Preventing Speed Deflation

Good news.

I finally have an exact quote from Alan Greenspan as to what in the heck he thinks this deflation thing is; this horrible bugbear that is clogging up his mind so much that he cannot even think clearly.

Here it is: “Corrosive deflation, that is a deflation that essentially feeds on itself, creates falling asset prices, which in turn bring down levels of economic activity through the wealth effect, contracting profit margins and a type of weakness which we all at least theoretically conclude is far more of a concern than inflation.”

Right. This apparently means, as Greenspan has said, he cannot see a bubble, either as it is forming or after it has formed, and therefore does not fear a bubble in anything, but that as soon as that bubble-that-cannot-be- seen starts to deflate and bring down those overvalued asset prices to some semblance of normal value, THAT is the exact moment that he finally decides to spring into action and do something about the bubble-that-previously-could- not-be-seen-but-is-now-seen. Namely, keep it inflated!

But that is only half of it. Starting to get animated in my seat and punching the keyboard with more than the usual amount of thinly veiled sardonic hostility, I desperately try and convey the most sarcastic, sneering, disrespectful and condescendingly snotty tone of voice that I can muster from the pit of snakes that currently characterizes my current mental condition when I rhetorically ask, “And just who in the dangity-dang-dog, ding-dong hell IS this ‘we’ that has the guts to stand up and say, in front of people who know better, that they ‘…at least theoretically conclude (that deflation) is far more of a concern than inflation'”?

Deflation: “We” Agree

There may be a “we” that would agree on such a thing, but I sure ain’t in that group. And given the historical record of economists and their ideas, I am not sure that saying that some “supermajority-we” of modern economists has agreed on something can be anything other than alarming.

So who are these “we,” anyway?

I need names here! I want to know the exact names of the people who think that falling prices are a danger, when they have never said that rising prices were a danger! I want to see actual names, addresses and Social Security numbers, and color photographs would be a nice touch too, of the morons who think that prices of things coming down, and thus making them more affordable to more people, after they have risen so much for so long, is something worse than the inflation which drove prices too high to start with!

I want to see these brain-dead jackasses lined up, shoulder to shoulder, so that Mister and Missus America can get a good, hard look at them, so that we can transfix them with our steely gaze and commit their faces and names to memory on the off-chance that one of them may run for public office one day, like Janet Reno rising from whatever Land of the Undead she lives in, and then we will be able to intelligently and vengefully use our votes against them.

At the end of the day, we have the Federal Reserve saying that inflation and bubbles are good, well, maybe not good, but not so bad that we would actually go out and look for one, and if we did see one we would pretend that we didn’t see it, and also that, on the other hand, deflation and lack of bubbles is bad.

Deflation: How Little It Takes to Impress

This doesn’t even SOUND like anything that a normal person would say, and yet people are in awe of this, this, this, words fail me here!

Not even in my most manic phase – and I can tell you stories about record-setting manic phases that would make you scream in your sleep for a month – can I come up with an expletive-deleted word or phrase that comes even close to expressing not only my outrage, but my out-freakin’- rage!

On the bright side, if that is all it takes to impress the mouth-breathing, brain-dead, sub-human, commie-think morons that now call themselves Real American Intellectuals, then let me take my cork-cored bat, step up to the plate and take a mighty swing at the same ball, so that I, too, can get a little of this cheap glory! Let ME be on the talk shows! Let ME be quoted in the paper! Let ME get some undeserved honors!

In pursuit of this new goal of mine to also win shallow and fleeting fame and fortune by saying patently preposterous things, let me start off by promising, and note that I am crossing my heart in deepest sincerity, that I will not recognize the danger when I exhort you to exceed the speed limit in your car, and when you are finally going as fast as the engine will allow, I will do everything in my power to make sure that you never have to slow down. In fact, I will make it my personal goal in life to print up higher octane gas, and I will call it “Preventing Speed Deflation: Making Sure It Doesn’t Happen Here.”

I will not recognize the danger when your children have swum too far offshore, and once they start getting tired out there in the deep, deep water, and if I listen closely I can hear that “Jaws” music, “Buuuuuum, dum! Buuuuuum, dum!” I will do what I can to encourage them to just keep swimming – swim, my little darlings! Swim! – and maybe even swim out even farther, but at least stay where they are. Because it is obvious that the children will not drown if they just keep on swimming, then so it is also obvious that encouraging them to keep swimming will save their lives! All they need is a little food and water and amphetamines. I will print up encouraging slogans, and provide money to produce food, water and amphetamines, and call my program “Preventing Swimming Deflation; Making Sure It Doesn’t Happen Here!”

Deflation: It Won’t Happen Here

Also, I will not recognize the danger when you and your family gets so obscenely fat, tipping the scales at more than two-hundred pounds over your ideal body weights, but I will do everything in my power to make sure that nobody ever loses a pound! I will spend my every waking moment printing up cookies, and I will call it “Preventing Weight Deflation: Making Sure It Doesn’t Happen Here!”

I will not recognize the betting of the entire future of America and Americans on bubbles of ever-increasing shares of stock, nor the debt incurred to buy the stock, or houses, or just anything and everything. Even when the prices paid for financial assets (stocks and bonds) and even physical assets (houses) get to be so completely out of whack with real value that the mind rebels just by looking at it, boinnngggg! So I will do everything I can to make sure that they get even more absurdly priced, by printing up money. I will call it “Preventing Deflation: Making Sure it Doesn’t Happen Here!” Oops. Sorry. This preposterous promise has already been made, so I will just do the first three.

But note, I am doing THREE things, and Greenspan’s Fed is only doing ONE.

So how come I, the real Mogambo, have to live in a dumpster behind Wal-Mart, and Greenspan gets to be on TV? And at night, when I am kept awake from the blinding red dots of laser-sighting scopes being trained on my forehead by government agents, all the time whispering to each other “Do we have permission to shoot yet?” Greenspan probably has government agents posted outside his house protecting him, making sure that nobody gets to do a little zeroing-in of THEIR laser-sighting scopes!

Talk about your asymmetries!


The Mogambo Guru,
for The Daily Reckoning
June 16, 2003

P.S. The idea that provably lackluster economists agree on something should, to the contrary, be viewed as a loud klaxon on a submarine blaring “Ah-ooogah! Aa-oogah! Dive! Dive!” Besides, I don’t like that whining wail of, “But Mommy! All the kids say the same thing” crap when toddlers say it, I don’t like it when idiot adolescents say it, I don’t like it when hostile and scary teenagers from hell say it, and I sure don’t want to listen to that crap when the head of the Federal Reserve says it.

Mogambo Sez: As each day goes by, I try and take a moment to look at the world as we know it, and bask in the peaceful and predictable way things are. One day it will be much different. One day soon.


“You seem to contradict yourselves almost every other day,” writes a confused Daily Reckoning reader. “One day you say the U.S. is headed for Japan-style deflation…which would be good for bonds. The next day, you tell us that the dollar will be destroyed and warn us to get out of bonds…Can you make up your mind?”

Ah, that…well…

Our surly response is that if we knew the course of tomorrow’s markets, we’d at least charge a few bucks for the Daily Reckoning.

Our polite answer is that we are as puzzled as he is.

On the one hand, the U.S. economy seems to be tracking the Japanese into a long, slow-motion slump. Perhaps even with deflation. Prices are not exactly falling across the board, but enough of them are falling around the edges of the board to make economists worry about it.

On the other hand, Alan Greenspan and George W. Bush are fighting for their careers – by opening every monetary and fiscal spigot they can get a wrench on. The money supply is increasing 4 to 5 times faster than the GDP; the only thing that is growing more quickly are the federal government’s deficits.

“Get me a damned one-armed economist,” quipped Harry Truman in a similar puzzlement.

Where will it all lead? Our guess is that it leads to a mild case of deflation…and a lethal case of inflation, in that order. But we’re not ready to cut an arm off with a pen-knife in order to tell you for sure. At least, not for free.

In the meantime, we live happily with the apparent contradiction. Will the nation suffer a Japan-style slump, increasing bond prices even further? Will it be beset by an Argentine-style inflation and currency default? Will the bond bubble burst? Without a doubt. Yes. Probably. Most likely. Maybe. Could be.

Over to you, Eric…


Eric Fry, writing in New York…

– Peer-pressure wields a powerful influence in the stock market…Both individual investors and their professional counterparts are equally susceptible to its dastardly influence. Individual investors – a.k.a., mom and pop – just can’t bear to sit idly by while their neighbor racks up paper profits week after week. So, they try to keep up with the Joneses by buying what the Joneses own: ever- rising common stocks.

– The higher the market climbs, the more enthusiastically mom and pop rush in and buy stocks. And just about the time the last mom or pop has rushed in, the market falls. We call this process: “Buying high and selling low”…and we do not recommend it.

– Even so, many professional investors also pursue this questionable investment strategy. They charge into a rising market because they suffer from a kind of “performance anxiety.” These insecure professionals are deathly afraid that their assets may fail to rise and stay up with a rising stock market. So, the higher the market climbs, the more they want to buy stocks.

– Without question, this mass national peer pressure is helping to push share prices higher. But peer pressure alone can lift the stock market only so far. At some point – we never know exactly when – fundamental economic factors must take the lead, or the stock market falls lower…maybe much lower.

– Early last week, all the major averages soared to new one-year highs. But a late-week sell-off left the stock market with a big “nothing done.” The S&P 500 barely budged, rising less than a point to 988, while the Nasdaq slipped by less than a point to 1,626. The Dow gained a meager 54 points to 9,117.

– Despite the market’s lack of progress last week, most investors remain supremely confident that stocks will continue their ascent. Bullish sentiment has, once again, become quite extreme…and that’s a very bearish omen. Here’s a stunner: the weekly Investors Intelligence poll of newsletter writers showed a big drop in bearish sentiment to 16.3%. That’s the lowest bearish reading since early 1987. “That’s the sort of evidentiary item that could build toward a convincing case that the bulls have gotten carried away, and will soon be carried out,” Barron’s surmises.

– “It seems to us that the stock and bond markets are both pricing in a ‘sweet spot’ that is vulnerable to any number of things going wrong,” writes Andrew Kashdan of Apogee Research. “Until recently, stock prices were falling and bond prices were rising (yields falling) as investors became increasingly concerned about the weak economy. But since March 11, the major stock indexes have reversed course, shooting up 20% to 25%, and bonds have continued in rally mode, with the 10-year Treasury yield declining to below 3.2% from about 3.9% over the last six weeks…and that’s not something that you see every day, especially when stocks are soaring.

– “According to the conventional wisdom, the stock market ‘smells’ a recovery (finally!) that has reached its self- sustaining critical mass. However, at the same time, the bond market apparently lacks the stock market’s acute olfactory sensibility. The bond market hasn’t even caught a whiff of recovery. So it continues to soar higher on the notion that the still-lurking deflation threat will force Mr. Greenspan to keep his omnipotent thumb on ALL interest rates, both short-term and long-term. It is, indeed, the best of all possible worlds for both bonds and stocks!”

– What will happen to interest rates – and, by extension, the rallying bond market – if the Fed succeeds in its ‘inflation or bust’ strategy? And what will happen to the ‘bulled-up’ stock market if the ‘recovering economy’ fails to recover, or if the heavily indebted and underemployed American consumer refrains from spending every spare (borrowed) cent buying either a house or a tech-stock fund?

– “We wouldn’t be so bold as to suggest that thousands of well-informed stock and bond traders are mistaken,” says Kashdan. “But looking at the overall picture, we aren’t too keen on jumping aboard either bandwagon.”

– Finally, for those concerned about what might happen if the Fed takes interest rates all the way down to zero, here’s something that may cheer you. Jesper Koll, of Merrill Lynch (Japan), speaking of Japan’s banking sector, says: “With zero interest rates and zero funding costs, there cannot be a financial crisis because the banks are infinitely wealthy.”

– Just think…every basis point by which Greenspan lowers interest rates brings us that much closer to infinite wealth.


Bill Bonner back in Paris…

*** It is hot. Sticky. Sultry. Lazy. Few buildings are air- conditioned in Paris. So, we strip and sweat.

This morning, a half-naked fat man hangs out of a hotel window across the street. That is not the meat we were looking for as we turned our own eyes out the open window.

*** We checked the weekend papers to see how the war was going.

“U.S. troops keep up the pressure,” was the International Herald Tribune’s contribution to enlightenment. While admitting that it could be a “long, hot summer” in the Iraq desert, the article was most upbeat: “Battles intense as GIs track Iraq militants.”

But over in the French press, every note seemed to portend calamity. A photo on the front page of Le Figaro shows a group of American soldiers, not on the attack, but huddled back-to-back, guns pointed out, looking around for a sniper. “Forty-five U.S. soldiers have been killed since George W. Bush announced the end of fighting,” the article points out. Heavy-handed U.S. measures are stirring up more and more resistance, it continues.

“Big mistake,” the article quotes an Iraqi general, commenting on the U.S. decision to dissolve the army as well as various militias and other defense workers. “The soldiers returned to their tribes with their guns…the Americans created 1.5 million opponents…”

The Daily Reckoning