Posted by Michael A. Kamperman on August 31, 2009
Is Japan the canary in the coal mine? On Sunday the Japanese elections swept out the ruling LDP, who has held power since 1955. The consensus opinion is the voters are not embracing the message of the winning Democratic Party; the voters are embracing trying something else…anything else. Such change swept many ruling governments from power in the 1930’s. In the U.S. FDR seized power. In Germany it was Adolph Hitler. While in no way am I suggesting a Nazi regime is waiting in the wings, I am suggesting change is waiting in the wings. Such is the price of a debt-induced inflationary depression on the current leaders. The people know things are not going in the right direction. However, most of the people don’t know what change of direction things should be going in. They only believe it is better to try the devil they don’t know rather than keep the devil they know. The next major industrialized nation up for potential electoral change is Germany. Right now the polls believe Chancellor Angela Merkel’s ruling coalition will prevail. But this expectation has been thrown into doubt by the gains made in elections over the weekend by leftist parties. Like the policy proposals that swept Japan, the left leaning Free Democrats in Germany are the only major party to run on cutting taxes and the federal government bureaucracy. And in both Japan and Germany this platform gained votes. The economic crisis is causing social upheaval to sweep the globe, and it is prevalent in the U.S.
In the U.S. in 2007 less than 1 in 12 Americans were on food stamps. Now the number has risen to 1 in 9. In the middle of 2007 about 1 in 100 Americans with prime mortgages were 30 days delinquent. Today, the number of Americans with prime mortgages that are 30 days delinquent, or more, is approaching 1 in 10. Such devastating personal financial tragedies have consequences. In democracies these consequences are expressed at the ballot box. The economic uncertainty in the U.S. has spilled over at Town Hall meetings held by members of the House and the Senate across the U.S. What is specifically troubling is how easily the depressed and confused electorate can be drawn to ideas that are frankly dangerous to the economic health of the U.S. For example, my own Congressman Chet Edwards held a health care Town Hall meeting in Waco this weekend. Three times questioners suggested we would be better off eliminating Social Security, Medicare, and Medicaid. What panics me is not that an individual in a crowd of over a thousand would stand up and say this. What panics me is the individuals who expressed these viewpoints received standing ovations from large segments of the audience.
In no way would the U.S. be better off eliminating these programs. In fact, during times of debt-induced deflationary depressions the federal government would be wise to expand these programs. But a false fixation on balancing the budget and having fiscal discipline in times of economic crisis risk throwing the U.S. and the world into a new depression greater than the Great Depression. I hope President Obama is paying attention to the economic pain the country is feeling. If not, he will certainly go down in history as President Herbert Hoover II.
Posted by Michael A. Kamperman on August 28, 2009
Japan just reported unemployment in the country has risen to 5.7%. While this is low by our standards, it represents a post World War II high for the Japanese economy. Additionally, Japan also reported that their core CPI for the last 12 months was -2.2%, which is also a post World War II low for deflation. It is widely expected that the Japanese people will vote out the ruling Liberal Democratic Party and change leadership. The Democratic Party of Japan is led by Yukio Hatoyama, who will become the Prime Minister should his party win. Mr. Hatoyama is promising to not raise taxes, cut wasteful government spending, and reign in the bureaucracy. Basically, Mr. Hatoyama wants Japan to revitalize its consumers to generate internal demand. He envisions Japan’s economy being less dependent on exports to the U.S. This is great news for Japan and for the world economy if the Democratic Party wins and Mr. Hatoyama is successful in implementing his vision. Japan will have a much healthier economy if it strengthens internal demand and is less dependent on exports. The people of Japan are voting to make their economy function more like the economy functions in the U.S.
Ironically, the let them eat cake leadership in Washington is looking to go in the opposite direction. The Obama Administration has decided to adopt the economic strategies of the very soon to be thrown out Liberal Democratic Party. Rather than fix the broken credit markets so that consumers and business can have easier access to credit, President Obama’s economic team has chosen to have Zombie banks that make loans only to the most credit worthy borrowers while leaving most others left out in the cold. Furthermore, rather than looking to stimulate internal consumer demand as the key solution to our economic woes, the Obama team is preaching a strategy of higher savings for U.S. consumers and more of a reliance on an export driven economy. Never mind that the Obama economists have yet to answer the crucial question export to whom?
The Obama Administration needs to take their cue from the Democratic Party in Japan. Empower the consumer and focus on an economy primarily dependent on internal demand rather than exports. To do this the Obama administration will need to get serious about fixing the broken credit markets. Unemployment will keep rising and deflation will keep going lower until the average U.S. consumer can obtain a loan to buy a new car or a home. Right now if your credit score is under 700 it is very difficult to obtain a loan. Many people cannot obtain loans that still have jobs and have credit scores over 700. Over half of the country has a credit score under 690. How can we sell all of the houses we need to sell when we have a supply of single family homes for 70% of our population and only about 40% of our population can qualify for a mortgage right now? To demonstrate the fallacy of the Zombie bank policy now over 9% of prime mortgages are 30 days delinquent, which is way above the normal average of 2%. Prime mortgages are made to people with good credit scores above 700. But a bunch of these people have lost their jobs because we no longer build houses or cars for the average American. Japan has learned that the traditional U.S. economic model is the best one available. So why are we trying to abandon it to develop a production based export economy?
Posted by Michael A. Kamperman on August 26, 2009
The media has hyped the recent GDP data out of France, Germany, and Japan and has declared their economies emerged out of recession in the second quarter and returned to growth. In July which is the start of the third quarter, Japan’s exports fell 1.3% from June. Exports in July fell 36.5% from year earlier levels and imports fell 40.8%. Should we really declare an export dependent economy exporting less than 2/3 of what they exported the year before as out of recession and growing? How weak is domestic demand in Japan if imports have fallen 40.8%? In July exports from Japan to the U.S. fell 39.5%. Now how is the U.S. economy on the verge of recovery if our imports from Japan are down nearly 40%? The clear answer is both Japan and the U.S. are still mired in a deflationary depression. If a V-shaped recovery is on the way, then it must have started in August because it certainly didn’t start in July.
But what really caught my eye from Japan’s report was that Japanese exports to China dropped 26.5% from a year earlier. Many economists expect China to play a major part in pulling the world out of the global economic crisis. These analysts point to China’s 7.9% growth rate in the second quarter as a sign their stimulus plan is working. I’m sorry, but an economy that is truly growing 7.9% per year does not have a 26.5% drop in imports from one of its largest trading partners. While China is not doing as badly as Japan or the U.S., in many ways the numbers out of China are more disturbing. China initiated an aggressive stimulus plan that is the largest in the world as a percentage of GDP. China’s stimulus plan has been front-end loaded, whereas the dysfunctional U.S. plan has been back-end loaded. China has also opened the lending spigot. Whereas total lending from U.S. banks has been negative the last few months, China’s banks have increased their loans by over one trillion dollars already this year. Shouldn’t China be showing growing imports based on all of the stimulus spending and lending in their economy?
China calculates their GDP data based on production and not on final demand. As long as products are produced they are counted in the GDP data even if they are simply placed in a warehouse for storage. The drop in imports is indicative of declining demand in China. Most likely China has been over-producing relative to real demand to maintain its growth rates. If this is so, then China will not need to increase production when real demand returns. If demand doesn’t return, then China has placed itself in a position whereby it will need to sharply curtail production. Perhaps the lack or internal demand in China is the reason China’s electricity consumption is down. It also explains the reason the Chinese economy is now experiencing deflation. In the Great Depression there was a sharp leg down in the economy, followed by a temporary flattening period, followed by a second sharp leg down in the economy. Another leg down in the global economy could originate with a loss of faith that China can actually pull itself out of the global deflationary depression, no less the rest of us.
Posted by Michael A. Kamperman on August 23, 2009
Christina Romer, the chairperson of President Obama’s Council of Economic Advisers, says “Deficits do matter.” “No one believes that more than the president.” First we lost the Fed this week and now we lose the President. For those wondering how to interpret these comments let me translate. Ms. Romer is saying the President cares more about satisfying the bond vigilantes in China and on Wall Street than he does about whether or not the average American keeps their job or their home. First the Fed thinks keeping Zombie Banks that don’t go under, but don’t lend either, will eventually work even though it didn’t work in Japan. Now the President is assuring the balanced budget hawks the federal government is prepared to either raise taxes or slash spending in the middle of the greatest downturn since The Great Depression. Perhaps he can channel the ghosts of Herbert Hoover and FDR to find out that if they had a chance to do it all over again the last thing they would have done is worry about the deficits until the economy was strong enough to stand on its own. We are still hemorrhaging jobs and we have significant deflation. Washington needs a real stimulus plan, needs to fix the broken credit markets, and needs to print a lot more money. But it is obvious that this will not be happening anytime soon. Hence, the “Great Unraveling” will continue unabated.
The “Great Unraveling” is simply the process of the economic dominoes falling into each other one by one. A person loses their job, loses their home, and quits spending money at the local clothing store and restaurant. The local clothing store and restaurant go out of business and the owners default on their mortgages. These dominoes will continue to fall into each other until something stops them. In the Great Depression the domino stopper was World War II. In the Panic of 1873 the domino stopper was time. In the Japanese Lost Decade the dominos have not stopped falling into each other even though their crisis started 20 years ago. Do you know a family member or close friend without a job? Is there a home in your neighborhood that is vacant? Do you see local businesses closing their doors? These are the economic dominos that represent the “Great Unraveling.” That is what a debt-induced deflationary depression is all about. Those trapped in post World War II inflationary boom bust cycle thinking erroneously believe that the dominos will reverse on their on. They won’t.
Consider that we will enter September with more people unemployed than at anytime since the crisis began. Consider that we will enter September with more people delinquent on their mortgages than at time since the crisis began. Consider that those that lost their homes already and those that have been out of work for more than a year are not counted in these statistics. Consider that state and local governments enter September with lower spending levels and higher taxes than they entered last September. Consider that most for profit and non-profit institutions enter September with small budgets than they entered last September. We enter September weaker, not stronger. The consumer has shown no signs of opening their wallet, except for those with clunkers to unload. Homebuyers are scarce, except for first time homebuyers taking advantage of the $8,000 tax credit. To balance the budget the federal government has to end the few kernels of stimulus spending that have actually been working. However, I would like to suggest a budget cut that will have overwhelming bipartisan support amongst the American people. Until the unemployment rate is back under 8% as promised, let the President, every senior member of his Administration, and every member of Congress take a 50% pay-cut. We need to see an end to the “let them eat cake” policies Washington is sending us.
Posted by Michael A. Kamperman on August 21, 2009
Over 1 in 8 mortgages in America are now 30 days or more past due. The Mortgage Bankers Association has reported that 13.2% of all mortgages are more than 30 days past due, which means people owe two or more payments. So who are these people? Mainly they are parents with children who are still living at home who are not wealthy. While exact data is not available, it is reasonable to assume that perhaps up to 1 in 5 families with children living at home and classified as lower to upper middle class are delinquent on their mortgage. How is this possible if only 1 in 8 people are delinquent on their mortgages? Well, currently about 66% of all households own a single family home. About 83% of married couples own a home. Most of the truly poor people in America do not own a home, although recently some did. Many of the non-poor married couples who do not own a home consist of those recently married for the first time still renting and those near the end of life who are living in assisted living situations. Most of the others are so mobile they do not purchase a home, or they live in natural rent areas like New York City. Basically, it is the dream of most middle class married couples to purchase a home. The data that 1 in 8 mortgages are delinquent is for all mortgages, whether they were made last month or 29 years and 11 months ago. The vast majority of mortgages owed by people who have been in their homes for 15 or more years are not delinquent. Most of the married couples who have been in their homes for 15 or more years have seen their children grow up, move out, and in some cases move back in. Basically, the vast majority of troubled mortgages are to people who have been in their homes for less than 15 years. Most middle class families with children living at home have been in their homes for less than 15 years.
Yet middle class families with children are not only reeling from significant price depreciation on their properties. They are also reeling from suffering a disproportionate blow from the unemployment crisis. Most employers that have laid off workers have based their decisions on seniority. Therefore, job losses are much higher amongst people in their 20’s and 30’s than it is for those in their 40’s and 50’s on average. So the crisis is not only most acute amongst families with all ages of children living at home, but especially amongst families with younger children.
Sadly, Washington seems oblivious to the crisis. Today Ben Bernanke, who was our last and best hope to give the economy the jolt it so desperately needs, predicted the economy would soon return to growth. Apparently Fed Chair Bernanke is too focused on Wall Street and not nearly focused enough on Main Street. How will a world economy that is dependent on the spending patterns of U.S. households with children return to growth when 1 in 5 of these households are struggling to hold on? What kind of consumer confidence can exist in middle class families not affected by the crisis when all of them know a close personal friend or family member that has lost their job? At this point we are back to President Obama, who desperately wants to be re-elected in 2012, as our last best hope. If I were him I would refinance every existing mortgage in America at 4% without an appraisal, a credit check, a new title policy, or a verification of income. And for those people that are delinquent I would simply add the delinquent payments to the mortgage balance and give them a chance to start over. All of the money for existing mortgages is already out the door and in one way or another the American taxpayer is already on the hook for over 80% of all mortgages. We don’t need change we can believe in, we need leadership we can believe in.
Posted by Michael A. Kamperman on August 20, 2009
Many economists are predicting positive growth for the U.S. economy in the third quarter of this year. Others are saying the recession has already ended and the economy is now recovering. The weekly jobless claims report is indicating those believing the economy is in a state of recovery are clinging to faith, not facts. The latest weekly jobless claims number rose to 576,000 and the 4 week moving average is back up to 570,000. This means the economy is still shedding jobs. Some economic commentators are claiming that as soon as the weekly jobless claims fall below 500,000 the economy will start creating jobs. We are so used to seeing horrible numbers that we now think really bad numbers are good. Weekly jobless claims in the high 400,000 range will still mean the economy is losing jobs, just less slowly than it is now. For perspective, consider that the peak in weekly jobless claims in the recession in the early 1990’s topped out at 509,000 in March of 1991, the only week reported at over 500,000. Yet the unemployment rate rose from 5.2% in May of 1990 to 7.8% in June of 1992. Unemployment rose 2.6% over a 2 ½ year period at a time when weekly jobless claims were averaging over 130,000 less than they have in the month of August. In the recession of the early 2000’s, weekly jobless claims reached a peak of 517,000 in September of 2001, and averaged over 140,000 less than the month of August. Again, the unemployment rate rose by over 2.4% in a 2/12 year period from 3.9% to 6.3%.
The jobs picture in the month of August is much worse than it was during any month in the previous two recessions. All we are witnessing is a slower rate of decline, not growth. The positive GDP reports out of France, Germany, and Japan for the second quarter of 2009 were based on declining imports boosting the “net exports” calculation. If other large economies are buying less rather than more how can growth resume around the globe? The answer is it cannot. As long as credit is tight the job losses will continue.
What we need is a strong focus from Washington on a program that will create jobs. It doesn’t make sense to debate whether tax cuts or stimulus spending is the best method. What we need to debate is the current stimulus plan is not working. It is not creating jobs; it is not saving nearly enough jobs. It is better to be weaving down the road in the right direction than to be heading in the wrong direction. Right now Washington is asleep at the wheel and needs to wake-up. While it is true that economic growth precedes job growth, it is not true that economic growth occurs when job losses are still mounting. History says weekly jobless claims that are averaging 570,000 are a strong indicator we are still losing a substantial amount of jobs.
Posted by Michael A. Kamperman on August 19, 2009
In today’s New York Times, Warren Buffet wrote an Op-Ed saying that the federal budget deficit was too high in relation to the country’s economy and is unsustainable. He made an excellent point that the world is only in a position to naturally invest about $900 billion per year in U.S. Treasuries from a combination of growing U.S. savings and growing foreign reserve surpluses from our key trading partners. He said that the $1.8 trillion annual budget deficit is twice as much as the readily available capital to finance the debt. He then warns about the dangers of printing money to cover the deficit claiming it will kick off high rates of inflation and says the U.S. doesn’t want to risk becoming a banana republic. He states we risk collapsing the currency if we print too much money, or if we allow our debt to GDP ratio to continue to rapidly climb beyond the 56% ratio it is expected to reach by the end of the year. Warren concedes Japan and Italy have much higher debt to GDP ratios than the U.S. does, but we dare not test the upper limit.
The only problem with Warren’s quaint editorial is the facts do not support his fears. If President Obama follows Buffet’s advice he will plunge the world into economic Armageddon. What will happen to the economy if the federal government stops spending money? Gone will be extended unemployment benefits and support for Medicaid payments to the states. Gone will be much of the defense budget at a time we are fighting on two fronts. Or, gone will be Medicare and Social Security. If we continue to borrow our debt to GDP ratio will grow, as will our interest payments on the debt. But Italy and France have a debt to GDP ratio of over 100%. Germany’s is over 80%. Japan has a debt to GDP ratio of over 200% and has been printing money for years. The British pound has rallied 20% against other currencies in the last 6 months and Britain is printing more money compared to its GDP than any country in the world other than Zimbabwe. Britain also has a debt to GDP ratio over 100%. Yet these are the currencies Mr. Buffet fears the world will flee to. These facts were not part of Mr. Buffet’s Op-Ed.
Compare Mr Buffet’s position with that of Bank of England Governor Mervyn King, who is the equivalent of our Fed Chairman Ben Bernanke. It was just revealed that the normally hawkish Governor King wanted to increase the last round of quantitative easing in Britain by 75 million pounds, rather than by the 50 million pounds the board voted for. The only other times Governor King was voted down he wanted to raise rates more than the committee in both 2005 and 2007. So the question in my mind is what has turned the usually hawkish Governor King in the world’s most dovish central banker? I have a feeling he knows where the bodies are buried and he sees the deflationary spiral the world has entered. One of these men is seeking to lead the world down the wrong economic path. The worshippers of the god of inflation can worship at Mr. Buffet’s altar all they want. But I’m following the path of Governor King. Deflation is the global threat and it is gaining a foot-hold in all of the major economies of the world. In a world without wage pressures, declining demand, and massive excess capacity in every industry, those seeing inflation are seeing a mirage.
Posted by Michael A. Kamperman on August 18, 2009
Many describe the state of our current economic malaise as The Great Recession. Others have used more dire terms like The Second Great Depression, The New Great Depression, or The Great Depression 2.0. But these labels are simply attempts to measure the severity of the global economic collapse to compare it to past economic crisis. Since the economy has not yet recovered, no one can say with certainty how deep the global economic contraction will ultimately be. It is no secret I am firmly in the New Great Depression camp. But I have been thinking we need a new term that describes what the economy is going through, rather than one that just measures how low we ultimately go. Therefore, I am coining the phrase “The Great Unraveling” to describe the economic calamity we are living through. By understanding what we are experiencing it can help people calculate on their own how much further we may have to fall before we reach bottom. The misnomer The Great Recession has many analysts getting out their charts of previous recessions in attempts to predict when this so called recession will end. However, what we are experiencing is not similar to any of the post World War II inflationary era recessions.
“The Great Unraveling” is a term that describes the process the global economy is now working through. This process will continue until it has run its course and the untangling and unraveling of a global economy that has relied on too much debt is completed. Excessive mortgage lending in the U.S and most of the rest of the developed world led to a significant rise in real estate prices. For example, pedestrian 1,000 square foot apartments in New York (Manhattan), London, Paris, and Tokyo started selling for over $1 million and 2,000 square foot 30 year old ranch houses in Southern California that were not near the beach began selling for over $500,000, despite the fact the houses were located in middle class neighborhoods. When there weren’t enough legitimate borrowers left to keep the bubble going, the standards for mortgage lending fell all the way to outright fraud with no money down loans for the purchase of these properties given to unemployed people with bad credit. When the credit rating agencies stamped over 90% of pools of these loans AAA they killed the shadow banking system that supplied almost 75% of the nations credit needs. Hence, our economy is left without the ability to use the house as an ATM machine. The economy will continue to contract as long as the consumer is forced to restore their balance sheet and their access to credit remains tight. We are living through the greatest unwinding of a bubble since the Dutch Tulip bubble. Most of the imbalances of the global economy will be brought back into balance before economic growth resumes.
Proof that debt is still unwinding came from a recent federal government report that loan balances at the 22 largest recipients of TARP funds fell by $45 billion in the month of June. The money supply is still contracting. It took 20 years after the oft forgotten debt induced Panic of 1873 for the global economies to resume strong growth in the 1890’s. It took the start of World War II to catapult the global economies out of the Great Depression of the 1930’s 10 years after it began. If we continue to adopt the Washington strategy of watchful waiting it could take 10 to 20 years before the debt induced deflationary depression we have entered finishes unraveling on its own. It could take longer and civil society could begin to come apart at the seams in the interim. I remain an advocate of shock and awe quantitative easing to stop the otherwise inevitable Great debt Unraveling in its tracks.
Posted by Michael A. Kamperman on August 13, 2009
Don’t ask me because I don’t know the answer. For many years now the U.S. consumer has been the source of final demand and has driven the global economy forward. Because of the collapse of available consumer credit, the U.S. consumer has reigned in their spending as evidenced by today’s disappointing retail sales report. Why some were surprised that rising unemployment and restricted access to credit led to lower retail sales is the real mystery. They explain the aberration in their mind away by guessing that since 200,000 people purchased a clunker in the last week of July that caused 300,000,000 people to close their wallets for the whole month. Who are these people that get passed off to us as experts? Today it was also reported that the Euro-zone economy contracted less than expected and that France and Germany actually had a small amount of positive economic growth in the second quarter. But this growth came from the calculations of modern alchemists known as economists. Because imports dropped faster than exports fell in both countries, the alchemists claim they are now growing. Countries with declining imports are buying less from others because they have weak economies. In no way are they positioned to drive global growth going forward. Many will claim China is prepared to drive global growth forward. China’s has a production oriented economy that is dependent on selling goods to the West. The West is buying less and less. China calculates its economic growth based on production and not based on final demand. So if China builds something nobody wants and sticks it in a warehouse they claim positive growth. If China has such a strong economy why are their imports falling too?
My concerted opinion remains that the key to restoring global economic growth relies heavily on reviving the spendthrift U.S. consumer. With excess debt levels and deflation prevalent in the U.S. and the rest of the world, the only way to restore the U.S. consumer is for the Fed to pursue a much more aggressive policy of quantitative easing. A step they failed to take at yesterday’s meeting. According to the economic data the U.S. economy was still declining in July. The predictions that the recession has ended by some alchemists and the consensus of the alchemists that the U.S. will see positive economic growth in the second half of 2009 looks to be in jeopardy right now. The problem is these alchemists continue to talk about how long past post World War II recessions lasted and base their forecasts on the false assumption that we remain in the inflationary growth economy that defined the first 62 years of the post-war period. Those days ended in August of 2007 and we have returned to a debt-induced deflationary depression.
Fortunately, the Fed with at least three blind mice as voting members did not signal an end to further shots of quantitative easing despite wide spread media reports to the contrary. What the timid Fed did was they punted the ball to the next meeting to make a final decision. Hopefully they can open their eyes and see the economic truth between now and then.
Posted by Michael A. Kamperman on August 11, 2009
The Federal Reserve has a dual mandate; economic growth and price stability. There can be little question that the economy would benefit if the Federal Reserve increased its program of quantitative easing (printing money) at tomorrow’s meeting. But what the markets and the media are missing is that the Federal Reserve needs to print more money to maintain price stability. Price stability requires limiting the amount of inflation or deflation that impacts the purchasing power of a dollar for a domestic U.S. consumer. This should not be confused with whether the value of the dollar is rising or falling versus other currencies like the euro, the pound, or the yen. Printing money to maintain price stability will seem counter-intuitive to most observers of the markets and the economy. The knee-jerk response is usually that if the Fed prints more money we will eventually have hyper-inflation. The Federal Reserve needs to ignore the voices of ignorance at tomorrow’s meeting and follow the lead of the Bank of England and print more money, and lots of it. The reason is the U.S. economy is experiencing levels of deflation that are approaching the levels of deflation last seen in the early 1930’s during the Great Depression. Most people have missed this fact due to the use of owners’ equivalent rent in the CPI index, which dramatically understates the decline in home prices in the U.S.
The official CPI numbers state that prices fell 1.4% in the last 12 months in the U.S. The CPI currently uses owners’ equivalent rent to calculate the price of home ownership. Owner’s equivalent rent accounts for over 23% of the CPI Index. In the last 12 months this calculation has risen 1.9% and has contributed a positive .4% to annual CPI. Say WHAT? That’s right; the official CPI statistics calculate that it is more expensive to purchase a home today than it was 12 months ago in the U.S. An alternative measure of home prices is the Case/Shiller index. This index has fallen over 17% in the last 12 months and much more accurately captures the trend of the costs of purchasing a home for a U.S. consumer. If the CPI used changes in home prices in the CPI index rather than owners’ equivalent rents, then the positive .4% housing contributed to CPI in the last 12 months would actually have been a negative detraction of approximately 3.9%. This means the real rate of deflation in the U.S. over the last 12 months is 5.7%, not 1.4%. If our CPI were reported as minus 5.7% over the last 12 months, then Washington would be much more concerned about deflation.
From 1929 to 1933 the U.S. economy experienced mid single digit deflation for 4 years in a row. But the official CPI Index in the 1930’s used home prices to calculate the cost of purchasing a home for a consumer, not owner’s equivalent rent. The federal government changed the calculation for the cost of homeownership in the CPI Index in January of 1983. We will find out tomorrow if the Fed understands that deflation over the last 12 months is tracking the levels of deflation of the Great Depression. If they get it they will surprise the markets and increase the level of their quantitative easing program. If they don’t get it, then they will stand pat. The Obama Administration has already checked out on further assistance to the economy in the near term. Mr. Bernanke is our last and best hope to battle the economic crisis. My objective in detailing this is not to be value added by helping people understand and interpret the statistics they are looking at. My objective is to give all Americans a wake-up call and say we are facing a New Great Depression and we need to insist Washington takes action.
