Stagflation

No he does not. Inflation in the 70s was double digits. Inflation in this decade has been consistiently below 3%. He cherry picks certain prices, but overall price levels, including all goods and services, have never gone up YOY by over 3.5% in four years.

Stagflation requires inflation, which requires that employees have the power to win raises to keep up with rising prices and that companies believe that rising productivity should lead to rising wages. This is not the world we live in. There is no point in worrying about '70s style stagflation unless you also think that unions and the middle class are coming back.

In any event, stagflation wasn't the main story in NYC in the '70s.

The '70s were not a good time for NYC real estate. New York's traditional middle class industries were in decline -- factories were well on the way into leaving the City in the first stage of their march abroad -- and the Wall Street takeover of the economy had not yet begun. So good jobs, which are the core of any city's success, were not in high supply. The middle class was not doing well and the finance elite was still tiny.

Meanwhile, the City wasn't collecting enough taxes to maintain the services on which its survival depends and no one had a clear vision of how to fix that. The schools, subways, garbage collection, CUNY, public museums, libraries, hospitals, electrical grid, police, etc., were all in trouble and any attempt to fund fix them was stymied by taxpayers who were happy to move outside the city limits and freeload off the declining center, especially since the suburbs then (as now) were free to exclude the expensive children of the poor and while more easily leeching off Federal taxation through highways, cheap oil, and cheap mortgages. So, long term investment in the NYC real estate looked like a mugs game.

Sales prices were as low as 2 or 3 times annual rents at the nadir. If you want to worry about that coming back, feel free.

But you should be worrying about a major victory for the no-tax, no-government forces, not stagflation. In great cities, life quickly becomes unbearable without effective and well-funded government. Taxes are the price of civilization, as Justice Holmes said. If people aren't willing to pay taxes, then they won't get what taxes buy. When the garbage piles grow and the museums decline, NYC will cease to be quite as attractive to those who have choices.

Or, you could worry that in the next round, Wall Street so over-steps that it generates a real political backlash and is shrunk back down to a reasonable size, with no new industry taking its place in NYC. With fewer high paying jobs and less trickling down to the servants of uber-finance, the city's attractiveness would drop fast.

Neither of these seem terribly likely. But they are at least possibilities. Stagflation in the 1970s sense is not.

Actually, he does have a very good case for stagflation, as we're living it - thanks to Milton Friedman economics! Flooding the market with money that has no useful place to go has caused it to go into financial assets, driving the price of everything up.

My favorite chart, spot corn:

http://futures.tradingcharts.com/chart/CN/M

Them's lots of tortillas to account for since the start of QEII, and every other chart looks the exact same way. What the Fed has done, rather than let the market correct as it had to after years and years of excess liquidity, is to apply the same fix to the problem as caused the problem: excess liquidity. It's like taking a stiff drink to cure a hangover: it works, but in the end it's either a Ponzi scheme, or your liver turns to styrofoam.

The only solution to this is to withdraw the liquidity; nothing wrong with keeping interest rates at 0%, but you can't force a horse to drink, as it were: if the country is delevering - as it is - the economy will necessarily sputter. But at this point the Fed has painted itself into a corner, by letting a bubble form among financial assets: it should have stopped QEII as soon as it saw what was happening.

Bernake is inept - September 2008 proved it. These government interventions don't work: whether it's subsidizing mortgages through interest rate guarantees and tax deductions, or giving a temporary tax credit to buy a first home, or priming the system with cash, all it does is kick the can down the road.

The only one who ever saw the truth in this, and had the balls to do something about it, was Volcker. It led to nearly 20 years of prosperity. We should be following that model, and the WWII model, to put people back to work. Not this foolhardiness of priming the pump with money.

Once the money is withdrawn, it will lead to a crash. It's hard to tell right now, but it's very possible that stocks revisit their 2009 lows once the money is gone, since the government engineered this bubble by increasing the Fed's balance sheet. It is not a good scenario.

the difference is in that the inflation in the 70s saw rapid credit expansion with it, as one would expect with a monetary definition of inflation. This time, there really is no inflation. No rapid radit expansion, and certainly no upward wage spirals as finance guy points out. This round of stagflation will be the result of a huge housing/credit bust and the destruction to the labor market that resulted from the interconnected web of credit we live in. I think we have ticked up for 5-6 months now, after a huge destruction. Look at velocity chart.

http://research.stlouisfed.org/fred2/series/M2V?cid=32242

Our banks are still in bad shape, we are just carry trading them back to health for however long it takes so that hopefully when things do turn, who knows when, the banks will be healthy enough to sustain a longer period of credit expansion that will see our fractional reserve system work the way it was designed to. Right now, it aint!

Look at the M1 Multiplier chart

http://research.stlouisfed.org/fred2/series/MULT

It doesnt go back to 70s though. Inflation today powered by rising wages, rapid credit expansion? Dont think so. What you do see today are the unintended consequences of policy actions taken by the fed/govt to stem deflationary forces: that is, higher food costs, higher energy prices, higher health care costs, higher commodities across the board, higher taxes, etc..all the stuff that hurts profit margins and squeezes consumers wallets.

So, stagflation..yes! But not the 70s kind

oops, "radit" = credit

A big increase in money supply does not automatically equal inflation, as we can clearly see now in the US and in many other countries. You had it with DEFLATION in Japan for years.

Stagflation requires actual big inflation inflation which we have not had so far. inflation was higher from 1995-2007 than it has been since. Furthermore, the bond market is not predicting it, even slightly.

Also, in the 70's, saving rates topped 15%.

Back to the original question - in this period of "pseudo inflation w/ accompanying stagnant economic growth" (much harder to say than stagflation), where does NYC real estate fit in?

"there really is no inflation."

Yes there is, using the 1970's definition of inflation. And even today, using the CPI. The "core rate" has its usefulness, but unfortunately by the time the CPI seeps its way into the core rate, it's too late to put the brakes on.

No, an increase in money supply does NOT automatically mean inflation - the problem here is that despite all of the money pumped into the system, the money supply hasn't risen, and neither has. Because the money has been invested in financial assets. There is simply no demand for the money that is being supplied, hence it is invested in financial assets.

See Spot Corn.

It's like comparing tidal crest to a tsunami. You need to compare nyc re to other bubbles. If we do have stagflation It only sucks if you can't pass along your costs, i.e. If you were not part of bubble..... It looks pretty going forward. You know productive members of society. Not leeches like borkers.

There is no inflation by any definition that resembles the ordinary use of the word: wages are flat to down and prices are barely up. The prices that are up are international commodities where we are competing with faster growing economies: that's not inflation, it's us getting poorer.

This is a post-bubble recession. The problem isn't inflation. It's unemployment.

We are suffering from a lack of demand: people don't have as much money as they thought they did during the bubble, so they cut back spending. Fewer customers threaten smaller profits. Businesses respond by firing people. Unemployed people can't spend. Less spending, less income, less profits also means less taxes. So state and local governments must cut spending too. Perversely, the Federal government -- purely voluntarily -- is doing the same. Each cutback means someone loses a job which means less spending which means less income which means less profits which means less investment which means fewer jobs.

The Fed tried to break the cycle by its usual tool: giving money to banks. But banks won't lend and businesses won't borrow unless they see customers, even if money is free. So cheap money isn't enough.

What we need is government investment in things that the private sector never provides enough of anyway: infrastructure, education, transportation, sustainable energy sources and changeover to new systems, schools, teachers, trains, parks, museums, insulation, roads, R&D, science, garbage collection and reprocessing, and so on. Spending to create jobs now and to build the underpinnings for sensible economic growth later.

We should be building a hydrogen supply network and a thousand solar plants and insulating every home in the country and building a modern train system and a modern cell phone/internet system and a decade's worth of school buildings while we have construction workers and equipment sitting around doing nothing -- if we borrow to pay for it (at 0%) we can pay back the loans with the money we save and the growth we create.

And we need a cheap dollar to make exports profitable and US manufacturing and services competitive again.

But all that requires consent of the Congress and all Republicans and some Democrats are opposed.

Unless the Congress reverses course, recovery is likely to be slow and painful. Not stagflation. Just plain old stagnation: lots of unemployment and no pay increases for a long time.

Impact on the NY real estate market? Barring some major Wall Street collapse, we are doomed to a long slow slog until the bubble is worked off.

So long as sale prices remain far above rental value and construction costs, investors will slowly build and convert, until supply grows enough to bring prices down, or enough rental units are converted to drive rents up. But with the economy doing poorly, confidence is low, so investment will be slow.

In the end, either rents will go up hugely, which will be quite difficult with flat wages and 2% inflation but would be more likely if we had some wage/price inflation, or prices will drop significantly.

If buyers or sellers get cold feet, prices could adjust fast. If they remain confident in the future of the city (and builders remain cautious), it'll continue to be painfully slow. But inflation-adjusted sales prices in a decade will be far below their current levels, much closer to the cost of construction and rental value to investors.

Instead of looking at the 70s, which were not similar, why not look at the collapse of other real estate bubbles, for example in LA and SF and Chicago in the last several years? Or Tokyo since its bubble. NY looked like them on the way up, and it's likely to look like them on its slower way down.

I am not talking core CPI, I am talking basic CPI, which has been well below the 1995-2007 average for the past three years. Apples to apples. Fuck the 70s definition, which NO country uses anymore. I am comparing two periods that used the SAME definition. Inflation is lower now than it was for the 12 years before, and no one said it was hyperinflationary.

Despite the fact that official CPI numbers understate inflation hyperinflation is not back. To say we have hyperinflation is exaggeration. What we do have is higher inflation than last year or the year before.

What is a concern is that Current Fed/Gov't policy has created the back-drop where an uptick in inflation is now more likely than ever and that if the Fed does not sop up the QE2, etc we would be even more likely to experience more inflation in the future.

Urban,
I think the mistake is to think that the next round of inflation looks like what we saw in the 1970's. Fed has created excess liquidity. This can result in higher inflation or higher asset prices. Additionally we now have a more global economy where we compete for goods and services with countries such as China, India, Brazil, Russia, etc, so even if our economy is weak demand from those countries coupled with excess liquidity drives up asset prices.

Our dollar buys:
89% of what it did 5 years ago.
.78% of what it did 10 years ago.
..69% of what it did 15 years ago.
...60% of what it did 20 years ago.
....40% of what it did 30 years ago.

That is inflation.

How can a decline in the value of the dollar as a result of money printing, err sorry, quantitative easing, not qualify as inflationary?

Because wages haven't risen? Wages are not the only way for money to find its way into the economy. Witness the equity markets, commodity markets, food and fuel prices since May 2009. Value hasn't been added, we've just diluted the measuring stick, the dollar.

So while you can say that inflation isn't occurring because it's not being caused by what you believe needs to cause it, that doesn't change the fact that we are all paying more for fuel and food, figures not included in the CPI because that is precisely where the greatest price inflation is occurring and will continue to occur.

What's more, just because we have deflation in credit-financed goods does not detract from the fact that increasing the money supply has decreased the purchasing power of the dollar against goods not financed with credit. We're coming off of the biggest credit bubble in history, of course those "assets" are going to devalue even in the face of a devaluing currency, because their price in REAL terms was inflated far far beyond any reasonable valuation.

>....40% of what it did 30 years ago.

Does your house cost 2.5x what it did 30 years ago?

food goes up..it's inflation
house goes up, it's not inflation.
but 30 years ago if the house went up it was inflation.
bottom line it's inflation even if it's not in the cpi

No one fucking said inflation was not occurring, you fuckwits. Its not runaway inflation. Its low inflation by historical standards, and even by recent standards.

Jason10006, see financeguy's comment above: "There is no inflation by any definition that resembles the ordinary use of the word".

Ok, I exaggerated. We have some price inflation -- prices are rising at less than the Fed's target of 2%, which it calls "stable prices". The Fed's target is too low. Higher inflation would make adjustments easier as the economy changes, lead to higher employment, more flexibility and greater prosperity. And prices would still be plenty stable.

But in any event, we are BELOW the Fed's target and BELOW the inflation level at virtually any prosperous time in our history. There is no theoretical reason to expect rising inflation when the economy is in the middle of a demand deficit slump with idle capacity everywhere and extraordinary demand for safe assets, although it would be helpful if the Fed could figure out how to generate some. There is no empirical evidence of any significant inflation occurring. And there is no sign that the markets are concerned about the prospect of inflation in the foreseeable future. Inflation simply is not something that we need to worry about right now.

We need to worry about unemployment and underemployment and people who aren't counted as unemployed because they've lost hope of ever finding a job again. These are real crises, at levels last seen in the Great Depression.

We need to worry about our infrastructure falling apart because the public sector is so underfunded, one party is unalterably devoted to shifting income upward and the other is not unalterably devoted to anything at all. We need to worry about income and wealth inequality that is so great that it threatens the health of both the economy and democratic politics. We need to worry about the inadequacy of our social welfare system. We need to worry about the out of control profits of the finance and medical (insurance) sectors. We need to worry about how to fund education, research, and innovation. We need to worry about global warming.

We do not need to worry about stagflation or any other form of inflation.

This notion that somehow we now need inflation or better put destruction of the purchasing power of our money as necessary and good for our economy is a very new and dangerous notion.. In other words it's garbage. In the 19th century we had relatively flat pricing and our economy grew and prospered. The only people who benefit from inflation are debtors, Corporations and individuals who borrowed more than they should to consume what they could not afford.

Actually, all countries use the CPI or some variant of it - only the US uses "core inflation," which while useful is not what people use to make their daily decisions.

FG is right - government programs got us out of the Depression: it is guaranteed targeted spending that will increase aggregate demand. Flooding the system with money does not and will not work.

The problem is that Monetarists like Bernake and the House of Representatives are ideologically opposed to government spending, but they don't know what to do when their own disproved economic models don't work (again). To them flooding the economy with money is free, with no moral hazard or economic complications. Unfortunately, that is also untrue: we have, right now, created an asset bubble, and deflating it - as it must be deflated - will cost more than just leaving the system to work its way out of the whole Hank Paulsen and Ben Bernake got us into in 2008.

RS, the US hasn't suffered hyperinflation since the 19th century when - YES! - we were under the gold standard.

So much for that ditty.

Uggghhhh, neither I or finance guy is talking about CORE inflation, we are talking OVERALL CPI which is low by any sort of historical measure. Shut the fuck up about core!

ANd sorry, Riversider, but DEFLATION is dangerous, which is why all central banks have INFLATION targets. No one on this board or at the Fed or anywhere is arguing for 70's style inflation - the Feds target is 0-2%. Some other economists argue that like some other central banks, the band could be as high as 5%. BUt this is not a NEW idea. Its an idea that goes back even before miltion friedman. That you want neither runaway inflation, nor deflation.

Stop telling lies, you moron.

"Many don't have $2,000 for a rainy day"

"A new study by the National Bureau of Economic Research shows 50% of Americans would struggle to come up with $2,000 in a pinch, for example in the event of an unanticipated car or home repair, a large medical bill or legal expenses."

http://money.cnn.com/2011/05/24/news/economy/americans_lack_emergency_funds/index.htm

and "only a quarter of Americans said they are certain they would be able to come up with the funds ($2000)". And there are nearly 5000 places for sale in NYC over one million dollars. How will they be able to come up with the 0.2% down payment?

No worries a borker will give you $2k any day.... The govt, yours truly will backstop the $998k. Buy buy buy..... Bf they are all gone.

Signed
Strategic renter.

Wage stagflation at its finest.

Uggghhhh, neither I or finance guy is talking about CORE inflation, we are talking OVERALL CPI which is low by any sort of historical measure. Shut the fuck up about core!

ANd sorry, Riversider, but DEFLATION is dangerous
--------------------
Disagree--
1)If prices fall because of over-supply that's the markets correcting. Too much of something means the price
needs to come down
2)If prices are falling because of technology, scales of production or efficiencies, then again this is a good
thing. Should the Fed have intervened(if it existed) during the industrial revolution to counter-act the
lowering of production costs?

Civil war deflation was the result of increased productivity. It was not a concern and seen as beneficial to the
economy. Jason you should be more cognizant of the winners and losers of inflation vs deflation. Inflation benefits debtors , deflation savers. So those that are worried about it are just trying to prop up the banks.
There's more damage due to inflation. It destroys accounting decisions where now historic costs are useless and have to be adjusted otherwise Financial statements become distorted.

Again, we had deflation to flat pricing in the 19th century and we did just fine.

Cream cheese hoarder giving sound financial advice. At least he Practices what he preaches, unlike Tiffany Gingrich.

Riversider's world.

Me likes inflation on my coop in w125th street. Hatez cream cheese inflation.

Hatez social programs. Except social programs that help me.

Hatez foreign aid, except foreign aid to my olde country .

Criminal when an old man has sex with a young girl, exceptz when my German friend and I get on a plane to Bangkok to 'help' some 14yo orphanage.

The real question is whether the Fed is worried about asset prices or the CPI. I think it's the former which is interesting because home prices are not a cpt of the CPI, which leads me to believe the Bernanke will accept any inflation as long as home prices don't go down.

Other than that the inflation question is one of whether prices are coming down due to weak demand or technological advances and if it's the former whether the Fed can engineer new demand by having a weak money policy. In the case of housing , it's not weak demand but excess supply. People don't need new houses right now.

Of course this whole easy money qe2 policy is setting the stage for new problems and distortions just like what happened under Greenspan.

Sorry, RS, you're wrong: deflation is one of the deadliest economic scourges known to the modern world. That is why the Fed HAD to intervene in the banking crisis (that it caused) and it HAD to intervene with quantitative easing and 0% interest.

Where it went wrong was trying the untested QEII strategy on such a massive scale, flooding the market with unusable money. This caused a financial asset bubble and commodity inflation, which will be very painful to deflate.

But deflate it will and is, and you might see a correction as 40%-50% assuming the Fed does nothing to intervene, which it probably won't as intervening is what got us here in the first place.

"Civil war deflation was the result of increased productivity."

What? Civil War deflation was the result of Civil War inflation, returning to the abandoned gold standard that is unsustainable over time. "We had deflation to flat pricing in the 19th century and we did just fine."

We also had slavery in the 19th century, which is great for productivity and the overall bottom line.

What a maroon! Google "1800's" and "panic" and see how many entries you come up with: there was a financial panic every 5 years, with no central bank to intervene - properly - to control it, and no transfer payments to smooth out the economic cycles.

You probably believe in Santa Clause, as well.

Instead, look for the good deflation of excess supply driven by new tech. This was true in the late 1800s, when the Industrial Revolution and railroads created tremendous productivity and excess capacity. The economy grew an extraordinary 4% per year in real terms between 1870 and 1896, as wholesale prices fell 50%. Similarly, the Roaring Twenties were deflationary, as electricity and autos spread. Another boom occurred.

http://www.forbes.com/forbes/2002/0218/112.html

Oh thou dust misunderstand, RS: commodities have been falling in price since the beginning of time (until QEII). The deflation that Shiller is discussing is not monetary deflation - it is increased productivity, which is quite different.

What the Fed was trying to ward off - rightly - was deflation based on falling wages and a lack of demand. The Roaring Twenties certainly were not known for having a lack of demand. The Fed can't control increased productivity: it just happens.

My business is a case in point: when I started in 1993 there was no Internet, and computers were limited in what they could do (I think my first one had a 40 Hz processor, or something like that). Most translators worked for law firms or banks - now, most are independent. As a result, my rate per word has not increased very much in 18 years (about 20%, more or less). However, my income has skyrocketed, since I have many more clients all around the world, all aided by technology.

One of the biggest innovations of the 20th century was the BankAmeriCard, the first credit card, now Visa, followed by MasterCard, then MasterCharge, owned by Wells Fargo. Add to that the ATM. When I went to Europe the first time in 1982, it was all cash and traveler's checks.

When was the last time you saw a traveler's check?

That type of deflation - decreased transaction costs due to efficiency - is good. But it's not really deflation. Deflation is when there is no demand, as in the Great Depression. THAT is what the Fed was trying to prevent.

RIversider, about 99% of economists and economic historians believe that deflation is bad. Japan is a living example. I think Oprah that you have zero political power, because you sir are the Ruh Tard.

thank Oprah. I also think her.

http://graphics8.nytimes.com/images/2011/05/26/opinion/052611krugman1/052611krugman1-blog480.jpg

The OECD projection for core and overall CPI through 2012. Every other survey, and the bond markets, all agree - HISTORICALLY LOW INFLATION FOR THE FORSEEABLE FUTURE.