Regarding inflation vs. deflation

There is an ongoing debate about what the US is going thru and what it will go thru: inflation or deflation?

Martin Armstrong says we are in a deflationary monetary cycle. And in the big picture, he is right.

However,

Groovygirl has always said, it depends where you are. And gg has always said, it doesn’t matter how cheap a product/service is, if you don’t have any money to buy it. It is always about can your wages buy the necessaries or not? It really doesn’t matter the actual price, it’s the relation. Can you pay cash to buy a car or must you borrow? Can you borrow? Can you afford the monthly payment? A house? College? Health care? What percentage of your monthly income is spent on debt? 10%, 25%, 50%? If your wages go down, it could turn into 75% overnight?

I remember my grandfather talking about the Depression. He said he was much better off than many people because he had a steady job. He didn’t get a raise for 10 years, but he could save money and buy a car, because prices were low or relatively lower than before 1929/1930. He didn’t have to go in debt to survive. He could pay for food and rental housing and some extras like a car. And he wasn’t ever unemployed during that time.

People were in trouble during the Depression, because they couldn’t get a job, couldn’t earn enough (Farmers) to buy food and shelter, or couldn’t keep a steady income over that 10-year period and fell into debt to buy necessities. So, prices were expensive to them and many were starving and homeless.

It’s the relation of wages (employment) to prices. That’s why people are protesting for a higher minimum wage.

(That’s why people are leaving California with its high state income taxes and high property taxes for the Midwest. That’s why seniors are flocking to states, like Florida, that have no state taxes. People that can move are moving. They can do math and they can save 10-30% simply by moving to a different state and might get a better or steady job.)

But in Germany in the 1930’s, it was all about inflation. But inflation in prices didn’t keep up with wages (because of the country’s debt and their short-term solution of currency manipulation). It was still about the disconnect between wages and prices, but this time is was an inflationary macro environment.

So, structure investments, jobs, and assets to bring in income/gains that will keep up with prices in your home currency. And don’t forget about taxes. Income taxes and other taxes were not as extensive in the 1930’s as they are now. They must be considered in the “price” of living and assume they will go up.

The Loophole

Groovygirl has been searching for the loophole. The loophole that will keep the real estate market going (in the face of the complete fall off of mortgage apps in the last six months along with higher rates) through 2015, Martin Armstrong’s date; and the loophole that will trigger the next, and according to Martin, extended decline in the US real estate market thru 2032.

Click here for Martin’s paper and chart on the US real estate 78-yr cycle.

gg thinks she found the loophole.

Here is an article that groovygirl disagrees with, but it has some interesting information about the new Qualified Lending rules. From the linked article:

With the dislocations in mortgage lending since the housing bubble popped, Fannie Mae and Freddie Mac have increased their share of the mortgage market significantly. When combined with lending from the Federal Housing Administration and the Veteran’s Administration, the government or government-sponsored share of mortgage lending has climbed to more than 90 percent in recent years. That is an untenable situation in the long run, but is unlikely to change much this year.

The good news is that new Qualified Mortgage lending rules from the Consumer Financial Protection Bureau exempt home mortgages that qualify for purchase or securitization from Fannie and Freddie. As a result, mortgage lenders won’t have to tighten their mortgage-underwriting requirements in response to QM as long as they sell their loans to the GSEs.

Side musing: groovygirl is feeling the same way she felt in 2005 and 2006: who in the world is left to get a mortgage? Haven’t we maxed out all plausable applicants? , no, some deceased people were left to carry on the housing market boom until 2007. Groovygirl just did not think dead people could get a loan and did not factor that in. Again, gg is thinking, with unemployment at a real rate of 23%, who else can possibly qualify for a mortgage, especially with all these new rules? Aren’t we maxed out. Apparently, it’s the GSEs to the rescue to help this thing along for another year or so.

Click here, looks like even the corporate buyers are slowing. But, they are saving their capital for the big transfer from Freddie and Fannie? Read on.

And here is the loophole for the next trigger….

Replacing Fannie and Freddie with private insurance (but with government bailout, if necessary). Be careful, groovygirl actually threw up when she read this. Click here. A quote from the link at Forbes:

Our political leadership is proposing that we abolish Fannie and Freddie for the sins of the banks and the mortgage lenders, and then hand over the keys to these same architects of the mortgage disaster that brought us to the brink of financial collapse.  We are still healing and these are serious people proposing that we again legislate our way to mortgage prosperity, using no more common sense than that which got us into this mess.  What could go wrong?

gg says: yes, what could go wrong? It looks like on the surface that getting rid of GSEs and “selling” them to private underwriting companies is a good thing. It will get the government off the hook for future collapses, right? Wrong!

But, the real reason for this extremely unwise decision. The transfer of wealth.

Here is a little tidbit from Catherine Austin-Fitts. She clearly knows the possibilities. It is a repeat of the same game as 1980’s.

Click here.
gg says: But this time is totally different, we are in a global debt deflation, global currency crisis (Japanese currency trades can’t get us out of this one), and an aging population and debt-ridden younger population.

From Catherine’s link above. You pay for the detail. Bold is gg’s.

The current proposal to phase out Fannie Mae and Freddie Mac has the potential for ever greater back door shenanigans. Lot’s of money that can go out through the back door when the federal government turns huge amounts of federal credit over to private insurance companies. For example, when FHA engaged in coinsurance with private mortgage insurance providers in the 1980’s, the FHA General Fund lost 50% of the $9 billion underwritten in 3 1/2 years. They were paid a mortgage insurance premium of .50%

Given AIG’s traditional role in these and related areas, and Berkshire Hathaway’s relatively new activities in municipal bonds and local realtors, is this part of the work up to the ultimate in reengineering the federal budget and housing finance system by place? I want to see the players behind the scenes.

gg says: looks like we are right on schedule for the next mortgage/insurance/housing/banking/hedge fund crisis. The good news: fire sale housing prices for those with cash!

The real stats from John Williams

Here is the free summary from John Williams with shadowstats.com:

– Payroll Jobs Increased by 175,000, but the Number Employed Rose by 42,000; Neither February 2014 Statistic Was Meaningful
– Deliberate Misreporting Showed December Payrolls up by 84,000, Where 67,000 Was the Consistent Number
– February Unemployment: 6.7% (U.3), 12.6% (U.6), 23.2% (ShadowStats)
– January Trade Data Hint at Troubled First-Quarter GDP
Year-to-Year M3 Growth Rose to 3.5% in February

John Williams with shadowstats.com

John Williams has his latest real stats out. You pay for the detail, well worth the money, but here is the punch line:

– Strongest Signal for a Recession Since September 2007
– January Real Retail Sales Activity Plunged by 0.6% for the Month
– Unadjusted Monthly January 0.4% CPI Inflation Squashed to 0.1% by Seasonal Adjustments
– January Annual Inflation: 1.6% (CPI-U), 1.7% (CPI-W), 9.2% (ShadowStats)

John uses the original inflation index formula, before gov started jacking with it. Did your wages/income go up by 9% to meet the real inflation index? groovygirl’s didn’t. Who needs hyperinflation when wages are down or flat or zero because you are unemployed coupled with a 9% real inflation rate and climbing? In the main street household, that can feel like hyperinflation pretty quick. At the very least, it means less consumer spending, saving, and debt for big purchases like houses, cars, and student loans.

John Williams with shadowstats.com

Latest free summary from John Williams with the real stats.

– Particularly Unreliable Economic Data
– 2013 Annual GDP Growth Slowed to 1.9% from 2.8% in 2012
– Growth Bloated by Continuing Excess-Inventory Build-Up

gg says: it’s that annual growth number, 1.9%, that is the reason all the talking heads are promoting the 4th quarter numbers. And speaking of those fourth quarter numbers, 3.2% GDP. That’s the official number, not John’s. But if you just look at the components of that number, energy exports, and exports in general, had a huge impact. The components of the US growth are slowly changing. Consumption, the main driver of our GDP for the last 20 years is changing to exports. That is why China’s GDP is down. Their main driver was exports, which has dropped. It is important to look at the components. Because an economy with a GDP that is driven by exports (especially one heavy in energy) is very different from one driven by consumption. It affects everything from wages to prices to investment to business.

John Williams with shadowstats.com

Summary of John Williams’ real stats:

– Inflation Picks Up as the Economy Slows Down
– December Annual Inflation: 1.5% (CPI-U), 1.5% (CPI-W), 9.1% (ShadowStats)
– Real Retail Sales Declined by 0.1% in Industry’s Flagship Month of December; Slowing Annual Growth Signaled Recession
– Real Weekly Earnings Declined in December

gg says: quite a disconnect between inflation formula of today and inflation formula of the pre-1980’s. If you don’t like the number, just change the formula! Did your wages and/or investments go up 9% after taxes?

Employment Participation

Click here for a chart from zerohedge about the low employment participation rate. This chart has economic issues influencing it, but also demographic issues (baby boomers retire). And technology issues (improved productivity requiring fewer workers). And education issues (employment opportunities shift from industrial to informational age, but education is still in industrial age). groovygirl could go on. Just realize it is not just the economic depression that is feeding this chart, it has other influences. And because it has other influences, it will not be fixed by an improving economy. This is a paradigm shift.

Regardless of the cause: unemployed people whether they are on a fixed income in retirement or just have no or low paying jobs, they do not pay taxes, they do not buy things, they do not invest in large purchases (like houses), and they sell their stocks to live. They spend whatever money they have an essential living expenses. And if they are older, they spend money on healthcare. This is a feedback loop that will haunt us (and other first-world countries) well past the initial economic downturn.

John Williams with Shadowstats.com

John has released several notes on recent data. Here are some bullet summaries for free. He also released a Hyperinflation Update. He still calls for hyperinflation to begin in 2014. This conflicts with Martin’s thoughts on the dollar continuing to move up (or not decline) as capital flees the Euro and emerging markets.

– Extremely Difficult Circumstances in the Year Ahead: Confluence of Economic and Systemic Crises Should Intensify
-With Global Confidence in Dollar Rattled by Uncontrollable Fiscal and Monetary Excesses, U.S. Government and the Federal       Reserve Have Limited Options to Address Panics
– Heavy Selling of U.S. Dollar Remains Likely Proximal Trigger for Inflation Pick-Up
– Developing Hyperinflation Would Push Ongoing Recession into Deep Depression
– Physical Gold Remains Primary Hedge for Preserving Wealth and Assets

One thing to note. John’s definition of a hyperinflation is an increase in prices/expenses and a decrease in debt availability. There are other factors that can affect prices here in the US. Things that are produced here: US taxes, state taxes, rising health care costs. Things that are imported from emerging markets: rising manufacturing costs in China due to taxes, currency exchange rates, and labor demands. In reviewing gg’s utility cost breakdown for 2013, she noticed that the cost of energy/water was down or stable, but the taxes, admin, and service costs were up again. This has been a trend since she started tracking it. Infrastructure costs, labor costs, and taxes have a major impact on basic living costs. These things don’t have anything to do with the dollar chart. groovygirls says: if your basic living expenses go up 2-3% per year, but your wages are flat or go down, it feels like an inflationary depression to you, personally. Martin’s thoughts on the dollar are invaluable to those able to trade the globe, not just the US economy.

– Jobs Loss or Jobs Gain, Either Is Possible Within the Reporting-Confidence Interval Around December Payrolls
– Revisions Show Headline Unemployment Changes Are Meaningless
– December Unemployment: 6.7% (U.3), 13.1% (U.6), 23.3% (ShadowStats)
– Year-to-Year Growth Slows in December M3

– Plunge in Oil Imports Narrowed the Trade Deficit; Data Were Positive for Fourth-Quarter GDP
– November Construction Gain Was Statistically Insignificant, Yet, Earlier Numbers Were Revised Higher
– Revised Headline Unemployment Due on January 10th

Two interviews

Greg Hunter over at usawatchdog.com has two good interviews. Each are about 30 minutes.

One with Gerald Celente. Click here.

One with John Williams. Click here.

They each update their thoughts on 2014 trends and predictions.

groovygirl follows John Williams at shadowstats.com. remember that John’s definition of hyperinflationary depression is an economic downturn that is triggered by a deflation in debt (debt unavailable and/or too expensive) and an inflation in expenses (especially living expenses and commodity-related needs). There can be inflation in assets, but assets that are dependent on new debt creation (such as housing) will be under pressure long-term.

In gg’s opinion, we have been in this situation since 2006-2007, but creative accounting and money printing has masked the truth. At some point, we will have another round. Investors will either not believe the numbers and sell in a panic, we will have a trigger in the shadow banking system that spreads to other markets which occurred in 2008-2010 and investors have to sell assets to cover other debt obligations.

We still have a global economic balance sheet problem. Money printing and creative accounting solved the cash flow problem, but only temporarily.

2014 Trends from Charles Hugh Smith

Click here for an article about trends for 2014 from Charles Hugh Smith. He also looks back on his 2013 trend predictions. He has a window of 2012-2015 for these general trends, but very similar to Martin’s timeline through 2015. gg looks to Martin for dates/turning points.