My Ideas Re. Inflation — Please Critique
- As the credit bubble grew and grew and eventually peaked, many new dollars were entering the economy in droves. At the same time, however, you had lots of new goods and services (as well as a rapid rise in asset prices) all competing for these new dollars. Consumer inflation, while high when measured honestly, has not been considered rapant since the late 1970s even though lots of new dollars were out there. These dollars were being "soaked up" by soaring real estate costs and a huge influx in goods and things available to spend them on.
- As the credit bubble has popped, let us remember what we are primarily looking at: Defaults. Those who took out credit are now defaulting on their obligations. They are not paying back the dollars they borrowed– they are defaulting. The money is not being returned to the lenders — it is staying out in the economy. Rather than having dollars being destroyed, we have dollars staying in existence, still floating around and looking for a home somewhere.
- At the same time that massive amounts of dollars are still out there (left over from the credit bubble) real estate prices have dropped dramatically. It costs less to buy a home. Manufacturers are or will be producing less. Things that people want but do not need (new homes! new cars! new TVs!) are not soaking up the dollars like they were.
- The buck should stop with the lenders. If they are not being paid back, they should go out of business. Credit should dry up. Lending should slow dramatically. Some equilibrium should be reached between the supply of dollars and the supply of goods, services and assets available to spend them on.
- But, if our governments have their way, lenders will not go out of business. Governments will "borrow" money and print money and do what they can to keep the lenders artificially afloat through various measures. Governments will essentially force lenders to lend through subsidization and if they cannot force lenders to lend, then they will lend themselves.
- What this means is that, even though we are now experiencing a temorary drying up in lending, there will be far less destruction of lending capacity than would be expected if lenders went out of business.
- Because consumers and businesses are shell shocked, however, and because real estate was so totally overpriced, and because people are simply feeling poorer due to a destruction in their net worth, asset prices and the production of non-essential goods (new homes! new cars! new TVs!) will stay much lower than they were when they were when the credit bubble was at its peak.
- Relative to the things people need, however, (food! essential services!) there will be many more dollars competing.
- If this recipe is correct, we can expect a sharp increase in prices for the basics and an overall increase in consumer price inflation even as the economy as a whole is stagnating.
I agree with everything you’ve said except #7. Here you make an assumption that the consumer will not go back to buying non-essential goods because he/she feels poor. If this indeed is the case, then your conclusion that there will be too many dollars chasing too few goods seems to make sense. But living at or just beyond one’s means is a deeply ingrained part of American culture that can easily resume as soon as the media concludes that we’re headed down the path of financial recovery.
My theory is that if a critical mass is reached in the number of people which experience severe pain (losing a home to foreclosure, filing bankruptcy, etc.), then your assumption is correct. Enough people will not participate in the next consumption cycle and hence fewer non-essential goods will be produced leaving an excess of dollars in the economy. But, if this critical mass is not reached then we will see a resumption of consumption of non-essential goods and hence the dollars to goods equation will remain relatively balanced and therefore only mild inflation.
There are a lot of dollars out there looking for a place to go, but these dollars did not go to the people who would spend them on essential goods. Rather they went to people who already had too much money (how much of the bailout went to bonuses for upper management?).
Not criticisms, just comments
2- The dollars are not staying out in large numbers- A lot of people are out of work, upside down with a mortgage, and facing other difficulties, like the price of food, etc. Also, a lot of people have lost an incredible amount of money in the stock market or investments in general. With a lot of collections defaulting, that money is vapor. The only asset left is a withering, foreclosed home that will require capital to fix up and sell.
7- I see consumer goods dropping dramatically because of the holidays approaching, and a slowing in demand. They don’t make money having these goods stay in the warehouses. The American impulse to consume will drive them to spend the last dime they have on stupid, unnecessary items regardless if they can or can’t.
8- Things people need will be where the flogging begins. I love it when Oil prices go up, and it’s immediately reflected at the pumps when the reserves of the oil companies are reflecting the price from a month ago, and then when it goes down, it takes the gas stations a few weeks or longer to slowly change the prices to a lower price. We are going to get bent over on a majority needed items.
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