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