Economist Joseph T. Salerno, Phd addresses the concept of deflation, and the myth surrounding the concerns related to it.
Author: Wolf Richter
Date: Nov 24, 2020
A pandemic of house price inflation.
House prices jumped 7.0% across the US, according to the Case-Shiller Home Price Index released today. Other indices have indicated similar price surges. House prices are going nuts despite a terrible economy. They’re being fired up by low interest rates, $3 trillion in liquidity that the Fed threw at the markets, fear of inflation that drives people into hard assets, work-from-home that causes people to look for a larger place, the urge to-buy-now before putting the current home on the market, and a shift from rental apartments and condos in high-rise buildings to single-family houses. And condos, as we’ll see in a moment, are not universally hot.
Los Angeles House Prices:
House prices in the Los Angeles metro in September jumped by 1.3% from August and by 7.7% from September last year. They’re now 12.9% above the peak of the totally crazy Housing Bubble 1, have nearly doubled (+93%) since early 2012, and having more than tripled since January 2000 (+209%):
The Case-Shiller index was set at 100 for January 2000 across all 20 cities it covers. Today’s index value for Los Angeles of 309 means that house prices have surged 209% since January 2000. This makes Los Angeles the most splendid housing bubble on this list.
For Los Angeles, the Case-Shiller Index provides sub-indices for condos, and for high-, mid-, and low-tier segments of houses. In the low-tier segment (black line) – where people can least afford price increases – prices shot up 10.2% from September last year, having nearly quadrupled since January 2000 (+280%). During Housing Bubble 1, the low-tier surged the most, and during the Housing Bust, it plunged the most, -56% from peak to trough. High-tier prices (green line) have risen 7.6% year-over-year and are up 186% from January 2000:
The Case-Shiller Home Price Index avoids some of the distortions inherent in median-price and average-price indices because it is based on “sales pairs,” comparing the sales price of a house that sold in the current month to the price of the same house when it sold previously, and it does so going back decades. Today’s release for “September” is a rolling three-month average of closings that were entered into public records in July, August, and September. So that’s the timeframe we’re looking at.
San Diego House Prices:
The Case-Shiller Index for the San Diego metro jumped 1.8% in September from August and was up 9.5% from a year ago:
This is “House-Price Inflation”: Loss of purchasing power of the dollar.
Because the Case-Shiller Index compares the sales price of a house in the current month to the price of the same house when it sold previously, it tracks how many dollars it takes over time to buy the same house. In other words, it measures the purchasing power of the dollar with regards to houses. This makes the Case-Shiller Index a measure of “house-price inflation.” And that’s all this really is – the loss of purchasing power of the dollar with regards to houses.
San Francisco Bay Area:
House prices in the five-county San Francisco Bay Area – the counties of San Francisco, San Mateo (northern part of Silicon Valley), Alameda and Contra Costa (East Bay), and Marin (North Bay) – rose 1% in September from August and 6.0% from a year ago. The index has more than doubled since 2012 and nearly tripled since 2000:
But condo prices in the five-county Bay Area fell for the fourth month in a row and are down 2.3% from a year ago, and are back where they’d first been in March 2018. Condo prices in San Francisco itself have fallen much further amid a historic all-time record condo glut, with the median price down 12.8% year-over-year. But the Case-Shiller Index covers a vast area around the Bay, including those where San Francisco refugees are moving to, and some of them are seeing rising condo prices:
Read the rest of the article here: https://wolfstreet.com/2020/11/24/the-most-splendid-housing-bubbles-in-america-november-update/
Author: Daniel Lacalle, Phd
Central banks continue to be obsessed with inflation. Current monetary policy is like the behavior of a reckless driver running at two hundred miles per hour, looking at the rearview mirror and thinking, “We have not crashed yet, let’s accelerate.”
Central banks believe that there is no risk in current monetary policy based on two wrong ideas: 1) that there is no inflation, according to them, and 2) that benefits outstrip risks.
The idea that there is no inflation is untrue. There is plenty inflation in the goods and services that consumers really demand and use. Official CPI (consumer price index) is artificially kept low by oil, tourism, and technology, disguising rises in healthcare, rent and housing, education, insurance, and fresh food that are significantly higher than nominal wages and the official CPI indicate. Furthermore, in countries with aggressive taxation of energy, the negative impact on CPI of oil and gas prices is not seen at all in consumers’ real electricity and gas bills.
A recent study by Alberto Cavallo shows how official inflation is not reflecting the changes in consumption patterns and concludes that real inflation is more than double the official level in the covid-19-era average basket and also, according to an article by James Mackintosh in the Wall Street Journal, prices are rising to up to three times the rate of official CPI for things people need in the pandemic, even if the overall inflation number remains subdued. Official statistics assume a basket that comes down due to replicable goods and services that we purchase from time to time. As such, technology, hospitality, and leisure prices fall, but things we acquire on a daily basis and that we cannot simply stop buying are rising much faster than nominal and real wages.
Central banks will often say that these price increases are not due to monetary policy but market forces. However, it is precisely monetary policy that strains market forces by pushing rates lower and money supply higher. Monetary policy makes it harder for the least privileged to live day by day and increasingly difficult for the middle class to save and purchase assets that rise due to expansionary monetary policies, such as houses and bonds.
Inflation may not show up on news headlines, but consumers feel it. The general public has seen a constant increase in the price of education, healthcare, insurance, and utility services in a period where central banks felt obliged to “combat deflation”…a deflationary risk that no consumer has seen, least of all the lower and middle classes.
It is not a coincidence that the European Central Bank constantly worries about low inflation while protests on the rising cost of living spread all around the eurozone. Official inflation measures are simply not reflecting the difficulties and loss of purchasing power of salaries and savings of the middle class.
Therefore inflationary policies do create a double risk. First, a dramatic increase in inequality as the poor are left behind by the asset price increases and wealth effect but feel the rise in core goods and services more than anyone. Second, because it is untrue that salaries will increase alongside inflation. We have seen real wages stagnate due to poor productivity growth and overcapacity while unemployment rates were low, keeping wages significantly below the rise of essential services.
Central banks should also be concerned about the rising dependence of bond and equity markets on the next liquidity injection and rate cut. If I were the chairperson of a central bank I would be truly concerned if markets reacted aggressively on my announcements. It would be a worrying signal of codependence and risk of bubbles. When sovereign states with massive deficits and weakening finances have the lowest bond yields in history it is not a success of the central bank, it is a failure.
Inflation is not a social policy. It disproportionately benefits the first recipient of newly created money, government and asset-heavy sectors, and harms the purchasing power of salaries and savings of the low and middle class. “Expansionary” monetary policy is a massive transfer of wealth from savers to borrowers. Furthermore, these evident negative side effects are not solved by the so-called quantitative easing for the people. A bad monetary policy is not solved by a worse one. Injecting liquidity directly to finance government entitlement programs and spending is the recipe for stagnation and poverty. It is not a coincidence that those that have implemented the recommendations of modern monetary policy wholeheartedly, Argentina, Turkey, Iran, Venezuela, and others, have seen increases in poverty, weaker growth, worse real wages and destruction of the currency.
Believing that prices must rise at any cost because, if not, consumers may postpone their purchasing decisions is generally ridiculous in the vast majority of purchasing decisions. It is blatantly false in a pandemic crisis. The fact that prices are rising in a pandemic crisis is not a success, it is a miserable failure and hurts every consumer who has seen revenues collapse by 10 or 20 percent.
Central banks need to start thinking about the negative consequences of the massive bond bubble they have created and the rising cost of living for the low and middle classes before it is too late. Many will say that it will never happen, but acting on that belief is exactly the same as the example I gave at the beginning of the article: “We haven´t crashed yet, let´s accelerate.” Reckless and dangerous.
Inflation is not a social policy. It is daylight robbery.
The US Dollar Index has lost 10 percent from its March highs and many press comments have started to speculate about the likely collapse of the US dollar as world reserve currency due to this weakness.
These wild speculations need to be debunked.
The US dollar year-to-date (August 2020) has strengthened relative to 96 out of 146 currencies in the Bloomberg universe. In fact, the US Fed Trade-Weighted Broad Dollar Index has strengthened by 2.3 percent in the same period, according to data compiled by Bloomberg.
The speculation about countries abandoning the US dollar as the reserve currency is easily denied. The Bank of International Settlements reports in its June 2020 report that global dollar-denominated debt is at a decade high. In fact, dollar-denominated debt issuances year-to-date from emerging markets have reached a new record.
China’s dollar-denominated debt has risen as well in 2020. Since 2015, it has increased 35 percent while foreign exchange reserves fell 10 percent.
The US Dollar Index (DXY) shows that the United States currency has only really weakened relative to the yen and the euro, and this is based on optimistic expectations of European and Japanese economic recovery. The Federal Reserve’s dovish announcements may be seen as a cause of the dollar decline, but the evidence shows that the European Central Bank (ECB) and the Bank of Japan (BOJ) conduct much more aggressive policies than the US while economic recovery stalls. Recent purchasing manager index (PMI) declines have shown that hopes of a rapid recovery in Europe and Japan are widely exaggerated, and the Daily Activity Index published by Bloomberg confirms it. Furthermore, at the end of August, the balance sheet of the ECB stood at more than 54 percent of the eurozone GDP and the BOJ’s at 123 percent versus the Federal Reserve’s 33 percent.
What we have witnessed between March and August has just been a move back from an overbought exposure to the DXY index due to the severity of the crisis, with investors increasing positions in safe havens in February and March, only to reverse as markets and the economy recovered.
The lesson most governments should learn is that economies do not become more competitive or deliver stronger growth and exports with a weak currency. Emerging markets have shown in the past years how a weak currency does not help, and the eurozone has had a weak euro versus the US dollar for years just as its economy delivered disappointing growth.
The reason why the US dollar’s world reserve currency status is not at risk is simple: there are no contenders. The euro has redenomination risk, and the constant political and economic concerns about the union’s solvency weaken the currency, as historical performance has shown. It tends to strengthen relative to the US dollar when investors place unjustified hopes on the eurozone growth only to weaken afterward, when poor growth adds to an overly aggressive ECB policy, with negative rates and massive money supply growth. The yuan cannot become a world reserve currency if the country maintains capital controls and concerns about legal and investor security remain. The Chinese central bank (PBOC) is also extremely aggressive for a currency that is only used in 4 percent of global transactions according to the Bank of International Settlements.
We are living a period of unprecedented financial repression and monetary expansion. The US Dollar reserve status grows in these periods where countries ignore real demand for their domestic currency and decide to copy the Federal Reserve policies without understanding the global demand for their currency. When the tide turns, most central banks find themselves with poor reserves and lower demand for domestic currency risk, and the position of the US dollar as reserve currency strengthens.
This is not a year of US Dollar weakness or the end of its supremacy as reserve currency, what we are witnessing is a generalized fiat currency debasement through extreme monetary policy. That is the reason why gold and silver continue to rise despite hopes of an economic recovery that seems to be stalling. The US Dollar will likely remain the most demanded fiat currency, but the excessive monetary stimulus will ultimately damage the confidence in most fiat currencies.
Daniel Lacalle, PhD, economist and fund manager, is the author of the bestselling books Freedom or Equality (2020), Escape from the Central Bank Trap (2017), The Energy World Is Flat (2015), and Life in the Financial Markets (2014).
He is a professor of global economy at IE Business School in Madrid.
By Claudio Grass
It doesn’t require too dark an imagination to realize the gravity of the concerns over the digital yuan. China is a true pioneer when it comes to surveillance, censorship, and political oppression, and the digital age has given the state an incredibly efficient and effective arsenal. Adding money to that toolkit was a move that was planned for many years and it is abundantly clear how useful a tool it can be for any totalitarian regime. The ability to track citizens’ transactions, access their financial data, control and freeze the account of anyone that presents a potential threat, it all opens the door to the ultimate oppression: total control over private resources, over people’s livelihoods and their capacity to cover their basic needs.
But we don’t even have to wait for the first signs of abuse of the system. As part of the government’s COVID relief spending packages, digital vouchers were loaded to Chinese citizens’ smartphones to encourage them to spend in their local stores. According to Dr. Shirley Yu, visiting fellow at the London School of Economics: “Digital coupons allow the Chinese government to trace the usage of these coupons,” and they “allow the government to know which sector is most helped, who uses it and where money is actually spent.” Of course, if the government has access to data that allows them to check if their policies were well transmitted and if the money was spent as they intended, they can also use that data to check and trace any transactions for any other purpose.
Xu Yuan, a senior researcher with Peking University’s Digital Finance Research Centre, highlighted the regulatory benefits of making all cashflow in society traceable. “In theory, following the launch of the digital yuan, there will be no transaction that regulatory authorities will not be able to see – cash flows will be completely traceable,” Xu said in an interview. Of course, this thought is scary enough on its own, but it becomes infinitely more terrifying when those who control the system have a very long track record of abuse and blatant disregard for basic rights and liberties.
Read the rest here…
The Graph featured here shows the break out of the various debt holdings on the Fed’s balance sheet, over a specific time interval of 2004 to the present. It clearly shows a growing trend of the accumulation of assets. How did it grow so quickly during this time period? The Fed buys up the assets from the banks, as the banks receive cash from the Fed. Note: The third party dealers broker the transaction.
This has been the primary tactic for the various Quantitative Easing(QE) programs since the market correction of 2008. The balance sheet gives some indication of how much money was been introduced into the money supply, and just imagine how the fractional reserve factor has impacted the actual balance of loanable funds for the banks.
Inflation…inflation and inflation. $4.5 trillion and rising.
Since the outbreak of this “virus”, emergency measures, by The Federal Reserve(The Fed), have been implemented. One of those measures has been The Federal Reserve dropping interest rates to 0%.(Read more of this on my other blog articles) Other measures have been on going prior to this “pandemic”—these measures are accelerating thanks to the “virus”.
Let’s look at the graph of the growth trend Federal Reserve’s balance sheet. Assets, on the Fed’s balance sheet, have skyrocketed for the year 2020, overtaking the Repo activity done by the Fed from September 2019 to December 2019(On the graph it is indicated as QE-4). Although they did not officially call this “Quantitative Easing”, the net result was the same: Liquidity was restored for banks, while the Fed purchased the illiquid bank’s assets—this was done printing money from nothing. Looking at this chart, it is quite evident that the current Fed balance sheet is well over $4.67 trillion dollars and rising. This has surpassed the prior peak of circa 4.5 trillion during the zenith of QE-3.
Critics will claim: “Well there isn’t any inflation. See the Consumer Price Index.” This claim is non sense. By definition, inflation is a monetary phenomenon, as it is the expansion of the monetary base. It’s quite clear the monetary base as been expanded exponentially. The “price” inflation impacts the capital markets first, as seen by the equities market and other capital markets. (Note: The term “Price” inflation is simply used to recognize rising prices, as its separate from actual inflation) The recent market crash is evident of this, based upon the constant build up of the prior QE measures. Also, if there were no “price” inflation, why the need for the bailout of the banks with sub prime auto debt on the books?
With regards to sub prime auto loans, Car prices have risen—not necessarily due to the increase of the economic cost to make a car(I would argue it’s declined), but the value of the currency to actually purchase the vehicle has declined. This makes it difficult for the average citizen to purchase the vehicle, as the price seems out of reach. This is due to his wages not keeping pace with the rising prices(declining currency value). Sub prime lending bridges the gap, and many individuals can acquire a new vehicle. However, due to the nature of the sub prime market, the default rate is high—leading to bank illiquidity. Due to the increase of sub prime auto loan defaults, this creates a ripple effect on the secondary market—where institutional investors purchase large packages of these loans—causing the aforementioned QE action by the Fed. Yes, there is inflation.
A growing Fed balance sheet is a harbinger for inflation. The Fed simply doesn’t print cash, it buys assets with cash, that action expands the money supply. The transaction—that buys the assets—is done with a third party dealer, and that dealer deposits the check in their bank. The deposit expands the money supply thanks to fractional reserve banking deposit factor, Also, where does the Fed obtain the cash to buy the assets? Answer: It creates it out of thin air.
Oh and speaking of the dealers, here is a listing, per the New York Fed:
These entities handle the monies for the asset purchases between the Fed and the Fed chartered banks. Once the monies are deposited, the money supply is expanded.
The intrepid zeal to “fix” the issue is in play with the Fed especially during a time of crisis. Will these “fixes” “help” boost the economy?
Read more regarding this topic here:
In an effort to “boost” the economy, the Fed has dropped interest rates to 0%. What does this mean? With regards to the fundamentals of interest rate theory, the overall aggregate time preference of marginal utility is based upon purchasing items in the present versus the future. In short, the rationale behind this interest rate drop is to encourage spending and boost consumption. There are some glaring flaws with this tactic.
First of all, the notion of the interest rate is subjective to each individual in the economy: How does the Fed actually know what the utility ranking for each individual in the marketplace? They may aggregate numbers, and run various statistical models to attempt to determine the true interest rate, however, this process still will come up short. Unless the members at the Fed are demigods, there is no way of accurately determining the rate. This causes mis allocation of resources starting in the capital markets.
Secondly, it debases the monetary base. Since the rate is at 0%, the goal is to push for consumption in the present. The need to spend money now due to the “cheap” money will deliver more lending into the marketplace. Since the interest is technically a “price”, the Fed price fixing it at 0% makes for a false expansion of the money supply. The asset prices will rise(like a balloon), at the cost of those who can not afford to acquire those goods(assets) at the inflated prices. Note: The prices rise, not due to Price inflation per se, but due to the devalued monetary base. It takes more monetary units to buy that particular item, as that is reflected in higher prices for that item.
If many are concerned about the growing inequality between “classes”, the analysis should start here with monetary policy. As the Fed continues to expand the money supply and grow its balance sheet, look for a growing trend of more sub prime lending to help the lower income classes to acquire goods. This class will not be able to catch up with the rising prices, since their income is fixed.
It was supposed to usher in a market crisis that would prompt the Fed to launch QE4 according to repo guru Zoltan Pozsar. In the end, the preemptive liquidity tsunami unleashed by the Fed in mid-December which backstopped just shy of $500 billion in liquidity, proved enough to keep any latent repo market crisis at bay.
The year’s final overnight repo operation, which the Fed expanded to as much as $150 billion ended up being just 17% subscribed, as Dealers submitted only $25.6 billion in securities ($15.2BN in TSYs, $2BN in Agencies, $8.35BN in MBS) in the year, and decade’s, final overnight repo meant to bridge the financial system’s short-term funding needs into 2020.
Stock market booms are often based on a “good” story or a narrative of better things to come. Excess liquidity usually provides the fuel for bull market runs, as fundamentals of growth and profits usually don’t play a major role, at least not initially.
In the past 5 years, the S&P 500 stock index has risen over 50% and during that period operating profits for non-financial companies have declined over 15%, a drop that has always been associated with economic recessions.