There are times when I question the sanity of economists and economics writers more generally. After articles predicting deflation, isn’t it time to put up or shut up? Where’s the deflation?
That’s what I thought of when I read this piece by Brian Chiappatta at Bloomberg:
For years, Fed officials fretted that consumers’ inflation outlook was almost too stable at historically low levels. Vice Chair Richard Clarida, for one, follows University of Michigan data that surveys expected price changes during the next five to 10 years. That gauge fell to 2.2% in December, a record low. A year earlier, when it was at 2.6%, he called it “within — but I believe at the lower end of — the range consistent with price stability.†Since 2012, expectations have fluctuated in a tight window of 2.2% to 3%, including 2.6% in a report released Friday. The central bank generally views 2% as its target rate.
The coronavirus pandemic has shaken American households to their core in any number of ways. At best, it’s acclimating to working from home and adjusting day-to-day behavior. At worst, the most economically vulnerable individuals are suddenly unemployed and unsure when — or if — they’ll be rehired.
Right now prices are going in every direction. Yesterday I filled my gas tank for the first time since March. I paid about the same price at the pump as I did then. The price went down, then it went up again. Where will it go now? I have no idea.
Food prices, particularly for meat, are skyrocketing. After years of stability the price of a steak has tripled over the last couple of months. Where will prices be in a year? I have no idea and I don’t think anyone else does, either.
Also, it bothers me when they talk about “inflation” or “deflation” when what they mean is that prices are going up or down. When I was in school inflation was thought to be a monetary phenomenon. When wages and prices go up, that’s inflation. When some prices go up, some go down, and wages go down, which is what really seems to be happening, calling that “inflation” is a misnomer.
The federal government has already decided to expand the M1 money supply (physical currency, demand deposits, travelers’ checks and the like) by about 20% and the M2 money supply (M1 + savings deposits, money market securities, mutual funds, etc.) by 12% since January. And they’re preparing to do it again.
Issuing a lot of credit and declining demand for the dollar don’t sound like the raw materials of deflation to me but what do I know?
I suspect the Fed’s massive interventions and the very large US deficits are largely offsetting deflationary pressures. However, the deflationary pressures are real, at least for First World countries. Free trade and open borders put large downward pressures on First World wages and prices. That, after all, is the whole point. And the result has been the actual loss of high wage (and high tax paying) industrial jobs and their replacement (sometimes) with lower paying service jobs. Again that is the point of free trade and open borders.
Of course the opposite is true in the Third Word, and to some extent in the Second World. But if we were running budget surpluses (like Russia) and the Fed stood to one side, I think we would be seeing price collapses in many areas.
By the way, we just dumped $3 trillion on pandemic recovery, and the Dims want to dump another $3 trillion. That on top of a budget deficit of $1 trillion. Our GDP is what, $17 trillion?
Banks and other creditors are currently offering forebearance on mortgages in default. That can’t go on forever. When the foreclosures start you will see falling real estate prices.
Maybe in some places. But a large number of people who never expected it will end up underwater on massive mortgages.
If this summer turns out as I expect people will be fleeing New York and Chicago in the tens of thousands for Orlando, Dallas, and Houston. And who can afford California real estate? Million dollar starter homes?
From 1993 through 2019 we were importing consumer goods and deflation from China and exporting jobs and inflation. You can judge for yourself who has won and lost from that. As one additional data item consumers have captured about 2% of the economic surplus resulting from trade over that period. Producers have captured the rest.
Times have changed. I don’t think we can afford to import consumer goods or export jobs. The last 10 years turned out to have been a time during which subsidizing capital investment in agriculture would have been a very prudent move. Instead we disincentivized it and imported workers.
Another data item: the lowest earning 40% of income earners are now more likely to be former income earners that the top 10% of income earners are. And they’re less prepared to capture the benefits from the so-called stimulus packages. The reason I say “so-called” is that our gravest problem right now is not enough production rather than not enough consumption.
What really galls me is that the Democrats being interviewed on the “talking heads” shows this morning are still promoting education and health care as the solutions to our economic woes. Subsidized health care and education primarily benefits the upper middle class.
This will not be like the last real estate down market. Commercial real estate will fall the most. Unless there is a vaccine available this year most dine in restaurants will close. The same for physical retailers other than grocers and drug stores. Who will occupy the space if they are not converted to residential use?
I don’t know, but I have a grim sinking feeling that our lawmakers are out of their depth.
Jerome Powell will be interviewed on 60 minutes tonight. That’s not for nothing. Last week he said the nation’s economic future was “very uncertain”. I suspect he’ll try to paper that over with soothing words tonight. I don’t know that I believe him. Nor do I think he even knows.
mercer:
That’s not what will happen. Most of the retail space is already occupied by grocers, drugstores, hardware stores—”essential services”, and big box retailers (who are pretending to be grocers, drugstores, and hardware stores).
Even it were true I think it’s more likely that people will begin to accept the risks.
There are a lot of restaurants and clothing stores near me. Many of the former are independently owned and I doubt have much money. Many of the latter are covered in this article:
https://www.washingtonpost.com/business/2020/04/29/which-iconic-brands-could-disappear-because-coronavirus/?arc404=true&itid=lk_interstitial_manual_24
Sears, J C Penney, Neiman Marcus, J Crew are in bankruptcy court, and Macy’s needs a $5 billion loan to avoid it. The large mall nearest me has Sears, Penney, and Macy’s as anchor stores. It must be close to bankruptcy itself.
Most of these stores were in trouble and in bankruptcy before the pandemic, which is an indication of the underlying weakness of the American economy. The Trump administration has effectively declared war on China by attempting to shutdown Huawei, EVEN IN CHINA. There will have to be a countermove by the Chinese, possibly shutting off access to the Chinese market for American companies. Qualcomm makes most of its money in China, and they could go belly up in a trade war.
I wouldn’t say it was a sign of weakness in the economy so much as an over-capacity in retail. Consumer spending is already a larger part of the U. S. economy than any other major economy—it’s not going to expand to fill up the capacity so some retailers are contracting.