Hi Jim.
I am responding to your message #931 where you make a case for the "bifurcation of the US economy". Also, this post in a sense questions the timing of Jim Puplava's analysis in his Monday wrap-up today:
financialsense.com
In your post referred to above, you make a distinction between finished product prices - which you feel will incure deflation, and commodity and imported product prices - which you feel will exhibit inflationary tendencies.
I feel quite strongly as do you that "in the long run", commodity prices will rise in real terms do to the emergence of China, India, etc. as they compete for scarce natural resources. However, do you agree or find flaws with my analysis of deflation below?
Message 19328056
Message 19328362
... and in particular my conclusion that:
"I would think that typically in a deflation, earnings power is no longer sufficient to meet claims on wealth ... most especially debt. If there is significant overcapacity in an economy, this is inevitably a very difficult situation to overcome, as households, companies, and governments must get by with minimal earnings power, to finance outstanding financial claims as well as provide for current cost of living requirements. This is the primary cause of "deflation", that current earnings power is insufficient to service outstanding debt."
Because if this is genuinely the cause of deflation, the gap in earnings power and global debt to my mind could cause a massive aggregate demand shock in the global economy, that would be massively deflationary. However, the signs for this would not be yet visible in the CRB and many other markets, for the simple reason that this aggregate demand shock has not yet occurred.
Furthermore, interestingly, I would think it quite possible that the country poised to suffer most from a looming global aggregate demand shock, because it's the economy that has built up the most overcapacity, is precisely China. When debt default starts to kick in in a serious manner, China may well experience massive overcapacity in her manufacturing industry. This could well cause China to reduce prices even further on her manufactured goods, effectively attempt to "dump" her overcapacity to export markets, causing yet even further deflation. The impact to commodity prices would be very severe to my mind, in a negative sense. I believe this is precisely why Japan and China have been buying US$ debt like it's going out of style, for they anticipate the dire consequences of a global debt-based aggregate demand shock to their domestic economies. Alas, at some point, the piper must be paid.
I'd appreciate your analysis of my analysis. (smile)
Best wishes,
Glenn |
