Mistaking Economic Depression for Deflation

There is a great debate raging in the blogosphere at present, over whether or not the United States is undergoing deflation. It is a question to which there is no easy answer, as systems like the United States' economy are incredibly complex. We personally feel that the U.S. is undergoing deflationary trends, which will almost certainly turn into significant inflation at some point in the future, but we don't think that deflation proper is underway.

Let us explain what we mean by deflationary trends: certain things are getting cheaper. We've been seeing some great deals on meat and meat 'products' recently, and our local grocery is carrying organically-raised medium eggs for 97 cents a dozen. Some other food products have also gotten cheaper, like the roasted almonds we are partial to, but for the most part our food bills have remained relatively stable.

In short, deflationary trends are scattered drops in price within a broader niche of the economy, but not the entire niche experiencing overall drops in prices. In proper deflation, one could expect all prices within an effected niche to experience reductions, caused by a concurrent rise in the purchasing power of one's currency. Although our perceptions of the situation are indeed limited - as we are but one person - we have not seen evidence of an across-the-board increase in the purchasing power of our U.S. dollars.

What we expect the 'deflation' that commentators see is the effects of the 2007 Depression. Those eggs we mentioned are probably not getting 'cheaper' per se, but rather the company which owns the chickens which lay the eggs are selling said eggs at liquidation prices. We posit the same goes for meat and meat 'product' producers as well.

To put the situation in more general terms, the 2007 Depression is exerting enormous pressure on the entire economy, and certain companies are moving faster than others in order to liquidate excess products. This will create the appearance of honest-to-goodness deflation, when the situation is perhaps more along the lines of a liquidation of certain niches or industries. Muddying the waters, as it were, are the concurrent bursting of various bubbles (such as housing prices, automobile manufacturers, et cetera), the products of which are dropping rapidly in value.

To conclude, the U.S. economy is cratering, pure and simple. The prices which one may expect to find on products one wishes to buy may fall to some degree or other, but we don't expect to see full-on deflation in this Depression. Rather, and as long as the economy catastrophises faster than money creation by the Federal Reserve, we posit that prices will stay relatively the same. The exciting part will come sometime in the future, when the economy completes its face-plant; it will be at that point when the Fed's money-printing will come home to roost.

12 Percent Behind = Banking System is Toast

The US Mortgage Bankers Association reported a record 12 percent of the Nation's homeowners with mortgages are delinquent or in foreclosure. The article referenced does not give dollar amounts, but we will.

According to the Federal Reserve Bank, at year-end 2008, mortgages on 1-4 family units were 11 trillion dollars. Thus 12% times 11 trillion = 1 trillion, 320 billion.

Problem number one: delinquent mortgages aren't really worth any where near their nominal balances. A lot of them will go into foreclosure.

Problem number two: foreclosed houses aren't worth very much. Sometimes they become a liability to the bank.

Problem number three: there is a terrific glut of housing on the market right now. Throwing millions of foreclosed houses onto the market is like, well, putting gasoline on a fire. House prices will crash, and crash hard. Falling prices will create the bad sort of positive feedback in which more homeowners will 'walk away' before their financial position gets even worse.

Problem number four: commercial mortgages, credit cards, consumer loans, and business loans will be no help to banks. They are likely to perform as badly as home mortgages, or worse.

The real world is giving the US banking system a 'stress test' far worse than the coddlers in Washington could ever dream of. Most banks will fail, and resolving the failures through the FDIC will be a lot for that agency to digest. Even now, it is moving through the worst of the worst somewhat slowly as its resources permit. The sluggishness with which it is moving allows the financial rot to worsen and actually increases the ultimate cost to the taxpayer. (By the way, the slow pace of liquidations is a repeat of the lack of proper bank supervision which led up to the S&L fiasco some years back).

We expect the rot to get worse and worse until some sort of 'banking holiday' is declared to perform mass triage on the system. The sooner the reorganisation happens the better for everyone, but we expect that to be put off for a couple of years yet.

The United States Needs Canada to Survive

We have been pointing at the problems of the concentration of decision-making quite a bit recently, but we feel it bears repeating. Much blame for the 2007 Depression can be placed on, for example, the U.S. Federal Government allowing the super-huge American banks to become... well, super-huge. It gave those banks, and therefore their respective managements, so much power that the bad decisions made by the banks had global implications. The rest, as they say, is history.

Now the United States is hurtling down the first dip of the 2007 Depression, and the programmes for a quick "recovery" back to the consumer economy are only opium-induced hallucinations. In our opinion, the only real way to bring the Depression to a close is the old-fashioned way: liquidation, down-sizing, and reformation. If we were the optimistic type, we would suggest that the Government is running out of time to allow this. Realistically, though, we fear that the point-of-no-return is several economic pot-holes in the past.

So... where does that leave the average American citizen? Nowhere comfortable is our reply; the Citizenry is faced with a mind-numbingly-large (and exponentially growing) national debt, the fallout from the imploded consumer economy, and a world in a Depression. Whether or not the Citizenry is aware of this is another matter; the important point is that the United States probably will not be able to bring itself out of the 2007 Depression by its lonesome anymore.

Hence, the U.S. will need friends. Specifically, friends with usable industrial capacity, a less-unsound currency, a less-irresponsible Federal Government, and a Citizenry with a healthy work ethic. Bonus points for having a border with the U.S., as well as being a major trading partner.

We would suggest Canada: it is the only functional country which borders the U.S., and it offers the qualities we listed above, more-or-less. Canadian Citizens have their problems, to be sure, but Canada has not done many important things: the Federal Government hasn't been usurped by the super-huge banks; it isn't running massive wars of occupation; it hasn't annihilated its cities and industrial capacity in favour of strip malls and hair salons, it is the U.S.'s largest trading partner.

It seems, however, that the U.S. Federal Government is intent on de-friending Canada. We'll write more on this topic tomorrow.

Read part two here.

We Scared Ourselves

Yesterday's post about dealing with hyperinflation got us scared. So we will tell you about two action steps we are beginning to implement immediately.

The first step is to lay in a one year supply of non-perishable food and basic consumable items. We will maintain this inventory and rotate the stock. Our inventory consists of things like 100 pounds of rice, 100 pounds of flour, 100 pounds of oats, and so forth.

We imagine several benefits from this programme. First, is that it is probably one of the best uses of cash. If stuff explodes in price, we will regret hanging on to our little dollars. Second, it provides an emergency ration we could use to keep being reasonably well fed if shortages should develop. Third, it will lay in a stock of useful 'trade' items such as food, soap, razor blades, etc. More than once a neighbor has knocked on the door asking for a roll of toilet paper. Next time we'll ask for a jar of herring, or whatever, in return.

The second step is to keep an eye out for things that are 'too cheap'. There is much liquidation going on as many businesses fold. This makes for a plethora of odds and ends that get sold below cost at places like Big Lots (and even Wal-Mart from time to time). Additionally, more good, cheap stuff is pouring out into our neighbour's lawns during rummage sales. It's an art to know when to pounce and 'buy it all', and when to avoid buying something one won't use and probably can't parlay into something one will.

We suspect the coming hyperinflation is going to turn a lot of people into peddlers. It's a tried and true survival strategy in hard times. It's also a way people can work together - swapping an extra candle for a chocolate in order to maintain a modicum of creature comfort in a dark hour.