There is a difference between asset inflation/deflation and outright deflation andy, in asset inflation the stuff you own, houses, stocks e.t.c goes up while the price of consumer goods goes down because competition is a naturally deflationary process. Take a look at computers for an example of massive deflation, they get cheaper every year come what may. What we have now is asset deflation after many years of asset inflation, what the worlds governments are trying to avoid is outright deflation where people save. Indeed you and I would say people should save and buy what they need but if too many people go from spending to saving in one go then you end up with a recession, if managed incorrectly a depression. Too much money stops circulating and starts being hoarded by savers, this effectively makes money/cash worth more, this is whats happening now, the dollar as worlds reserve currency is becoming more valuable because people are saving and hence there is more demand for dollars. The problem with this whole scenario is that A) it's happening too quickly and B) even worse, the world or at least the western world has huge amounts of debt. Imagine a scenario where all that debt begins to be worth more instead of less, inflation means the amount of work you need to do to pay off your debts becomes less, because the value of the money or purchasing power of the money it's denominated in is worth less. Deflation means that the value of the currency is worth more, so you have to work even harder to pay off your debts, so naturally the worlds central banks are trying to fight off deflation tooth and claw because they fear the consequences of deflation, people save, don't spend, businesses go bankrupt, prices continue to fall, people save their money and wait for prices to fall more, a self reinforcing cycle that's hard to get out of, it's happening in Japan for about 15 years now.
The worlds central bankers reason it's easier to throw everything at the problem now than to enter a deflationary spiral and try and get out of it later. This is apparently a lesson they learnt in the great depression, the bad side of this is of course that inflation may come back stronger than ever, but that is a risk they are willing to take.
Nothing would cause the gears of the economy to grind to a stop like deflation. Great for anyone with a pile of cash. Terrible for businesses or anyone else that regularly borrows money.
Hi Mr. Andy.
Hellfire! Why all the doom and gloom? Depression?? That is so far from silly its pathetic.
If you want to get pissed, take a look at your alternative purchases from these PUBLIC traded companies.
Never mind the dollar...its a given the world ALWAYS looks to us for sanity in our spending. We ARE the market place. The problem is we are hesistating at the garbage coming at us.
WE ARE FINALLY GETTING FED UP.
Clearly, we are not getting value for our dollars. Nonetheless, the rest of the world still has most confidence in our system. We just simply have to wait for them retool and rethink...I for one need some decent polyisocyanurate insulation and FRP (fiberglass reinforced panels) AGAIN.
Nothing new here, same song different verse.
Take care farmboy
80 percent of the plant makes about 10 dollars per day, these countries compete with the developed countries, it is easy to see who will win.
Just a response here to cornbread's assertion that the rest of the world has confidence in our system. Maybe so, maybe not. That's what the mainstream drive by media has been saying. I'm not convinced. Traders have been taking advantage of the fact that the yield on the dollar and yen have been close to zero for years. So, they take loans out in dollars and yen then reinvest it overseas where the yield has been much higher. The margin calls and deleveraging recently have forced many of these dollars and yen to come back home (repatriate). Driving up the value of both currencies while other currencies go down. Its not a long term trend in my opinion. No crystal ball, but I predict once this mess is straightened out (say about 2010) you'll see both the dollar and yen collapse. Especially the dollar because of America's massive debt load and trade imbalances. You will also see runaway inflation as commodity prices once again skyrocket. Keeping money in a dollar denominated bank account long term is riskier than most imagine. Definitely not a good plan for wealth preservation. At the very least consider keeping currency in a resource economy (ie Australia or Canadian dollars).
Is cash trash? Or is cash king? For investors the last 5 years cash has been trash; steadily losing purchasing power. Lately that's been reversed. But trillions have been pumped into the financial institutions by the world govt.s That easy money will sooner or later be reflected in prices. Once again making cash trash.
Fundamentally, I agree with you. The govt.s should let markets run their course and self-correct. But they never do and have shown no willingness to do so this time. Cash will be trash.
Everyone loves an early inflation. The effects at the beginning of inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays. That is the early part of the cycle. In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the latter effects, but the latter effects patiently wait. In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and ineffectiveness of all traditional remedies. Everyone pays and no one benefits. That is the full cycle of every inflation.