Friday's Consumer Price Data Could Touch Off Deflation Tsunami

Well, "Deflation Week" has arrived and the British are the first to sound the alarm after the government reported that year-over-year inflation fell to just 0.1 percent in January, the lowest level since 1960.

In the U.S., the latest consumer price data will be reported on Friday and we may be in for a veritable "Deflation Tsunami" from the mainstream media since we were teetering on the brink of a negative consumer price index last month.

Naturally, something must be done about it.

But, what?

Run the printing presses of course!

More money must be created promptly because the money currently in circulation is actually beginning to increase in value.

It must be right?

Prices are now falling, so that must mean that money is becoming more valuable than it was before, and if there's one thing governments don't want it's money that is gaining purchasing power...

Sometimes, it just makes you cry to think of what a mess contemporary economists have made of things and it doesn't look like they're going to stop now.

This report from the Telegraph has all the details - there will surely be similar stories state-side at the end of the week:

Politicians and analysts have warned that Britain is on the verge of deflation after economic data released this morning showed that living costs are rising at their lowest rate in almost 50 years.
...
Liberal Democrat Treasury spokesman Vince Cable said inflation was now "virtually disappearing" as a threat to families, although this might not be obvious to those facing higher council tax bills.

"It is becoming clear that for the foreseeable future there is a higher risk of deflation than inflation, which is why it is inevitable and sensible that the Bank of England should be moving towards expansion of credit and the money supply directly," said Cable.
...
Economists expect CPI to drop sharply in coming months amid sliding commodity prices and a slowing economy, piling pressure on the Bank of England to take further action to stimulate the economy.

The Bank has slashed interest rates to a record low of 1% and is now considering more drastic measures to get consumers and businesses spending again.

Bank governor Mervyn King said last week the monetary policy committee would discuss "quantitative easing" – boosting the flow of money in the economy – when it meets to decide on interest rates next month.

If you're going to live in the U.K., it would probably be best not to grow old there.

It seems it's the worst of all worlds for "pensioners" as meager interest on their savings is countered by inflation that still runs at about five percent - for them.

Despite falling prices in the government's inflation data, the cost of living for retirees is still rising rapidly due to higher prices for such items as food and electricity.

This is just a horrible thing to do to the "Greatest Generation" in Britain.

Comments

[Mark Anthony:]

Tim:

Governments massively print money NOT because they want to fight deflation. What? 0.1% y-o-y inflation is a big deal deflation.

Government massively print money because they need to SPEND the money on trillion dollar deficit spending. Goverments get money in one of three ways:
1.Taxation
2.Borrowing
3.Printing

Right now neither taxation nor borrowing is feasible. How do you tax when corporations are not making profits and individuals are losing job and haveno income? Who is going to lend money when all the foreign governments have to spend money to take care of their own affairs?

That leaves massively printing money as the ONLY solution to the government. And that, always leads to hyper inflation:

What is the BIGGEST DEATH TRAP in today's market?

seekingalpha.com/artic...

The so called deflation in the last few months is just ab aberration, as the result of banks hoarding money away and refuse to lend money out. This will not last. A bank's regular business is to take in deposits and then lend it out to earn from spreads of interest rates. It is unsustainable that banks do not do their regular business.

When does it all blow out? When the market has exhausted potential treasury bond buyers.

Feb 18 03:33 AM

[TTT:]

I can't get it right.

What is the difference between inflation and deflation ? Am I right in saying that in an Inflation things gets more and more expensive due to too much money in circulation , while in an deflation things also gets more expensive due to not enough money in circulation?

If inflation is the opposie of deflation, Then in deflation, things should be cheaper and not more expensive? Sorry, i know nothing about economics jagon.

Feb 18 08:38 AM

[Jason Rines...:]

> in saying that in an Inflation things gets more and more expensive
> due to too much money in circulation ,

Yes, the classic definition of inflation is too much money chasing too few goods.

while in an deflation things
> also gets more expensive due to not enough money in circulation?

Things are getting cheaper and your last part of your comment I cut off shows your on the right path of thinking. An asset like a home for example was too much money in circulation chasing too few goods. Pricing of the goods become unsustainable and then you have too few buyers that corrects the monetary imbalance. You then have oversupply and little demand which drops the price of the good. Your two points tie into:

1) Monetary policies. Google the 'Business Cycle', Central Banking and Fractional Reserve lending, excess leverage. Thats a great start of self education and the "Cause" of nations that go through depressions which correct monetary imbalances. Depressions are an "Effect". This model is not new to the U.S., it originated in Europe 500+ years ago and it's origins can be traced back to debates about usery in lending for thousands of years. Government's like this model of Central Banking to print money for wars, pet projects etc. and this creates inflation, a hidden tax on the population.

2) Supply and demand. That's economics 101 and can be found easily by doing searches and I believe you already may understand.

Feb 18 01:42 PM

[TinyTim:]

"Sometimes, it just makes you cry to think of what a mess contemporary economists have made of things and it doesn't look like they're going to stop now."

economic science keeps moving forward, economic reality keeps moving forward faster.

hence, contemporary economists are less proficient than their predecessors

Feb 18 05:14 PM

[Tim Iacono:]

Very nice article.

Mar 02 08:04 PM