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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

Category: Deflation
July 18, 2012 at 10:00 AM

The specter of hyperinflation

All this money the Federal Reserve “printed” to bail out the banks and prop up the economy must eventually swing back as hyperinflation, particularly if the central bank engages in another round of easing as growth slows further or stalls. So goes the argument of the likes of stock broker/gold bug/Austrian School investor Peter Schiff. Ron Paul and House budget boss Paul Ryan have voiced similar concerns. We have plenty to worry about, but is hyperinflation near the top of the list?

Throughout the turmoil of the past five years, Treasuries and the dollar have remained safe havens for world investors. A weaker dollar would actually help American exporters and, combined with modest inflation, would, oops, lower our debt to the People’s Republic of China. The actual problem the world has faced has been deflation. Inflation is nearly nil in America from a macro standpoint.

The high inflation that Americans of a certain age remember, the 1970s, was caused by two major events: The oil-price shocks and a Federal Reserve that lacked the will and political support to stop it for fear of raising unemployment. When Jimmy Carter appointed Paul Volcker as Fed chair, and Ronald Reagan backed him, he induced a severe recession that killed the inflation for a generation.


Comments | More in Deflation, Inflation

June 1, 2012 at 10:00 AM

The economy on the edge

I read an economist comment that today’s report of only 69,000 net new jobs created in May is “what a jobless recovery looks like.” No, this is what an economy tipped on the edge of a new recession looks like.

China and India are slowing. Much of the eurozone is already in a recession and on the verge of a breakup and breakdown that will make Lehman Brothers look like a community bank failure. And the U.S. economy is rapidly decelerating. The job growth was half what’s needed just to keep up with the natural growth of the labor force, much less find new work for 12.7 million unemployed. Worse, all the new jobs came from part-time positions. With the decline in labor-force participation, the unemployment rate badly underestimates joblessness. Average hours and weekly wages fell. The share of people unemployed for longer than six months grew. (Here’s a quick briefing in charts).

In Europe, leadership is lacking; the big banks are in control and seem happy to take the continent down. The Federal Reserve has consigned itself to the sidelines. Unlike the Reagan administration, which expanded federal jobs amid the 1981 recession and after, the Obama White House has been cutting them. The demand hole mostly behind the jobs crisis was never adequately addressed. Yet no new stimulus will be forthcoming from a gridlocked, election-year D.C. Unless things get really scary. And they just might.

Read on for the best links of the week and the haiku:


Comments | More in Debt, Deflation, Eurozone, Federal Reserve, Global economy, Great Recession, Jobs/Unemployment, Outlook

October 12, 2011 at 10:15 AM

Debt overhang: One big weight keeping the economy down

I’ll call your attention to Harris Collingwood’s article in The Atlantic: “The recovery’s silent assassin: How debt deleveraging is killing the economy.” It points to a little-discussed phenomenon after three decades of debt-driven growth: As households, businesses and governments pay down debt at the same time, the economic crisis will only linger and perhaps get worse. This isn’t the only problem facing the economy, but it’s a big one.

Using one woman’s life changes as an example, he writes:

Millions of Americans are taking similar steps. Some 8 million U.S. consumers stopped using bank-issued credit cards in 2010, according to the credit-reporting agency TransUnion. The average credit-card balance has fallen 10 percent this year from 2010, to $6,472; U.S. consumer debt has dropped for 12 consecutive quarters, from a peak of $14 trillion in early 2008 to $13.3 trillion last spring, mainly because of mortgages repudiated or abandoned. People are cutting visits to the hairdresser, buying used cars without financing, and living on surplus cheese as they trudge toward the promised land of a debt-free existence.

Suppose everyone did what Heather Anderson is doing? And that the federal government, just as virtuously, did the same? And Europe too? What if everyone deleveraged at once? Guess what–that is exactly what’s happening in the wake of the Great Recession. For better or worse.


Comments | More in Debt, Deficit, Deflation, Housing, Income/living standards, Recovery

September 28, 2011 at 10:00 AM

Echoes of ‘green shoots’ from another downturn

The report tells of a “decided improvement in business and banking conditions” in the Western United States. It goes on to state: “During the period from mid-March to late summer, rehabilitation of the banking structure proceeded rapidly and business improved substantially. Production and distribution fluctuated considerably during the last four months of the year, but in November and December were only moderately below the highest levels reached in the summer months. The position of banks was further strengthened during these months…”

If that sounds like the search for “green shoots” since the Great Recession, it was actually from the year-end 1933 report of the Federal Reserve Bank of San Francisco. As we know, the Great Depression was only starting. It would require extraordinary measures of the New Deal to bring down unemployment of 25 percent, and not finally be overcome until World War II restarted demand.

Yet the narrative sounds like the most recent Beige Book, which included, “Economic activity continued to expand modestly. Demand for retail items rose slightly, and upward price pressures appeared to ease overall.”


Comments | More in Banking, Deflation, Federal Reserve, Great Recession

September 1, 2011 at 9:55 AM

Don’t expect the Fed cavalry to ride to the rescue, yet

August rumbles away, leaving more uncertainty than happy vacation memories. Federal Reserve Chairman Ben Bernanke pretty much admitted in his Jackson Hole speech that the central bank is powerless to create jobs and stimulate growth without help on the fiscal side from the White House and Congress. That won’t happen. President Obama is timid. As for Congress, as Daniel Weeks, president of Americans for Campaign Reform put it, “Congress isn’t broken — its fixed by special interests.”

There will likely be no QE3 unless deflation appears as a serious threat (what we really need is a little inflation to help with debt deleveraging). The Federal Open Market Committee is divided over the path forward. The Fed faces unprecedented threats to its independence, not least from Rick Perry, potentially the next president, who implied that further easing would be treasonous.


Comments | More in Canadian economy, Deflation, Eurozone, Federal Reserve

July 8, 2011 at 10:00 AM

The new Misery Index

People of a certain age remember the Misery Index: It combined the inflation rate with the unemployment rate. Candidate Ronald Reagan used a high of nearly 22 percent in 1980 to highlight the economic failures of Jimmy Carter and win the presidency. Although President Obama’s rate by the old measure is a little more than 10 percent, a shrewd Republican challenger would be working on a new Misery Index.

It will take some work, because it should include the real unemployment rate (16.7 percent) plus several other critical measures: Long-term unemployment, loss of household wealth due to the real-estate crash and damage to average investors’ holdings from the Great Recession; stagnant or falling wages for most working Americans; the percentage of the population on food stamps, poverty rate, etc. A big part of this yardstick would be capturing the de-facto deflation that has hurt millions of households. Together, it would be a staggering number.

Today’s national unemployment report is dreadful: 18,000 jobs created in June, 250,000 more people dropped out of the labor force and average hours declined. Only 25 percent of American teenagers have summer jobs, the lowest rate on record. May’s data were revised downward, meaning two straight months of less than 25,000 net new jobs. At 58.2 percent, the employment-to-population ratio matched its lowest point in the downturn. As economist Heidi Shierholz of the Economic Policy Institute put it, “Virtually every single measure was devastatingly weak.”


Comments | More in Deflation, Great Recession, Income/living standards, Jobs/Unemployment, Politics and the economy, Recovery

December 31, 2010 at 11:00 AM

Markers for the economy in 2011

Before I wobble-off to the martini-infested precincts of New Year’s Eve, here are some things to watch in the coming year. It’s not a forecast, but rather some important focal points that will have an outsize bearing on how the economy performs. Add your own in the comments section, and have a great New Year.

1. Will growth in gross domestic product translate into robust job creation and better wages for more Americans? One forecasting firm sees growth next year at 4.4 percent, a rate that traditionally would have caused large spurts of hiring. In recent years, GDP and the Dow have told less about the condition of average Americans. We’ll see how offshoring of jobs and much leaner, and more profitable, companies affect the old GDP-jobs calculus. Little in the forecasts indicates that the relatively stagnant average wages of the past three decades will change. And even the most optimistic GDP forecasts still mean years of high unemployment?

2. Will the stimulus of extending the Bush tax cuts, including for the richest Americans, offset or even outweigh the falling off of the real stimulus enacted in 2009? If history is a guide, they will, at best, make the rich richer but not produce many new jobs. But maybe this time is different. Still, it will be fighting the headwinds of states losing federal stimulus money, projects winding down and the end of Census hiring,


Comments | More in Banking, Deflation, Dollar, Energy, Eurozone, Federal Reserve, Global economy, Great Recession, Income/living standards, Jobs/Unemployment, Macro/Big picture, Outlook

November 15, 2010 at 9:21 AM

Checking out the Fed bashers

I’ve done my share of criticizing the Federal Reserve under Ben Bernanke. It didn’t apply proper oversight to the casino of swindles and fast money called the “financial services sector.” It failed to provide transparency as it took perhaps trillions in toxic “assets” off the books of the biggest banks. It has been a foot-dragger on real reform. Bernanke’s Fed has done too much to help those who caused the collapse instead of the other way around, as Nassim Taleb (he of The Black Swan) and others have observed.

On the other hand, if it hadn’t acted with dispatch to provide liquidity during the great panic of October 2008 and fight deflation since, the Great Recession would look like the roaring ’90s. The latest round of Fed action, so-called QE2, is aimed at pumping more money into an American financial system that remains weak. This has brought out new platoons of Fed bashers.

In his usual flashy style, former Fed Chairman Alan Greenspan implicitly criticized Bernanke and QE2 in a Financial Times op-ed, writing that Washington was deliberately weakening the dollar. He could be writing the briefing papers for our trade partners, who are also steamed (including serial currency manipulator China)


Comments | More in Bailout, Deflation, Federal Reserve

September 30, 2010 at 9:45 AM

Three quarters in, and economy’s still sending signals of fragility

As the third quarter slouches across the finish line, many of the worst fears of early summer weren’t realized. Deflation did not break out. A double-dip recession did not happen. The Eurozone did not collapse. Commercial real-estate’s sickness did not become a worse drag on the economy.

On the other hand, no magic optimism rescued the labor market. Unemployment remained acute, particularly for younger workers, minorities, older workers who had lost a job and those in many distressed industries. Five unemployed workers are chasing every opening. In addition, the weak recovery is sending more people into poverty and income inequality, which was already at levels not seen since the 1920s, is increasing. The real pain and general anxiety is creating an unstable political environment even as it seems to paralyze political leaders from meaningful action.

The Dow rose some 8 percent in September (we’ll see how it ends the last day of the month). Bullish analysts saw it as a sign of fresh life in the expansion. Other observers, also using a word with “bull” in it, pointed out a fresh infusion of money from the Federal Reserve, which was mainlined into equities via low interest rates and was no real vote of confidence in the economy. Interestingly, or ominously, gold stayed above $1,300.


Comments | More in, Auto industry, Banking, Deflation, Dollar, Eurozone, Federal Reserve, Global economy, Housing, Income/living standards, Jobs/Unemployment, Microsoft, Starbucks, Stock market

August 26, 2010 at 10:20 AM

The double-dip recession: No longer so far fetched

Goldman Sachs has increased its odds of a double-dip recession to 25 percent. Mark Zandi of Moody’s sees a 1-in-3 chance, vs. 1-in-5 just a few weeks ago. Short of an outright financial panic, however, a double-dip might look much like the “recovery” to millions of Americans. The Bush and Obama administrations, along with the Federal Reserve, committed trillions to save the financial sector that caused the disaster. The Obama stimulus, while averting an outright depression, was never enough to make up for the lost output from the crash, nor was it targeted enough to job-creating infrastructure investments for the future.

The “recovery” was an increase in GDP that never translated into much new hiring. The vast overhang of debt and bad bets from the bubble are still holding back real recovery. So are fifty fiscal crises in the states and thousands in local governments. Many companies laid off workers because of the recession; some used it as an excuse for radical downsizing. Even though corporate America is sitting on large amounts of cash, it’s not hiring, whether because of uncertainty, low demand from frightened consumers, antipathy to the Obama administration — or a new business model of fewer workers, more offshoring, etc. The old housing Ponzi scheme lies in ruins. We’re a poorer country after this binge, and unemployment is the worst in decades.

So here we are. As anyone who has ridden a roller-coaster knows, it takes a real rise to lead to a dip.


Comments | More in Bailout, Consumer spending, Deficit, Deflation, Federal Reserve, Great Recession

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