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2024-04-02 07:00 by Karl Denninger
in Consumer , 305 references Ignore this thread
But 'Economists Say'....
[Comments enabled]

Deflation is bad, mkay, even if you can't afford anything right now you just have to suck it up.

Who wrote this piece?  Good question -- all we have is who contributed to it from AP's Auto Desk (in Detroit, of course) home of the place where they have tarted up pickup trucks to the point that they likely have $40,000 gross margins on that $90,000 truck.

Of course there is no option to buy the $30,000 version anymore without all the gizmos because "nobody wants it" they say.  The truth is that plenty of people would want it if you didn't have inexpensive financing.  Oh wait, that seems to be gone now due to the lack of uneconomic interest rates that were all the rage for 10 years in the post-crash era after 2008.

Hmmm..... what was the problem again?

Actually, it wasn't The Fed.  It was Congress and the "mavens" in the markets who all thought they should (and did) roll over debt that was at higher rates for much lower ones but, of course, never paid any of it off.  And note this nonsense:

The bank’s researchers said the biggest economic risk came not from falling prices for goods and services but rather from a freefall in the price of assets — stocks, bonds and real estate. Those collapsing assets, in turn, can topple banks that hold crumbling investments or that made loans to struggling real estate developers and homebuyers.

The damaged banks may then cut off credit — the lifeblood of the broader economy.

Lifeblood?

Don't think so.

In fact, I'd argue all that is the "lifeblood" of is bubbles which are inherently destructive.  Oh sure, they feel great when you start, but facts are facts and no, they're not good.  A bubble house is of no good to you if you own one before it starts.  If you think otherwise explain to me what happens when you want to move from said house to a newer or larger one.  The newer and/or larger one also got bubbled so you make nothing; you get more for the existing one but you pay more for the other one and your net value improvement is zero.

The person who wants one and doesn't have one now gets hosed because affordability gets damaged.

The banks, title companies and real estate brokers all win because most of these firms make a percentage either on the price or they get paid for volume (e.g. title companies) so the more transactions the more they make.

The other argument often raised is that if there is deflation you'll put off purchases in the hope they're cheaper tomorrow.  That's certainly true if the only motivation to buy in the first place was a fear of the price going up!  Its definitely not true if your refrigerator or car is broken and you need a new one because you would like a place to store your refrigerated foods, a vehicle to get around in or an HVAC system for your house.  None of those are things you will avoid buying "because they might be cheaper tomorrow" if you actually have a reasonable need for them, which by the way can include something being materially better.

On that point: Are the newer vehicles materially better?  How about the refer or HVAC system?

In some cases, absolutely.  I replaced my working HVAC system last year because the older one was old enough that a failure was increasingly probable and the newer one is more efficient.  Had the newer one not been more-efficient I would have waited until the old one broke down at an unreasonable price to fix.  How about my refer?  The one I own now I will certainly not change out for a "newer model" because they have reached pretty-much the endpoint of efficiency improvements (and its not small either; it draws a fraction of the power of the one I had in Florida, all because its new and inverter-driven.)

On cars why would I buy a newer car when my other ones work perfectly well and the price ramps include forced purchases of things I don't want?  I just ordered up a few hundred dollars of suspension parts for my 2015 Mazda (250,000 miles on it by the way) and will install them myself.  Do I need to do that maintenance?  No, but it will improve the ride somewhat since deterioration over time is reality and the price is reasonable.  How would you get me to buy more of that sort of thing more-often?  If it was cheaper (deflation) I would!

huge percentage of Americans live on ever-expanding credit today.  The premise of "economists" that this can continue literally forever is false; nothing exponential expands forever -- it can't.  This is a finite rock hurtling through space with finite size and mass. You can certainly pull forward demand for things that would be bought tomorrow into today with credit and some of that is mostly ok, such as single-family homeownership in that stability in the home is good for both kids and communities.  But don't kid yourself about such situations in the general sense; they are not good when it extends to people putting their groceries on credit they cannot pay off at the end of the month.

Expanding credit always forces prices higher.  If you think not look at "insurance" in the health industry and the most-egregious example, college.  Before "student loans" were handed out to anyone who fog a mirror and bankruptcy discharge was prohibited college cost went up at a reasonable price along with everything else because if you borrowed it was at a ridiculous interest rate since everyone understood that there was no way to "repossess" what you were taught, unlike a car or house.  Thus lenders were quite-careful and demanded to be well-paid for their risk.

Today?  All of that has been progressively destroyed.  Now college is essentially impossible to fund spinning pizzas and through summer jobs (it wasn't hard to do it in the 1980s at all when Pell Grants and Stafford Loans, both heavily capped and tested were basically it) but they'll hand you any amount of money for a degree that has close to zero marketable value in the workplace.  Why?  Because if you don't pay it back or get the President to try to force the taxpayers to eat it they will hound you literally to death, garnishing your Social Security in old age, if you don't pay.  As a result colleges have felt perfectly free to add all manner of non-instruction fluff and bill you for it.

AP says that cutting off credit would be bad.

What would happen to the price of college if there were no loans?  It would fall by about 80% and all the fluff would disappear.

Explain to me why the fluff adds to he value of learning Calculus, Physics or Medicine and we can certainly debate whether we should cut it all off other than on strict merit and at a very high interest rate, or whether we should allow what is now a cancer on our educational system to continue to metastasize until it eats the economy exactly as has health care.

The author of this piece is the owner of this site and is a former CEO who never borrowed a nickel from a bank or other financial institution to operate his business (MCSNet), and did just fine without any of that nonsense.  Of course the banks didn't make much of anything off me, other than the discount rate on credit cards, which I'm sure annoyed them greatly as I refused their "financing" offers.  Go figure.

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