Claus Vistesen

The Global Economy: Is Deflation the Next Macro Story?

Hi Guys,

Thanks for the comments, not nearly as harsh as I had expected :) since this was after all a bumper piece and I know that SA readers don't take too kindly to these kind of things. I am glad that you took your time to read through it (or some of it, or just the conclusion). Anyway ...

"The deflation scenario has been in track for some time and given the size of the world housing markets it is the prime mover."

This is true Whidbey, but what I try to draw attention to is the fact that some economies may simply get stuck due to the particular severity of this downturn.

"For The Big Freeze is the path"

Quite and I would then submit that some countries may simply never thaw!

@ Ihunt

Excellent points ... I guess we can agree that we agree then.

"As well as the 1st to come back will be emerging mkts."

I do think this is one of the main points in the sense that whatever recovery we will see it is going to be assymmetric. Little by little I would also expect money to flow steadily back towards the yield offered by high growth markets. In fact, this would be the biggest threat to the US if we imagined that the Fed would have to raise rates to defend the USD. However, if the the ultimate push from this is deflationary it may not come to that.

"On the other hand, I think the US $ will fall. We just keep printing dollars. Europe will be Forced to do some similar package or watch Rome burn, as well as the Euro. The Real Blood is just now showing up on the Real Streets. As this happens, Asia, South America, Central America, Middle East, will be shoved up against the wall or kill the System. Much like the Ugliest Global Financial Crisis has played out very quickly, it is possible to go hyperinflation just as quickly. Then, full on deflation as consumers can not pay for anything on the cash adjusted basis."

A scary scenario, but it may be likely. The feedback effects from whatever policy (inflationist or calvinist) can definitely turn out to be quite volatile.

@Real Broker

Very interesting comment. There is definitely a sense of re-coupling in action here. At least, I personally find it quite amusing that people were speaking of the Euro as the new global powertrain only one year ago as Bernanke started to cut rates. Now of course, we are all a lot smarter as it is clear that Europe will now have to clean up its own mess.

"You can only monetize debt for so long until it becomes mathematically and even theorectically impossible to make good on your promises."

True, very true and I would not downplay the US situation for one minute. This is not small chips (or whatever) and the US economy will not command the same position in the global economy after this.

@ YR Dog

"An interesting question is that if deflation is coming, what will happen to gold. It's hard to look to the Depression for answers there when the countries were abandoning the gold standard and US citizens were forbidden to own gold from 1933. Will gold be a safe haven independent from deflation or will its value fall like everything else? "

I think many people are asking themselves this question. Clearly, many Austrian punters would just love to see the fall of the global fiat reign and the return to a solid tangible standard. However, that would also imply, I think, a kind of coordination that just is not possible at this point.

"The interesting thing to watch is will foreigners continue to buy Treasuries at 0.0% ??? They seem to be a hard sell right now. A rate increase any time soon would really seize up markets. "

Ah yes, this small point. Well, I do think it is quite obvious that the foreign purchases of agencies and treasuries are not necessarily for the real yield they offer. So there must another reason ... now, collectively we would label this system Bretton Woods II although I am unsure that this is still the right thing to call it. Ultimately however, the fact that foreigners have been so eager to finance the US is also a counterproduct of their endogenous growth path and strategy.


Claus

What's Next for Brazil's Economy?

Hi Guys,

Thanks for your comments.

@ User247325

"I agree with the points above, but the biggest issue that Brazil has today is corruption at

all levels."

Point taken! I certainly do not want to come off as someone who seems complacent towards

this issue. Honestly, I also have to admit that it is a topic of which my knowledge is very

limited. However, if I take your points at face value they would obviously constitute an

important obstacle for whatever Brazil sets out to "become".

Ultimately though beauty, as always, is in the eye of the beholder and I would be surprised

to see if Brazil's development endeavors shored up at the sluggishness by which the state

apparatus conformed to modern "western standards". This does not mean of course that

something should not be done and that the issues should not be treated.

I guess that I am seconding Egan's points here since what is "corruption" really in this

context. Clearly, if you are placed with operations in Venezuela et al. the threat of

trigger happy govvy soldiers marching in and taking your property is a BIG issue, but I

would argue that Brazil is another level up from these kinds of adverse business

environments.

@ Brahm

Thanks for this elaborate comment. I do have to concur that this piece was not one of my

most succinct.

It is of course interesting to note that those four economies you mention constitute that

almost infamous BRIC economy group coined by Goldman Sachs almost a decade ago (I think).

My main argument here is consequently first and foremost that Brazil together with other

rapidly developing emerging markets WILL see their share of world GDP grow. I think that

this is the big global development story of the 21st century and it really should not be

lamented. I would also expect that their increasing clout of their economies as a share of

world GDP be especially pronounced in DOLLAR terms. In this way, the world already HAS de-

coupled from the US economy so to speak, but it is a much longer term process than what we

are immediately seeing.

Within this frame of reference I am fundamentally bullish on Brazil (and India btw)

especially compared to China and Russia where I think we will NEVER see a them becoming a

net absorbers of global capacity (i.e. sustainable external deficit economies). Of course,

Russia may experience an external balance at some point but Gazprohm inc will fight long and

hard before that happens.

You see, what Brazil has is a relatively favorable demographic structure and one which at

this very point in time is almost at its "optimal" level if we look at age structure. This

is really the gist of my argument (I guess that I should have been clearer here).

So, I would simply put up the simple hypothesis that Brazil CANNOT be expected to crash

completely due to internal momentum. Obviously, as you say yourself; both India and Brazil

are hard at work to try to halt the spike in inflation and to prevent the money from coming

in too fast. So, they WILL definitely slow, but 1997 style crises should not occur in these

two countries I think.

"Brazil is an interesting case. My take here is that commodity prices will have some effect

on the export revenues. However, I do not expect severe decrease as commodity prices will

moderate probably by only 10-15% overall. Don't expect massive decrease in revenue because a

disproportionate fraction of exports of commodities is to emerging economies. These

economies will not have much decrease in infrastructure investment, and hence the need for

commodity imports will remain significant as most of the economies do not serious balance of

payment problems."

I could not agree more really. I think this is an excellent point. Sure, commodity prices

are falling and can fall further if the investor community starts to worry about deflation

and recessionary risks in OECD, but once countries as Brazil, India, Turkey etc start

accelerating again (my guess is end 2009), then commodities will once again begin their

structurally bound upward march.

@ Whidley

Thanks for your points and also those of educative nature. SA readers and commenters are a

demanding bunch, but I do appreciate that you (they) take their time to massage the more

argumentative side of my pieces.

"I did not see much on internal consumption in the economy in your analysis: why?"

A fair point, and while the Brazilian consumer is sure to wind down in the coming slow down my main argument is that she will not fold completely. Moreover, I am arguing that the relative "gusto" of Brazilian domestic demand is high compared to other (especially OECD) economies which should flatter the the economy in terms of inflows for investments and portfolio purposes.

"The structure of the demand side of the economy is weak and seriously underdeveloped for want of educational and training policies that foster the middle classes and a stable lower class and lack of economic opportunity and mobility."

Definitely, and nothing comes for free. More specifically, I would say that Brazil now has a golden opportunity to lock in a growth and optimal growth path for the next 20 something years. One of the challenges/pre-requisi... here will certainly be investment in human capital (i.e. on the quality side that is).

best wishes everybody

Claus