You Say Stop; I Say Go, Go, Go

Robert Schiller November 5, 2008 Interview


If he's thinking deflation...

Jim Rogers Spiritedly Disagrees


And gives his perspectives on 1929, true facts and CNBC.

Is It Real or Not?

Time Magazine is Alerted

With the economy in the U.S. "contracting significantly" in the fourth quarter, as San Francisco Fed president Janet Yellen recently put it, an issue that was practically unthinkable three months ago is now, for the Fed, front and center: the possibility of the U.S. entering a phase of deflation, or protracted declines in the general price level. In its statement accompanying the most recent interest-rate cut, the Fed said, "In light of the declines in the prices of energy and other commodities and weaker prospects for economic activity, [the Fed] expects inflation to moderate."

Much of today's deflation anxiety results from keen awareness of the Japanese experience of the 1990s. Indeed, New York Federal Reserve governor and vice chairman of the Federal Open Market Committee Timothy Geithner was Treasury attaché in the Tokyo embassy for the first half of that decade. That's when a widespread banking crisis led to a credit crunch, an economic slump and eventually interest rates that were lowered to zero by the Bank of Japan. Even so, Japan's banks, which were in the process of repairing their balance sheets, were extremely reluctant to lend. Thus, even though interest rates were low, the economy weakened. Prices for pretty much everything declined, following a bust in the real-estate and stock markets in Japan. The country entered a decade of stagnation.

Some economists — for now a minority, to be sure — believe the U.S. is at serious risk of a deflationary spiral, even if just a quarter ago, inflation was above the Fed's comfort zone of 2% to 3%. "Compared to Japan's problem a decade ago, this crisis is unfolding much faster and spreading wider due to financial globalization," says Shanghai-based independent economist Andy Xie. A financial system unable or unwilling to lend, a tapped out U.S. consumer, and business now retrenching — and laying people off — all are a formula for possible deflation. What's so wrong with declining prices? For one thing, it makes the real cost of paying off debt that much higher — and for American consumers in hock to the tune of $14 trillion, anything that makes that debt burden more onerous is anything but helpful.

The good news is that in the U.S. now, as Richard Berner, chief U.S. economist for Morgan Stanley, writes, "The ultimate bastion of defense against deflation is a Fed committed to avoid it at all costs." And that's what we have. Study of the Japanese experience became something of a cottage industry for Fed researchers over the past eight years, and the Fed has responded accordingly: lending directly to banks, backstopping the commercial-paper market (which companies use to raise short-term money), trying to bring yields on both long- and short-term maturities down. Further, Fed chairman Ben Bernanke went out of his way recently not to object to the possibility of further fiscal stimulus from Congress. In other words, the Fed is throwing everything but the kitchen sink at avoiding a deflationary spiral, and it's doing so more quickly than its counterparts in Tokyo did a decade ago. Disinflation — diminishing inflationary pressure across the board — is healthy for the U.S. economy. Deflation is something the U.S. doesn't want to see. And the Fed knows that better than anyone.

From ThisIsMoney in the U.K.

Western powers could spiral into a period of 'sustained deflation', the International Monetary Fund warned on a day of renewed market turmoil.

The IMF said the drug of aggressive interest rate cuts is becoming less potent, and that governments need to supplement it with heavier doses of public spending.

It plans to call for a coordinated boost to state spending and tax cuts at this month's meeting of the G20 nations in Washington.

But despite government intervention, there are now 'growing risks for deflationary conditions in advanced nations', the Washington-based IMF said.

Deflation, the opposite of inflation, is one of the most destructive diseases that can afflict an economy. As prices tumble across the board, firms are driven out of business, unemployment rockets, and debts become ever-more burdensome.

It has periodically blighted Japan since the beginning of the 1990s and was last seen in the leading Western economies during the Great Depression.

The warning came as a series of aggressive interest rate cuts sent a wave of fear across world stock markets. Normally shares respond positively to cuts in official rates, but the scale of yesterday's moves stunned traders.

The Bank of England slashed 1.5 percentage points from its main rate, while the European Central Bank and its Swiss counterpart reduced rates by a half-point.

At 3%, UK rates now stand below those in the Eurozone for the first time since the single currency was introduced in 1999.

Many people will ask: 'What does the Bank know that the rest of us don't?'.' City economists expected the cautious Bank to reduce rates by a percentage point at the most.

[T]he Bank said it is now worried that a 'marked deterioration' in the UK economy could quickly drive inflation down.

The Old Lady said there are 'substantial' risks it could undershoot its 2% inflation target.

While the danger of deflation remains relatively remote, it is growing, the IMF argued.

Western powers could spiral into a period of 'sustained deflation', the International Monetary Fund warned on a day of renewed market turmoil.

And in an alarming passage, it said that the credit crunch is showing signs of becoming ' impervious' to government intervention.

Blanchard said: 'We can't be sure there are no landmines left in the field in advanced and emerging markets. So it is conceivable that we will see a flare-up of the financial crisis.'

Australia's TheAge.com

THE TD Securities-Melbourne Institute monthly inflation figure dropped 0.2% in October after an increase of 0.4% in September when the yearly headline inflation rate topped 5%. While the Reserve Bank must get some relief from such a sharp fall in the monthly figures as consumers reduce spending and the recent fall in commodity prices kicks in, it is still in uncomfortable territory and way out of the 2 to 3% target range.

As the RBA deputy governor argued last week, inflation will remain a major concern over the short to medium term, once the liquidity from the world's major economies and their central banks becomes an economic reality. Inflation may have significant implications for the Rudd Government's domestic reform agenda.

While Australia's financial system and economy is better placed than most advanced countries to ride the financial turmoil, some unique economic challenges face Australia.

Over the last year, international economic concerns have been directed to possible stagflation (lower economic growth coupled with rising inflation) due to higher consumer prices. However, with declining economic growth, falling house prices and the threat of substantial periods of high unemployment, attention has turned to "deflation".

While the world might be facing a sustained period of deflation, Australia's inflationary bubble could be about to burst, putting the Australian economy at a significant international competitive disadvantage.

I'll Trade You My World Economy for Yours

Deflationary Trade

The global shipping crash continues to get worse and this morning’s GDP data shows the US recession is already deeper than 2001 and probably 1990-91 as well.

Meanwhile the International Monetary Fund seems determined to make the whole thing worse by imposing the most ruinous strictures on supplicant nations.

Yesterday the Baltic Dry freight rate index fell below 1000 for the first time in six years and last night it fell another 40 points to 885. In June the index was 11,900, so it has fallen 93 per cent in a few months – a crash far worse than anything ever seen in the stockmarket.

The spot daily rental for a Capesize ship is now $6365, down from $234,000 per day over the space of a few weeks. Maybe that previous price was absurdly inflated, but at $6365 it is just $365 above the average daily cost of crews and fuel.

As a result the world’s ports are filling with empty ships because shipowners can’t afford to run them, as well as some full ships because the owners of the cargo won’t unload without a bank letter of credit, which banks are refusing to supply.

Shipping companies are starting to file for bankruptcy in increasing numbers as they breach loan covenants, and a shipping researcher, Andreas Vergottis of Tufton Oceanic has told Bloomberg that a fifth of the world’s dry bulk companies may soon have negative net worth because the market for second hand ships has collapsed and the value of their fleets is below outstanding debt.


From the Middle East

Deflation could well be the next major concern for economies across the world in the coming year as most global economies grapple with a grim financial and economic scenario, which is likely to deteriorate further, a senior official of Standard Chartered Bank said.

Dr Gerard Leyons, Chief Economist, Group Head of Global Research, Standard Chartered Bank, projected a further downfall specifically in the United States and the United Kingdom economies.

Leyons said in spite of some "helpful factors" in the year ahead such as correction in oil prices, a likelihood of lowered rates and cheaper mortgages, the outlook is grim. "We can't stop the recession that is about to hit us. But despite best efforts to stabilise the financial crisis, the economic situation will still deteriorate."

As further reductions in interest rates take place, worries pertaining to inflation are replaced by fears of deflation. "In fact, by this time next year, deflation may be the major concern. That is both because of the intense competitive pressure evinced in global supply chains and the deflationary pressures resulting from the financial crisis."

Talking about the correction in oil prices, he said that oil producers were not yet suffering from the recent correction in oil prices because many countries have budgeted oil prices not too far from previous levels, or even lower.

Considering the difficulties they may face in raising liquidity, the oil producers would require to open up their markets, he added.

"Because of the financial crisis, many oil producers will find it harder or costlier to attract capital, thus pushing up the cost of production. This many oil producing counties will need to open up their markets to attract capital inflows."

Adding that official interest rates in economies such as US and the UK could be expected to decline further by 0.5 per cent and more, Dr Leyons said the outlook for Europe too was poor.


RGE Ecomonitor

The financial wildfire has turned around the stagflationary trends seen earlier this year into a vicious cycle of global deflation in debt, assets, wages, and goods. Headline consumer inflation has peaked in most of the developed and emerging world, except in places where food/fuel subsidies were recently rolled back or post-Q3 data are still unavailable.

According to the IMF’s October World Economic Outlook, the world’s average consumer prices have increased 6.2% y/y Q2 2008. JPMorgan expects world CPI inflation to slow to 2.6% y/y Q2 2009. Lower commodity prices subdued headline inflation and are expected to continue doing so on slackening global demand.

Core inflation has yet to show a significant decline but a feedback loop of debt deflation, asset deflation, commodity deflation, wage deflation, and slower global growth will likely lead to flat or lower headline and core consumer and producer prices in Q4 2008 through 2009.

But in the short- to medium-term, stag-deflation seems the most likely scenario for the world economy.

Demand Is Clearly Contracting

Andrea Rothman reports on International Air Traffic

"Air France-KLM Group, Europe's biggest airline, said profit targets will be ``difficult'' to meet as an industry report showed the first monthly decline in global passenger traffic since 2003 amid slumping travel demand."

"The Paris-based airline said the global credit crisis and slowing economic growth mean fewer tourists and business travellers, and vowed to curb capacity and freeze costs. Global airline-passenger traffic fell in September, the first drop in five years, the International Air Transport Association, or IATA, said today."

``The recession is deepening more than we expected, and the worst is yet to come'' Giovanni Bisignani, IATA's chief executive officer, said on a conference call from Istanbul. ``At this rate, losses may be even deeper than our forecast of $5.2 billion for this year'' for the industry.

The struggle at Air France, one of the world's most- profitable airlines and among the best-capitalized, may signal far worse in store for weaker carriers."

``It confirms it's a really tough year for airlines,'' said Douglas McNeill, an analyst at Blue Oar Securities in London. ``Demand is clearly contracting and airlines that managed to ride out the oil-price spike in the summer are now finding that they're faced with a fresh headache to deal with.''

"Air France fell 3.1 percent in Paris, following a 13 percent drop yesterday, after the airline said it will struggle to reach an operating-profit goal of 1 billion euros ($1.26 billion) for the year through March 2009."

"The stock fell to 11.5 euros, down 52 percent this year, giving the company a market value of 3.45 billion euros."

"Passenger-traffic grew 0.5 percent last month, the slowest rate in at least two years."

``Given the current economic climate, the company indicates that it will be very difficult to meet its operating-profit goal,'' Paris-based Air France said in its statement today. ``Nevertheless, this figure should remain clearly positive if market conditions do not deteriorate further.''

"IATA said today that passenger traffic last month -- the number of passengers multiplied by miles flown -- declined 2.9 percent from a year earlier, while freight traffic suffered a 7.7 percent decline."

"The drop in passenger travel -- down 6.8 percent in the Asia Pacific region -- was the first since an outbreak of severe acute respiratory syndrome in 2003, while the cargo drop was the first since the technology-stock bubble burst in 2001."

"Even as oil prices have tumbled to about $67 a barrel from a record of $147.27 on July 11, the financial-industry crisis has slowed demand for business-class travel, which provides the bulk of airlines' earnings. Seat occupancy rates fell 4.4 percentage points from August to 74.8 percent in September."

"North American international passenger traffic fell 0.9 percent, after steady 5 percent international growth seen earlier this year, IATA said. European carriers saw traffic drop by 0.5 percent from last year. And in the Middle East, after years of double-digit growth, passenger traffic turned to a negative 2.8 percent, Bisignani said."

China Aluminum Maker Profit Dives 92%

"Aluminum Corp of China Ltd., the world's No.3 alumina producer, said on Sunday its quarterly earnings plunged 92 percent, lagging forecasts, with its outlook clouded by high costs and sliding aluminium prices."

"As China's largest producer of the metal tries to stabilise prices and cut costs, it has cut its aluminium capacity by 18 percent and alumina capacity by 10 percent."

"But analysts say that is not enough to shore up prices of aluminium, which is widely used in the financially stressed construction and automobile industries."

"Chalco is likely to make a loss in the fourth quarter since Shanghai aluminium prices have come down to early 2003 level while costs remain high," Geoffrey Cheng, an analyst at Daiwa Institute of Research, said.

"The global aluminium market is heading for big surpluses in the next few years because smelters outside China have delayed cutting output despite weak demand and falling prices, analysts said."

"The company, also known as Chalco, reported a net profit of 182.9 million yuan ($26.7 million) in the quarter ended September, down from a restated profit of 2.29 billion yuan in the same period last year, under Chinese accounting standards."

"Its total revenue for the third quarter fell 7.9 percent to 19.08 billion yuan but operating costs surged 46.5 percent to 12.16 billion yuan."

"Threats of another round of electricity tariff hikes in China and an oversupply of aluminium clouded the company's earnings outlook, analysts said."

"We think that Chalco's operating environment is likely to remain difficult for the next 2-3 years," Macquarie said in a recent research report."

"The stock lost nearly half of its market value in the third quarter and underperformed an 18 percent drop in the blue chip Hang Seng Index .HSI. It has lost nearly 85 percent so far this year, making it the third worst performing stock on the benchmark index."

Volvo Truck Orders Plunge

"Orders at Volvo, the world’s second-largest truckmaker, fell 55 per cent in the third quarter year-on-year, and in Europe it had almost as many cancellations as new orders. Volvo recorded just 115 net order bookings for new trucks in Europe, down from 41,970 a year earlier – a 99.7 per cent drop."

“We’re heading towards the sharpest downturn I’ve ever seen in Europe,” Leif Johansson, Volvo chief executive, told analysts."

"The company said that the slowdown appeared to be spreading to emerging markets and its orders in North America had failed to recover."

“We thought North America would come back up but right now it’s not the case and its continuing to go down,” Mr Johansson said.

"European truckmakers had until last year enjoyed a long boom, driven by demand from construction and hauliers in Western Europe and fast-growing east European markets led by Russia."

"Volvo said on Friday that many of its customers were holding back on replacing vehicles because of the economic uncertainty, and some were not receiving loans to finance new trucks because of tighter credit markets."

The General Macroeconomic Trend Right Now is Deflation

Desmond Lachman write in WashingtonTimes.com:

"It is often said that generals tend to fight the last war. Judging by their continued pronouncements about inflation risks, one has to wonder whether the same might not be said of central bankers."

"Despite ever-increasing signs that the global economy is in the grips of a vicious process of financial market de-leveraging and asset price deflation, central bankers continue to fret about the threat of rising price inflation. They do so at the very time they should be worrying about the risk that a deep and prolonged recession could raise the specter of deflation of the sort that long plagued the Japanese economy after the bursting of its asset price bubbles in 1989."

"Looking in the rearview mirror, there can be no doubt that over the last year inflation has risen to levels that must give rise to concern. Indeed, U.S. headline consumer price inflation has now risen to around 5 percent or to a level not experienced in the last 25 years. Similarly in Europe, headline inflation has ratcheted up to almost 4 percent or to a level that is approximately twice the European Central Bank's inflation target of "close to but under 2 percent."

"Looking forward, as central bankers should do in setting interest rate policy, one has to be struck by the extraordinary bust in international commodity prices over the last four months. Since July 2008, international oil prices have about halved from $145 a barrel to around $70 a barrel, thereby totally reversing their earlier run-up. For their part, international food and metal prices have dropped by around 40 percent."

"This extraordinarily rapid bust in international commodity prices has occurred as markets have rapidly internalized the ever-increasing signs that the global economy is more than likely headed for its worst economic recession in the postwar period."

"Sadly, a deep economic recession will hardly be confined to the United States. For a similar equity market bust and a similar vicious credit crunch has also occurred across the globe. In those circumstances, one must expect that the international commodity price bust of last four months will prove to be anything but ephemeral. Rather, one should not be surprised to see international prices drift even lower in coming months as commodity demand wanes as the global recession takes hold."

"In the same way that the earlier spike in international commodity prices caused headline price inflation to rise substantially above core inflation up until July 2008, one must now expect that the recent dramatic bust in international commodity prices will cause headline inflation to decline substantially below the core inflation rate."

"At the same time, one must expect that, over the next year, core inflation will gradually decline in both Europe and the United States as a deep recession opens up large gaps in labor and output markets. As a result, there is every prospect that headline inflation over the next year could very well be negative in the United States and Europe."

"The prospect of falling headline inflation should make both the Federal Reserve and the European Central Bank more mindful of Japan's painful experience with price deflation in the 1990s after the bursting of its asset price bubbles. More to the point, it should alert them to the folly of insisting on fighting past inflation battles when the real risk to the global economy is that of a deep and prolonged deflationary recession."


Byron King in Australia's Dailyreckoning.com.au:

"The price has bounced all over the charts lately, from the mid-$800s per ounce down to $750 and below. The thing is, the 'paper' price from gold has just plain disconnected from the price - and the availability - for the real stuff."

"Have you tried to buy real gold lately? Many dealers are just out of bullion and coins like the U.S. Gold Eagle and Krugerrand. The U.S. Mint has customers on allocation. The only way to get real gold is to pay a premium over the 'paper' price, and I don't mean the former $20 markup per ounce."

"As far as I can find out from a spokesperson, the SPDR Gold Shares does have physical gold to back up every ounce on the books. The only other way to find out is to go tour the vault and count each gold bar."

"The other gold and precious metals miners in the Outstanding Investments portfolio are all way down. It's a combination of low metal prices and the market meltdown. I know that it's frustrating to watch these gold miners decline. It's painful. What ever happened to the 'dollar down, gold up' thesis? I'm just going to wait it out. Unless I absolutely needed the money right now - and if I did not come up with the money, there would be a severed horse head in my bed - I would not sell the gold shares."

"I'd like to think that the current share prices are absolute bargains. I'd like to think that we would all kick ourselves in five years for not buying up all the shares we can get hold of right now. But then again, this market is confounding. There always seems to be another down day. So my advice is to hang in with what you've got. And buy shares only with your speculation money, not any funds that you cannot afford to tie up for a long time."

"And speaking of long times, I believe that the current banking 'bailouts' (pardon me, 'rescues') are going to be inflationary. The general macroeconomic trend right now is deflation. And the U.S. and most other central banks of the world are fighting that with inflation of the money supplies. This can only be bad news for the dollar. And it should be good for gold."


The New York Fed has dismal news on manufacturing:

"The Empire State Manufacturing Survey indicates that conditions for New York manufacturers deteriorated significantly in October. The general business conditions index dropped 17 points to a record-low -24.6. The new orders index also fell to a record low, and the indexes for shipments, unfilled orders, and inventories all declined sharply. The prices paid index eased significantly, to its lowest level of the year, while the prices received index also fell, although less sharply. Employment indexes were negative. Future indexes declined markedly with exceptionally large declines in the future new orders and shipments indexes."

"Roughly 22 percent of respondents in the current survey said that their need for borrowed funds had increased over the past year, but a larger proportion, 31 percent, indicated that their need had decreased. When asked about changes in borrowing needs since July, 20 percent of respondents reported higher borrowing needs and almost the same percentage reported lower needs."

"The prices paid index moved downward for a third consecutive month, dropping 13 points to 31.7, its lowest level in more than a year. The prices received index also fell, although to a lesser degree, shedding 3 points to reach 20.7. Employment indexes were negative. The index for number of employees, at -3.7, remained close to last month’s level, and the average workweek index fell to -9.8."