Disinflation starting again?

[jon]

The numbers are leading some to already say that prices have peaked and thus we have seen the apex of inflation. Bill Gross says the 10 year treasury is going to hold 3% to 4.5% for the next five years; that is anything but inflationary. Indeed, there is talk of disinflation once more, the phenomenon the economy saw in the 1990’s even as economic growth spurted. This is not deflation where asset values decline, but prices of goods not rising even as demand remains solid. Healthy growth without inflation; that is precisely what happened in the 1980’s when the Regan tax cuts and deregulation took the chains off the economy and reawakened investment in the US. Capital was unlocked by the billions from tax shelters designed to protect money. When that hit the economy the 20 year boom started.

During that time interest rates started their decline. They fell all through the mid to late 1980’s but then started to rise in the mid-1990’s following the Bush 1 and Clinton tax hikes. As the deficit turned to surplus, interest rates hit their highest levels since the end of the early 1980’s recession. That flies in the face of the Robert Ruben theories about deficits ‘crowding out’ private investment by driving up interest rates. History shows precisely the opposite happened, i.e., interest rates rose and the economy started to suffer. Combine that with the Fed rate hikes and you had a market collapse and economic recession.

You never hear the mainstream report why this occurs, particularly those who prefer higher taxes and government spending to lower taxes that keep the money and thus the investment decisions in private hands. What happens is this: when tax rates are too high they take too much money from the economy. When there is a surplus that is only indicative that the government is taking way too much money from the economy. That is real money taken out of your pocket and your business’ pocket, not the government’s deficit money that it basically prints at the Treasury. The government took that money out of circulation and used it to pay down the funny money it created. Good money used to replace funny money.

That made money more expensive because there was less money in the system because it reduced the money the real world, the small business world, uses to finance new business. Interest rates rose even though prices overall were still in a disinflation mode. That was unsustainable, and as stated, when the Fed took aim at the stock market and dried up the rest of the money supply, the combination crashed the market, forecasting the economic recession that was to come.

As I have been stating, this cycle is trying to start again. The disinflation is not a bad thing at all. It is very good for the stock market. The problem is the Fed hiking rates and draining money supply into a slowdown and disinflation. The Fed has a problem recognizing prosperity founded in tax cuts and less regulation as opposed to economic surges in periods of higher taxes, high regulation, and high interest rates. In short, it looks at every economic period through the Phillips Curve prism even though that theory only worked for about 6 years in the entire history of economics. At this point in our understanding of economic history, you would think that the Fed and certain members of Congress would start to realize that the Phillips Curve was the rare exception and not the rule in economics. All economics textbooks from the late 1970’s and early 1980’s should be burned or at least taken out of the hands of the Fed members and some in Congress.

I was very concerned about inflation sparking in this recovery. It was starting as demand was leading supply. Then the soft patch had more impact on demand than I thought and it appears that supply and demand are evening out a bit. It still is not there, and supply still needs to get stronger to avoid any real inflation growth. The recent signs are positive, however, and if we can get over this demand bubble and let supply catch up, the expansion could extend further even with a normal slowdown in this 2.5 to 3 year range in the recovery. In other words, it would be normal for an expansion to slow some 3 years from its start, but if supply and demand are roughly at equilibrium, that would allow the expansion to continue just as it did in the 1980’s and 1990’s after it hit slow spots.

[VJW]

Originally Posted by jon

Healthy growth without inflation; that is precisely what happened in the 1980’s

Uh, inflation during Reagan's two terms was close to ONE AND A HALF TIMES what it was during Clinton's two terms, and the average real GDP was LOWER during Reagan's two terms than during Clinton's two terms.

when the Regan tax cuts and deregulation took the chains off the economy and reawakened investment in the US.

Corporate profits during President Clinton's two terms were nearly THREE TIMES the corporate profits during Reagan's two terms.

When that hit the economy the 20 year boom started.

What "boom" ?

Once again, the 'Standard of Living' of the vast overwhelming majority of American workers went backwards by close to 20% during the 12 years of Reagan/Bush.

During that time interest rates started their decline. They fell all through the mid to late 1980’s but then started to rise in the mid-1990’s following the Bush 1 and Clinton tax hikes. As the deficit turned to surplus, interest rates hit their highest levels since the end of the early 1980’s recession. That flies in the face of the Robert Ruben theories about deficits ‘crowding out’ private investment by driving up interest rates. History shows precisely the opposite happened, i.e., interest rates rose and the economy started to suffer.

NO, "history shows" that interest rates were lower at the end of Clinton's terms than they were at the end of Reagan's terms. Specifically, the Prime Rate [in 'Percent per Annum'] was 9.23% in 2000 and 9.32% in 1988. More importantly, the average Prime Rate during Clinton's two terms was 8.04%, whereas the average Prime Rate during Reagan's two terms was 11.54%.

Ruben was correct, you are wrong.

The Fed has a problem recognizing prosperity founded in tax cuts and less regulation

Because it's never happened. "Tax cuts and less regulation" have only ever produced the opposite of prosperity.

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