Deflation, not inflation

Excellent reminder article on why deflation remains the dominant force today in the world economy notwithstanding a fire hose of central bank liquidity. A perfect vortex of deflationary factors presently at work include the debt overhang weighing down disposable income for governments and households, over-capacity following the credit bubble, lack of monetary velocity through the economy, demographics, the urge/need to rebuild savings rates, downward pressure on union membership and labour costs, technological innovation, alternative energy sources, as well as the US now retracting from a decade of herculean military spending. Every one is afraid of runaway inflation, but few today have any experience or understanding of the forces and effects of deflation. For consumers it can actually be a healing, helpful force toward restoring purchasing power in the absence of wage gains; and taking the urgency out of a desire to buy today what we can get cheaper tomorrow, it has a positive tendency toward increased savings and lower expenditures which helps to heal dilapidated net worth. For companies though, it means lower revenues. For governments it means lower tax collection which necessitates smaller governments and less spending.

“The expectation of rising prices is reasonable. Most people have only experienced inflation. The last meaningful episode of deflation was in the 1930s. That’s also the last time the U.S. was truly at peace. Deflation is a peacetime phenomenon.

The U.S.’s bouts of inflation, however, have historically occurred during wartime. That applies not only to shooting wars, but to the Cold War and the War on Poverty. These are periods when vast overspending by the federal government is combined with a robust private economy. These aren’t the conditions we have today, when government stimulus can’t offset private-sector weakness…”

Read the whole article here: Why Global Economies Face an Age of Deflation

This entry was posted in Main Page. Bookmark the permalink.