Tuesday, July 14, 2009
Inflation, Deflation and "Got You" Prices
A rule of thumb is that inflation doesn't become sticky until the unemployment rate dips below 5%...
"I see very little prospect of accelerating inflation" partly because of the employment outlook, said Mark Zandi, chief economist of Moody's Economy.com. "I don't think the risk shifts toward inflation until 2011, or even 2012."
Because even Obama and Larry Summers think that unemployment will probably rise (and see this), that argues against inflation happening any time soon.
Renowned economist Dr. Lacy Hunt is calling 15-20 years of deflation.
Ellen Brown, Tyler Durden and Mish all argue that the break down in the securitization markets ensures deflation.
And James Perry, Phil's Stock World, and Niels Jensen all give their own arguments about why deflation will rule for some time to come.
On the other hand, a lot of very smart people are predicting runaway inflation given the amount of money the feds are printing. For example, Marc Faber is 100% guaranteeing hyperinflation at some point, but thinks it might not happen for years or even decades.
"Got You" PricesYou know from experience that when you're in a national park, movie theater or some other contained place, prices are higher than elsewhere.
Basically, the stores in such places know you can't go somewhere else, so they can charge you what I call "got you" prices. In other words, you're a captive buyer, and they've "got you".
I've noticed the same thing with health care costs. My family's health care premiums increased 6% last year - on top of the 6% increase the year before.
This is "got you" prices. The health care industry knows that Americans are desperate for health care, and that if they raise prices, people will pay.
I've previously pointed out that inflation versus deflation is not necessarily an all-or-nothing proposition: we can have inflation in some asset classes and deflation in others.
So my current theory is that we will have deflation for some time in most asset classes, but inflation in the "got you" classes of basic necessities that everyone needs - food, energy, and health care.
In a tough economy, companies that can squeeze broke consumers for more money will do so.
See this for more on the great inflation versus deflation debate.
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Yo GW,
ReplyDeleteAn added note on "gotcha" prices. The reason the food counter at the movies is called a "concession stand" is because in the old days, when the theater was owned by private individuals not associated with the studios, they only got a small percentage of the ticket price, known as the "nut." The high prices for candy, popcorn, soda etc. are a "concession" to the owner, so he can turn a profit.
Birds regurgitate food for their fledglings.
ReplyDeleteDeflation and inflation are obsolete terms in this sort of regurgitative-economy.
The government has been regurgitating bailouts for every political action group that stalks the halls of Congress.
We have seen the banking bailout.
We have seen the auto company bailout.
We have seen the UAW bailout.
We have seen the oil industry bailout.
We have seen mortgage industry bailout.
We have seen the road construction industry bailout.
We have seen the insurance industry bailout.
We are being prepped for the medical industry bailout and the education industry bailout.
Vomiting money neither equates to inflation or deflation.
Vomiting money on queue in a recession to placate political action groups equates to vast opportunities for political corruption.
It defines the abject failure of the notion that an elected government can do anything more than vomit money.
I'm coming up short here somewhere.
Oh, yes, the wars...
The wars will not stop either, because the war lobby needs its own seemingly continuous stream of vomit.
The lesson is, -economic progress ain't what it's portrayed to be, because no matter who it is that's selling their ideas of economic progress, they really are just selling vomit.
The terms inflation/deflation are often misused.
ReplyDeleteRegardless ... what is evident is that we are in a period of declining living standards. The basics seem more expensive because we are poorer.
Sure,the blatant corruption of Government directing Trillions from Main St to Wall St does ensure we sink even faster, so does the burden of our never ending wars.... however our situation originated about 30 years ago.
We didn't learn from the Vietnam War, didn't learn from the first round of Oil shortages in the '70s. Instead the U.S. began a borrowing/spending/bubble orgy that is now unwinding in a huge way.
This will likely take many years to run it's course and not to be a pesimus, but it's probable the U.S. will never regain its former position economically.
Does anybody see any demand out there. The classic definition of inflation "TOO MUCH MONEY CHASING TOO FEW GOODS" Does not apply to the US I am looking at today. There is no demand and there certainly isn't an excess of money in the hands of the working stiffs. The people that have the money are sitting on it because they now have even scared theirselves.
ReplyDelete