Good afternoon to you Henry and hope you are thriving.
The BOJ is now down to nearly zero interest rates: that means, "...please I want to give you the money you want... you must, promise, promise, promise to pay us back". Free money. The ideal of every venture capitalist. Amazing.
From Comstock Partners a very succinct statement about world wide deflation:
"World wide debt buildup, over-capacity and currency devaluation have set in motion a “deflation trap” which is seemingly resistant to any policy cure. The bursting of the Japanese bubble in 1990 was at first contained because of that nation's enormous trade surplus and currency reserves. The Mexican devaluation in 1994 was well absorbed when the US was able to purchase a major portion of its exports. However, when little Thailand was forced to devalue in 1997, the deflationary forces it set off spread quickly to the rest of Southeast Asia and, now, to Latin America. Along the way Russia and Eastern Europe were also hit hard. Presently, among the major areas of the globe, only the US, Canada, Western Europe and Australia remain free of recession or depression.
The “deflation trap” begins with a major global capacity expansion, largely financed through debt. Eventually, the ability to produce outruns the capability of consumers and businesses to purchase these goods and as a result, prices begin to decline and some countries find it difficult to sell their goods abroad. The currency markets, gauging the economic situation accurately, then proceed to attack the weakest link. (Thailand in 1997.) While the crisis may be triggered by currency speculation, it is the fundamental economic situation that is actually the cause of the crisis.
Once a nation's currency is attacked, it has a limited number of policy choices, all deflationary in the end. If the nation has enough reserves, it can defend its currency until its reserves run down or raise its interest rates to an extremely high level causing severe recession or depression and domestic deflation. The other choice is to devalue, which causes domestic inflation, but exports deflation to other nations by reducing the effective price of its exported goods. It is at this point that each affected country is swallowed up in the deflation trap. There is no escape from this trap as each trapped country tries to resist devaluation by raising rates or depleting their reserves to protect their currency. This doesn't last long as the economic consequences or currency speculation eventually force the trapped country into devaluation. Then the process starts all over again. This is essentially what has happened worldwide over the past 19 months from Thailand to Brazil. Now the remainder of Latin America is also under pressure and the economies of Western Europe are also slowing down. Only the US remains an oasis of prosperity, and as Alan Greenspan warned a few months ago, this is unlikely to continue.
The dilemma of this world recession/depression/deflation, called by many economists "the greatest economic crisis in sixty years", is that any policy moves initiated by the US Federal Reserve and other central banks have unintended negative consequences. For instance, the Fed temporarily eased the global crisis in the fall of 1998 with three interest rate cuts, totaling three quarters of a per cent, with other central banks also falling into line with a total of 80 rate cuts. Like any medicine, these rate cuts had adverse side effects like keeping marginal producers alive and pumping out more goods. They also extended the US stock market bubble, which in turn, gave a boost to the US economy, thereby resulting in rising interest rates. The dilemma is that lowering rates actually caused rates to rise a few months later. In addition the US consumer is virtually supporting the world economy, but only by running a negative savings rate. Thus the Fed is stuck on hold while the global spread of deflation continues unabated. This is the “deflationary trap”. The condition of excess global capacity will continue to spread deflation until that capacity is reduced. This has not been done and the deflation will soon reach Western Europe and the US."
On this cheery note I am going down into my cellar and make sure the mold is not growing on my cash.
Best to you,
Clark |
