Credit contraction dwarfs debt monetization, leaving us in a state of net contraction, even though we have just experienced a large rally lasting months, which should have been the most favourable condition for reigniting lending if such a thing were in fact possible. I would argue that it is simply not possible and that deflation is inevitable. –Stoneleigh
Read the whole (long, brilliant, and scary as hell) interview over at The Automatic Earth.
Chris Dierkes
Chris Dierkes (aka CJ Smith). 29 years old, happily married, adroit purveyor and voracious student of all kinds of information, theories, methods of inquiry, and forms of practice. Studying to be a priest in the Anglican Church in Canada. Main interests: military theory, diplomacy, foreign affairs, medieval history, religion & politics (esp. Islam and Christianity), and political grand bargains of all shapes and sizes.
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Your ‘brilliant’ prognosticator ‘Stoneleigh’ is predicting a 90% decline in nominal home prices ‘on average’. That ought to be a red flag to you, Mr. Dierkes.
His scenario needs to contend with a problem: there has been no deflation of consequence. Consumer prices have declined by 1.3% since September 2008 and have seen only one month of decline in the last ten. (By contrast, consumer prices declined by about 8.5% per annum in this country over the period running from October 1929 to March 1933). The author seeks to finesse this by contending we stand at some sort of point of inflection which anticipates a future deflation; in contrast with his scenario, there has been in recent months no ‘disinflation’ (autumn or otherwise) either. There was an abrupt drop in prices in the last quarter of 2008 followed by several quarters of mild inflation; there has been no decline in the monetary base, no decline in M1, and only a mild (recent) decline in M2. There has been a considerable contraction in consumer credit this year, but this has not been incongruent with the stabilization of production levels over the last six months.
Per the Federal Reserve, the ratio of debt service to disposable income stood at 13.11% during the 2d quarter of 2009. If one repairs to the period running from January of 1980 through March of 1982 (as it was just subsequent to that period that the United States began running chronic balance of payments deficits on current account), one sees that this ratio stood at 10.83%. That is an unsalutary change, from my perspective, but it seems on the face of it rather modest if one wishes to construct a thesis that American households are due for some vast and rapid and chaotic deleveraging. About 80% of the increase in shares is attributable to hypertrophied mortgage payments. Service ratios on consumer debt has seen only modest change (from 5.15% to 5.83% for homeowners).Report