Research & Commentary

A Global Deflationary Trend is Clawing at Prices Around the World

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[Editor’s note: A text version of the video is below.]

Deflation has arrived at our doorsteps and where we shop.

This is an astounding statement considering:

  1. Most economists laughed at the idea of deflation just a few years ago;
  2. Global central banks have unleashed unprecedented monetary stimulus to combat it; and …
  3. With exceptions, important global stock markets remain relatively elevated.

In this article, we will only scratch the surface of global deflation, but first, let’s briefly discuss what got us here.

Robert Prechter’s Conquer the Crash (2002) said the 1929-1932 deflationary depression was preceded by a sizeable buildup of credit during the ‘Teens and 1920s. The book then warned that the expansion of credit since 1932 dwarfed that of the prior buildup; hence, an even bigger deflationary setup.

Conventional economists [have] the erroneous belief that expanding money and credit promotes economic growth, which is terribly false. It appears to do so for a while, but in the long run, the swollen mass of debt collapses of its own weight, which is deflation, and destroys the economy.

So, the 2007-2009 financial crisis came as no surprise.

But some seven years after the Great Recession ended, it appears we are not in the clear. Far from it.

Before discussing the evidence, let’s define deflation. Webster’s says it’s a contraction in the volume of money and credit relative to available goods.

But, what leads to this contraction? The answer: a financially cautious mindset. And that means a reduction in economic activity and less spending. The velocity of money slows. Downside pressure is put on prices.

So, lower prices are an effect of deflation.

But, keep in mind that at this stage of the trend, deflation’s tug is revealed by a slowdown in the rate of price rises. Yet, in some cases, prices are already falling.

This is from Bloomberg (Aug. 25):

dearthofinflation

Central banks almost everywhere have sanctioned a 2 percent inflation target as signifying financial Nirvana. But, as the table above shows, consumer prices in the world’s major economies are rising much slower than that arbitrary ideal.

One major consumer item is food. So let’s look at how deflation is effecting food prices around the globe:

  • Supermarket earnings tumble as food prices fall (Sept. 13, 2016, USA Today)
  • UK food prices see biggest fall on record in August (Sept. 5, 2016, International Business Times)
  • [Australian supermarket chain] squeezed by food price fall (Aug. 24, 2016, The Australian Business Review)
  • Russian Weekly Prices Drop First Time Since 2011 on Food Costs (Aug. 3, 2016, Bloomberg)
  • Restaurants slash prices and frills as living standard in Japan drops (June 25, 2016, Japan Times)

Before wrapping up this brief deflation review, let’s return to why you should be concerned about today’s worldwide buildup of credit, which, as you’ll recall, is a prerequisite of deflation (March 2016, Wall Street Journal):

Global debt of all types grew by $57 trillion from 2007 to 2014 to a total of $199 trillion, the McKinsey Global Institute reported in February last year. That’s 286% of global GDP compared with 269% in 2007. The current ratio is above 300%. … The debt load, McKinsey noted, “poses new risks to financial stability ….”

When global debt growth sharply reverses, like it did in the 1930s, the downward path will be a lot steeper than it was some 80 years ago.

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