Stiglitz: "Deflation is Definitely a Threat Right Now" → Washingtons Blog
Stiglitz: "Deflation is Definitely a Threat Right Now" - Washingtons Blog

Friday, October 2, 2009

Stiglitz: "Deflation is Definitely a Threat Right Now"

On September 22, I wrote a lengthy summary of arguments for deflation. 5 weeks later, there's a lot to add.

Nobel prize winning economist Joseph Stiglitz says:

Deflation is definitely a threat right now.

Alan Greenspan said on September 30th:

We are still, by any measure, in a disinflationary environment.

And the President of the Chicago Federal Reserve Bank, Charles Evans, said on September 9th:

Disinflationary winds are blowing with gale-force effect.

Flattening Yield Curve Points Toward Deflation

PIMCO's Bill Gross said:

There has been significant flattening on the long end of the curve,” Gross said in an interview from Newport Beach, California, with Bloomberg Radio. “This reflects the re- emergence of deflationary fears. The U.S. is at the center of de-levering as opposed to accelerating growth.

Gluskin Sheff's David Rosenberg, Tyler Durden and Mish also believe that a flattening yield curve indicates deflation.

Bloomberg notes:

The difference in yield between nominal and inflation-protected Treasury securities maturing in one year is negative 0.4 percent, suggesting investors expect deflation during the next 12 months.


Job losses are accelerating.

JPMorgan Chase’s Chief Economist Bruce Kasman told Bloomberg:

[We've had a] permanent destruction of hundreds of thousands of jobs in industries from housing to finance.

A new report from Advance Realty and Rutgers - America’s New Post-Recession Employment Arithmetic - argues that we will not have a full recovery in unemployment until until 2017, and that:

• The Great 2007–2009 recession is the worst employment setback in the United States since the Great Depression.

• In the twenty months from December 2007 (the start of the recession) to August 2009 (the last month of available data as of this analysis), the nation lost more than 7.0 million private-sector jobs.

• The recession followed a very much-below-normal economic expansion (November 2001–December 2007) that was characterized by relatively weak private-sector employment growth of approximately 1 million jobs per year.

• This was less than one-half of the job-growth gains of the two preceding expansions (1982–1990 and 1991–2001), when average annual private-sector employment grew by 2.4 million jobs per year and 2.2 million jobs per year, respectively.

• In the preceding two expansions combined, private-sector employment growth per year was approximately 435,000 jobs higher than the annual growth in the number of people in the labor force.employment deficit.

• The weak economic expansion sandwiched between two recessions (2001, and 2007–2009) produced a lost employment decade.

• As of August 2009, the nation had 1.3 million (1,256,000) fewer private- sector jobs than in December 1999. This is the first time since the Great Depression of the 1930s that America will have an absolute loss of jobs over the course of a decade.

• From 1980-2000, the US gained a 35.5 million private-sector jobs. During the current decade, America has lost more than 1.7 million private-sector jobs.

• Total “employment deficit” could approach 9.4 million private-sector jobs by December 2009.

New jobs aren't being created.

Even Larry Summers says unemployment will remain 'unacceptably high' for years.

The New York Times points out that U.S. job seekers exceed openings by record ratio.

2 out of 5 Californians out of work.

Almost half of 16-24 year olds are unemployed.

Credit Still Constrained

US credit has shrunk at Great Depression rate prompting fears of double-dip recession:

Professor Tim Congdon from International Monetary Research said US bank loans have fallen at an annual pace of almost 14pc in the three months to August (from $7,147bn to $6,886bn).

"There has been nothing like this in the USA since the 1930s," he said. "The rapid destruction of money balances is madness."

The M3 "broad" money supply, watched as an early warning signal for the economy a year or so later, has been falling at a 5pc annual rate.

Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an "epic" 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc...

US banks are cutting lending by around 1pc a month. A similar process is occurring in the eurozone, where private sector credit has been contracting and M3 has been flat for almost a year.

The Independent notes:

A second credit squeeze and a £200bn national "funding gap" threatens to sabotage the recovery in the British economy, the IMF warned yesterday.

In its latest Global Financial Stability Report, the fund said that a combination of a soaring government deficit and the borrowing needs of British companies and consumers – coupled with a still broken banking system – would leave the UK with a national "funding gap" of 15 per cent of GDP, or around £200bn next year, much higher than in either the US or the euro area.


Moody's forecasts that housing won't return to pre-bust levels until 2020, "Florida and California will only regain their pre-bust peak in the early 2030s"

Treasury says millions more foreclosures are coming.

Fannie Mae's serious delinquency rate is skyrocketing.

Half of all borrower who are getting help with loan modifications end up redefaulting.

And apartment rental prices are falling world-wide.


The creation of small businesses is way down.

Experts are projecting unprecedented corporate defaults.

Ghost fleets of unused ships lie rusting in port.


State tax revenues have plunged 17%.

More Signs of Deflation

Bloomberg writes:
The U.S. faces the possibility of deflation for the first time since the Eisenhower administration...

Consumer prices are experiencing deflation, with the consumer price index sliding for six straight months from year- earlier levels, the longest stretch of declines since a 12-month drop from September 1954 to August 1955, according to the Labor Department...

While the economy contracted 2.7 percent during the 1953 recession, it shrank 3.8 percent in the current recession, the most since the 1930s. Economists at New York-based JPMorgan Chase & Co. and Goldman Sachs Group Inc., the second- and fifth- biggest U.S. banks by assets, say there’s so much deflationary excess labor and plant capacity in the economy that the Fed won’t raise interest rates until at least 2011.

Paul Krugman writes:

A new report from the International Monetary Fund shows that the kind of recession we’ve had, a recession caused by a financial crisis, often leads to long-term damage to a country’s growth prospects. “The path of output tends to be depressed substantially and persistently following banking crises.”

The U.S. Census Bureau reports that 40 million Americans are living in poverty.

Albert Edwards makes the case for balance sheet-based deflation, arguing that - even as the government tries to inflate its way out of all its problems and printing trillion in new treasuries - it is unable to catch up with the non-governmental balance sheet collapse:

The US Federal Reserve recently published their comprehensive flow of funds data for the US. This showed that the household sector continued to pay down debt for the fourth consecutive quarter. Corporates also started to pay down debt sharply in Q2 at a similar $200bn pace. The non-financial private sector paid down debt at a $435bn pace in Q2. This compares to a $2,116bn pace of expansion in 2007 (see chart below). Add to that the financial sector unwind and the total private sector is unwinding debt faster than the government is able to pile it up (hence the red line is still negative)! The lesson from the balance sheet recession in Japan is that the massive private sector headwind to growth has a long, long way to run.

If that is the case, we can expect, just like Japan, frequent relapses back into recession. The market now understands how an end of inventory de-stocking can boost GDP, i.e. it is the change in the change that matters. Similarly as Dylan Grice points out - link, it is the change in the fiscal deficit that is a net stimulus or drag to GDP. A massive 6pp stimulus last year is likely to turn into a 2pp drag on growth next year (see chart below). With continued private sector de-leveraging likely next year and beyond, how can one seriously not expect the global economy to relapse back into recession next year taking nominal GDP deep into an abyss?

AP writes:

As in the 1980s, much of that shift will be driven by baby boomers. For the 78 million people born from 1946 through 1964, the Great Recession hit at a particularly inopportune time – during peak years of earning and saving before retirement. Boomers range from 44 to 63 today – the youngest is nearly 10 years older than the oldest was in 1982. They are running out of time and are most likely to remain cautious spenders and become aggressive savers even as the economy improves.

The housing bubble mistakenly led boomers and millions of others to believe their home was their retirement nest egg. If they left their home equity alone during the boom, they've taken a hit the last couple years but are still ahead. But many treated their home like a personal bank and spent the gains by tapping a home equity line of credit.

Alix Partners finds:

While American industry is struggling to get through what could become the worst recession since the Great Depression, Americans say that even after the recession ends, their spending will return to just 86% of pre-recession levels, which would take a trillion dollars per year out of the U.S. economy for years to come. According to this in-depth survey of more than 5,000 people, Americans plan to save (and therefore not spend) an astounding 14% of their total earnings post-recession, with the replenishment of their 401(k) and other retirement savings leading the way among their biggest long-term concern.

As Huffington Post notes:
"There will be a fundamental shift in the kind of cars we buy, a fundamental shift in the homes we buy, and a fundamental shift in consumption generally," says Matt Murray, an economist at the University of Tennessee. "And that is not something that took place in the 1980s."


  1. I would like an explanation of how a majority of working families could be paying down debt and saving money when 50% of the household are making 50 K or less.

  2. I think it is called filing for bankruptcy. But there are other means GT. One of them is ceasing to buy crap. $50K has become a tight living standard (I'm old enough to remember if you made $30K you had made it, as in on Wall Street or something), but there are new forces at work. Eat at home one more time a week. For a family of 4, eating out is at least a $40 to $50 venture minimum. You can watch the super market deals on meat and other items and have steak for 4 at home for $20 and eat something else for $10 or less. Annual savings if you take the low end? $1500 a year. Take a sack lunch instead of eat lunch out. Cost about $1.50 to $2 a sack as opposed to $7 to $10. Times 3 (kids eat 1/2 adults) $8 as opposed to $21 to $30. Times 5, savings ia $65 a week at a minimum times 50 is $3250. So in merely changing how you eat a minimum amount, a $50K household has saved 10% of its income.

    Next, you drive a cheaper car. Wear cheaper clothes. Wait til next year to buy something you would have bought this year. Don't go to the movies.

    I have been broke before. A friend of mine who was on disability and I lived on $2000 a month and both of us smoked at the time. Rent and utilities was $900 of it and phones and cable was another $180. When you are in that shape, you can eat very easily on $35 a week, trust me. That is a per diem if you are eating out.

    Maybe you get an idea who is going to get hit. Housing has a long ways to go down. I would guess if this trend continues, utilities are going to come down and phones are going to get cheaper. Cars are going to be less lavish and used ones are going to go longer. In fact, I think cars are made to go 200K miles with minimum trouble now, so 15 year old cars won't be that uncommon. There are still a lot of extra cars in the US.

    The result is a $50K household might drop its expenditures 20% by just changing how they are consuming.

  3. Wash, I want to say your blog is one of the best kept secrets on the web. ZeroHedge has found it. Based on the number of comments, I can see it is still underviewed. I have it on my links. You always have good stuff.

  4. Amazing there have been 2 major deflations created in the US over the past 95 years and Wall Street finance and the Federal Reserve created both of them. These inflations are always fun, but kind of like doing euphoric drugs are getting drunk, there is always the hangover. The solutions being attempted now are the same as not coming down or staying drunk. This can go on for years. The country and the world should be looking at how to survive deflation (survive a hangover)and get it over with instead of how to avoid it. The answer to avoiding it was to not do what was done in the 1990's. Since the tech bubble broke, what we have been doing is akin to getting drunk all over again and in the process have now destroyed the housing market, inflated China and destroyed real household net worth. Now we face bankrupting our governments. The next shoe to drop will be the deflation of China.

  5. With all these experts making "new" predictions
    what reason is there to consider them any more valid than previous ones? It seems that the recession is soon to give way to depression.

    Talk about which letter it resembles will become moot as folks focus on basics. One bright side to the above is that we will finally be rid of the armchair speculator.

  6. There's a movement to radically change California government, by getting rid of career politicians and chopping their salaries in half. A group known as Citizens for California Reform wants to make the California legislature a part time time job, just like it was until 1966.


→ Thank you for contributing to the conversation by commenting. We try to read all of the comments (but don't always have the time).

→ If you write a long comment, please use paragraph breaks. Otherwise, no one will read it. Many people still won't read it, so shorter is usually better (but it's your choice).

→ The following types of comments will be deleted if we happen to see them:

-- Comments that criticize any class of people as a whole, especially when based on an attribute they don't have control over

-- Comments that explicitly call for violence

→ Because we do not read all of the comments, I am not responsible for any unlawful or distasteful comments.