What’s all this talk about deflation?


"Credit expansion is the governments’ foremost tool in their struggle against the market economy. In their hands it is the magic wand designed to conjure away the scarcity of capital goods, to lower the rate of interest or to abolish it altogether, to finance lavish government spending, to expropriate the capitalists, to contrive everlasting booms, and to make everybody prosperous."
"The final outcome of the credit expansion is general impoverishment."
                                          Ludwig von Mises

Commentary & Analysis
What’s all this talk about deflation?

Have the deflationists not heard about quantitative easing? What about the Fed’s printing presses? What about rising commodity prices? What about the collapsing US dollar?

I mean, come on – who in their right mind would expect deflation could be more of a threat to the US economy than inflation?

We would.

After the 2008 financial crisis set in, a nasty period of deleveraging and deflation began. Quickly, though, many policies were implemented and seemed to have prevented a lasting deflationary environment (at least as far as asset prices and economic activity are concerned.) But there are very legitimate questions and concerns over some items that still reflect tones of deflation.

And now that it appears a major market top could be in the works, some steadfast analysts are taking the opportunity to warn of a new deflationary period.

Here is an excerpt taken from our Deflation Rising report that we penned back in
September 2009:

The deal is that money is not moving through the economy. All this money that’s “flooding” the system is being saved or used to pay down debts or thrown into stock markets. You can see this clearly from an indicator referred to as the Velocity of Money. If the velocity of money falls, and it has actually plunged thanks to the credit crunch, it means the money being created is not being spent in the real economy. So, if people aren’t chasing real goods with the money created, it doesn’t impact prices:

It may not be a stretch to say that we could see a secular change in the spending habits of the American consumer thanks to a devastating hit to his wealth and newfound appreciation for what “over leveraged” really means. If so, the velocity of money could continue lower and stay lower for years to come.

Below is an updated chart – the period-to-period percentage change looks promising, but the velocity of circulation remains at historic lows and lower than when we last published this chart in our report:

Come to think of it … Barack Obama was just the other day urging US companies to start hiring American workers. Makes sense, I guess, considering that the unemployment rate is much too high, near its post-crisis peak, and companies, some of which were helped out via government stimulus measures, are realizing exceptional earnings growth. Increased productivity plays a large role here and has prevented simultaneous wage and employment growth. But the bottom line is that many companies are sitting on cash without any immediate plans to put it to work.

So … are we on the verge of a new round of deflation as optimism from rising asset prices and economic recovery figures fades?

We think it is very possible, and we will discuss why in this month’s publication of BLACKSWAN Global Investor (formerly known as Currency Investor.) If you’re not already a member, consider joining for only $49 for an entire year! This month’s publication titled Global Deflation: Still a Real Threat is due to be released on Thursday, May 19th. Use any of the following links to sign up now: