Friday, October 16, 2009

Taipan Daily: Inflation or Deflation, What'll It Be?

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Friday, October 16, 2009
Taipan Daily: Inflation or Deflation, What'll It Be?
by Justice Litle, Editorial Director, Taipan Publishing Group

In terms of trying to figure out “what’s next” – or, more plainly, what’s going on here and now – a few sharp-eyed readers have noticed two historical comparisons popping up time and time again in these pages.

The first comparison is to the 1970s. The second is to post-1980s Japan. In a recent missive, we managed to fit both in at the same time.

Of course, there is a big difference between the two. If we are headed back to the disco era, that’s inflationary. If the West has instead contracted “Japanese disease,” that would argue for the opposite experience.

So which is it? Inflation or deflation?

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For Now, Both

It’s a hard question to answer, because for now the answer is both. How can this be so? Because the powers that be have set it up this way.

We’ve long known that Washington is basically owned by Wall Street. The most recent bit of confirming news has to do with Turbo Timmy Geithner over at U.S. Treasury.

“Geithner aids reaped millions working for banks, hedge funds,” Bloomberg reports. “Some of Treasury Secretary Timothy Geithner’s closest aides, none of whom faced Senate confirmation, earned millions of dollars a year working for Goldman Sachs Group Inc., Citigroup Inc. and other Wall Street firms...”

Yawn. Big surprise – what does this have to do with the inflation/deflation question?

Simple. It just underscores how well entrenched “the plan” is. “The plan,” as far as it goes, is to use government cash and pumped-up paper schemes to funnel profits into the pockets of Wall Street, while turning a blind eye to the deflationary forces ravaging Main Street.

Wall Street Versus Main Street

Recent events show the contrast plain as day. “Wall Street On Track to Award Record Pay,” the WSJ reports. “Major U.S. banks and securities firms are on pace to pay their employees about $140 billion this year – a record high that shows compensation is rebounding despite regulatory scrutiny of Wall Street's pay culture.”

There’s your inflation right there. After nearly bringing down the global economy, Wall Street is awarding itself with a massive paycheck – courtesy of you and me. J.P. Morgan and Goldman Sachs, the crème de la crème of connected megabanks, reported blockbuster earnings this week to boot.

It’s all about sleight of hand. If you think of the hundreds of billions to trillions in government stimulus as a giant river of cash, Wall Street has done a masterful job of diverting that river away from the heartland (where it was supposedly directed) and into its own pockets. This isn’t hard to do when guys like Tim Geithner and Larry Summers are your front men.

Main Street, meanwhile, is in the grip of a deep deflationary vice, even as paper assets and raw materials go nuts.

Consider this frank acknowledgement from the J.P. Morgan earnings call: “we believe you are [going to see] several hundred additional smaller regional based banks go – you know, not make it...”

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While the top players are literally stronger than ever as a result of the government’s largesse, those same players openly acknowledge that the little guys are crawling through a desert landscape. And dying of thirst.

Half As Alternative to None

In ironic juxtaposition to the news of Wall Street’s bonus bonanza, The New York Times ran a telling piece this week titled “Still on the Job, but at Half the Pay.”

The gist of the piece is that, in addition to the millions of Americans unemployed, and the millions of “discouraged” unemployed on top of that, many Americans with full-time jobs are taking voluntary pay cuts, sometimes massive ones, in lieu of being issued a pink slip. The NYT tells the story of family man Bryan Lawlor, who accepted a demotion and a 50% cut in pay, to $34,000 a year, in order to keep his job as a commercial airline pilot.

Downward pressure on wages, along with reduced working hours and lost jobs, counts as a massive deflationary force.

China also has a hand in America’s downward wage pressures. The dragon has used its half-trillion-dollar stimulus package and aggressive bank lending mandates to keep the export machine humming along as briskly as possible. This, in turn, has led to cost cuts and price wars in multiple countries (including the United States). This translates to more hourly cutbacks and lost jobs.

An interesting difference between China, Japan and the United States is the emphasis placed on employment. Japan has historically been willing to move heaven and earth to maintain high levels of employment. China, too, is laser-focused on keeping up employment at the expense of profits. Meanwhile, Washington doesn’t give a damn about employment (except in theory) and Wall Street actually celebrates earnings “beats” brought about through wrenching cost cuts. Guess who loses in this scenario?

Paper Assets Up, Real Economy Down

So, again, the reason the “inflation or deflation” question is hard to answer is because right now we are seeing both.

As we have discussed at length in these pages, the current market rally is very much stimulus driven, with bad news ignored or swept under the rug as banks play the “extend and pretend” game as long as they can.

What’s more, the ability of Wall Street to hold almost complete sway over Washington has resulted in a mass diversion effort, wherein the benefits of government stimulus and rampant credit creation have almost all flowed to a cadre of connected players. Small businesses continue to suffer as consumers retrench and regional banks refuse to lend (or find themselves unable to lend). In money and credit terms, we have a few pockets of lush oasis surrounded by arid desert landscape.

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Musical Chairs

And as for the future? In your editor’s humble opinion, we won’t have a true bead on the inflation-versus-deflation question until the current mini-mania comes to an end.

As long as Main Street continues on in dazed complacency, pretending things are okay (or even getting better) when they are actually getting worse, Wall Street will keep playing the game of diverting taxpayer-funded capital flows to its own ends, bidding up paper assets and enriching itself with Washington’s blessing.

The longer this game goes on, the more bizarre the situation will get. Picture an accelerating trend of bank and business failures even as the price of food and gasoline soars to new heights. Think vast numbers of Americans with shrinking pay and depleted savings, wondering how the hell the CPI can register “no inflation” when their cost of living has skyrocketed (even as local business has gotten worse).

At some point a light bulb will switch on – if not in the heads of Americans, then perhaps in the heads of America’s foreign investors who are gamely footing much of this tab. When this moment of clarity arrives, it will be a bit like a game of musical chairs... whoever is left without a chair will be forced to sell in a panic.

Next week we’ll talk a little more about possible resolutions to the current situation.

But for now, note that this time, “both” isn’t the typical two-handed economist’s answer to the inflation versus deflation question. We really are experiencing both simultaneously – at the expense of Main Street, by the design of Wall Street, via the conduit of Washington.

Warm Regards,


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