Deflation Fears Stir in Developed Economies

[TomCADem]

Source: Wall Street Journal

Worries about consumer price deflation are resurfacing in the world's developed economies after weeks of financial-market turmoil driven by Europe's fiscal crisis.

The fears are most pronounced in Europe, where policy makers are under pressure to reduce large budget deficits now, before durable recoveries emerge. A combination of spending cuts and tax increases could weigh on economic growth and feed into deflation, which is a broad decline in consumer prices.

Deflation makes it harder for consumers, businesses and governments to pay off debts. Principal repayments on debt are fixed but deflation is marked by falling incomes, so as deflation sets in the burden of paying off old debts gets greater.

Officials fret about deflation because it is hard to stop. Interest rates are already near zero in the U.S. and elsewhere, so policy makers can't use the traditional tool of rate cuts to spur growth and stop deflation.


Read more: http://online.wsj.com/article/SB10001424052748703627704575298912427566820.html

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The corporate media, of course, is trying to protect financial institutions by insisting on lowering the deficit in order to fight inflation. Yet, aside from Glenn Beck's gold infomercials, the reality is that we are in danger of entering into a period of deflation. The disaster in the gulf certainly will tend to depress consumer spending further. But, will deflation ever find its way into the 24/7 cable news narrative?

[Warpy]

1. As all the phoney money generated by the derivatives market

continues to evaporate, you had better believe we're going to see a period of deflation.

As miserable as inflation is, deflation is far, far worse.

Just don't try to tell the gold bugs this stuff. They're all convinced those shiny rocks that have inflated in price far faster than the overall inflation rate are going to be the only thing out there that survives.

Ooops.

[Dover]

6. Not sure what will happen to gold, but several countries seem to be relying on it

to stay afloat as well, as they've been increasing stockpiles. My cousin told me the other day that her broker has heavily added gold to their portfolios. Not gold certificates but the physical stuff which they have
also paid to store! She told me her broker said that gold isn't just for 'gold bugs' anymore.

It's difficult to know what, if anything, will be the standard of choice as the dollar declines. Here's an interesting discussion about Deflation and Gold.


Why gold if deflation is the threat?
http://blogs.reuters.com/rolfe-winkler/2009/10/02/why-gold-if-deflation-is-the-threat/

[Xipe Totec]

7. Gold prices crater in a deflation scenario nt

[Dover]

8. Did you read the article I linked to?

Here's a short excerpt:

Alice Schroeder wrote a great column for Bloomberg yesterday that I’m just getting to. The best stuff comes at the end, where she describes why some people are buying gold even though inflation doesn’t seem to be a big risk. (Apologies in advance for block-quoting lots of stuff in this post, but I think it’s worth it…)

In a nutshell: They aren’t playing a conventional inflation trade. They’re buying currency crisis insurance.

Gold bugs aren’t just betting on inflation, as is the conventional wisdom. Gold has a wicked history of being an unreliable inflation hedge. It has, though, at times been a haven against sudden currency depreciation.

In all the talk of inflation because the Treasury is printing so much money versus deflation because it may not print enough, there is one type of inflation that is rarely discussed. This is the mega-inflation caused by a sudden currency devaluation. Currency is like any financial innovation, an obligation secured by assets. When the obligation is perceived to have increased far beyond the level justifiable by the assets, which in this case make up a country’s economy, a bubble has formed.

Schroeder is describing, in much simpler terms, what economist William Buiter has called a “sudden stop” event.

--

I don't pretend to understand economics very well, so not sure what to think of this article. But it certainly does seem that the usual conventional economic model analysis is not necessarily taking into consideration the unique characteristics of the current situation. In other words, we're not in Kansas anymore.

[Xipe Totec]

9. I read it. It's gibberish

The main point is:

"Might as well stock up, they say, before gold becomes a controlled substance."

That's it? That's the plan?

:eyes:

[Dover]

10. Is this gibberish too?

I don't know about that "controlled substance" statement, but if we are in a currency crisis as described then it appears gold IS the solution, at least temporarily, that is being chosen.


Gold Finds Identity Amid Currency Crisis
Tuesday, 11 May 2010
CNBC - Fast Money

Gold hit a new record high on Tuesday as the $1 trillion bailout of the Euro-zone region combined with the giant U.S. deficit leaves bullion as the only reserve currency of choice.

“You finally have a fundamental reason to own gold,” said Joe Terranova, chief market strategist for Virtus Investment Partners and Fast Money trader. “It’s a diversification tool for central banks around the world, especially China and India, now that the Euro is on the run.”

Today gold settled at new all-time high of $1,220.3 an ounce. Investors sent the metal reeling earlier in 2010 as government data showed concerns about inflation were overblown. The SPDR Gold Trust , one of the many ETFs out there focusing on the metal, is up 14 percent from its 2010 low in February.

The ECB’s purchase of government debt as part of the bailout plan will be at the very least “detrimental to the integrity of the currency itself,” wrote Dennis Gartman of The Gartman Letter. “That process shall tend on balance to put upward, perhaps relentless, pressure upon gold as gold becomes every day to be seen as the second currency, supplanting the EUR which had assumed that rule until quite recently.”

Gartman, who predicts the Euro will eventually be forced to break apart one day, agrees with that the central banks of the world have no other choice now than to own gold. Sure, there are other currencies, like the Canadian Dollar, which will gain favor, but none have the liquidity and fungible value of gold. This enormous force will put a long-term bid under the metal, they said.

Gold lost its inflation-hedge identity following a loss of its safety identity in 2008. Gold plummeted in 2008 along with almost every other asset class as investors were forced to take profits in the metal to raise cash for margin calls and redemption requests. But now we face a crisis centered around a currency and not exotic derivatives which had diseased every corner of the financial system.

“It’s different this time,” said Terranova , who is also a ‘Fast Money’ trader. “It’s true identity is a safety play and inflation hedge and this time around it will be viewed as such.”

http://www.cnbc.com/id/37088361/Gold_Finds_Identity_Amid_Currency_Crisis

[Po_d Mainiac]

11. Nope..

The shiny metals can always be exchanged for whatever currency/barter that OPEC decides to trade in.

"Gold/silver-bugs" ain't holding hard because the expectation is for huge returns. It's to CYA if paper is used for little more than cleaning the same region.
YMMV

[Dr.Phool]

2. The cable news doesn't even know what deflation is.

And it's a vicious spiral once it starts.

Several leading economists have been warning about it for over a year. The financial crisis in Europe is going to push things along a little faster. There may be problems in China as well.

----------------------------------------------------
I had Gold Bugs once. Blue ointment got rid of them.

[MidwestTransplant]

3. If we enter a period of real deflation, his gold bug buddies will get busted the fastet.

[Sherman A1]

4. Seems to me that prices continue to rise

on consumer goods and the day to day things, so I wonder where this deflation is occurring?

[Demeter]

5. In Real Estate and Financial Paper

Anywhere the cheap money bubbled up. Also in commodities, to some extent (for example, oil futures).

We will probably have simultaneous inflation in basics of life and deflation in anything else. That's the way the govt. policy is set.

It's the outsourcing of manufacturing and white collar jobs that is really going to kill us, though.

[conspirator]

17. That's sums it up. They print monopoly money to inflate the prices of property and food,

while eroding our savings, to keep us as slaves.
And deflate the prices of all the junk commodities they want us to buy, also to keep us as slaves.

[bossy22]

12. Paul Krugman rants about this daily

and i tend to agree with him. All these austerity measures will end up stalling the recovery and could send the world back into a recession. I'm all for lowering the deficit but not until we see a true durable recovery; and then it should only be taken gradually. Hopefully obama and congress critters listen to people like Krugman (a noble prize winning economist).

[Dover]

16. With interest rates near zero how much wiggle room do they have left?

With a jobless recovery, it seems there's no one around to buy anything, so that leg of the table is gone.

[Odin2005]

13. Meanwhile the Libertarian morons are still screaming about impending hyperinflation.

Libertarians = STUPID

[DJ13]

14. Its about time prices deflate to match the deflated wages

Since 1980 wages have actually declined relative to the ever present inflation in goods and services.

[wordpix]

18. I had to leave a job 4 yrs. ago because wages went up 1.5%/yr while electricity, gas & food

climbed 25%. I was in the same job for 12 yrs. and finally said goodbye, I can't afford to work here anymore. I got another job that paid 50% more.

[pscot]

15. This is a really good comment thread

Sane, informed and polite. :toast: