Tag Archives: economics

YOU WORRY ME!

CharityMy Comments: I’m very conflicted by current events in the Middle East. On one hand I’m a dove, sick and tired of the hatred and death and tribal motivations of the people involved. It also reinforces my discomfort about religion since the conflict always seems to be driven by a false belief that “my God is better than your God!”. What a crock of hoooey.

I joined this world in 1941, at a time when another evil became manifest, thanks to a certain Adolph Hitler and his band of merry men. If ever there was an ideology that was cancerous and needed to be excised before it left the barn, that was it. We did eventually, but it took millions of lives and countless treasure.

ISIS is the 21st century equivalent of that cancer. Left alone, it will metastasize and and while I don’t expect it to bring Western civilization to its knees as it believes, it will be a pain the ass, to put it mildly. So somehow this ideology has to be stopped. And I’m inclined to think it will be better to make the effort sooner rather than later, and worry about the consequences after the fact. It cannot be allowed to grow.

These following comments come from someone who expresses the entire issue in well paced words. And while today is a holiday for some, Labor Day, if you have time read his words and make a comment. Thanks.

By Captain John Maniscalco, American Airlines Pilot

I’ve been trying to say this since 911, but you worry me. I wish you didn’t. I wish when I walked down the streets of this country that I love, that your colour and culture still blended with the beautiful human landscape we enjoy in this country. But you don’t blend in anymore. I notice you, and it worries me.

I notice you because I can’t help it anymore. People from your homelands, professing to be Muslims, have been attacking and killing my fellow citizens and our friends for more than 20 years now. I don’t fully understand their grievances and hate, but I know that nothing can justify the inhumanity of their attacks.

On September 11, ARAB-MUSLIMS hijacked four jetliners in my country. They cut the throats of women in front of children and brutally stabbed to death others. They took control of those planes and crashed them into buildings, killing thousands of proud fathers, loving sons, wise grandparents, elegant daughters, best friends, favourite coaches, fearless public servants, and children’s mothers.

The Palestinians celebrated, the Iraqis were overjoyed as was most of the Arab world. So, I notice you now. I don’t want to be worried. I don’t want to be consumed by the same rage, hate and prejudice that has destroyed the soul of these terrorists. But I need your help. As a rational American, trying to protect my country and family in an irrational and unsafe world, I must know how to tell the difference between you, and the Arab/Muslim terrorist.

How do I differentiate between the true Arab/Muslim Americans and the Arab/Muslim terrorists in our communities who are attending our schools, enjoying our parks, and living in OUR communities under the protection of OUR constitution, while they plot the next attack that will slaughter MORE of the same good neighbours and children?

The events of September 11 changed the answer. It is not MY responsibility to determine which of you embraces our great country, with ALL of its religions, with ALL of its different citizens, with all of its faults. It is time for every Arab/Muslim in this country to determine it for me.

I want to know, I DEMAND to know and I have a right to know, whether or not you love America ….. Do you pledge allegiance to its flag? Do you proudly display it in front of your house, or on your car? Do you pray in your many daily prayers that Allah will bless this nation; that He will protect it and let it prosper? Or do you pray that Allah will destroy it in one of your Jihads? Are you thankful for the freedom that this nation affords? A freedom that was paid for by the blood of hundreds of thousands of patriots who gave their lives for this country? Are you willing to preserve this freedom by also paying the ultimate sacrifice? Do you love America?? If this is your commitment, then I need YOU to start letting ME know about it

Your Muslim leaders in this nation should be flooding the media at this time with hard facts on your faith, and what hard actions YOU are taking as a community and as a religion to protect the United States of America. Please, no more benign overtures of regret for the death of the innocent, because I worry about who you regard as innocent…. No more benign overtures of condemnation for the unprovoked attacks, because I worry about what is unprovoked to you. I am not interested in any more sympathy; I am interested only in action. What will you do for America – our great country – at this time of crisis, at this time of war?

I want to see Arab-Muslims waving the AMERICAN flag in the streets. I want to hear you chanting ‘Allah Bless America’. I want to see young Arab/Muslim men enlisting in the military. I want to see a commitment of money, time and emotion to the victims of this butchering and to this nation as a whole.

The FBI has a list of over 400 people they want to talk to regarding the WTC attack. Many of these people live and socialize right now in Muslim communities. You know them. You know where they are. Hand them over to us, NOW! But I have seen little even approaching this sort of action. Instead I have seen an already closed and secretive community close even tighter. You have disappeared from the streets. You have posted armed security guards at your facilities. You have threatened lawsuits. You have screamed for protection from reprisals.

The very few Arab/Muslim representatives that HAVE appeared in the media were defensive and equivocating. They seemed more concerned with making sure that the United States proves who was responsible before taking action. They seemed more concerned with protecting their fellow Muslims from violence directed towards them in the United States and abroad than they did with supporting our country and denouncing ‘leaders’ like Khadafi, Hussein, Farrakhan, and Arafat.

IF the true teachings of Islam proclaim tolerance and peace and love for all people, then I want chapter and verse from the Koran and statements from popular Muslim leaders to back it up. What good is it if the teachings in the Koran are good, pure, and true, when your ‘leaders’ ARE teaching fanatical interpretations, terrorism, and intolerance? It matters little how good Islam SHOULD BE if huge numbers of the world’s Muslims interpret the teachings of Mohammed incorrectly and adhere to a degenerative form of the religion. A form that has been demonstrated to us over and over again. A form whose structure is built upon a foundation of violence, death, and suicide. A form whose members are recruited from the prisons around the world. A form whose members (some as young as five years old) are seen day after day, week in and week out, year after year, marching in the streets around the world, burning effigies of our presidents, burning the American flag, shooting weapons into the air. A form whose members convert from a peaceful religion, only to take up arms against the great United States of America, the country of their birth. A form whose rules are so twisted, that their traveling members refuse to show their faces at airport security checkpoints, in the name of Islam.

We will NEVER allow the attacks of September 11, or any others for that matter, to take away that which is so precious to us — our rights under the greatest constitution in the world. I want to know where every Arab Muslim in this country stands and I think it is my right and the right of every true citizen of this country to DEMAND it. A right paid for by the blood of thousands of my brothers and sisters who died protecting the very constitution that is protecting you and your family.

I am pleading with you to let me know. I want you here as my brother, my neighbour, my friend, as a fellow American…… But there can be no grey areas or ambivalence regarding your allegiance, and it is up to YOU, to show ME, where YOU stand. Until then, “YOU WORRY ME!”

Gauging The Stock Market With The Tocalino Index

bruegel-wedding-dance-ouMy Comments: Football season is about to start, Ukraine is still bothered by the Russians, and Ferguson, Missouri is still a mess. So here I am talking about the stock market and an index I have never heard of before. I suspect you haven’t either.

But there is reference here to the Misery Index, which I have heard of, though never followed. It’s the sum of the unemployment rate and rate of inflation. Right now it’s pretty low in historical terms and getting lower. That’s good.

My next question has to do with why so many of us think the world is coming to an end. Well, maybe it is, but I doubt it. A changed world, definitely, but one we must adapt to and stop with the constant message of doom.

By Sebastiao Buck Tocalino, August 12, 2014

Summary
• Here I’m gauging the performance of the Dow Jones Industrial Average with the Help of the Tocalino Index (applying demographics to a variation on Arthur Melvin Okun’s Misery Index).
• The point that stands out recently is the noticeable gap between the rapid rise of the Dow Jones index and the lagging behavior of my own indicator from 2009 onward.
• The market seems to be feeding more on some sort of paranoia or complacency from the lack of investment alternatives than any demographic, business and economic fundamentals could ever support.

Among the many indicators that track the health of the economy, two are very popular due to the obvious affliction they may inflict on all of us regular Joes and Janes. They are: the inflation rate and the unemployment rate. Between the two of them, inflation is often the most conspicuous. After all, we routinely have to reach for our wallets to pay for our daily needs and those of our children, including education and a variety of goods and services. But, if the unemployment rate is somewhat less followed by those who hold on to a steady job, it is still the most distressing for the less fortunate ones who are out of work!

Arthur Melvin Okun was a professor of economics at the famous Yale University, later he was also an important economic advisor to presidents John F. Kennedy and Lyndon B. Johnson. Besides “Okun’s Law,” another well-known contribution of his to the tracking of economic trends was the Misery Index. Its formulation could not be any simpler or more intuitive: it was just the sum of the unemployment rate and the inflation rate. Naturally, to be out of work and having to cope with an escalating cost of life is a sheer disastrous situation leading to social distress, therefore the obvious choice of name for this indicator: the Misery Index.

(Some economists may say that, with a delay of one year or so, this Misery Index, with its implicit social distress, would be a contributing factor to swings in the rate of crimes. I tend to believe that crime is still more related to cultural issues.)

Personally, I don’t usually pay much attention to this index and believe that few people actually do. Though we pay close attention to its two constituents separately. But for some time recently, I have been glancing at the Misery Index and its downward trajectory in the U.S. It is clear that, in spite of all the insane efforts in printing money and keeping real interest rates negative and punitive for the more cautious and conservative majority of savers, inflation is still modest and below the target aimed by the FOMC and the Federal Reserve. By the end of June, the twelve-month inflation climbed a tad higher at 2.07%. Data relative to the closing of July is scheduled to be released only on Aug. 19.

At the closing of June, to the cheers of everyone, the unemployment rate had also fallen to 6.1%. It did rise slightly to 6.2% in July, as reported on Aug. 1.

Trying to avoid much of the noise in inflation data, I will adopt from now on the 12-month core inflation rate, which excludes the more disruptive cost swings of food and energy (due to the villainy of oil prices). The core inflation for the 12 months ended last June was of 1.93%. By using that same month’s unemployment rate of 6.1%, the sum has resulted in an 8.03% Misery Index.
Misery Index

CONTINUE-READING

The Typical Household, Now Worth a Third Less

My Comments: You have read my posts before where I talk about income inequality  (the HAVES vs. the HAVE NOTS) and how if left unchecked, could result in social chaos in this country. Probably not in my lifetime, but definitely affecting the lives of my grandchildren. It’s an issue that demands discussion among ourselves and those who profess to be politically motivated.

Economic inequality in the United States has been receiving a lot of attention. But it’s not merely an issue of the rich getting richer. The typical American household has been getting poorer, too.

The inflation-adjusted net worth for the typical household in 2003 was $87,992. Ten years later, in 2013, it was $56,335. This is a 36 percent decline in very few years, according to a study financed by the Russell Sage Foundation. Those are the figures for a household at the median point in the wealth distribution — the level at which there are an equal number of households whose worth is higher and lower. But during the same period, the net worth of wealthy households increased substantially.

The Russell Sage study also examined net worth at the 95th percentile. (For households at that level, 94 percent of the population had less wealth and 4 percent had more.) It found that for this well-do-do slice of the population, household net worth increased 14 percent over the same 10 years. Other research, by economists like Edward Wolff at New York University, has shown even greater gains in wealth for the richest 1 percent of households.

For households at the median level of net worth, much of the damage has occurred since the start of the last recession in 2007. Until then, net worth had been rising for the typical household, although at a slower pace than for households in higher wealth brackets. But much of the gain for many typical households came from the rising value of their homes. Exclude that housing wealth and the picture is worse: Median net worth began to decline even earlier.

“The housing bubble basically hid a trend of declining financial wealth at the median that began in 2001,” said Fabian T. Pfeffer, the University of Michigan professor who is lead author of the Russell Sage Foundation study.

The reasons for these declines are complex and controversial, but one point seems clear: When only a few people are winning and more than half the population is losing, surely something is amiss

Increased Consumer Spending Driving Strong Economic Growth In USA

USA EconomyMy Comments: On Thursday, July 30 the market dropped 300 points. The blogosphere and media were all a chatter about “was this the start of the correction?”. Who knows ?!?

It illustrates why those of us who profess to be financial advisors are more in the dark than you are. Here we are talking about a looming market correction, one that will happen, and the longer it takes to start the more violent it is likely to be. And here I am this morning, coming to you with good news about the economy. Seems totally weird, doesn’t it?

What has to be remembered is that the markets are always forward looking. I want to invest my money before it goes up, if at all possible. If I think it’s going to crater, I’m taking my money out. At least that’s the plan, unless you use some of the approaches favored by us at Florida Wealth Advisors, LLC.

What this headline tells me is that when the correction happens, it will be relatively short term and though perhaps dramatic, it will not be systemic.

Jul. 31, 2014 / APAC Investment News

Summary
• The Bureau of Economic Analysis is reporting 4 percent growth in the second quarter, a strong rebound from the first quarter.
• Consumer spending in both durable and non-durable goods is up. Both exports and imports also rose, along with most other indicators.
• This economic growth should provide some upward pressure for markets, at least in the short term.

The United States has struggled to fully recover from the 2008 Financial Crisis. While stock markets have rebounded, unemployment has remained high and economic growth has been tepid. New data points to the U.S. economy growing a solid 4 percent in the second quarter, however, propelled by an increase in consumer spending. This should help stabilize markets and perhaps even push them higher.

With consumer spending accounting for roughly 2/3rds of America’s economy, any increase in consumer spending should come as a relief for those concerned of yet another slowdown. Still, stock markets hovered in place following the release of the data on Wednesday, likely over concerns about the Fed’s next move with interest rates and the continued wind down of its asset buying program.

Consumer Spending On The Rise
According to the Bureau of Economic Analysis consumer spending increased a solid 2.5 percent in the second quarter, up from 1.2 percent in the first quarter. Durable goods, which includes automobiles, appliances, and other similar goods, increased by an astounding 14 percent, compared with an increase of just 3.2 percent in the first quarter. Non-durable goods, which includes food and clothing, increased by 2.5 percent. The BEA presents its numbers in seasonally adjusted annual rates.

Automobiles have been performing particularly well as of late, even while General Motors is still feeling the fallout from a major scandal and many automakers are suffering a rash of recalls. There were some fears of a major slowdown following the economic contraction in the first quarter, but for now it appears that the feared slow down hasn’t materialized.

Ford did suffer a decline in sales in June, falling some 5.8 percent YOY. While this may not seem like good news, the drop was not as bad as expected. Meanwhile, General Motors sales rose 1 percent even in spite of the bad publicity from the ignition scandal, and Chrysler posted a solid 9.2 gain.

Growth Being Driven By Other Factors
Besides consumer spending, other areas of the economy have also performed well. Exports rose by 9.5 percent, following a sharp decline of 9.2 percent in the first quarter. This suggests that the global economy may also be growing. Imports also rose 11.7 percent, compared with an increase of only 2.2 percent in the first quarter.

Investment in equipment rose 7 percent, while investments in non-residential structures rose by 5.3 percent.

Interestingly, federal government consumption actually decreased by .8 percent, suggesting that the rise in spending is being driven by private businesses and consumers. This should come as a welcome sign given the government’s high debt burden. Simply put, the American government likely couldn’t afford to drive up consumption even if it wanted to.

Strong Economic Growth Should Re-enforce Markets
For now, strong economic growth should keep markets buoyant even with many factors exerting downward pressures. Sanctions on Russia, tensions in the South China Seas, political infighting in Congress, the possible fallout of the Fed curtailment of its asset buying program, and numerous other factors have created jitters. Strong economic growth can counteract these downward pressures, at the very least.

Meanwhile, as stock indexes have surged to all time highs, there have been some concerns that a bubble may be building. While stock markets have been performing well, the economy in general seemed to be suffering from sluggish growth, suggesting that something besides actual economic performance has been driving stock prices upwards. Now, however, economic growth finally appears to be in line with the rising stock market indexes.

So long as the economy continues to grow, markets should remain stable. Of course, the economy itself could quickly swing back into contraction. Government debt levels remain high, profits can evaporate over night, and consumer sentiments can change quickly.

Further, as the economy continues to grow, the Fed will almost certainly continue to cut back its stimulus measures, and eventually even raise interest rates. This, in turn, could slow economic growth. Meanwhile, stagnant wages, continued high unemployment, high debt levels, and other factors could eventually pose a threat.

These 3 Charts Show The Amazing Power Of Compound Interest

retirement_roadMy Comments: Math was not and remains not one of my strengths. But I understand this part. If you are younger than I am and have an opportunity to put some money to work, you need to push the envelope and make it happen.

Whether you do or not, the price you pay for stuff with your money will also increase via the same compounding mechanism, so it behooves you to make sure your savings are growing at least as fast and preferably, much faster. Remember, money is only useful if you can use it to buy the things you need and the things you want.

By Libby Kane July 12, 2014

One of the biggest financial advantages out there is something anyone can access by opening a simple retirement account: compound interest.

Retirement accounts such as 401(k)s and Roth IRAs aren’t just savings accounts — they’re actively invested, and therefore have the potential to make the most of this benefit.

As Business Insider‘s Sam Ro explains, “Compound interest occurs when the interest that accrues to an amount of money in turn accrues interest itself.”

So why is that so important?

The charts below will show you the incredible impact compound interest has on your savings and why starting to save in your 20s is one of the best things you can do.

1. Compound interest is incredibly powerful.

The chart below from JP Morgan shows how one saver (Susan) who invests for only 10 years early in her career, ends up with more wealth than another saver (Bill), who saves for 30 years later in life.

By starting early, Susan was able to better take advantage of compound interest.

Chris, the third saver profiled, is the ideal: He contributed steadily for his entire career.

chart-jp-morgan-retirement-1

2. When you start saving outweighs how much you save.

This chart by Business Insider’s Andy Kiersz also emphasizes the impact of compound interest, and the importance of starting early. Saver Emily, represented by the blue line, starts saving the exact same amount as Dave (the red line), but begins 10 years earlier. Ultimately, she contributes around 33% more than Dave over the course of her career, but ends up with almost twice as much wealth as he does.

saving-at-25-vs-saving-at-35-continued-saving-prettier-1

3. It can even make you a millionaire.
Compound interest can get you pretty far. In fact, Business Insider calculated — based on your current age and a 6% return rate — how much you need to be saving per month in order to reach $1 million by age 65. You can also see the calculations based on different rates of return.

monthly-savings-chart-new-1

 

J.P. Morgan Weekly Market Recap – July 21, 2014

My original idea was to post these every week or so. (That didn’t work out too well! ) Many people like to make their own investment decisions and this recap is a great way to gain insight into what is going on globally. This weekly broadcast from J. P. Morgan will give you some insights as to what is going on right now. Here’s the essential text.

The Week in Review
– Retail Sales were weaker than expected
– Industrial Production was soft in June
– Housing Starts fell to 893k and Permits
fell to 963k
– Consumer Sentiment fell slightly in July
The Week Ahead
– CPI
– Existing Home Sales
– New Home Sales
– US Flash PMI
– Durable Goods

Thought of the Week
The 2Q14 earnings season is under way, and this week will be an important one with 146 S&P 500 companies scheduled to report. By the end of this week, nearly 60%
of S&P 500 by market capitalization will have reported earnings, giving us a good
sense of where things currently stand. Thus far, we have seen many of the big financial sector companies beat earnings estimates; given that financials and technology are the two largest S&P 500 sectors, this suggests that strong profits in the technology space should help actualize current earnings expectations. Turning to the fundamentals, as shown in this week’s chart, the majority of earnings growth we have observed so far this quarter has been a function of margins, as companies continue to operate with as few expenses as possible. Looking forward, however, it is not clear that margins can continue to materially increase, meaning that the baton will need to be passed to revenues in order for earnings to continue pushing higher over the coming quarters.

If you want the full 2 page file, email me and I’ll forward the link to you. Right now it doesn’t want to work properly so I can’t add it to this page. TK

 

Inflation Vs. Deflation

global capitalismMy Comments: Yes, It’s Monday but please, don’t be turned off by the topic. I know economics is often a complicated and boring exercise, but what follows is not only compelling, but written so that most anyone will understand it.

This is quite different from what you hear on television and from political pundits that make it so easy to switch to another channel. Here, there is no blame to assign anywhere.

But those of you with money to invest, or businesses to build, or saving accounts to grow, need to have a good understanding about inflation, about interest rates, about tactics you can use to benefit yourself and those around you who matter. This is just a start, but a good one.

Comstock Partners | Jul. 17, 2014 | [Originally published on 6/4/2014]

Most investors are bewildered by the fact that interest rates on the 10 year U.S. Treasury have been going down year to date from 3% to 2.5% after rising from about 1.6% to 3% last year. At the end of last year virtually everyone expected interest rates to rise this year while the Fed tapered their purchases and the economy improved. In fact, the surveys taken by CNBC showed that every single economist predicted higher interest rates this year. Whenever you get a consensus so strong in these liquid markets you will find that they almost never pan out, and the masses going along with this crowd get fooled.

We believe that this consensus of people who believed that interest rates would rise will now agree falsely as to why the 10 year Treasury declined. Everyone seems to try to explain the move down as either a weaker economy or a “short squeeze.” We have been calling for a decline in interest rates for some time due to the world-wide deflation which we have been discussing in our comments for years. There is not much difference in the debt levels, especially in the financial sector, between the U.S. and Japan back in 1989. That was when Japan fell into the “deflation trap” (or “liquidity trap” explained later) that lasted for the past 25 years. We have used the “Cycle of Deflation” since the early 2000s and it couldn’t be clearer to us that this is the most likely scenario for the United States.

Last week the financial television shows interviewed numerous extremely sharp economists who all were concerned about inflation being the main problem this country will surely have to deal with over the next few months and years. One of them showed a chart of inflation being 1.1% at this time last year, 1.5% at the end of last year (2013) and 2% presently. He believed that this trend would continue moderately higher over the next few months and accelerate from there over the next few years. He did not think it would be horrible hyper-inflation, but one that would need the Fed to deal with the rising prices. He also believed that Ben Bernanke was not as concerned about inflation as he should have been when he was the head of the Fed.

Another economist stated that, “at a minimum deflation is dead.” He was concerned about the rising prices of food, energy, and rents. He also believed that wages are a lagging indicator and with four months in a row of rising non-farm employment greater than 200,000 (he assumed that May would also exceed 200,000) wages would rise much more than they did in the past and since wages represent 40% of the core CPI index.

The other economists added more concerns to the above bringing up the fact that the cost savings for prescription drugs is now over, and the prices of cars and clothing are now rising. Global wages should rise from 2.5% to 3.5-4% as other central banks like the ECB and the Peoples Bank of China will be following us and the Japanese in easing as their economies slow down. Inflation rates are on the rise and the Fed is “behind the curve.”
These economists that I referred to above are very sharp and present a powerful case for an inflationary scenario not only in this country but globally. We, on the other hand, strongly believe that this onerous debt that was generated from the early 1980s to present will more than likely end with the debt collapsing into a deflationary depression or another “great recession” both here and abroad. We would put a probability of around 60% on a deflationary outcome, but we also agree that if it doesn’t end in deflation, the next highest probability would be hyper-inflation and we would put about a 25% probability on that (with a 15% probability of muddling through with the debt continuing to expand for years).

VELOCITY OF MONEY

Our problem with the inflationary scenario is the velocity of money and multiplier of money. As far as velocity goes, the turnover of our money supply has been declining since the middle of the 1990s from 2.2 velocity to 1.5 now, and as it continues to decline we will not experience the recovery strength we witnessed after every downturn since the “great depression”. The M1 Velocity (GDP/M1-see attachments #3–# 4) has declined from 10.5 in 2007 to 6.3 presently). When the consumer is overburdened by debt he or she is afraid to continue borrowing and spending, and most banks are reluctant to loan money to anyone except the most credit worthy. Under this scenario the velocity will continue declining producing a lower than normal money supply and GDP.

The consumer debt relative to GDP jumped from a long term average of less than 50% for decades leading up to the middle of the 1980s where it grew to over 95% in 2008. We are now at 77% on the way back to the past 50% norm. Consumer debt to Personal Disposable Income (PDI) was under 60% for the decades of 1950 to the middle 1980s to almost 130% of PDI before the “great recession” starting in 2007. After peaking in 2007 the H/H debt to PDI has declined to about 105% presently on the way back to the norm of 60%.

MONEY MULTIPLIER

Another reason we are putting such a high probability of deflation (60%) versus inflation (25%) and muddling through (15%) is because of the money multiplier which determines how much the money supply grows relative to the monetary base. You see, the Fed can only control the Monetary Base and the Federal Reserve’s balance sheet. The Fed balance sheet grew from $800 bn. in 2008 to $4.1 tn. now, and most inflationists believe that unwinding that much money will create hyper-inflation. The Fed uses their tools of lowering the Federal Funds rate (the rate that the banks can borrow money from the Fed) and purchases of government bonds as well as mortgage backed securities (or Quantitative Easing –QE). They can also issue low cost Certificates of Deposit –CDs to the banks as well as reverse repos, but the main tools of the Fed are lowering rates and QE. However, these tools don’t directly control the Money Supply (NYSE:MS). How much M2 grows is dependent upon the money multiplier and if it continues down as it has lately the money supply will continue to be hampered by this multiplier.

“LIQUIDITY TRAP”

Another problem with the inflationary scenario is the “liquidity trap” we are struggling to escape from presently. This is a situation in which prevailing interest rates are low and savings rates are also low, making monetary policy ineffective. In a liquidity trap, consumers choose to avoid bonds and keep their funds in the safest investments because of the prevailing belief that interest rates will soon rise. Because bond prices have an inverse relationship to interest rates, many consumers do not want to hold an asset with a price that is expected to decline.

In this situation, banks sell their bonds to the Fed and receive cash, but instead of loaning the dollars out they deposit the money back with the Fed as excess reserves and therefore the dollars do not recycle or circulate. This prevents the money supply from growing, and eventually has a deflationary outcome. You can supply all the money the Fed wants by increasing the Monetary Base, but if the public and corporations don’t want to borrow the money, the money supply is restricted and when you think there will be inflation, instead there will be disinflation and possibly deflation.

So, it seems to us that because of the velocity of money, the money multiplier, and the liquidity trap, inflation will be postponed indefinitely and replaced by disinflation or even deflation. The global environment for inflation is also on the side of disinflation as the European Union just reported an inflation rate of only 0.5% and Germany’s inflation rate was only 0.6%. The ECB will attempt to address these deflationary indicators this week. And if China’s GDP growth continues on the downward growth path they could lead the way to emerging market weakness and disinflation or deflation.