Sunday, October 26, 2008

Stag-Deflation !!

The Coming Global Stag-Deflation (Stagnation/Recession plus Deflation)

This one argues for a deflationary outcome based on the fact that globally, as well as the UK, there is a demand shock, people want less, prices will fall to clear stocks and there will be downward pressure on wages as fewer workers required. Against this, for an inflationary outcome is that they are associated with supply shocks and there aren't any supply shocks. Well, I think there was a supply shock earlier this year with oil and wheat etc but that does seem to have finished. Relating this to the previous article post I can see that specifically for the UK, dependant on imports, it is not impossible that we will induce a supply shock with a devaluation of sterling, which would lead us into inflation. Neither of them include any figures or evidence but I do feel ...(continued)

Posted by stillthinking @ 11:09 AM (1999 views)
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4 thoughts on “Stag-Deflation !!

  • stillthinking says:

    .. I do feel less certain about deflation that I used to. Also the government seems to have announced deficit spending, whether they will or not who knows. I think the government do intend to inflate their way out of this, or at least attempt to inflate their way out. I think also that sterling doesn’t look good as a place to hold savings anymore. Perhaps we will see how well the government are able to raise their borrowing requirements. If UK government debt is refused then there is a good reason for a confidence crisis as they will have to raise debt anyway for current operations let alone ambitious spending plans.
    Also, I have no idea whether inflation will rescue house prices. I can see that a wage spiral would make things better, but with rising unemployment I don’t see that. Higher import costs will break many people.
    Anyway, something to mull over on sunday.

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  • planning4acrash says:


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  • Nouriel Roubini is not wrong but rather I think we have a period of steep deflationary pressures followed by hyper inflation. How can this be? First of all the deleveraging of the massive oversupply of credit is not yet over. The only way to unwind credit is to sell assets or to save. Prices in a forced selling environment are always harsh, hence the downward pressure on prices which lead to production cut backs and contraction of GDP, a self fulfilling prophecy. We still have a long way to go into this unwinding process. Probably 4Qtrs to 6 Qtrs of a steep U or L shaped recession.House prices are going to fall 40% peak to trough and will not recover before 2011 – 2012 and then will be sluggish. (Because as deflation takes hold governments will PRINT MONEY. (if you are an austrian economist) more money supply = inflation. And alot more money supply = hyperinflation.) Governments are printing money as we speak and Brown and Darling are going to turn the UK into a marxist state run nation by doing so. They will be too late to catch the bounce and rein in money supply hence the hyper inflationary outlook. This will not help bewildered house owners who if they are still hanging on will have to face into interest rates going through the roof just at the time that they are losing their jobs and demand remains weak for the housing stock. Although it is clear that there could be strong rallies in stock markets within the overall bear market soon (if the Dow continues to fall at 500 points a day it will be at zero in 2 weeks which clearly it won’t be) it is not over yet by a long shot. I have been looking at buying into stocks in the USA and Japan there are some great bargains BUT note that in the last 4 bear markets the market lost 25% of its value in the last segment and no market has ever recovered before copper prices and other commodities prices have stabilised. (which they definately have not yet.) Currencies are going to be treacherous too. The US Government are going to deflate their currency to escape their debts. (note that we are not so far away from thepoint at which interest payable is greater than the taxable revenue base of the entire USA. What happens then? Who buys US debt? Well only those nations that want something geopolitical in return or if US interest rates go to the moon. In this environment Gold is probably the only asset which will perform. (Both in a deflationary and consequent inflationary environment.)

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  • Dogfox,

    I can’t see hyperinflation. Even if the central banks printed enough money to offset the credit losses, it would be done over a long period of time and it wouldn’t take that much money to cover it. Inflation maybe (though I side more with Roubini’s deflationary argument); hyperinflation definitely not.

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