Friday, January 16, 2009

CPI Understates Deflation; or, Requiem for a Heavyweight?

The Bureau of Labor Statistics has released the CPI data today.

The annualized rate of prices for the last three months is a negative 12.7%. This is Great Depression-level deflation.

This report understates current deflation because of the following:

"Continuing decreases in the indexes for lodging away from home, airline fare, and new and used motor vehicles, along with downturns in the indexes for apparel and recreation, offset increases in other indexes including rent and owners' equivalent rent, medical care, and education." (emphasis added)

Housing is NOT making a positive contribution to the cost of living. It is making an important negative contribution. Even if we understand and agree that the Government goes out of its way to make matters look less inflationary than they really are, I think that we can agree that currently there is no price increase almost anywhere that can "stick" except whatever is imposed by law or regulation.

The markets "get it" and are taking stock prices down, especially the financials, the latest rally of which has vanished. I suspect that a lot of Governmental and Fed officials have been talking to the Swedes about their nationalization of their banking system in the early 1990s following a real estate bubble. We appear to remain in the teeth of the economic storm.

While what is happening in economics and finance is disastrous, the continuity vibes coming out of the incoming Administration do not encourage me. In my opinion, Mr. Obama needs to bring into his Administration and amongst his advisers those who foresaw that the TARP bailout was hastily and wrongly designed. The complaints about its implementation ring hollow when the complaints come from those who crafted and fought for the legislation. Mr. Obama and his people need to come out hard in favor of equity and not debt. This is not an issue du jour but rather the key to long-term economic recovery. If he does not embrace this issue, the Republicans might do so and unexpectedly gain the edge in what could the most important economic theme of the next supercycle (though it takes time to build such a movement). The productive capacity of the U.S. is unimpaired; the cost of imported goods is plummeting; the people are eager to work; there are no major state enemies; Al Qaeda is on the run and its financial backers are going broke.

Therefore these can be the best of times, and soon. However if the new Administration persists on the failed long-term path of a debt-based economy rather than a true ownership society, not the Bush version that was based on debt (we know Obama will fight for a "fair" society as well), Econblog Review predicts that the best it is going to do is patch the aging fighter up to survive to fight another round or two.

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