This came from Prudent Bear on the "inflating" the deflation scenario:
A sudden shock caused by a declining US$ can change the so called
over-capacity situation immediately. Look at how much manufacturing capacity
has been reduced in America; fourteen months of declining output. All of the
over-capacity has really been in foreign countries, servicing America's
manufactured product demand while counter-balancing the goods inflow with
foreigners buying US$ financial assets.
A sudden drop in the US$ would strand all that manufacturing capacity
overseas and rebalance American industry overnight.
That is why competitive devaluations are so appealing in a depression; they
stimulate real demand in your economy while they cause price inflation.
However, the country with the big negative trade balance obviously has the
upper-hand in doing a devaluation. That is what Japan is resisting by
supporting the US$ in the last few months.
The only over-capacity which America has, which cannot be rebalanced by a
US$ decline, is an overcapacity in services and real-estate which are not
importable products. In the coming asset deflation, real estate demand,
air-travel, entertainment, and many luxury services can be cut, dentist
appointments delayed, self-service can predominate, cheaper restaurants
chosen, a less luxurious life-style adopted, et cetera.
So, watch for a possible gross inflation in manufactured products and their
component commodity inputs as a recovering manufacturing sector is spurred
on by a sharp US$ devaluation.
The US$ devaluation would also create havoc with US multi-national
corporations as the shifting demand patterns would injure their
profitability. For example, a US company with production facilities in Asia
would see competitive pricing problems squeeze profit margins if the Asia
currency rose too much in value.
So, the deflation argument is not a sure thing. It really depends on the
excess capacity remaining in place. There are other outcomes, other than a
US$ decline that could eliminate that excess capacity faster than you think.
Bankruptcies and new monopoly corporations can arise, for example. Can you
see this happening in the airline industry quickly? Sudden bankruptcies
destroys the wealth of most airline shareholders and then one last remaining
airline can control pricing as all excess capacity is quickly purged by the
bankruptcies. I can see that scenario happening as easily as the funneling
of billions into these companies in order to preserve the over-capacity for
a long time. I cannot predict which scenario will happen. One is
inflationary and the other is deflationary, respectively. |
