7 things about deflation you must know: independent financial advice
Dominant macroeconomic paradigm is deflation/disinflation
Edward Lazear in WSJ on 5-16-2011 said a healthy labor market hires a gross amount of 5.5 million people a month, but now only a gross amount of 4 million a month are being hired, thus hiring is only 70% of normal numbers. The net growth of jobs is about 200,000 a month, and we need to get to 300,000 new net jobs a month to solve the unemployment problem. The number of gross new monthly jobs today is the same as during the bottom of the recession in February, 2009. The reason why gross hiring is more than net hiring is because of labor force separations. Think of McDonald’s employees quitting after a few months of employment.
The dominant macroeconomic paradigm is deflation/disinflation. The evidence:
- Persistently high unemployment: only 20% of jobs lost have been recovered
- Huge overhang of foreclosed and about to be foreclosed inventory of real estate
- Shrinkage of private sector credit (excluding student loans)
- No growth in real private sector GDP since 1998
- Overpriced stock market with “PE 10” at 24 instead of 15
- The evidence in favor of inflation/economic recovery is commodity prices, but that is a misleading signal caused by speculators
- Higher oil prices act to depress the economy, with OPEC funds recycled into bonds which may drive down interest rates.
I have written "Prices, assets going down" and "real estate deflation continues".
Is cash king during a crash?
Shadow banking trying to manifest itself in China reminds me of the Lehman real estate bubble
Shadow banking (where a non-bank lender provides loans usually in a manner that is difficult to see or to regulate) continues in China, despite attempts by their government to shut them down. This could causes bubbles in commodities which would send out a false inflation signal. See the article in the Financial Times on May 16, 2011. Bank clerks in China get a commission for these. (Sounds like the American mortgage bubble!) The interest rate in China, for a Letter of Credit to buy copper, is 1.4% in a country with inflation at 5% so that means it is a negative “real” rate of interest, which is clearly a sign of a bubble or a false boom. People are being paid to borrow (metaphorically speaking) and they use it to speculate. This drives up commodities causing Western economists to think that increased demand for copper is a sign of growth.
Remember when Bernanke said at the top of the housing bubble that rising house prices were a sign of increased personal prosperity? Well he was wrong, real estate went up because of artificially low interest rates and artificially lenient lending rules created by shadow banks. In fact incomes in 2000 to 2007 were declining which forced Americans to gamble and speculate in real estate in hopes of making extra money. Thus a scenario of worsening personal income helped contribute to the housing bubble and the resulting bubble was misdiagnosed by the Fed as a sign of improving income!!! I remember hearing from people during the housing bubble that they intended to make money with short term real estate investing because they were temporarily unemployed. I told them they should sell their home rather than borrow more money. I may have lost a potential client, but I'm glad I did the right thing.
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