[Rickson9]

Garth Turner finally talks about the possibility of deflation here on his blog at http://www.greaterfool.ca/

As I mentioned in the comments, everybody and their mother were talking about higher interest rates and inflation as a foregone conclusion! If the market has taught us anything, it's that anything is possible! There is more than one way to skin a cat!

If somebody believes in higher interest rates and an inflationary future, then this is their chance to take on massive debt! There is no better opportunity to lock in a million dollar loan at a rock bottom interest rate and to use those inflated future-dollars to pay everything off in no time flat! If you believe in higher interest rates and inflation then the people who are putting 5% down and mortgaging the rest are the "smart money"!

Heh. I doubt it!

http://www.theglobeandmail.com/report-on-business/crash-and-recovery/deflation-taking-root-in-global-economies/article1306056/

Disclaimer I have no clue what will happen in the future. The consensus is always wrong and having everybody tell me that higher interest rates and inflation was "inevitable" just made me chuckle.

http://finance.yahoo.com/tech-ticker/article/345240/Everyone-Thinks-Interest-Rates-Are-Going-Higher?tickers=xlf,dia,spy

Deflation in Japan started in 1990s. The government and the Bank of Japan reduced interest rates to 0%. This tactic was unsuccessful for over a decade and ended in the summer of 2006. The 'zero-rate policy' was deemed a failure.

Economics have cited the following reasons for deflation in Japan (some of these may sound very familiar to Canadians):

Falling asset prices including real estate. Japan experienced a massive real estate bubble that peaked in 1989. When assets like real estate decrease in value, the money supply shrinks which is deflationary.

When real estate prices collapsed, the banks who loaned money for the purchase of said real estate found that their mortgages weren't being paid. They tried to collect on the collateral, but it wasn't enough to pay off the loan. Banks then delayed these decisions in hopes that asset prices would improve. Some even made more loans to mortgage-holders to service the debt they already had (!) thus maintaining an "unrealized loss" (at least until the assets were sold off and the loss realized). This exacerbated deflationary forces.

As banks continued to rack up non-performing loans (no payments and not written off), they handcuffed themselves since they had to increase their cash reserves (to cover the non-performing loans) and were unable to lend any more money.

As the population paniced; fearing the collapse of the financial system, they avoided entrusting their money to the banks and instead used their cash to buy gold or foreign Treasuries. Again, this exacerbates deflation as the money is not available for lending or economic growth.

The savings rate rises and depresses consumption since the money isn't used in the economy in an efficient form to create new investment.

Japan also continued to import cheap Chinese goods. Domestic producers, in order to match these low (and continually lower) prices decreased prices for many items in the domestic economy and further promoted deflation.

Bill Gross believes that deflation is a real possibility:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aEHQiqgK1vdQ

If deflation happens, it will be ugly.

 

[DuckConference]

Governments and central banks are generally quite scared of deflation, and would likely take extreme measures to avoid it if it seemed imminent. This is, of course, no guarantee, but when the people setting the game's rules all want the ball to go one way, it's likely to go that way.

 

[Brad911]

Governments and central banks are generally quite scared of deflation, and would likely take extreme measures to avoid it if it seemed imminent.

Why do people think governments took such drastic action last year when banks began to collapse and the economies of every nation contracted so sharply?

It wasn't "economic growth" that they were concerned about.....

 

[steve41]

Anyone have an idea what the feds would do with the tax brackets if the inflation rate went negative? Ditto entitlements.

"Reduced inflation equals higher taxes, lower CPP/OAS"

Hmmm.

 

[el oro]

Deflation is here! That's why I shorted the market recently, when the USD bottomed for the short/medium term. This deflationary broad market decline will be short lived, imo, and I'll be long again later this year.

This means I'll be holding one of those betapro bear etf's for more than a week, maybe even a month. Crazy, eh?

 

[steve_jay33]

Deflation...bah...

Garth Turners predictions are usually good for a good laugh.

I will take Warren Buffett's and David Dreman's warning that inflation is on the horizon, thank you very much.


http://www.wallstreetreporter.com/2009/08/contrarian-investor-david-dreman-inflation-interest-rates-10-14-in-a-few-years/

http://www.nytimes.com/2009/08/19/opinion/19buffett.html?_r=2&pagewanted=1

 

[Rickson9]

Deflation...bah...

Garth Turners predictions are usually good for a good laugh.

I will take Warren Buffett's and David Dreman's warning that inflation is on the horizon, thank you very much.


http://www.wallstreetreporter.com/2009/08/contrarian-investor-david-dreman-inflation-interest-rates-10-14-in-a-few-years/

http://www.nytimes.com/2009/08/19/opinion/19buffett.html?_r=2&pagewanted=1

Inflation will save people from their $1M mortgages.

Whether deflation or inflation comes (because nobody knows), hopefully investors have a strategy for it because if a person doesn't know what to buy, it really doesn't matter what happens.

 

[HaroldCrump]

I don't believe there is any deflation going on.
And I don't think we're going to see any significant deflation in the near future.
With the exception of the price of gas, pretty much every household expense has gone up since the same period last year.
Property values are increasing (inspite of the recession), salaries are stagnant or reducing, cost of groceries, clothes and general household needs are higher.
Large corporations and retailers resort to price fixing to avoid deflation - they don't need Govt. help.

 

[Rickson9]

...salaries are stagnant or reducing...

That's an example of deflation. You might want to remove that from your list.

Large corporations and retailers resort to price fixing to avoid deflation - they don't need Govt. help.

Price fixing doesn't avoid deflation. Just an fyi.

As an aside, hoarding money is deflationary.
http://www.nationalpost.com/rss/story.html?id=2044036

Also as an aside, Germany is in deflation, the U.S. is in deflation, and Japan has been in deflation for 20 years. Canada is in deflation:
http://www.google.com/hostednews/ap/article/ALeqM5hcyuN4kz8LojaylRff6dTjOVgbbwD9AP4H6O0

Having said all this, I have no idea what will happen in the future. What I do know is that homeowners who took out million dollar mortgages are praying for inflation because inflation will save them. I also know that if inflation comes, I will wish that I had a million dollar mortgage

 

[HaroldCrump]

Can you then explain why the prices of most essential household goods are not coming down?
In fact, going up....
All the stats and charts produced by economists are good stuff, but at the end of the day, prices of daily use items are on the rise (except gas prices).
Ironically, inspite of gas prices dropping from $1.10 to $0.90 prices of goods are not lower.
I keep very detailed account of my household expenses and looking through my spreadsheets, I see the price of milk, bread, fruits, clothes, etc. higher than same time in 2008.

 

[Rickson9]

Can you then explain why the prices of most essential household goods are not coming down?

Not really. Honestly I'm not intelligent enough to understand why that is.

All I understand is that a number of countries, including Canada, are experiencing deflation - not inflation.

 

[steve_jay33]

Inflation will save people from their $1M mortgages.

Whether deflation or inflation comes (because nobody knows), hopefully investors have a strategy for it because if a person doesn't know what to buy, it really doesn't matter what happens.

You can't have a strategy for both, you have to pick one. I will stick with the gurus and bet on inflation....And warren knows....

 

[steve_jay33]

Not really. Honestly I'm not intelligent enough to understand why that is.

All I understand is that a number of countries, including Canada, are experiencing deflation - not inflation.

Where are you getting your info for that statement?

 

[Rickson9]

You can't have a strategy for both, you have to pick one. I will stick with the gurus and bet on inflation....And warren knows....

People who have recently taken out milion dollar mortgages are happy to hear that. And honestly, I would be happy if that happened as well.

Just an FYI: Warren Buffett has never claimed that he knows if inflation or deflation will come, but I strongly suspect that he supports inflation because a lot of his net worth (like mine) is tied up in stocks.

Also, if you like gurus, Bill Gross is on the side of deflation btw. But he doesn't know the future any better than anybody else.

 

[Rickson9]

Where are you getting your info for that statement?

What Inflation and Deflation looks like:
http://cosmos.bcst.yahoo.com/up/fop/embedflv/swf/fop_wrapper.swf?id=13550358&autoStart=0&prepanelEnable=1&infopanelEnable=1&carouselEnable=0

Canada in deflation:
http://www.cbc.ca/money/story/2009/09/17/canada-inflation017.html

U.S. in deflation:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aEHQiqgK1vdQ

Japan in deflation:
http://ibtimes.com.au/articles/20090930/japan-sees-deflation-deepen.htm

Deflation taking root in global economies:
http://www.theglobeandmail.com/report-on-business/crash-and-recovery/deflation-taking-root-in-global-economies/article1306056/

Europe falling from inflation to deflation:
http://news.bbc.co.uk/2/hi/business/8282321.stm

Note: Deflation = -ve Inflation

Again, I have no idea which way things will go in the future (neither does Warren Buffett or Bill Gross) but I would venture to guess that both of them recognize that negative inflation = deflation.

For me, inflation seems unlikely only because I can't imagine somebody putting down $50,000 to buy a $1M home is going to get off the hook because of inflation, but again, that's not proof of anything. And if deflation hits, I'm going to get decimated because I hold a lot of stock.

 

[el oro]

Imo, the formula is... credit bubble -> deflation (now) -> inflation with a possibility of hyperinflation.

The US Fed printing money trying to stop deflation = devalued world reserve currency. Countries are going to want to sell their huge reserves of USD and buy tangible assets. So, the dollar supply will come from printing money and the big holders wanting to liquidate. It's like a company diluting their stock by issuing more shares while the big institutional holders of that stock want to sell at the same time. China, for example, is buying a new natural resource property every week or so (worth billions each) with those dollars.

I'm happy to bet on deflation for the moment, though.

Here's an excerpt from a blog (I'm not sure of the source) that explains how we go from credit bubble to deflation and touches on inflation:

"In a normal circumstance, people borrow against rising earnings. Much of the growth of an economy comes from 20somethings entering the workforce and buying their "firsts": first car, first house, first furniture, first appliances. They lack savings but anticipate growing wages, so they borrow against future earnings. When a recession hits, they cut back on discretionary spending but continue to cover their debt payments.
In a credit bubble, people instead borrow against rising assets (stocks, houses). They buy more than their firsts; they buy second cars, new HDTVs, and so forth. When the credit bubble bursts, they are caught, since they borrowed ahead of their earnings. They have to liquidate assets (again, stocks and houses) to cover the debt. Often the assets drop below debt, and do not cover the debt. The delta has to be written off.
When debt is repaid out of earnings, money changes hands. When debt is written off due to assets dropping, it disappears. In 1929, people were able to buy stocks with 10% down and 90% margin. When the stock dropped more than 10%, the margin could be called. As the stock market collapsed, rather than pay down the margin people abandoned stocks. When they got sold at 50% lower, the 10% equity was lost and the margin of 40% was lost. It didn't change hands; it disappeared.

This is why a deflationary period follows a credit bubble, and why a depression is different in kind than a recession. In a depression, debt is written off, and money (in the form of credit) simply evaporates from the system. The destruction of credit money can dwarf the money supply; in our case, a writeoff of a mere $2T of the $52T debt is more than the whole extant supply of money in the form of currency and checking accounts.

The destruction of credit has already started - the so-called 'deleveraging' in the economy. It will accelerate as the real housing crisis hits - the potential $2.5T in the next wave of losses. It includes the huge losses GM and Chrysler bondholders are soon to suffer, and the even larger losses that will follow a major money center bank cratering.

The Fed will be proven unable to stop deflation. Bernanke has tried so many ways to push credit on the market, and to push money out there, but it is not moving. The credit markets remain largely frozen. All I can say is Bernanke is a fool and the people are smart. They know they have to cut back and save again; they can no longer live beyond their means. They won't take the credit. Hedge funds won't lever up. Companies will cut their debt levels. And so forth all across the food chain. The Fed is pushing on a wet noodle.

Bottom line: the bet to make right now is deflation, which will drive UP the value of the Dollar. As deflation ebbs, the excesses of Bernanke and Obama may come back to bite, especially if he continues his new Operation Twist and prints money, helicoptering it into the economy. There is a risk of a bout of hyper-inflation after deflation. That is the time to dump the US Peso and buy gold, as well as certain other currencies, especially those that do well when commodities do well (Australian Dollar, Canadian Dollar, NZ Dollar are examples)."

 

[dogcom]

$1600 Gold by 2011 and Rickson9 are right deflation is here. The only way I think it can be stopped is by giving Americans money directly by the Fed so they can pay down debt and spend money out of thin air. Of course the world and the savers will cry murder so they won't do this so we have deflation.

Otherwise ask yourself how the hell can anyone afford higher prices when people are being laid off and wages are barely increasing if at all. The big shoe to drop is commercial real estate and the rise in the US dollar which could nail stocks so watch out.

Like $1600 I am also looking at shorting the market at this time.

 

[PMREdmonton]

I don't know about shorting the market - I see it as slightly overvalued, maybe by 10-20%. Given what we've been through, it really shouldn't be overvalued at all, but strongly undervalued. I think the thing that has lead to the market rebound is the interest rate moves by the central bankers. Eventually, though, businesses have to create profits for shareholders no matter what the interest rates are.

For this reason, I have gone from 85% equities, 15% bonds in August to 80% bonds (mostly high grade government and corporate bond funds) and 20% equities since the start of September. There is not enough reward to accept stock market risk at this time.

I'll consider buying again in the next year if the TSX drops below 9000 or if the S&P500 slips below 800. I'll instead concentrate on deleveraging myself from my med school education and home renovations (only $25K left).

 

[Berubeland]

Prices will go down last on "essential" services precisely for the reason that they are "essential" If you have to buy it why would I lower the price?

Deflation will affect prices on luxuries a lot sooner than essentials. Essentials only become affected when retailers have to lower prices and profits to compete because they are bleeding red ink.

That's what I think and it's common sense.

 

[AntiBrian]

This kinda reminds me of a hobby I used to have.

Back in the very late 80's and early 90's I used to collect from used book stores various books about the comming depression from the 70s. Harry Browne [now dead] Doug Casey, Howard Ruff and the lads.
Generally the idea was that we had a fiat currency and much like having Uwe Boll direct a film, having a paper currency generally doesn't end well.

Point 1: The arguements they used were basically right
Point 2: They were also wrong in their forcasts.
Point 3: It seems those who are still alive, like your typical gold bug, never gave up the faith.


I don't know what will happen, but I don't get too excited when some talking head predicts X or Y, even if he seems to have some solid reasons for his predictions.


I'd be inclined to think that being massicly in debt and having a political culture that will do anything these days to avoid having to face facts that the US will toss money out of helicopters long before deflation becomes serious and long term. Not saying either will happen, but if one must, that would be it.