Billmon Gets It -- Do You?
Buried deep in a Billmon post today was a critical chart and a few words of wisdom on why this is NOT a repeat of the inflation scene of the ’70s and ’80s. Most reading his post probably missed the key idea in a potpourri of other ideas. Let’s take a look.
“We would need to see a lot faster wage growth — growth at or exceeding the current 3% core CPI rate — before I would think about buying a piece of the inflation is coming back story…
“And while those kind of wage gains are not impossible…I definitely don’t see it right now…What we have, in other words, is almost pure cost-push inflation — instead of the wage-price spiral that made the ’70s such an interesting time to live through, financially speaking. At some point, presumably when the extra disposable income derived from that last mortgage refi runs out, households are going to have to suck it in. Indeed, it looks like it’s already started — retail sales are weakening and the Amazon-sized river of imports flowing in from points east (or west, if you live in California) has actually slowed a bit. Meanwhile, job growth has decelerated, jobless claims are creeping up, and housing starts finally appear to be, well, stopping.”
That, indeed, is the heart of the matter. I have been harping about this for what seems like ages. Everyone is in some sort of “inflation scare” AFTER 16 consecutive rate hikes. Does this make any sense? I suppose it does to those that are perpetually gloomy on the U.S. dollar or U.S. Treasuries, who probably now feel vindicated by this blip up in Treasury yields.
It all comes down to wages, housing, and jobs. Without meaningful rises in employment and wages, the former above the birth rate and the immigration rate (both illegal and illegal) and the latter above the TRUE cost of living, inflation really does not have a chance. Yes, at 1%, we had sustainable inflation. An incredible housing boom was the result. The better question (looking ahead) is, “What now?”
Has Inflation Won Out?
I have been asked countless times what it would take for me to throw in my “deflation towel.” Oddly enough (or perhaps not), most of those questions have come in the last few months right on the verge of victory. Unlike Stephen Roach (a Morgan Stanley permabear who suddenly and without reason turned bullish about two weeks ago), I am not reversing course here.
Is that illogical? I think not. I have many times stated what will change my mind. It is really simple: wage increases, job growth, and housing that does not bust. I see little reason to change course now. In fact, Treasuries are probably a screaming buy.
Primer on Inflation
Most people screaming “inflation” do not know what it really is. Those that think “inflation = price increases” are sadly mistaken. In fact that is one of the reasons why we see repetitive bubbles being blown by the Fed.
If you think inflation = price rises, I suggest reading the following:
1. “Inflation: What the Heck Is It?”
2. “Is the Inflation Monster Tamed?”
3. “Marc Faber Shatters Prevailing Market Myths”
One of the reasons for these repetitive bubbles is the Fed does not itself know what inflation is. It thinks they can micromanage the economy, when all it is doing is chasing its tail, due to the lagging effect of its actions.
At some point, and I think we are at that point right now, a sort of economic zugzwang is reached. I spoke about this in “The Red Queen Race.” Here is the critical diagram:
In economic terms, there is no magic mirror. Bernanke is trapped in Wonderland, but, unlike Alice, has no way out. Bernanke gets to choose between hyperinflation and deflation. The moment he cannot run fast enough, the U.S. economy will implode. If he runs too fast, the value of the U.S. dollar, as well as the Fed’s power, will come to a very abrupt stop.
In effect, Bernanke is in zugzwang, and he does not even know it.
Eventually, Bernanke (like the Bank of Japan) will have to choose deflation. The reason is simple: Hyperinflation will end the game, which in turn would eliminate the wealth of the Fed, as well as all of its power.
I do not know if Billmon is an inflationist or a deflationist or neither. Personally, I think neither. What I do know is that without wage growth and with a housing bust, inflation is extremely unlikely to raise its head.
While everyone else is looking at the oil scare in the ’70s as the model, virtually no one is looking at Japan of the ’90s as the model. I am betting on the latter.
P.S. to Billmon: Whatever graphic package you are using, it seems worse than the Google software that I am using, which handles only JPEG images, as opposed to GIF images. I touched up the years on your chart as well as adding a trend line to show just how pathetic this recovery has been wage wise. But… beggars can’t be choosy. Nice article.
Mike Shedlock ~ “Mish”
May 22, 2006