MrB and all including the missing Iceberg: maybe it's time for us to
worry about DEFLATION. While some newsletter writers still are trying
to attract subscribers by scaring them with inflation, EXPERTS worry
about the threat of deflation. IBD has a story on the cover today. If
you don't subscribe, try the web site. If you'd rather not...
NATIONAL ISSUE
IS DEFLATION THE
REAL THREAT? Fed May
Be 'Behind The Curve' On
Falling Prices
Date: 7/17/97
Author: Anna J. Bray
As the economy chugs along at its current brisk
pace, almost everyone assumes that inflation isn't
far behind. Fast growth will lead to even lower
unemployment, which will push up labor costs
and then prices. Or so the common wisdom has
it.
Maybe. But it ain't necessarily so.
In fact, some economists are looking for - and
finding - deflation. Deflation happens when the
general price level declines, and the dollar's
purchasing power rises.
Sustained deflation has been rare in postwar
times. But the idea is worth a second look. A
bout of deflation would mean that the Federal
Reserve has been too tight-fisted with credit -
and should be looking to lower rates rather than
boost them, as many economists now predict it
will later this year.
Most official price gauges still show some
inflation, especially in services. But they show
overall prices rising at an ever- slower pace -
something known as disinflation. And some key
inflation indicators - producer prices, gold, even
commodities - are falling.
If deflation is around the corner, what would it
mean for the economy?
Mild deflation might not be so bad. Think of the
whole economy mirroring what's going on in the
computer sector. Consumers would enjoy falling
prices on the things they want. Companies
would have to rein in costs and innovate, rather
than raise prices, to make profits. But investors
would have a harder time finding profitable
companies.
On the other hand, severe deflation is no better
than severe inflation. To many, it recalls the
Great Depression, when companies had to cut
costs so much that millions were thrown out of
work. Consumption sank like a stone -and
started the downward spiral anew.
The deflation theory got a boost last week, when
the Labor Department reported a 0.1% decline
in the June producer price index. That marked
six straight months of decline, unprecedented in
the postwar years.
''We shouldn't get too carried away with the PPI
decline,'' said Edward Yardeni, chief economist
at Deutsche Morgan Grenfell-C.J. Lawrence
Inc. in New York. ''The question is whether it
will persist, and there's a significant possibility
that it might.''
In fact, gold prices suggest deflation may have
already been going on for a while, says Richard
Salsman, senior vice president at H.C.
Wainwright Economics, a firm that uses precious
metals prices to forecast interest rates.
Since the start of 1996, gold has fallen steadily,
dropping about 20% to $320 an ounce. Many
analysts have cited unusual central bank selling
that has flooded the market with bullion. Most
recent was Australia's surprise sale of over
two-thirds of its gold reserves.
But Salsman's research shows the amount sold
by central banks makes up a small share of all
gold traded. ''The price of gold is not falling
because central banks are selling,'' Salsman
wrote in a report. ''Central banks are selling
because the price of gold is falling.''
Falling inflation and deflation cut gold's value as
an inflation hedge. That makes it more valuable
to convert gold into currency assets like bonds,
which will earn a better return.
continued in next post |
