Monday, Jun 30, 2008
Why we should be worrying about deflation
MoneyWeek: Why we should be worrying about deflation
"...even though prices are rising at a rate of knots just now, deflation is also a very genuine threat to Western economies. How it plays out remains to be seen, but a period of inflation followed later be a longer period of deflation does look quite possible."
Posted by damien @ 10:33 AM (760 views) Add Comment
9 Comments
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1. last_days_of_disco said...
The D word in the headline, my my. It has to be John Stepek of course. My respect for this guy just goes up and up.
Inflation hump, then deflation.
I wonder if Robert Prechter will get a Nobel prize for economics by the end of all this?
Two bubbles in a row is pretty good going.
2. Cynicalsoothsayer said...
"Better yet, we could just scrap central banks and let the market decide where interest rates should be. After all, that’s pretty much what’s happening now that everything’s gone horribly wrong."
Aye, Gordie can bail all he likes, he's still sinking!
3. techieman said...
"But none of this is about inflation. What inflation really is, is an increase in the money supply. Deflation is a decrease in the money supply.
When the amount of money available to the economy is rising, it’s got to go somewhere. In this case, it largely went into chasing house prices higher. Now that the supply of money has been cut off, as banks stop lending, house prices are falling. And the real problem with deflation like this, is that as people get more and more concerned about the availability of money, they start to hoard it. That means that not only does no one spend money, they don’t invest it either. They don’t take the sorts of entrepreneurial risks with their money that are necessary to make an economy grow, because they are too scared of losing their scarce cash."
Yes - people get so scared that when they do have money they save it rather than spend it. Because before there were no rainy days on the horizon, now the conditions are overcast and a downpour looks on the way.
as Last days says - Prechter is pretty good - here (whats been posted before) is his explanation re deflation. Its quite heavy but worth the read.
Last days have you seen on their site they have a report re housing in Europe? I might invest but wont be able to post i think its about $49.
4. techieman said...
might help if i actually pasted the link! http://www.elliottwave.com/deflation/
5. drewster said...
As Stepek points out, the terms "inflation" and "deflation" are misleading. The next decade will see both inflation in consumables such as food, oil, and imported manufactured goods (clothes, computers, cars); and deflation in assets (houses & shares). In the US, Helicopter Ben and the Plunge Protection Team might print dollars to counteract the fall in asset prices. This would cause even worse commodity inflation, a politically untenable stance in an election year with voters very worried about high petrol prices.
I take issue with his suggestion: "Better yet, we could just scrap central banks and let the market decide where interest rates should be."
It's this kind of market-fundamentalism that led us into this mess in the first place. If the markets are so clever, why are the banks hemorrhaging money? Markets aren't rational, they naturally tend towards boom and bust. Perhaps Stepek believes that boom and bust cycles are good for us. There is some truth in that.
6. techieman said...
Drewster - off topic - i looked at the short sale "problem" that Byrne stated. Interesting. Now thats US stocks and yes they should tighten up but i dont know - but would like to - find out the same happens in the UK and /or European bourses. This Failure To Deliver shouldnt be tolerated IMO.
7. drewster said...
techie, thanks for looking into that. It's certainly shocking that it's allowed to happen in the first place. I'm afraid I have no idea if the same thing can happen in the UK. Intuitively I would doubt it, I think we would have heard about it by now as the UK system seems more transparent in general. I could be wrong of course.
8. techieman said...
Drewwster agreed - although i think that the http://www.businessjive.com/ presentation is very good - particularly slide 38 on which explains "legitimate" short selling very well , whether or not you agree or disagree with the concept (i obviously agree that you should be able to go long and short a market).
9. jamonit said...
If gold is a safe haven against inflation, what are the implications for gold of deflation? Surely if other investment assets are declining in value, this is good for gold as well. But this implies that it's good for gold whatever's happening! I'm confused again.