Deflation is coming! Deflation is coming!

So says Tim Iacono of "The Mess that Greenspan Made", and who am I to disagree? After all, I've been writing about the dangers of deflation for awhile now.

Actually, Tim makes the comment in a mocking sense, noting that

In the U.S., the latest consumer price data will be reported on Friday and we may be in for a veritable "Deflation Tsunami" from the mainstream media since we were teetering on the brink of a negative consumer price index last month.

Tim's essential point, if I read him correctly, is that the deflation we have experienced is really just the popping of the Oil price bubble.

So, am I going to get into a mud-pie flinging contest with Tim? Hardly. Actually our two views aren't that far apart.

In the first place, if the last 5 months really just were about the popping of the Oil price bubble, then Tim is right. I don't think that's true, though. As I've written before, this deflation is not just about Oil. If it were, then why didn't we have deflation every other time Oil declined precipitously?

Second, not just Oil but almost all other commodities are declining in price. For example, Bloomberg reported yesterday that:

Commodities plunged to their lowest level since June 2002, led by energy and industrial metals, on mounting signs that the global recession is deepening and demand for raw materials will decline further.

The Reuters/Jefferies CRB Index of 19 prices dropped for the sixth straight session, the longest slump since December. The gauge touched 203.25, the lowest since June 21, 2002, and has slipped 11 percent this year. Crude oil fell as much as 8.2 percent today, and copper declined the most in three months.

This deflation is driven by a precipitous global falloff in consumer demand.

But the real issue -- one that hasn't come into fruition on a large scale yet -- is whether the price declines are matched by wage declines. For example, during the Great Depression, prices fell by 25%. But wages fell 40%! If wages do not fall, it is almost impossible for a deflationary spiral to take hold.

That is where Tim and I agree, and that is the difference in my optimistic vs. pessimistic scenarios for 2009. If there are no widespread wage cuts, year-over-year deflation will be mild and probably will not last past summer. But if wage cuts spread, then we truly will be in a deflationary spiral.

Update: Import prices, including Oil, declined -1.1% in January. Typically both the PPI and CPI move in the same direction as import prices. If this holds true for January, expect a nasty deflationary surprise in the next couple of days.

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Comments

wage declines

What if....???

We have steady wage declines and to supplement their incomes many people either went into massive debt via credit cards and/or used their home equity loans through inflated home evaluation as an ATM.

So, wages overall are declining, the real unemployment rate is @ 14% basically and now with the never ending debt spiral stopping are wage declines that have been going on steadily for over a decade ...their effects finally appearing?

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In fact

That's a fairly good description of what's going on- we're already IN a deflationary spiral, have been for about 30 years now, but easy credit hid it. Now that the easy credit has disappeared, the second half of the spiral cycle (deflationary prices) can happen.

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Maximum jobs, not maximum profits.

My guess on unemployment

Now my estimate on the real average unemployment (I coin it that way because some areas have a higher rate and others a lower one) is really around 18-20%. You already have areas where almost a fourth of the populace is out of work. Also, we really never take into account the under-employed. For me, under-employment is someone working less than 20 hours a week, which we must have millions at this point. Add them into the mix, and I'd say unemployment (or would a better term be ilemployment ?) would be a third of this country's working population.

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U7=100-((TotalEmployment)/(TotalPopulation)*100)

And is approximately 54%. Now that isn't real unemployment- it counts people living off of investment income (the retired) as unemployed, it counts the disabled as unemployed, it counts young children as being unemployed.

But I still hold that it is the real number.

Census website, however, doesn't give us the data we need for historical calculation of this number past 1940, and even that we only have the July 1 datapoint for each DECADE.
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Moral hazards would not exist in a system designed to eliminate fraud.

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Maximum jobs, not maximum profits.

Wrong!

Bankruptcy's Coming...Soon!

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BLS February 20th report on CPI

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Maximum jobs, not maximum profits.