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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (100824)	8/14/2009 5:05:04 AM
From: axial	Read Replies (1) \| Respond to of 116555

Deflation looms in the post-crisis world Deflation one. Inflation nil. While the U.S. Federal Reserve, moved gingerly towards a more optimistic view of the U.S. economy Wednesday, saying "activity is levelling out," it is clear that deflation rather than inflation remains the primary threat in a post-crisis world. Evidence from all quarters of the globe Wednesday showed that as yet, rampant stimulus-driven inflation has not emerged and deflationary forces continue to have the upper hand as economies struggle to recover from recession - a process that is expected to be slow and painful. While analysts generally do not expect a period of broad and sustained global deflation, price decreases are affecting some economies more than previously thought. As economies scrape dangerously close to outright deflation, the risk is consumers begin to expect cheaper goods, delaying purchases and sparking a damaging wide-spread bout of price decreases. "The bottom line here is that the Fed is sticking to its guns and maintaining a relatively aggressive posture on policy in a situation where the economy is at a critical turning point and inflation is running below the Fed's desired target," said Brian Bethune, chief U.S. financial economist at Global Insight in a note Wednesday. Japan has dipped in and out of defation for years and the recent bout is expected to linger for another two to three years. The country posted a record 8.5% drop in wholesale prices in July over the year before. The Bank of England also downwardly revised its inflation outlook Wednesday, with consumer prices now likely to drop below 1% in the short-term, well below its target of 2%. It does not expect prices to stabilize until 2012. Gilts surged. "It is more likely than not that later this year I will need to write a letter to the Chancellor to explain why inflation has fallen more than one percentage point below the target," said Mervyn King, the governor of the Bank of England. In Germany, figures showed consumer prices fell for the first time in more than 22 years, dropping 0.7% in the year ended July, while wholesale prices plunged a record 10.6% in the month. The Fed said in its monetary policy statement Wednesday that while the prices of energy and other commodities had risen recently, the "substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time." The sharp drop in the price of light sweet crude oil from the record high of US$147 a barrel in July, 2008, has had a significant dampening effect on headline consumer prices around the world. This phenomenon should continue to weigh on inflation figures in the next few months. With the build-up of spare capacity as a result of the recession, price pressures will likely be slow to materialize and inflation readings will likely continue to fall below central bank targets, making it hard to bring their economies back into balance. Gabriel Stein, an economist at Lombard Street Economics, said deflationary pressures in Europe would continue to grow in the next few years because of the widening gap between economic output and potential output. "All relevant indicators point to consumer prices remaining subdued, most likely falling, but certainly remaining below the European Central Bank's definition of price stability," he said. Eric Lascelles, chief economist and rates strategist at TD Securities, said it was surprising given the depth of the recession that prices hadn't fallen further, with some categories, such as food, actually increasing. He noted the Bank of Canada had upwardly revised its outlook for core inflation, which removes volatile items such as energy from the calculations, in its monetary policy statement in July. It now predicts core inflation to bottom at 1.4% at the end of the year compared with 0.9% previously. financialpost.com Jim

To: mishedlo who wrote (100824)	8/14/2009 10:42:54 AM
From: Hawkmoon	1 Recommendation Read Replies (1) \| Respond to of 116555

Mish, I hope I'm asking a fair question here. I think we both share a healthy disdain for the manner in which the stimulus package was put together. But I'm curious as to what you would do, keeping political considerations in mind, to confront the deflationary pressures. My view is that without confronting unemployment directly, the debt markets will continue to collapse as borrowers default. Maybe the debt bubble is excessive, but I don't see it as desirable to just permit it to collapse, given the economic consequences. But I don't believe we can just continue to employ people in non-productive industries where we're competing with low-cost Chinese labor. We need employment in areas where it increases our country's wealth and advances us into a new higher tech economy (nano-materials or a renewed space program?) The government's job, IMO, is to orchestrate national economic and technical priorities that cannot be better organized by the private sector. The space program is a perfect example of that, IMO. It is also tasked with investing in its people, via job retraining opportunities. Of course, all this is premised by my belief that economic ideology should serve the people, not the reverse. Would be interested in your ideas. Hawk