers.

 Not really disagreeing  with Escrooge for once.  But would like to clarify that the resetting ARMS's are probably having as much of an impact on OER's as the increased demand is affecting rents. 

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#9) On February 10, 2008 at 3:42 PM, GeisterFool (52.15) wrote:

The measure of inflation:  If you follow the fed numbers and the talking heads that spout the Fed numbers, you are placing yourself to be a lemming.  This fool has not stopped eating, heating his home, or running his car to work.  Today it costs me more to eat and consume energy.  If my pay raise is reflective of the governments inflation numbers like everyone on social security verses my actual inflation costs, I spend more money to obtain less.  I don't know about you, but when I spend more money to get less, I call that inflation.

If you don't believe it costs more to eat, just go food shopping and observe the size of the packages you are buying.  In most cases you are either paying the same or more for a smaller sized package.  Look at cereal, ice cream, coffee to name a few.  This is how manufacturers pass along inflation to their customers, without the typical customer noticing.  All they realize is that when they buy cereal or ice cream, they pay around the same amount per box or carton they did last week or last year.

Take a look at this chart, with all the extra money pumped into the economy since 2000, we have barely exceeded the high recorded in March 2000 almost eight years later.  More money pumped into the economy to get back to square one eight years later stinks of mal investment and inflation.  The inflation went from the NASDAQ to real estate.  The latest rate cut is going to prop up lenders and borrowers who made bad investment decisions.  Again more money pumped into nothing that benefits the economy in a healthy manner.  The rate cut is a rescue package.  Since the late 1990's, the wealth effect has pushed the markets and real estate into mal-investments, with people taking risks to buy beyond their means in proportion to hype from the talking heads.  Why on earth would people use adjustable rate mortgages when a 30 year mortgage was at a historic low?  They got caught in the market hype, and bought more than they could afford, then being maxed out, energy prices increased causing the cost to heat those large homes they could not afford in the first place to exceed their budget.  Inflation has been present since the late 1990's.  We finally hit the point where we can't afford it any longer, so contraction is occuring.  (See real estate, auto's)  The question is how big will the contraction be?  Recession or Depression?  Sector or wide spread?  Looking at debts of companies, and government (Local, State, Federal) my guess is we are in for some pain. 

Take a look at this chart, it takes more dollars to buy an ounce of gold.  

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#10) On February 15, 2008 at 12:06 AM, dwot (29.45) wrote:

I disagree with the definition that you use for inflation.  It is commonly used, but so is minus for negative and a whole host of different terms. 

I like Mish's explanation of the range of interpretations for inflation and the conclusion that although price increases and increased money supply generally run together, they are not necessarily the same thing.

Money supply is contracting because the expansion wasn't from printing money so much but rather, from credit expansion.  Credit is tightening up and therefore the money supply from credit is deflating.  Credit has only started to tighten since last summer so it most certainly has not had a chance to be showing up in last year's data.

Vacancy rate is almost double the norm.  There may be some markets that have tight rental markets, but many of those home sold to spectators that can't be sold will most likely soon be rented.  Rents have already been coming down in Florida.

I guess you missed that in California, for example, retail sales were down almost 10% in January from the January a year earlier.

I guess you missed the new on the hundreds of thousands that got letters telling them their credit cards and home equity loans were being cancelled. 

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#11) On February 15, 2008 at 6:19 PM, EScroogeJr (< 20) wrote:

Hah? "Printing money" does not mean they're actually printing dollar bills. In the 21 century, money usually comes as strings of ones and zeros. You take a HELOC loan to pay your bills, the bank generates the money it lends to you at 6% by borrowing from the Fed at 3%, and the Fed  generates the money it lends to the bank by producing a string of ones and zeros in its computer.  So yes, increasing M2 is clearly inflationary. That access to credit is being taken away from the poor and given to the rich is nothing new. Same old story.

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