We are quite impressed with the intensity of the inflationary obsession among the generality of economists, Wall Street "sages," financial market commentators, and "informed opinion," as refracted via the general media. We would note, passim, that there is one very notable institution ABSENT from the persisting inflationary fixation. That institution is the Federal Reserve. It would appear that the FED has finally taken the point, albeit very, very late in the game.
Up until very recently, when the gravity of the crisis in the banking system finally began to achieve at least a portion of the recognition it demands, the inflationary obsession focussed on fears of excessive growth (ha,ha), surging commodity prices, the seemingly endless upward march of oil prices, deficit spending, the trillion dollar war, etc etc. Today, the bulwarks of the inflation-phobic opinion-makers have shifted: now the focus is on the alleged "inflationary" impact of a FED-inspired reflation via very low interest rates and a forthcoming flood of liquidity (which, if truth be told, we have YET TO SEE). Additionally, there is mucho concern that fiscal stimulus and -- horror of horrors, relief for the besieged mortgagee class -- will produce the DEMON INFLATION!
These alarums find expression in pervasive "investment recommendations" urging abandonment of Treasuries (for those who have had the wit to seek refuge in same as the risk of a deflationary tsunami ratchets up). Indeed, it is these very same gurus who ignored the investment significance of the yield curve inversion, maintaining their hostility to long-dated Treasuries and insisting upon the need to keep maturities short -- REAL SHORT -- who have now changed the verbiage of their continuing antagonism to long-dated Treasuries. In plain English, these gurus missed entirely the strong rally at the long end of the Treasury market, and consigned their "advisees" to the fate of having to roll over their short-term Treasury securities or other short-term paper at lower and lower rates of interest. Since many of these sages have been doing this since the secular decline in interest rates began more than a quarter of a century ago, we are hardly surprised.
The clue to the future trend of prices, we think, inheres in the near-virtual absence of the word: DEFLATION. Indeed, we would not expect this hated term to come into wide "currency" (please excuse the pun) UNTIL deflation actually comes crashing down upon us.
We wish to submit the following proposition re. deflation: The deflation of a major asset class inevitably spills over into the general price level and the direction of prices, overall. When the collapsing asset class is HOUSES and REAL ESTATE -- which constitute the core of the exaggerated "nest egg" of the ordinary American in a 401K (i.e., PENSIONLESS) world, we are looking at a prospective deflationary wave unlike anything we have seen since the 1930s. We infer this via a methodology called: COMMON SENSE. If Mr. and Mrs. American consumer can no longer spend money, because they cannot spend money they can no longer borrow (having LONG AGO run out of spendable income or "savings"), they WILL NOT SPEND. If Mr. and Mrs. American consumer do not spend, retailers, wholesalers, distributors, exporters, manufacturers, bankers, etc etc will experience DECLINING BUSINESS, declining margins, and declining (or evaporating) profits. Their options then will be: cut prices, cut costs, cut wages, or go bankrupt. If this is not deflation, we would appreciate someone telling us what is.
