A compendium of deflation indicators

The debate on whether we are in deflation or not and whether or not this is a deflationary recession is something you should pay particular attention to. This is not purely an intellectual exercise. This is an exercise with real life implications for your material well being and that of your family.

I’m at a loss as to how I can convey the idea that today, more than ever in the past 100 years, you must at the very least consider the possibility that deflation may not be impossible in this, our modern world. And if you can entertain the idea that deflation is possible, then I must encourage you in the strongest terms to think through the ramifications of what is virtually an unknown state of affairs in the political, social and economic context of our society. In layman’s terms, deflation is equivalent to an upside-down world as you know it. All the economic and social assumptions you have grown up with must be revised, reversed and/or scrapped.  Your plans for the future must be revised, adapted and/or scrapped.

I am telling you that if indeed main stream politicians, economists and the press should at some point concede that, indeed, we have entered a deflationary era, your life will no longer be the same. The quick and dirty is that if you are currently in debt, a deflationary environment will make your life miserable.  Conversely, if you currently have savings and assets, a deflationary environment will make for quite a good life.

BUT… there is a “but” and it is a pretty big-ass “BUT”!! As I have outlined in previous essays, a deflationary environment is lethal to a political system and it is lethal to the working of government. Deflationary environments lead to bankruptcy of debtors (i.e. governments). As the largest debtors in the world, the USA, UK and EU would be under unbearable stress in a deflationary environment.  In a deflationary environment, debtor governemnts will very likely resort to war.

Everywhere I look, all I can see is the hallmark of deflation. Recent press items:

Ken Rogoff says the Fed should set inflation target – (if you read my essay “Is government almighty” you know that under particular circumstances, it may not be within the powers of government to restart inflation)

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4701569/Ken-Rogoff-says-Fed-needs-to-set-inflation-target-of-6pc-to-help-ease-crisis.html

Microsoft slashes contract worker rates by 10%

http://finance.yahoo.com/news/Microsoft-slashes-contract-apf-14483026.html

Moody predicts default rate will exceed peaks hit in great depression

http://www.telegraph.co.uk/finance/economics/4840805/Moodys-predicts-default-rate-will-exceed-peaks-hit-in-Great-Depression.html

Hat tip to Shys39 on VOY for the following link. Doomsday charts comparing various decades. Except for the chart “shipping order book” all the other indicators are consistent with a deflationary environment. I don’t know why the shipping order graph should be at a high when the Dry Baltic index has virtually collapsed in the past six months.

http://3.bp.blogspot.com/_FM71j6-VkNE/SaVUDA0vv1I/AAAAAAAABFY/Zen3bxybbPQ/s1600-h/doomsday.jpg

Gost town: the future of the American economy. Article on “barometric” indicators as leading indicators of the direction of the economy.

http://www.thetrumpet.com/index.php?q=5980.4346.0.0

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One Response to “A compendium of deflation indicators”

  1. guidoamm Says:

    Someone told me that their life was already miserable in inflation so how is that going to be any different in deflation? The answer to that question is that if that was already the case, I can only assume that you were in greater debt than you could afford or were in a job with a salary that was not scalable. In either case, deflation will certainly exacerbate that situation in the first case but may be beneficial in the second. In the first case if you already had too much debt in inflation, deflation will positively wipe you out. If on the other hand you had no debt and a non scalable salary, then, provided you can keep your job you will do all right. That’s because simply by holding on to your salary, you will be able to afford more things in an environment where the cost of living will be decreasing significantly.

    Also, when I say that if you have savings and assets your life will be quite good in deflation, I must qualify that by saying that in nominal terms all your assets will depreciate. So your aggregate wealth (your property, your watches, your paintings, your stocks) will decrease in value. However, on a relative basis, you will be far better off than people that are in debt because in a deflationary environment, the debt burden increases relative to the assets you own.

    But I reiterate. Other people that will do well are all those employees that had no debt and no assets and can still keep their job. That is because even though their salary may be reduced, the general cost of living will be decreasing too (groceries and rents for example). The key here, is to keep the job though.)

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