Dr. Doom strikes again: Get set for three years of deflation

johnnymk · 05-06-2009, 09:14 PM

I don't know what to believe now.

http://www.dailyfinance.com/2009/05/...-of-deflation/

This observation may send the inflation hawks scurrying back to their nests: New York University economics professor Nouriel "Dr. Doom" Roubini says excess capacity in the global economy may lead to a deflationary period lasting as long as three years.

"There is already excess capacity in the global economy because of the over-investment in capacity by China, Asia and other emerging markets," Roubini told Bloomberg News in Singapore Wednesday. "Without an increase in global demand, we will have even more excess capacity," and China "is not building domestic demand," he said.
More cheery news

In the U.S., Roubini said housing, consumer goods and commodity prices will be held down by excess capacity and weak demand, and "this will lead to deflation in the next three years." Roubini added that he expects both economic data and corporate earnings to disappoint.

Many economists expect the U.S. economy, which has been in a recession since December 2007, to enter a recovery phase by Q4. Even so, global trade is expected to contract 9 percent for the year -- international trade's largest decline since World War II, according the the World Trade Organization.

Further, Roubini predicted that 2010 U.S. GDP growth is going to be very low, totaling only 0.5 percent. "Prospects for recovery in Europe and Japan are even worse than in the U.S.," Roubini said, Bloomberg News reported.

Deflation - - a protracted, systematic decline in prices and wages - - occurs in pronounced recessions and other conditions where demand is non-existent, and it robs companies of the ability to increase revenue and hurts the economy's ability to grow. If it takes hold, that's another hurdle policymakers will have to grapple with as they attempt to end the U.S. and global recessions.

Through fiscal and monetary policy, the United States has added a record $12.8 trillion in stimulus and liquidity to the economy and financial system, a policy that economic conservatives have argued will to lead to rising inflation.

"Roubini is on the mark"

Economist David H. Wang, an economic modeler, agreed with Roubini that those concerns are misguided -- because we have a more serious problem to worry about. Although there are "inflationary forces acting on the economy," Wang said, "the deflationary forces are stronger, currently."

"Roubini is on the mark. In the U.S., the housing hangover is the biggest factor because it is a large component of the cost of living. Also, when houses are not bought in large numbers, neither are the goods that go in them, and that has led to downward price pressure on consumer goods," Wang said. "Internationally, we can see a clear overproduction in autos, and this is rippling through other sectors, including commodities like steel, and electrical components. Nine of my ten international industrial variables have deflationary readings, so the bigger danger is deflation, at least through mid-2010."

Wang said, ironically, a rising price of oil -- historically the bane of the industrialized world -- could be a savior here, by counteracting deflation pressures. However, although oil burst through $55 per barrel Wednesday on talk of a recession bottom, Wang expects the price to retreat to "well under $45, due to excess supply, taking more cost pressure off prices throughout the system."

Once an obscure, little-regarded academic, Roubini rose to prominence in 2008 after he successfully predicted -- two years in advance -- the current global financial crisis and recession. Roubini was the first economist to predict massive mortgage and housing-related losses for U.S. banks, which he originally pegged at $1 trillion; Roubini's most recent estimate now sees those losses totaling $3.6 trillion.

Economic Analysis: Inflationary pressures exist, but again, the deflationary pressures are stronger. That is not to say that government spending from the stimulus can't cause "pocket" price surges – such as a rise in local food costs in an area that builds a new U.S. Navy submarine or major alternative energy facility, for example. But nationally the demand is not there, due to high unemployment, and, according to Roubini, international demand is still insufficient to eliminate the surplus of manufactured goods built up during the previous expansion. With both domestic and international demand so light, the contours are in place for a period of weak pressure on prices, which historically has led to low, or, worse yet, negative, inflation.

zippyjuan · 05-06-2009, 09:24 PM

I don't know about three years of deflation. Companies lower their prices because they want to get rid of excess inventory- they were caught with a lot of it last year- especially around Christmas time. But they have lowered their projections for the future and along with that have pared their production and expenses (mostly labor costs). Unless they have seriously missed their new projections about future sales, I don't think we will see as much price cutting. Consumer spending seems to have flattened out meaning that people are not looking like they are going to tighten spending much more than they already are althought things can certainly change in the future. It is my own opinion (and just that- an opinion) that the deflationary period is coming towards its end.

The article mentions falling commodity prices for things like steel and oil. Lower prices on those helps businesses save money on production while maintaining some of their profit margin- reducing the need for them to lower prices further.

I also question the $12 trillion in stimulus number. The only way you can get that high is to include all the various assetts the government has pleged to guarantee- they wil only cost $12 trillion if every one of those guarantees goes bad. In actual payouts the real money spent is about one tenth of that (there have been so many numbers tossed out I could not give a firm number on that but it is certainly not $12 trillion).

VTGreg · 05-07-2009, 06:45 AM

Quote:

Originally Posted by zippyjuan

I don't know about three years of deflation. Companies lower their prices because they want to get rid of excess inventory- they were caught with a lot of it last year- especially around Christmas time. But they have lowered their projections for the future and along with that have pared their production and expenses (mostly labor costs). Unless they have seriously missed their new projections about future sales, I don't think we will see as much price cutting. Consumer spending seems to have flattened out meaning that people are not looking like they are going to tighten spending much more than they already are althought things can certainly change in the future. It is my own opinion (and just that- an opinion) that the deflationary period is coming towards its end.

The article mentions falling commodity prices for things like steel and oil. Lower prices on those helps businesses save money on production while maintaining some of their profit margin- reducing the need for them to lower prices further.

I also question the $12 trillion in stimulus number. The only way you can get that high is to include all the various assetts the government has pleged to guarantee- they wil only cost $12 trillion if every one of those guarantees goes bad. In actual payouts the real money spent is about one tenth of that (there have been so many numbers tossed out I could not give a firm number on that but it is certainly not $12 trillion).

While I agree that the $12 trillion number is high, the money injected into the economy by the US is far more than $1 trillion. The fed alone has spent more money than that on treasuries.

johnnymk · 05-07-2009, 01:07 PM

Financial Rescue Nears GDP as Pledges Top $12.8 Trillion (Update1)
http://www.bloomberg.com/apps/news?p...CA4&refer=home

March 31 (Bloomberg) -- The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.

New pledges from the Fed, the Treasury Department and the Federal Deposit Insurance Corp. include $1 trillion for the Public-Private Investment Program, designed to help investors buy distressed loans and other assets from U.S. banks. The money works out to $42,105 for every man, woman and child in the U.S. and 14 times the $899.8 billion of currency in circulation. The nation’s gross domestic product was $14.2 trillion in 2008.

President Barack Obama and Treasury Secretary Timothy Geithner met with the chief executives of the nation’s 12 biggest banks on March 27 at the White House to enlist their support to thaw a 20-month freeze in bank lending.

“The president and Treasury Secretary Geithner have said they will do what it takes,” Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein said after the meeting. “If it is enough, that will be great. If it is not enough, they will have to do more.”

Commitments include a $500 billion line of credit to the FDIC from the government’s coffers that will enable the agency to guarantee as much as $2 trillion worth of debt for participants in the Term Asset-Backed Lending Facility and the Public-Private Investment Program. FDIC Chairman Sheila Bair warned that the insurance fund to protect customer deposits at U.S. banks could dry up because of bank failures.

‘Within an Eyelash’

The combined commitment has increased by 73 percent since November, when Bloomberg first estimated the funding, loans and guarantees at $7.4 trillion.

“The comparison to GDP serves the useful purpose of underscoring how extraordinary the efforts have been to stabilize the credit markets,” said Dana Johnson, chief economist for Comerica Bank in Dallas.

“Everything the Fed, the FDIC and the Treasury do doesn’t always work out right but back in October we came within an eyelash of having a truly horrible collapse of our financial system, said Johnson, a former Fed senior economist. “They used their creativity to help the worst-case scenario from unfolding and I’m awfully glad they did it.”

Federal Reserve officials project the economy will keep shrinking until at least mid-year, which would mark the longest U.S. recession since the Great Depression.

The following table details how the Fed and the government have committed the money on behalf of American taxpayers over the past 20 months, according to data compiled by Bloomberg.

===========================================================
--- Amounts (Billions)---
Limit Current
===========================================================
Total $12,798.14 $4,169.71
-----------------------------------------------------------
Federal Reserve Total $7,765.64 $1,678.71
Primary Credit Discount $110.74 $61.31
Secondary Credit $0.19 $1.00
Primary dealer and others $147.00 $20.18
ABCP Liquidity $152.11 $6.85
AIG Credit $60.00 $43.19
Net Portfolio CP Funding $1,800.00 $241.31
Maiden Lane (Bear Stearns) $29.50 $28.82
Maiden Lane II (AIG) $22.50 $18.54
Maiden Lane III (AIG) $30.00 $24.04
Term Securities Lending $250.00 $88.55
Term Auction Facility $900.00 $468.59
Securities lending overnight $10.00 $4.41
Term Asset-Backed Loan Facility $900.00 $4.71
Currency Swaps/Other Assets $606.00 $377.87
MMIFF $540.00 $0.00
GSE Debt Purchases $600.00 $50.39
GSE Mortgage-Backed Securities $1,000.00 $236.16
Citigroup Bailout Fed Portion $220.40 $0.00
Bank of America Bailout $87.20 $0.00
Commitment to Buy Treasuries $300.00 $7.50
-----------------------------------------------------------
FDIC Total $2,038.50 $357.50
Public-Private Investment* $500.00 0.00
FDIC Liquidity Guarantees $1,400.00 $316.50
GE $126.00 $41.00
Citigroup Bailout FDIC $10.00 $0.00
Bank of America Bailout FDIC $2.50 $0.00
-----------------------------------------------------------
Treasury Total $2,694.00 $1,833.50
TARP $700.00 $599.50
Tax Break for Banks $29.00 $29.00
Stimulus Package (Bush) $168.00 $168.00
Stimulus II (Obama) $787.00 $787.00
Treasury Exchange Stabilization $50.00 $50.00
Student Loan Purchases $60.00 $0.00
Support for Fannie/Freddie $400.00 $200.00
Line of Credit for FDIC* $500.00 $0.00
-----------------------------------------------------------
HUD Total $300.00 $300.00
Hope for Homeowners FHA $300.00 $300.00
-----------------------------------------------------------
he FDIC’s commitment to guarantee lending under the
Legacy Loan Program and the Legacy Asset Program includes a $500
billion line of credit from the U.S. Treasury.

zippyjuan · 05-08-2009, 11:22 PM

Yep- most of it is in pledges and guarantees.
Not all the TARP money has been distributed even and some of the monies are loans to be repaid later with interest. Some monies are asset swaps.

As for the Fed buying Treasuries, they have not really been buy much so far- they talked about buying long term notes. The Fed has always had some Treasuries as part of their portfolio and if I am reading this chart http://www.federalreserve.gov/releases/h41/Current/ properly currently (as of May 6, 2009)have $560 billion in Treasuries (section 9 on the page linked). They list total assets as about $2 trillion. According to this blog the Fed had $780 billion in September 2007 so their current holdings in T-Notes is down from then by quite a bit. July 2007 (same article) says it was $478 so it is not up that much since then either.

05-06-2009, 09:14 PM	#1
johnnymk Chief of Naval Operations Join Date: May 2000 Location: LEVITTOWN< PA> USA Posts: 13,621	Dr. Doom strikes again: Get set for three years of deflation I don't know what to believe now. http://www.dailyfinance.com/2009/05/...-of-deflation/ This observation may send the inflation hawks scurrying back to their nests: New York University economics professor Nouriel "Dr. Doom" Roubini says excess capacity in the global economy may lead to a deflationary period lasting as long as three years. "There is already excess capacity in the global economy because of the over-investment in capacity by China, Asia and other emerging markets," Roubini told Bloomberg News in Singapore Wednesday. "Without an increase in global demand, we will have even more excess capacity," and China "is not building domestic demand," he said. More cheery news In the U.S., Roubini said housing, consumer goods and commodity prices will be held down by excess capacity and weak demand, and "this will lead to deflation in the next three years." Roubini added that he expects both economic data and corporate earnings to disappoint. Many economists expect the U.S. economy, which has been in a recession since December 2007, to enter a recovery phase by Q4. Even so, global trade is expected to contract 9 percent for the year -- international trade's largest decline since World War II, according the the World Trade Organization. Further, Roubini predicted that 2010 U.S. GDP growth is going to be very low, totaling only 0.5 percent. "Prospects for recovery in Europe and Japan are even worse than in the U.S.," Roubini said, Bloomberg News reported. Deflation - - a protracted, systematic decline in prices and wages - - occurs in pronounced recessions and other conditions where demand is non-existent, and it robs companies of the ability to increase revenue and hurts the economy's ability to grow. If it takes hold, that's another hurdle policymakers will have to grapple with as they attempt to end the U.S. and global recessions. Through fiscal and monetary policy, the United States has added a record $12.8 trillion in stimulus and liquidity to the economy and financial system, a policy that economic conservatives have argued will to lead to rising inflation. "Roubini is on the mark" Economist David H. Wang, an economic modeler, agreed with Roubini that those concerns are misguided -- because we have a more serious problem to worry about. Although there are "inflationary forces acting on the economy," Wang said, "the deflationary forces are stronger, currently." "Roubini is on the mark. In the U.S., the housing hangover is the biggest factor because it is a large component of the cost of living. Also, when houses are not bought in large numbers, neither are the goods that go in them, and that has led to downward price pressure on consumer goods," Wang said. "Internationally, we can see a clear overproduction in autos, and this is rippling through other sectors, including commodities like steel, and electrical components. Nine of my ten international industrial variables have deflationary readings, so the bigger danger is deflation, at least through mid-2010." Wang said, ironically, a rising price of oil -- historically the bane of the industrialized world -- could be a savior here, by counteracting deflation pressures. However, although oil burst through $55 per barrel Wednesday on talk of a recession bottom, Wang expects the price to retreat to "well under $45, due to excess supply, taking more cost pressure off prices throughout the system." Once an obscure, little-regarded academic, Roubini rose to prominence in 2008 after he successfully predicted -- two years in advance -- the current global financial crisis and recession. Roubini was the first economist to predict massive mortgage and housing-related losses for U.S. banks, which he originally pegged at $1 trillion; Roubini's most recent estimate now sees those losses totaling $3.6 trillion. Economic Analysis: Inflationary pressures exist, but again, the deflationary pressures are stronger. That is not to say that government spending from the stimulus can't cause "pocket" price surges – such as a rise in local food costs in an area that builds a new U.S. Navy submarine or major alternative energy facility, for example. But nationally the demand is not there, due to high unemployment, and, according to Roubini, international demand is still insufficient to eliminate the surplus of manufactured goods built up during the previous expansion. With both domestic and international demand so light, the contours are in place for a period of weak pressure on prices, which historically has led to low, or, worse yet, negative, inflation.

05-06-2009, 09:24 PM	#2
zippyjuan Picture of the Day Guru Join Date: Oct 2002 Location: Sunny San Diego Posts: 8,756	I don't know about three years of deflation. Companies lower their prices because they want to get rid of excess inventory- they were caught with a lot of it last year- especially around Christmas time. But they have lowered their projections for the future and along with that have pared their production and expenses (mostly labor costs). Unless they have seriously missed their new projections about future sales, I don't think we will see as much price cutting. Consumer spending seems to have flattened out meaning that people are not looking like they are going to tighten spending much more than they already are althought things can certainly change in the future. It is my own opinion (and just that- an opinion) that the deflationary period is coming towards its end. The article mentions falling commodity prices for things like steel and oil. Lower prices on those helps businesses save money on production while maintaining some of their profit margin- reducing the need for them to lower prices further. I also question the $12 trillion in stimulus number. The only way you can get that high is to include all the various assetts the government has pleged to guarantee- they wil only cost $12 trillion if every one of those guarantees goes bad. In actual payouts the real money spent is about one tenth of that (there have been so many numbers tossed out I could not give a firm number on that but it is certainly not $12 trillion). __________________ I add new pictures to my photo gallery pretty regularly. You can see them here if you are interested: http://www.pbase.com/jeffryz Last edited by zippyjuan : 05-06-2009 at 09:31 PM.

05-07-2009, 01:07 PM	#4
johnnymk Chief of Naval Operations Join Date: May 2000 Location: LEVITTOWN< PA> USA Posts: 13,621	Financial Rescue Nears GDP as Pledges Top $12.8 Trillion (Update1) http://www.bloomberg.com/apps/news?p...CA4&refer=home March 31 (Bloomberg) -- The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s. New pledges from the Fed, the Treasury Department and the Federal Deposit Insurance Corp. include $1 trillion for the Public-Private Investment Program, designed to help investors buy distressed loans and other assets from U.S. banks. The money works out to $42,105 for every man, woman and child in the U.S. and 14 times the $899.8 billion of currency in circulation. The nation’s gross domestic product was $14.2 trillion in 2008. President Barack Obama and Treasury Secretary Timothy Geithner met with the chief executives of the nation’s 12 biggest banks on March 27 at the White House to enlist their support to thaw a 20-month freeze in bank lending. “The president and Treasury Secretary Geithner have said they will do what it takes,” Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein said after the meeting. “If it is enough, that will be great. If it is not enough, they will have to do more.” Commitments include a $500 billion line of credit to the FDIC from the government’s coffers that will enable the agency to guarantee as much as $2 trillion worth of debt for participants in the Term Asset-Backed Lending Facility and the Public-Private Investment Program. FDIC Chairman Sheila Bair warned that the insurance fund to protect customer deposits at U.S. banks could dry up because of bank failures. ‘Within an Eyelash’ The combined commitment has increased by 73 percent since November, when Bloomberg first estimated the funding, loans and guarantees at $7.4 trillion. “The comparison to GDP serves the useful purpose of underscoring how extraordinary the efforts have been to stabilize the credit markets,” said Dana Johnson, chief economist for Comerica Bank in Dallas. “Everything the Fed, the FDIC and the Treasury do doesn’t always work out right but back in October we came within an eyelash of having a truly horrible collapse of our financial system, said Johnson, a former Fed senior economist. “They used their creativity to help the worst-case scenario from unfolding and I’m awfully glad they did it.” Federal Reserve officials project the economy will keep shrinking until at least mid-year, which would mark the longest U.S. recession since the Great Depression. The following table details how the Fed and the government have committed the money on behalf of American taxpayers over the past 20 months, according to data compiled by Bloomberg. =========================================================== --- Amounts (Billions)--- Limit Current =========================================================== Total $12,798.14 $4,169.71 ----------------------------------------------------------- Federal Reserve Total $7,765.64 $1,678.71 Primary Credit Discount $110.74 $61.31 Secondary Credit $0.19 $1.00 Primary dealer and others $147.00 $20.18 ABCP Liquidity $152.11 $6.85 AIG Credit $60.00 $43.19 Net Portfolio CP Funding $1,800.00 $241.31 Maiden Lane (Bear Stearns) $29.50 $28.82 Maiden Lane II (AIG) $22.50 $18.54 Maiden Lane III (AIG) $30.00 $24.04 Term Securities Lending $250.00 $88.55 Term Auction Facility $900.00 $468.59 Securities lending overnight $10.00 $4.41 Term Asset-Backed Loan Facility $900.00 $4.71 Currency Swaps/Other Assets $606.00 $377.87 MMIFF $540.00 $0.00 GSE Debt Purchases $600.00 $50.39 GSE Mortgage-Backed Securities $1,000.00 $236.16 Citigroup Bailout Fed Portion $220.40 $0.00 Bank of America Bailout $87.20 $0.00 Commitment to Buy Treasuries $300.00 $7.50 ----------------------------------------------------------- FDIC Total $2,038.50 $357.50 Public-Private Investment* $500.00 0.00 FDIC Liquidity Guarantees $1,400.00 $316.50 GE $126.00 $41.00 Citigroup Bailout FDIC $10.00 $0.00 Bank of America Bailout FDIC $2.50 $0.00 ----------------------------------------------------------- Treasury Total $2,694.00 $1,833.50 TARP $700.00 $599.50 Tax Break for Banks $29.00 $29.00 Stimulus Package (Bush) $168.00 $168.00 Stimulus II (Obama) $787.00 $787.00 Treasury Exchange Stabilization $50.00 $50.00 Student Loan Purchases $60.00 $0.00 Support for Fannie/Freddie $400.00 $200.00 Line of Credit for FDIC* $500.00 $0.00 ----------------------------------------------------------- HUD Total $300.00 $300.00 Hope for Homeowners FHA $300.00 $300.00 ----------------------------------------------------------- he FDIC’s commitment to guarantee lending under the Legacy Loan Program and the Legacy Asset Program includes a $500 billion line of credit from the U.S. Treasury. __________________ “Socialism is a philosophy of failure, the creed of ignorance, and the gospel of envy, its inherent virtue is the equal sharing of misery.” (Winston Churchill)

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05-08-2009, 11:22 PM	#5
zippyjuan Picture of the Day Guru Join Date: Oct 2002 Location: Sunny San Diego Posts: 8,756	Yep- most of it is in pledges and guarantees. Not all the TARP money has been distributed even and some of the monies are loans to be repaid later with interest. Some monies are asset swaps. As for the Fed buying Treasuries, they have not really been buy much so far- they talked about buying long term notes. The Fed has always had some Treasuries as part of their portfolio and if I am reading this chart http://www.federalreserve.gov/releases/h41/Current/ properly currently (as of May 6, 2009)have $560 billion in Treasuries (section 9 on the page linked). They list total assets as about $2 trillion. According to this blog the Fed had $780 billion in September 2007 so their current holdings in T-Notes is down from then by quite a bit. July 2007 (same article) says it was $478 so it is not up that much since then either.

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