Sunday, November 7, 2010

Karl Denninger Doesn't Get It (and Neither Does Sarah Palin)

As I've said before, there's a lot of things I like about Karl Denninger.  Unfortunately, he can get sloppy in his thinking, even as he makes some pretty keen observations.

Karl has been doing a great job in identifying price inflation caused by speculation in commodities that are consumer staples.  Really, nobody has been more vocal than Karl in pointing out this phenomenon, which will undoubtedly cause a lot of pain to the least fortunate Americans, who are already struggling.

The problem is that Karl equates increasing prices with inflation (to the point that he equates price reductions due to improved productivity as "deflation"):
Now watch very carefully... remember, my thesis is this: Depressions are a function of margin collapse, not deflation.  You seek deflation intentionally every time you go to the store.  Technology creates massive deflation in many things (e.g. calculators, computers, music players, televisions, etc)   This is not bad, it is good.  It allows your earnings to go further and enhances your standard of living.
Because Karl thinks of inflation and deflation in terms of the price of consumer goods, he fundamentally misunderstands what is going on, even while he seems to see the self-reinforcing feedback loop that is being set up by QE2.  Unfortunately, he mistakenly believes that QE2 squeezing operating margins (which will implicitly lead to more layoffs or other forms of cost arbitration that will negatively affect the U.S. economy) is the problem, when the real problem is that QE2 will reallocate aggregate demand away from discretionary spending, causing  a reduction in unit sales.  Management at companies that sell consumer discretionary goods have a fair amount of control over their costs (and, therefore, their margins).  They have no control over whether or not customers will have any money to spend on consumer discretionary goods.  He also isn't taking into account the currency wars that are currently underway.  The international flavor of our global economy will ameliorate some of the margin impact in the U.S. because of the devalued dollar (which really isn't devalued directly because of QE2 because that money has no velocity and is not finding its way into the U.S. in any event).

Anyway, he shouldn't be surprised that Sarah Palin shares his confusion.