Why the Fed Does Not Control Inflation and Deflation

HappyBirthdayFEDAlthough we may not always agree with Steve Hochberg’s conclusions the following video contains some very thought provoking ideas accompanied by some charts that you probably haven’t seen anywhere else.  It’s interesting to note the quadrupling of the FED’s leverage over the years since 2008 and the amazing lack of inflation associated with it. Check out this excellent six-minute video clip by Elliott Wave International’s Steve Hochberg… at the Orlando Money Show.

Despite the Fed’s leverage and its attempt to inflate throughout the economy, the deflationary pressures in the U.S. are overwhelming.


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This article was syndicated by Elliott Wave International and was originally published under the headline Why the Fed Does Not Control Inflation and Deflation. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Deflationary Forces Overpower FED

Despite Bernanke’s famous helicopter speech the FED’s powers really are not unlimited. There is only so much they can do to stimulate the economy. After all they can’t force people who are concerned about their future to borrow money. Just like a turtle people naturally recoil and pull back when times are uncertain. And even if they wanted to borrow bankers are reluctant to lend in uncertain times. This results in a phenomenon called Pushing on a String  where no matter how hard the FED tries very little force is exerted on the economy. Robert Prechter believes that this is exactly what has been happening over the last few years where the FED has been trying to stimulate the economy but the only effect has been an anemic rebound in the stock market.  ~Tim McMahon, editor

Deflationary Forces Stymie the Fed’s Economic Rescue Efforts
See a stunning chart of the Federal Reserve’s assets

By Elliott Wave International

The Federal Reserve’s efforts to rescue the economy have been historically aggressive, starting with the initial round of quantitative easing in 2008 and continuing through 2013.

The central bank’s assets have skyrocketed due to the Fed’s bond purchases, which you can see clearly in this eye-opening report that Robert Prechter presented to the Market Technicians Association and his Elliott Wave Theorist subscribers.
Download the full 8-page report for free here.

Federal Reserve Assets

The main reason investors are expecting runaway inflation is [Read more...]

Deflation Warning: Money Manager Startles Global Conference

History shows that the U.S. should pay attention to economies in Europe

The economy has been sluggish for five years. There’s no shortage of chatter about “why,” yet few observers mention deflation. One exception is a hedge fund manager who spoke up at the recent Milken Institute Global Conference.

The presentation by Dan Arbess, a partner at Perella Weinberg and chief investment officer at PWP Xerion Funds, was startling because of how deeply it broke from the standard narrative. We’ve been wrong to assume that the economic crisis is over, Arbess said. … The threat of deflation is once again rearing its head.

“The persistent risk in our economy is deflation not inflation,” Arbess said.

CNBC, May 2

Deflation appears to be more than a threat. Consider what’s already happening in the U.S. and in Europe.

Industrial production declined in April by the most in eight months, indicating American manufacturers will provide little support for an economy beset by weaker global markets and federal budget cuts.

Bloomberg, May 15

Europe is slipping further into recession. The euro zone economy shrank more than expected in the first three months of 2013 … as France returned to recession for the first time since 2009 and Germany barely edged forward. It marked the longest recession for the euro countries since the currency was introduced in 1999.

New York Times, May 15

Here’s a relevant fact: The Great Depression of 1929-1932 started in Europe before coming to America. The economic wave may be much bigger this time. Robert Prechter made this observation:

Total credit will contract, so bank deposits will contract, so the supply of money will contract, all with the same degree of leverage with which they were initially expanded.

Conquer the Crash, second edition,
p. 111

EWI published this chart in March 2012.

Mole hill to Mountain 1929The enormous credit expansion that started in the early 1980s is due to be leveled.

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This article was syndicated by Elliott Wave International and was originally published under the headline Deflation Warning: Money Manager Startles Global Conference. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

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What is Biflation?

Biflation is a relatively new term coined by Dr. F. Osborne Brown, a Senior Financial Analyst for the Phoenix Investment Group in 2003. It is sometimes referred to as “mixed inflation” but it basically refers to a condition where both inflation and deflation occur at the same time. This seemingly contradictory situation is not a real a paradox but simply appears to be one as a result of faulty logic.

The problem results from thinking that all prices rise in lock-step in times of inflation but this is clearly not the case. It is quite common for electronics to be declining in price (deflation) while oil and gas are increasing in price. Thus we have “mixed inflation” or “biflation” however this is not the primary example of  biflation.

BiflationThe Cause of Biflation

The primary cause of inflation is an over-abundance of money injected into the economy by central banks. Since most essential commodity-based assets (food, energy, clothing) remain in high demand, the price for them rises due to the increased volume of money chasing them. However, in the case of electronics, technology is reducing the costs of production faster than the FED is printing money, thus the price is falling. One of the great gifts of technology is the ability to decrease the cost of living while simultaneously increasing the standard of living. Unfortunately, by printing money the government is appropriating that advantage unto itself, as a form of hidden tax.

Generally, the term biflation applies not to the deflationary effects of technology but rather to the competing forces of necessity vs. luxury items. Thus if incomes are limited, and unemployment is rising, and the price of necessities like gasoline, food and clothing are rising due to monetary inflation that can put downward price pressure on discretionary purchases such as housing and cars while simultaneously prices are rising for necessities.

During the liquidity crisis of 2008, [Read more...]

International Inflation and Deflation Trends over the Past 5 Years

International Inflation Rates Had Ups and Downs Over Past 5 Years.

The global economy has suffered some serious setbacks since late 2007, with some economists and experts going so far as to call it the “Great Recession,” after the 1920s-era Great Depression. And that certainly is an apt term for it, as the spread of the crisis has not been limited to a few countries.

International Inflation

Nearly every country in the world has been affected in some way, which is a telling sign of the modern international economy.

Inflation is one of the key indicators as to the health of the economy, but it needs to be looked at in context in order to have any value. Economists often use stretches of five years of rates, and they examine the way inflation has grown or shrunk during this time. This is then seen as an inflation trend, which can be positive or negative. Here are some inflation trends of various countries over the past 5 years.

Inflation in the United States

In many countries, as it is in the United States, inflation is measured with something known as the Consumer Price Index (CPI). This looks at the cost of things like food, energy and fuel, new and used cars, clothing, shelter, transportation, and medical care, collectively known as a market basket. The change in the cost of these things are studied monthly and released by the Bureau of Labor Statistics. The change is listed as a percent. This is then used to determine a trend.

The general trend of inflation in the United States has been [Read more...]

Deflation Not Over?

The majority of the inflation from 2012 occurred in the first quarter with extremely high monthly rates of inflation.  Overall in 2012 there were 6 very inflationary months (on a monthly basis), 5 slightly deflationary months and 1 very deflationary month (November).  The first month of 2013 started out pretty inflationary but the first quarter of the year generally shows the most inflation for the entire year.

See Table below

Month Monthly
Inflation
Annual
Inflation
Jan-12 0.44% 2.93%
Feb-12 0.44% 2.87%
Mar-12 0.76% 2.65%
Apr-12 0.30% 2.30%
May-12 -0.12% 1.70%
Jun-12 -0.15% 1.66%
Jul-12 -0.16% 1.41%
Aug-12 0.56% 1.69%
Sep-12 0.45% 1.99%
Oct-12 -0.04% 2.16%
Nov-12 -0.47% 1.76%
Dec-12 -0.27% 1.74%
Jan-13 0.30% 1.59%

Looking back at 2012 we can see deflationary forces building. Our friends at Elliottwave believe that more deflation is on the way and that its strength will build. The FED is cranking up QE3 in an effort to prevent it. So it will be interesting to see if the FED or the market is stronger and if in the long run you can solve the debt problem with more debt.

Key Economic Index Turns South

By Elliott Wave International

The federal government defines the Producer Price Index (PPI) as “the average change over time in the selling prices received by domestic producers for their output.”

[editor's note: Producer Prices are the costs producers have to pay for the components they use to build things. If they go up companies have to charge more just to break even.]

With help from the Federal Reserve’s massive inflationary policies, the PPI has climbed even as the economy began to fall in 2008-09.

All the while, the financial media persisted with stories of an economic recovery. EWI analysts offer an independent perspective.

The New York Times declares, “Economic Gloom Starting to Lift.”

Corporate America, however, is not so sure. This chart of producer prices [wave labels removed] probably illustrates why. After years of largely uninterrupted growth, the Producer Price Index appears to be on the cusp of a critical reversal that should turn into a steady decline in wholesale prices.

 

Theupescalator

 

Our friends at Elliott Wave International thought this message was important enough to repeat.  So you can read the full text of the originally published December Article here.  Or you can read a more recent post  The Secret Word: Deflation – And the Next Five Years of Financial Turmoil~Tim McMahon, editor

See Also:

The Secret Word: Deflation – And the Next Five Years of Financial Turmoil

The following is a sample from Elliott Wave International’s new 40-page report, The State of the Global Markets – 2013 Edition: The Most Important Investment Report You’ll Read This Year. This article was originally published in Robert Prechter’s July 2012 Elliott Wave Theorist.

In the first five months of 2012, there were 20 times as many Google searches on “inflation” as there were on “deflation.” This is down from a ratio of 50 times in June 2008. If any theme has been overdone over the past six years, it is the theme of inevitable inflation if not hyperinflation.

"Sloping Graph From Coin" by worradmuInflation reigned for 75 years, from 1933 to 2008. People are so used to it that they cannot imagine the opposite monetary environment. Bullish economists have been calling for recovery, which means more inflation, and bearish advisors have been calling for a crash in the dollar, which means hyperinflation. No wonder those are the terms on which most people have been searching.

But only one word allows you to make sense of what’s going on in the world, and inflation is not it. The secret word is [Read more...]

Producer Price Index (PPI) and Consumer Sentiment Index Point to Deflation

Two Signs That Deflation is Far From Over

Producer Price Index (PPI) turns south

The federal government defines the Producer Price Index (PPI) as “the average change over time in the selling prices received by domestic producers for their output.”

With help from the Federal Reserve’s massive inflationary policies, the PPI has climbed even as the economy began to fall in 2008-09.

All the while, the financial media persisted with stories of an economic recovery. EWI analysts offer an independent perspective.

The New York Times declares, “Economic Gloom Starting to Lift.”

Corporate America, however, is not so sure. This chart of producer prices [wave labels removed] probably illustrates why. After years of largely uninterrupted growth, the Producer Price Index appears to be on the cusp of a critical reversal that should turn into a steady decline in wholesale prices. –The Elliott Wave Financial Forecast, December, 2012

[Read more...]

In 1929, Deflation Started in Europe Before Overtaking the U.S.

Marcus Aurelius was the last of the “Five Good”  Roman emperors and is also considered one of the most important members of the Stoic philosophers. He ruled Rome from 161 to 180 AD.  He brilliantly said,

“Look back over the past, with its changing empires that rose and fell, and you can foresee the future, too.”

DeflationToday we may be seeing the beginning of the end of the American Empire. As Americans we don’t like to think of ourselves as having an empire but according to Daniel Larison,

The U.S. treats several key regions of the world as privileged space where it is supposed to have military and political supremacy, and regional challengers to that supremacy are treated as potential threats to the U.S. because they infringe on what our government considers its sphere of influence. U.S. military commands divide up the world, because it is taken for granted that the U.S. has some proper military role in every part of the globe, and the U.S. has hundreds of bases scattered around the globe. The President has the ability to wage war largely on his own authority, and when he condescends to consult Congress it is now little more than a formality, so that the phrase “imperial Presidency” is as appropriate now as it has ever been.

Ah, but What about Iraq?” you might ask. We left voluntarily didn’t we? Doesn’t that prove that we are not building an empire? Larison says that doesn’t prove anything.

Just because a state withdraws its forces from a country it has invaded and occupied for years doesn’t mean that it hasn’t acted as an empire does. After toppling a country’s government, installing a new government that it initially believed would be more cooperative and subservient, and occupying its territory against the will of most of the population for almost a decade, the U.S. certainly acted imperially in Iraq… When a government reserves the right to overthrow other governments that oppose its policy goals, it assumes that other states’ sovereignty is so limited that it can and should be violated when it suits the more powerful state. This is how many empires have acted in the past, and so it seems appropriate and accurate to refer to a contemporary American empire.

What Happens in Europe Will Not Stay in Europe

By Elliott Wave International

More than 1,500 years after the fact, scholars still debate the causes of the Roman Empire’s fall.

What historians do agree on is that the crumbling empire’s final days were marked by economic contraction, a struggle to fund Rome’s routine affairs and excessive debt.

Sound familiar?

Mark Twain said, “History doesn’t repeat itself, but it does rhyme.”

That quote seems to apply when [Read more...]

How the Dollar Affects Gold Prices

Interview with Jim Puplava, by Jeff Clark, Casey Research

Jim Puplava has robust convictions….The CEO of Financial Sense News Hour, Jim is a man you should listen to carefully if gold factors in your portfolio or if you are thinking about adding gold anytime soon. In this interview, Jim talks about how the dollar affects gold prices. He discusses whether we are moving into a phase of deflation or inflation and gives his views on what exactly that will mean to gold investors. He discusses the likely impact of inflationary or deflationary forces, which one he believes will win out, and the effect it will have on our economy.

Finally, he makes a very interesting prediction.

Of course, any investor will tell you that deflationists and inflationists have been arguing for years. Each side has data to back up its claims, so investors end up none the wiser and non the wealthier. All the arguing simply causes confusion, and that invariably that leads to inaction.

One thing they can’t argue about though: A defining moment in the deflation versus inflation argument will present itself when our current overburden of debt finally blows up. On the one side, deflationists will point to periods in history where deflation resulted from that overburden. But as always, there’s more to the argument.

Jim emphatically states:

“The outcome depends on whether or not the economy is operating under a fiat currency system, because there’s never been a deflationary depression when one’s been in place.”

Interesting.

When I saw this claim, I wanted to hear more, because deflationary forces seem strong at the moment. I asked Jim for a chat about his viewpoint. I wanted to get as clear as possible as I could about Jim’s thoughts on deflationary pressures, because it has direct and significant implications for investments, including gold, something all my readers care deeply about. Here’s my candid interview with Jim. [Read more...]