tag:blogger.com,1999:blog-7861688742346636904.post2636606122128096880..comments2024-03-26T11:55:00.783-04:00Comments on Thought Offerings: Price Deflation Today versus the Great Depression and Post-1990 Japan — Comparative Chartshblhttp://www.blogger.com/profile/03192933210484147113noreply@blogger.comBlogger10125tag:blogger.com,1999:blog-7861688742346636904.post-6685185930914142472009-09-08T09:34:06.830-04:002009-09-08T09:34:06.830-04:00Anon 3:10 - Good points... that may be one of the ...Anon 3:10 - Good points... that may be one of the more meaningful structural differences between then and now.hblhttps://www.blogger.com/profile/03192933210484147113noreply@blogger.comtag:blogger.com,1999:blog-7861688742346636904.post-10529106501472385392009-09-07T17:51:10.265-04:002009-09-07T17:51:10.265-04:00From Anon 3:10;
Thats a fair point and from that ...From Anon 3:10;<br /><br />Thats a fair point and from that perspective it does look very similar.<br /><br />But from an impact to our economy point of view, I dont think it is the same. It would be very hard to find anything in todays US economy that would have the same devastating effect on todays US economy that the collapse of food prices had on the US economy of the 20's. (maybe housing? uh oh...) Ag was a much bigger part of the economy and the US was the worlds leading exporter. In general, as the worlds net exporter in the 20's, the China of the day, we had most of the worlds excess capacity and when the draw bridges went up, we were stuck having to work off the surplus by ourselves.<br /><br />In general, I would think that deflation in commodity prices would be a net benefit to the US economy today. Especially if we got it in energy. Very hard on Australia, Canada, OPEC, people who export commodities but good for us. Yes it would still be hard on farmers in the US but they are a much smaller part of the economy today.<br /><br />One of the few advantages of running trade deficits is that when all this unwinds, it hurts us much less than the people who ran surpluses. As we learned in the Great Depression, it is much easier to default on debts (which the Europeans did back then) than it is to clear surplus production.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7861688742346636904.post-26160958010400249612009-09-07T15:33:04.193-04:002009-09-07T15:33:04.193-04:00Anon 3:10pm - The historical context is very helpf...Anon 3:10pm - The historical context is very helpful, thanks.<br /><br />I think if anything the idea that grain was in a temporary bubble with the price collapse apparently contributing to the deflationary spiral makes it MORE analogous to today (though the trade shutdown part is currently less comparable). The real question then is are commodity prices now in a temporary bounce (the resumed reflation trade combined with massive government-sponsored spending especially in China) or have they already bottomed... The crude PPI measure seems to have fallen so far that it's hard to imagine a fresh plunge from here, but on the other hand it is just back to the level of two and a half years ago when global economies were still expanding, so I don't think another fall can be ruled out, depending on what happens to emerging economies and to risk appetites.hblhttps://www.blogger.com/profile/03192933210484147113noreply@blogger.comtag:blogger.com,1999:blog-7861688742346636904.post-42961171834858396222009-09-07T15:10:27.542-04:002009-09-07T15:10:27.542-04:00I have a small point about about food prices durin...I have a small point about about food prices during the depression. Specifically grain prices in the US were wildly inflated by the collapse of agriculture in Europe during WWI as the farm workers went to the trenches. And then after the war, the Russian Revolution/Civil War plus ongoing chaos through out Europe meant that it was a while before grain production in Europe got back to normal. This created a bubble in US grain prices and part of what you are seeing is the price overreacting on the downside to the oversupply that always occurs during any bubble.<br /><br />Additionally a major component of international finance in those days was moving money, actually physically moving gold, between Europe and the US to pay for the grain exports. Bruner and Carr's The Panic of 1907 has a section on this. I am not sure how much gold was still being moved around by the 20's but the collapse of international money flows meant that closing international markets for grain, regardless of Smoot Hawley, which would mean a massive glut of grain in the US.<br /><br />Not sure how much you can extrapolate from grain prices in the US during the depression to commodities today. It was a unique set of circumstances.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7861688742346636904.post-70192644146122446282009-09-07T14:51:02.426-04:002009-09-07T14:51:02.426-04:00One other implied conclusion that I should have ca...One other implied conclusion that I should have called out more explicitly (even though I mentioned it once mid way through) is that at the onset of the Great Depression most price measures were already deflating, so it may have been much easier for popping asset bubbles and contracting debt to push the economy into its self-reinforcing downward spiral. Given the upward trajectory of inflation before the shocks this time around, perhaps the "momentum" (if such a concept is relevant) will buy enough time to avoid any downward spiral. Or perhaps not... I have more data than defensible conclusions.hblhttps://www.blogger.com/profile/03192933210484147113noreply@blogger.comtag:blogger.com,1999:blog-7861688742346636904.post-65819540722662936012009-09-07T14:35:55.778-04:002009-09-07T14:35:55.778-04:00Thanks for the thoughtful comments! (With which I ...Thanks for the thoughtful comments! (With which I am largely in agreement).<br /><br />Anonymous 2:04pm - Thanks for the insight on getting BLS weights and on the food/ethanol connection...<br /><br />As I see it, my implied conclusion was that Japan-style deflation (which took 8 years to begin after their asset bubbles peaked!) is likely a "best case" scenario, with the probably of the many degrees of "worse" being complete guesswork but not out of the question given the underlying dynamics. This conclusion is based as much on the content of my past posts as on what I presented here. You're right I should have explicitly called out the possibility that true recovery and reflation could take hold (perhaps with a lag as shown in CPI) but I tried to show the data in as neutral a way as possible and let people draw their own conclusions as well. Again in my opinion I don't expect the trend in core CPI to change direction unless total borrowing and/or total bank credit (two of the charts I linked to) start expanding again, and they haven't done so (the total bank credit report is weekly) even in the face of such massive stimulus. Of course I could be overlooking other factors that could matter more in the end (global supply shocks, monetary velocity surges, etc).hblhttps://www.blogger.com/profile/03192933210484147113noreply@blogger.comtag:blogger.com,1999:blog-7861688742346636904.post-86869872201552768192009-09-07T14:04:39.381-04:002009-09-07T14:04:39.381-04:00Thanks, very interesting post. You can probably g...Thanks, very interesting post. You can probably get the 1929 CPI weights by calling BLS. They are usually very quick to send out information.<br /><br />Part of the moderation of the housing index is due to the decline in energy prices, and of course that's a big part of the wildly-gyrating transportation prices.<br /><br />One quibble with one of your (implied) conclusions: in this environment, core CPI is what matters, given that energy prices have been so volatile, and food prices were jacked around by ethanol. Your graph seems to indicate that core CPI is continuing on an upward trend. So one the one hand, yes there has been no increase in inflation despite a highly inflationary monetary policy (and good reasons why that has not happened), but on the other hand, there wouldl be no indication (yet) that the battle is slowly being lost. Too early to call. Let's see what happens when the stimulus spending wears off!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7861688742346636904.post-36445499251596861732009-09-07T12:23:13.102-04:002009-09-07T12:23:13.102-04:00Great post. Like Anonymous Monetarist's commen...Great post. Like Anonymous Monetarist's comments also.<br /><br />I don't see global recovery for a generation. We need a population gain to provide the demand for the current supply. The BRIC's and all Western nations are sucking on a straw in a cup of stimulus. But the cup is getting empty.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7861688742346636904.post-58585685948279581662009-09-07T12:18:39.910-04:002009-09-07T12:18:39.910-04:00Nice post(s)
The careful charting is a real plus....Nice post(s)<br /><br />The careful charting is a real plus.<br /><br />Re your prior post on Treasuries, I agree. And a cyclical improvement in corporate profits and (someday) wages will shrink the deficit and there could be a (relative) shortage of Govt debt at a time when corp's aren't investing for growth and inflation is cyclically bottoming."DoctoRx"https://www.blogger.com/profile/07864962793726539567noreply@blogger.comtag:blogger.com,1999:blog-7861688742346636904.post-37349645198925806042009-09-07T08:03:10.625-04:002009-09-07T08:03:10.625-04:00Great charts!
Although GD1/US and Japan show that...Great charts!<br /><br />Although GD1/US and Japan show that deflation can occur even when inflation expectations are well anchored, your charts suggest that one key difference for both of these exporting nations was the vibrancy of the world economy around them.<br /><br />As such GD2 is obviously hanging on a 'dragon thread' ... will the growth driver that is China continue or will China undergo a creative destruction commensurate with the creative statistics that they have reported.<br /><br />Of course that simple 'thought offering' neglects the dynamic that Japan was supported by strong export markets. In GD1, America was not.<br /><br />The underlying metric that connects all your charts is income. GD1 and Japan both saw stagnant and declining wages, simliar to today. <br /><br />In both scenarios public debt was not able to completely offset private contraction and recovery, or lack thereof, was driven by increasing incomes.<br /><br />Since we seem hellbent on solving our debt crisis with more debt which , ironically, should exacerbate the balance sheet deleveraging, it would not appear that increasing domestic incomes will be a larger driver.<br /><br />Increasing incomes from the BRICs is heralded as the global stick save, but since they are still coupled to the US and Europe, it would seem unlikely that we will be allowed to limp along on their largess.<br /><br />In fact one might suggest the BRICs will take it the hardest unless there is a V in their exports markets..<br /><br />The authorities in the US it would appear believe that the Japan scenario is our best alternative ... mild deflation thanks to the surging import markets of the emerging world. That will buttress us until employment tightens providing that lubricant of inflation. <br /><br />Before we get to that idealized state I would suggest that there will be a dead zone. A zone where the deflationary shock of the new normal of the worlds' largest consumer crashes into the limits of substituting private demand with public. <br /><br />We are refusing to deal with the debt problem, hoping that we can do what we have done for the last 30 years...reflate and paper over our wealth transfer to exporting nations.<br /><br />Alas, all 'good things' must come to an end.<br /><br />Am providiing a link to you on my blog looking forward to your future posts.Anonymous Monetaristhttps://www.blogger.com/profile/05244697197094564980noreply@blogger.com