I heard about this on market to market a couple of weeks ago and been reading more about this, has anyone heard anything about this?

Deflation is a good thing if one is a saver. Not so much for the borrower

Yeah the guy on market to market said their aging population was helping to create deflation as they dont spend much money nor do they eat very much and he thought that’s what is hurting USA ag exports.

They didn’t sustain spring recovery as was hoped. All that debts weighing on them still. Upside is seems they aren’t as important to US economy as has been previously thought

Burn baby burn

I hope deflation makes tires go down. I need new ones.

A deflationary environment in this country will have serious consequences

Why?Lots of people now in the underground economy.
Only gonna hurt the Man.

Robert, I think you know why

China has an aging problem and a workforce problem. Both could sink it.

And how does that differ from our situation??

And Europe's and Japan's. Socialist Ponzi schemes need more paying in than collecting.

I say let it rip. This country gotten too big for its britches. Its abundantly clear, that the folks in charge of the dollar have no idea what they are doing; or how could they? We are in uncharted waters.

The FED is mandated to accomplish certain things. When they stay within the mandate, they are just following the law. Do you want them to manipulate inflation and unemployment? It will cycle regardless.

I thought they already were manipulating the real inflation and unemployment numbers Dirt?

The government calculates those numbers. The FED just manipulates interest rates and creates money.

You see a distinction between the government and the FED; as if they were separate entities. I don’t.

Yes I do. The FED, when they have a responsible chairmen, will do his job, regardless of the pressure. IMHO they doing a good job now. IMHO they should put pressure on politicians to do their jobs.

I don't ever remember voting for someone that works for the FED. So, they must be appointed and hired. Who appoints them?

China has big problems.

They sell apartments before they are built there, and many companies have defaulted and never built but took payments. People are not happy. Ther housing bubble is about to collapse.

Foreign manufacturing never came back after covid, I guess locking down for two years might be bad for business.

Also since their one child policy. They only have sons and no daughters for the sons to marry.

Those same youth have a 21% unemployment rate.

They had floods this year that were disastrous for the grain crop.

They have bought up and stored half the worlds grain. Worried about starvation maybe.

They are starting to openly protest now. Things might get interesting for the CCP soon.

The current chairman was appointed by Trump and reappointed by Biden. Senate confirms. 4 year term. Pretty common for chairmen to be appointed and confirmed by opposing parties and reappointed if following dual mandate.

I actually think this country has even bigger problems headed for us than China does.

So, they are not separate and distinct from the government.

How does Yellen fit into the current FED?

Yellen is secretary of treasury. She was not a good FED chairmen. Controllable hack. IMHO.

China lost a lot more of their older population to Covid than they have told the world. China chose to intentionally lock older sick people in their apartment complexes, with little food and medical care, to cull much of their no longer useful, retired population.

It's extremely reminiscent of the communist pigs sending the work horse Boxer to the glue factory, in George Orwell's "Animal Farm", after he could no longer work.

Keith

Uncharted waters?

Predictable! At least for a debt backed currency. The FED is and has been doing a very poor job.

Yellen was and is a hack, J Powell has some hope but I don't believe he'll stick to his guns. Rates need to go higher and remain there even in the face of that dastardly deflation.

Last time there was deflation, the FED started QE. The FED will not allow deflation IMHO.

Another view on China.



China’s Leaders Could Stem the Economic Slide. A Desire for Control Is Getting in the Way.


About the authors: Charles Dunst is deputy director of research and analytics at The Asia Group and the author of Defeating the Dictators: How Democracy Can Prevail in the Age of the Strongman. Kurt Tong is a managing partner at the Asia Group and former U.S. ambassador for Asia-Pacific Economic Cooperation.

As much of the world battles inflation, China’s policy makers are trying to beat back a specter that may be more worrying: deflation.

Should China slip into a deflationary spiral like that of Japan in the 1990s, consumers would ratchet back spending and focus on paying back debt. The resulting fall in prices would prompt consumers to postpone other spending, further weakening the economy. Productivity growth would falter even more than is already anticipated. The traditional drivers of China’s growth, domestic and foreign investment in manufacturing, would wither.

Top Chinese policy makers could probably stop this cycle before it takes root by enacting meaningful, if wrenching reforms. But China’s leadership has demonstrated a clear preference for maintaining state control over liberalizing the economy. That positioning makes substantial reforms unlikely. Without them, the country may soon plunge into a period of sustained deflation, a development that carries consequences for the rest of the world.

The numbers coming out of China make clear the problem at hand.

Gross domestic product grew by just 0.8% in the second quarter of 2023 from the previous one. Consumer confidence remains weak; China’s average household lost 20% of its wealth in 2022 alone. The nation’s $65 trillion property sector is heavily indebted, while property-related loans and credit comprise 41% of the assets in China’s banking system. The country continues to age, productivity improvements are slowing, and a distressingly high proportion of young Chinese citizens are unemployed. In July, consumer prices fell into deflation for the first time in two years.

China’s top policy makers seem to appreciate the problem. Less obvious is how they deal with it—without creating too many rips in the political fabric of the country’s top-down, Leninist governance.

They must decide whether to bail out property firms and take on more government debt, which would worsen the nation’s already enormous debt burden. They must figure out how to level the playing field between state-owned and private firms, unwind the government’s heavy-handed approach to technology and finance, and rebalance the allocative relationship between central government revenue and provincial government expenditure.

China has made some adjustments to interest rates and reserve ratios and is also considering infrastructure spending that could boost domestic demand, although the country is already overinvested in infrastructure. Some good luck in its most competitive sectors, like electric vehicles, might allow China to lean on exports to muddle through with solid growth for a few more years.

But Chinese policy makers’ preference for what they deem national security concerns over economic growth suggests that they will probably rely on Keynesian measures or monetary policy shifts to try to re-engineer growth. They won’t question the fundamental inappropriateness of their economic policy model for the next stage of China’s development.

As for which “grey rhino” could actually trigger a deflationary spiral, China’s huge debt—currently around 280% of gross domestic product, a higher proportion than that of either Japan or the U.S.—seems likely to eventually weigh down the economy with “zombie” firms and un-payable loans. A drop in housing prices looks inevitable too, causing many of the loans held by state-owned enterprises and property developers to go into default. That also would degrade the wealth of a significant proportion of the population, whose wealth is largely held in property.

Like Japan in the late 20th century, China has sufficient funds and political wherewithal to avoid a debilitating financial crisis or balance-of-payments crisis. Using those strengths, China may provide enough stimulus in the near-term to avoid a technical recession.

But the Chinese government’s fear of expanding credit when it is already overleveraged, coupled with the inherent difficulty of boosting domestic demand as more and more childless consumers approach a frightening retirement, means that mere fiscal and monetary policy stimulus will probably fall short of the mark. The result would be a period of prolonged deflation and even lower consumption and borrowing.

A deflationary cycle in China poses economic risks outside its borders. The U.S. economy is diverse and has strong fundamentals, but a severe slowdown in China’s imports would weigh negatively on U.S. economic prospects, and even more so on advanced economies across Asia and Europe that rely more on China-bound exports, such as South Korea and Germany.

A sustained decline in Chinese consumption and business spending would carry even more drastic consequences for developing economies that depend on exports and investment from China—countries as far-flung as Brazil, Malaysia, and South Africa.

Geopolitical planners will likely also worry about a slowing economy making Beijing’s leaders even more adventurous in international affairs, or at least prone to double-down on domestic nationalism and military modernization.

Ultimately, those most affected by China’s slowdown will be its own citizens. But economic trouble in China could mean trouble—economic and otherwise—across our still-interconnected world.

https://www.barrons.com

Of course they won't stand for it. They will print money like we have never seen.

After listening to most of what Powell has to say I have some hope that he will stick to his guns here.
Unfortunately he can't stop Congress and the executive branch from ramping up spending. That just makes the problem more difficult for the Fed to deal with.

Personally, I think we still need higher rates for a lot longer.

Neither consumers nor producers are growing in China.

I thought the fed was privately owned?

Nope. The Fed is " owned " by the member banks of each of the twelve Federal Reserve districs

I think he meant not owned by the gubbemint



He should have stuck to his guns in 2019. I agree that rates need to go higher and hold for some time.

Can you ever see that being a possibility?

I'll admit it is a long shot but we might get one more 25 bp hike this year. IMO we need to be over 6% now just to try to undo the damage from things like the chips act and the IRA fiasco.


I misunderstood his comment. The fed structure is such that it is easy to mischaracterize it. The term "owned" shouldn't even be used IMO.

The only real connection to the government is that the board of governors is in fact a government entity and answerable to Congress.

The reserve banks themselves are organized as non-profit corporations.

The way I understood the article White is that the CCP needs to become more capitalist view, but the writer of the article has the belief that they will return to a more strict form of communism, which I can see happening and in that situation they will reduce the burden of their aging population though some disturbing means. One point in that article that worries me the most is when they talk about China turning to international affairs which to me means a war, as history has shown in this country that a major war can spur on the economy mainly the manufacturing sector and that’s what’s been driving their economy lately.

"The size of China’s debt problem is truly staggering. At last measure, debt of all sorts – public and private and in all sectors of the economy — amounted to the equivalent of $51.9 trillion, almost three times the size of China’s economy as measured by the country’s gross domestic product."

Source Forbes



"As for which “grey rhino” could actually trigger a deflationary spiral, China’s huge debt—currently around 280% of gross domestic product, a higher proportion than that of either Japan or the U.S"

Looks like all debt in the U.S. is 94 trillion. GDP of U.S. is 26 trillion. Source: Fred The debt in the U. S. would appear to worse than China. Our debt must not be truly staggering?

Sounds like China needs a war to save its economy, the same as ours.

How about we fight each other to save each other?

Not save chancey, reset.

Dirt the 95 or so trillion figure doesn't take into account unfunded liabilities. That figure is truly staggering.

Ken I don't see how the US government can withstand these rates much longer or much higher ones. Eventually the service on the debt will cripple the nation.

Frankly I don't see how the math is going to work.

I'm pretty sure the only math politicians are working on is how much taxpayer money do I have to spend to buy votes.

That sounds like a really, really bad idea to me, but I still can't wrap my mind around debt based fiat currency; I can't figure out how it works, and I have tried. It makes no sense at all to me to print more money to buy more weapons to go to war. We can't spend what we don't have. I don't see how a war will help us, but the folks on the hill seem heck bent on making it happen anyway. None of it makes any rational sense at all to me.

Reset it to what Steven?

Could you please give me the Cliff's notes version of what you mean by the sentence in Bold? I don't understand it. I thought we need the high/or higher interest rates to tackle the inflation.

Many economist consider money not backed by a commodity like gold or silver debt backed. The dollar is backed by the full faith in the credit of the U.S. government.

Since the U.S. government borrows money, increased interest rates mean they have to pay more interest on new loans ( higher interest on their bonds ) and the FED is reducing their Bond holdings which was where the government borrowed money for almost free since most of the interest paid to the FED came back to the government.

Chancey we do need higher rates to combat inflation. Those higher rates will have consequences when new debt is issued and old debt is rolled over from the old rates to the new.

Dirt the FED is now losing money, so not only is the interest on those bonds is coming back, there is an good chance we will be bailing them out as well.

Only thing backing our current debt is our military. Bet that gives you warm fuzzies with current military leadership.

I thought our national debt was about 30 tril. Where does the 91 figure come from? I'm the first to admit I know nothing about it or understand it except the Fed gubmint has nobody to answer to unlike the common citizen.

Unfunded liabilities are well over that.

As in pensions?

Mostly entitlement programs.

I believe this number reflects all the loans in the U.S. Personal, Business, Governments., etc.

The number in White's article on China seemed to reflect the overall debt in China, not the Chinese government's debt. I thought;" How bad is this?", and found out ( I believe) that this number is similar to the U.S. If this is staggering, why is our debt not staggering?

Steve how can the FED lose money on money they just made up? Accounting nonsense. IMHO.

Bad news for the U.S. government though.

"This isn’t good news for a government already buried in debt and running massive budget deficits month after month. It means the US government will have to borrow even more money that the Fed will ultimately have to monetize.

This is yet another reason the Fed’s inflation fight is doomed to fail. Raising rates and shrinking its balance sheet to tame the inflation dragon means more federal government debt. That puts more pressure on the central bank to prop up the government’s borrow-and-spend policies. And this will ultimately necessitate lower interest rates and quantitative easing."

Source: Schiffgold

The other very remote possibility is that it might result in some fiscal discipline from Congress........not likely though.

You're right Dirt is is accounting nonsense. Unfortunately it has a very concrete, real world impact on tax payers.........and not a good impact.

The 12 reserve banks must, by law, utilize GAAP rules (Generally Accepted Accounting Principles).

As of the end of this month the entire reserve system will have an unrealized loss of 100 BILLION dollars over the past 18 months. That means no monies will move from the Fed system to the US Treasury. As you posted above.....that will lead to greater deficits requiring greater borrowing by Treasury, and consequently, higher interest rates for everyone while at the same time those higher rates increase the debt service that Treasury must pay.........compounding the problem.

I can hear Janet Yellen crying and it is music to my ears. Powell too would love to reduce rates to improve his own balance sheet but of course he has committed to doing just the opposite.

Like Steven, I don't see any way this math works.

Dirt the FED is losing money is paying out more in interest than it's taking in.

The FED takes deposits like any other bank. It ispaying more interest on those deposits than it is taking in.

Simple math

Fiscal discipline from Congress?

The people won't stand for it

X2

And it doesn't dare stop taking those deposits or all that surplus capital will overwhelm the financial system. Banks will start making more loans with that capital and drive inflation back up

Terrible! The government will have to sell treasuries to the FED to bail them out. At least the new treasuries will pay better interest than the old ones. This gets so ludicrous, you just got to shake your head.

Absolutely right !

The other thing going on is that a couple days ago the Atlanta Fed bank said the economy is on track to grow at 5.6% annually this year.
Yellen would love to see that because of increased tax revenues but this is the LAST thing that Powell wants to see. He is fighting a strong labor market already.

But consider this. If the economy is currently growing at 5.6% with nominal interest rates at 5.5 %...........that indicates to me that the economy could still grow at 3% even if rates were at 6% or higher.

If I can see that.......... I am certain Powell can too.

I’ve been reading where chances are the FED isn’t going to raise rates here in September, but very well could in November. I’ve been thinking about liquidating some assets that have debt on them, to lower other debt, but with the interest rates now and the capital gain taxes I would end up with higher payments so it’s keep working and see what happens.

That's the way I interpreted this also.
If things get bad enough for China they may view hostilities as their best alternative.
Sort of reminds me of FDR in 1939

That was my thought.

That sounds very bad to me given they have the capacity to build and manufacture stuff and we don't; as we shipped it all away.

Food for thought Chancey. 7.1 trillion of US debt matures in the next 12 months. Of course we will have to refinance that debt, the interest rates will at least double. How long are we going to be able to do that.

Another food for thought, August commercial bankruptcies were up 54 percent year over year.

Yes higher rates are necessary to combat inflation, those higher rates come with consequences.

This isn't 1981, the world is awash in debt.

Time for the great re-set.

Best I can figure the banks are betting normal interest rates can last 2 years before we go back to abynormal.

I saw a few credit unions offering 6% on 1 year CD's this morning.
With mortgage rates approaching 8% and ten year treasuries around 4.26% I'd guess they are trying to entice depositors with 6% while locking in 8% mortgages for 30 years.

CD rates are not following the traditional pattern. Feels like shopping for Airline tickets.

LOL ! That's true!

White, I'd like your opinion on something. I've had the POA on my mother for few years now and have been working on cleaning up much of her investment strategy. She is invested in several Bond funds that look to be paying dividends in the 3% range and these bond funds are way underwater right now. The monthly dividends appear to be reinvesting in the bond funds. Would it not be wiser, at this point, to put these dividends in 5 plus percent money markets for awhile? Not savvy on how all this works.

Thanks for any response.

Here's my opinion on that.
It is pretty likely that MOST of the damage has already happened in those bond funds. IF (big if) you believe that the Fed will start cutting rates next year, then those same funds should see price appreciation if and when that happens.

The question on money markets is one of volatility. Rates can and will fluctuate substantially with every daily change in bond yields. Also, if the Fed DOES start lowering rates, those 5% + yields will drop but you won't see any price appreciation as you would in a bond fund.

If I was in that position I would look at opening a Treasury direct account and just use T-bills at this point. I would stay on the short end of the yield curve for now until things become a bit more clear relative to what the Fed will do. I'd be looking at 1-4 month maturities.

If the economy starts to soften significantly and the Fed starts making noises about seriously reducing rates........then I would start locking in some longer term maturities.

One problem with bond funds is that they never mature so you are constantly dealing with fluctuating share prices of the fund NAV.

The way to avoid that is by owning the bonds(or bills/notes) directly and holding them to maturity. The only risk is reinvestment risk

My thoughts are similar " stop putting in the bond fund and look for new fixed investments in 5 plus percent range.?" That's what we are thinking right? The money market is my savings account to hold money until I invest in fixed investments. The way I'm playing it.

Pretty much Yes.

I should add...

Is this bond fund tax advantaged in any way ? Is it corporate/government bonds or is it possibly tax free municipal bonds ?

Is your mom still living ? If so, does she live in a state with an income tax ?

If you sold the bond fund completely, would she benefit at all from the capital loss ? Does she have any other income that could be reduced by that loss for tax purposes ?

Taxes are not that big an issue since the nursing home costs are 100% deductible.

OK. And is she in Alaska ?

The reason I ask is because US Treasuries are not taxed at the state and municipal level.

No.

OK well if she is in a state that has an income tax.....that is another reason in favor of going with treasury securities as opposed to the bond fund. The bond fund "income" could be taxable at the state level.

Well, I can't get her out of the Bond Fund now! Maybe someday!

It would probably be impossible to calculate her basis in that fund anyway..........without the help of the fund itself. I'm sure they can provide it when the time comes.

Anyway........yeah I would be looking for somewhere more lucrative to be stashing those 3% payments.

One heads up........if you open a Treasury Direct account you may run into the same thing I did. The Federal government has no GPS record of my address. (that's a good thing) ....so I had to get my signature notarized and send all paperwork in hard copy. Took about 6 weeks to get it set up

Most people can open the account online in about 15 minutes.

Well, if I am reading the fund report right they give me cost basis ( not round number) and unrealized gain/loss. Not pretty.

The cost basis changes over time. My guess the reinvestment keeps raising it.

I can imagine it is ugly ! The time to have gotten out of bond funds was 18 months ago.

A guy would expect that her basis would be declining if she is buying more, lower-priced shares each month or so........Unless the earnings are so small that they won't move the needle.

It's been reported that credit card and loan defaults in the US are at a 10 year high.

US debt total has surpassed 33 trillion.

1 trillion in the past 3 months

That doesnt mean anything anymore.

Of course it does.

No it doesnt they just keep raising the debt ceiling.
Spend baby spend.
Clean out your bank account,get about 6 credit cards and max them all out like everybody else.
Then youll have lots of hard assets when you need them.

It is a mistake to view "problems that China is having" from a Western perspective. They are Communists, historically known for being ruthless to their people. There are no economic issues which cannot be dealt with by simply finding a way to kill a bunch of them which are not producers. Old, crippled, weak women, Muslims come to mind.
Feel no remorse for the Chi-comms. They've got this.