Wednesday, October 29, 2014

The Probability Of Deflation Has Diminished?

The Fed said

"the Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year"
Yeah right! Look at a chart of the 30 year yield (down almost 100 bps ytd) or of a commodity index like DBC. Deflation!

What this tells you is that their concern about deflation is situational, conditional. Deflation that threatens the big banks that own the Fed is bad. Deflation that squeezes the proles out of their assets and makes them renters is good.

The big banks have been recapitalized and the proles are making a bit too much money flipping paper [1,2]. Maybe the Fed thinks it's time to pull the rug out from under them?

Removing the inflationary supports in conjunction with a nonsensical propaganda statement is consistent with pulling the rug out. Is it consistent with anything else?

Remember I said four years ago that the Fed was throwing the deflation game? Silver and gold are both significantly lower than when I wrote that post.

The biggest consensus in the market today - by far and away - is that the Fed is just kidding around and will print at the first sign of weakness, and that the printing will take asset prices to new highs. People have staked everything on the conjunction of those two assumptions.


whydibuy said...

Pulling the rug out??
My My.
Going off into conspiracy land are we? Its clear you have been reading Zero Brains too much and now you, too, see conspiracies everywhere like they do.
It was amusing to read them spin a tale about Saudi Arabia flooding the market with oil to combat Putin, Russia, etc, etc. Lower oil prices must be due to a conspiracy and not just a slower world economy, right?
Then days later I read about how the Saudis have reported that they have been cutting production since Sept to support oil prices. HHHMMMMM.
Now we get a fed conspiracy involving big banks.

Nathan said...


What do you see happening over the next 5-10 years in terms of US fiscal policy?

My impression is that the Fed's ability to lift inflation expectations rests almost entirely on moral suasion and has little to do with market operations. I think you can even make the case that QE will ultimately be disinflationary, since the assets that the Fed removed from the market are now more valuable. So, as long as deficits are contained to ~3% of GDP I think deflation is a real possibility.

My main concern is that over longer time frames there will be political pressure to pay for entitlement programs with increased deficit spending. Persistent deficits in the high single digits (as we had during 2009-2013) would threaten the deflation thesis.

Still, even deficit spending may not matter that much:
* Large deficits in Japan haven't generated much inflation.
* The vast majority of US obligations are real (entitlements) or nominal, but short term. So, there's no real value in trying to "inflate away" the debts.
* Even if the US runs 10% deficits forever, and gives that money directly to people who will immediately spend it, it seems like wealth inequalities quickly take that money out of circulation quickly. If you give grandma an extra $10 to spend, how long before that money belongs to Buffett or the Koch brothers? At that point the money either sits idle, for lack of viable investments, or goes back to the government through progressive taxation.
* Elites may not like seeing equities tank, but the alternative is probably worse for them. It doesn't matter what nominal value your business has if your job is to provide goods and services to people who pay in government script (e.g. SNAP).
* Millennials don't benefit much from deficit spending and would not be shielded from inflation, so they might be more fiscally conservative than baby boomers.

Anonymous said...

@whydibuy, get your facts straight. The Saudis are producing more and selling less oil month over month.

John said...


Every business venture involving more than one person is a conspiracy. It happens every day whenever any two or more people make plans.

The issue here is that you and CP disagree on the motives of the participants. You argue that their conspiracy is motivated by generous and noble impulses. CP and I see their motivations as much less noble and much less disinterested.

whydibuy said...

Hey, I'm just wondering? Is this move out of Japan for more easing part of this master conspiracy to pull the rug out in favor of the big banks?

No, John, its not a conspiracy. Central banks are acting in the best interests of their countries and for their people, not some secret society in a unmarked location.

John said...


I disagree. The central banks exist to protect commercial banks and lenders in general from the consequences of bad investments that they make, and secondarily to preserve the borrowing capacity of central governments.

The people of the countries they supposedly represent would be better off if insolvent banks were liquidated and the the bad debts extinguished. Reintroduce risk into debt and interest rates would rise and working class savers could earn a meaningful return on their savings.