World events put inflation fears to rest

Commentary: Deep losses have afflicted both the guilty and the innocent

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Since the Great Recession began in 2007, we’ve been barraged by a steady stream of commentary from every perspective arguing about what is happening to us, and debating risks and remedies, in a situation that’s without precedent.

Perhaps the dominant thread has been from those insisting that inflation will be the inevitable consequence of central banks’ efforts to save the global economy from implosion.

The “inflationistas” have also hijacked the language, describing central banks working to prevent collapse of stocks and housing and bank portfolios as creating “asset inflation.” Joining the inflationistas, as always, are the gold bugs.

By this week’s end, the sky was black with buzzards circling the remains of these arguments and their progenitors — not just here in the U.S., but everywhere.

In the U.S., too much attention is paid to the consumer price index (CPI). The Fed watches dozens of price indicators, led by personal consumption expenditures (PCE). PCE peaked in 2011, briefly almost 3 percent annualized, and has fallen ever since, now barely 1 percent.

Since the collapse of Lehman Brothers in 2008, the “core” PCE (which is stripped of energy and food costs) has never made it above 2 percent. Today core PCE is synchronized with nominal PCE at 1 percent, both falling.

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Right-click graph to enlarge. Source: Economist’s View.

When inflation falls below 1 percent, that means some components of the economy are already in deflation — a very bad thing if carrying debt which must be paid back in dollars more valuable than those borrowed in the first place. And the world today is more debt-soaked than ever in history.

The investment darlings of the inflationistas have cratered. The immediate impetus is a matter of debate among vultures and victims alike, but this combination did the deed:

  • new U.S. job weakness
  • Japan in last-ditch printing
  • China slowing fast while trying to convert from an excessive-investment economy to one that’s consumer-based
  • confiscation in Cyprus.

TIPS — Treasury Inflation Protected Securities — have fallen as never in their history. Gold peaked at $1,800 an ounce last October, stumbled slowly to $1,600 by April Fool’s Day and now trades — sort of — at $1,400. NYMEX crude oil has topped at $100 a barrel repeatedly in the last year ($150 in 2008), now $87. Ten-year Treasury notes are 1.70 percent and looking more likely to fall than to rebound.

Major crises often change course because of last straws in odd places. Little Austrian banks in 1930. Archdukes in Serbia. Cyprus.

On Wednesday Jens Weidemann of the European Central Bank and Bundesbank gave an interview in which he confirmed the German reputation for flexibility, diplomacy, and sensitivity to others. The European crisis will “remain a challenge over the next decade,” which means he has no idea. Then, “The Cypriot case shows that it is possible to wind down banks… taxpayers don’t always have to step in to bail out.”

The plan imposed by Germany on Cyprus involves confiscating about a quarter of its bank deposits. Some are Russian (as everywhere in the euro zone), but the rest belong to taxpayers. Used to.

The Cypriot economy will collapse by a like percentage, or more. Sparing harm to taxpayers? Hardly.

Adding heat to the gold meltdown has been the forced sale of Cyprus’ central bank’s gold reserves. If you buy gold to protect against the end of the world, do really think you’ll be able to get to your hoard when you need it, or that if you begin to spend it, no one will notice?

The New York Times reported this week, confirmed by UNICEF, that across the Aegean from Cyprus, Greek children now go hungry in large numbers, the economy having shrunk by 20 percent in the past five years and unemployment now exceeding 27 percent.

The greatest bank run of all time began in July 2007, and still we argue about “letting banks go” versus “taxpayer bailouts.”

Charlatans have pretended there is someone else available to take the loss, but in a bank collapse taxpayers always will take the hit one way or another. The same phony theorists claim that preventing financial collapse will inevitably bring inflation.

I hope that the deep losses taken in the last few weeks, afflicting both the guilty and innocent, will help us to move off dead center.

Here and a lot of other places.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@pmglending.com.

 

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