Questions for Inflationists: Touching Sentiment

Mike Shedlock poses 14 Questions for Inflationists, notes some sentimental logic in an AP Article, and examines a statement by Federal Reserve Board Governor Donald Kohn

Touching Sentiment

CHECK OUT THE following sentimental logic, reported by the Associated Press:

“‘This will be a good year in the market. It may not be a great year, but it’ll be a good year. Greenspan isn’t going to let this fall apart,’ said Michael Murphy, managing partner at the Piney Run Group in Baltimore. ‘There’s just so much respect for him, no one questions him. He’s the guy who moves the market. My concern is going to be for next year, when they try to replace him. You know how the market hates uncertainty.'”

Flashback 1998…

According to J. Orlin Grabbe, Rudi Dornbusch, a prominent MIT economic professor proclaimed in The Wall Street Journal , “This expansion will run forever.” The U.S. economy will likely not see a recession for years to come. Because, Dornbusch asserts (and I’m not making this up), “We don’t want one, we don’t need one, and, as we have the tools to keep the current expansion going, we won’t have one.”

One question for Mr. Murphy: Did Greenspan prevent the recession in 2001 that Rudi Dornbusch thought impossible? Gee, what happened to the silly logic that we will not have a recession simply because “we don’t want one”? Flash forward to 2005: This will be a good year because “there’s so much respect for Greenspan,” and unlike in 2001, “Greenspan isn’t going to let this fall apart.”

How touching.

Questions for Inflationists: 14 Questions


I keep getting e-mail responses to my articles telling me why I am wrong about deflation. I also keep seeing posts, like the following one, explaining why inflation is inevitable. This recent post from “Wendy” on The Motley Fool is typical:

“It’s clear from this that the same factors that threaten to pop the U.S. real estate bubble would also pop a worldwide real estate bubble. Like the popping of Japan’s real estate bubble in 1990, this could lead to long-term recession.

“I believe that the world’s central banks would flood the world with liquidity to prevent this from happening. Both Japan and China have already done this, with the central banks ‘creating’ hundreds of billions of dollars worth of their own currencies, which they used to buy U.S. Treasuries.

“This is a major reason that I believe that the economic problem of the future will be inflation, not recession.”
OK, Wendy — or any other inflationists out there — it’s time to step up to the plate. Here are the questions I would like you to address:

1. Can you please define the ending point in your cycle? Does the cycle end when everyone has three houses and no renters? Twenty houses and no renters?

2. Can the government print money from now until the end of time to forestall a recession? If it’s so easy to prevent a recession by printing money, why do we ever have them?

3. Is there no end to the demand for credit regardless of wage growth, outsourcing, and loss of union and other jobs?

4. Can Japan keep printing money and buying U.S. Treasuries until U.S. Treasury rates hit zero? What then?

5. Can home prices keep climbing exponentially if wages do not support prices?

6. How are people going to pay property taxes and medical expenses unless wages pick up?

7. Is GM about to offer unions more money?

8. Is outsourcing to India and China about to stop?

9. Are telecom mergers — slated to destroy 20,000 jobs this year — going to reverse?

10. Are bank mergers and other mergers that will destroy jobs going to stop?

11. Is productivity going to fall off a cliff so that more workers will be needed tomorrow than are needed today?

12. Are wages and employment going to rise while outsourcing, mergers, and productivity are increasing?

13. Is the demand for housing infinite regardless of price?

14. Is the willingness to supply credit for housing infinite regardless of price and regardless of the credit worthiness of borrowers?

Can ANY inflationist out there please address all of those questions in a single, coherent post and tell me how — with falling wages and stagnant jobs — the demand for money AND the willingness to lend it can be infinite?

Questions for Inflationists: Not Logical at All

Right now, people are willing to borrow and banks are willing to lend on the foolish belief that housing prices can rise forever. We had the exact same belief about the stock market in 2000. The only logical way to believe in inflation is to believe that credit expansion and the willingness to lend can go on forever in spite of falling wages and job losses to mergers and outsourcing.

Wait a second. That’s not logical at all. Then again, perhaps you think outsourcing will stop, GM will raise wages, airlines will become profitable, medical expenses will drop, and property taxes will not increase with rising home prices. Hmm, that does not exactly seem very logical, either. Is this a new paradigm such that logic and fundamentals will be meaningless from now until forever more?

I have one final issue I would like inflationists to address: It would seem to me that hyperinflation would bail out debtors at the expense of banks and lenders. Are banks going to want to do that? If so, why? Wouldn’t that make all of the malinvestment in property a smart thing to do? Does that seem likely or logical?

OK, would some inflationist out there please tie all of those questions together for me in a nice, logical reply? I am getting tired of the short answer always offered to every deflationist argument: “The Fed will not allow deflation and will print its way out of it.”

It is time for someone to step up to the plate and put some consistently logical reasons together addressing the questions I laid out above — and then tackle the final nut to crack, why banks would bring hyperinflation on themselves to bail out debtors at their expense.

I have been asking these questions for months and still have not found a taker.

Any takers?


Questions for Inflationists: Unexplored Territory reports:

“The U.S. economy is in “unexplored territory,” making it difficult for the Fed to get a handle on the outlook, said Federal Reserve board governor Donald Kohn.

“‘You need to keep in mind that our economy is in unexplored territory in many respects,’ Kohn said in a speech prepared for delivery to a banker’s conference Wednesday in New York.

“Kohn said there are ‘some unusual imbalances’ in the U.S. economy, pointing out that the U.S. current account deficit is in excess of 6% of GDP and household savings have fallen to about 1%.

“‘We are buying far more than we produce, and the extra purchases come from importing more than we export, financed by net borrowing from abroad,’ Kohn said.

“At the same time, low long-term interest rates have driven up housing prices.

“Given this mix, Kohn said historic relationships of interest rates, exchange rates and house prices ‘may not be very good guides to future relationships.’

“All in all, ‘the risk of rapid adjustments and unusual configurations of asset price movements is higher than normal,’ Kohn concluded.”

No kidding.

This is one of the few statements the Fed has made lately that has made any sense at all.

Unfortunately, Kohn blows it with this nonsense:

“‘I expect that the adjustment to more sustainable patterns of spending and production and saving will occur in an orderly manner,’ Kohn said.

“‘The fundamentals, such as growth and inflation expectations and underlying financial conditions, appear to support continued good economic conditions,’ he said.

“The Fed’s continued focus on price stability and high unemployment ‘should help damp the economic fallout from unexpected developments,’ Kohn said.”

This will be resolved in an orderly manner? That’s news. Since when are 20-year excesses, insane credit creation, loose lending standards, and mammoth bubbles everywhere you look resolved in an “orderly manner”?

As for “good economic conditions,” I violently disagree. We have horrid economic conditions. They appear good — and will continue to appear good — only as long as the credit bubble keeps expanding. With housing and consumer spending constituting at least two-thirds of the economy, the “good conditions” will last only until the credit bubble — supporting 0% loans for flipping insanely overvalued properties on both coasts, as well as in many major cities — collapses.

Finally, Kohn’s assertion that the Fed can simultaneously focus on both price stability and employment is ridiculous. It is hard enough to control one variable with economic policy. It is impossible to control two. Are these guys really that clueless, or are they just saying things to prevent panic?

For all the enormous stimulus that was supplied — 1% fed funds rate, business tax credits, war stimulus, dividend reductions, tax cuts, election-year stimulus, loose lending standards, cash-out refis, etc. — this economy has produced zero private-sector jobs under Bush. Now, with some of that stimulus being taken away, Kohn thinks we can have price stability and create jobs too.


Mike Shedlock, “Mish”
June 20th, 2005