Deflation Watch

Why This Economist Sees Deflation as a Big Threat

U.S. debt levels have skyrocketed since the Great Recession, and in EWI's view, this is a harbinger of deflation.

A historical review shows that major U.S. deflationary periods had one thing in common: an unsustainable buildup of credit.

A classic Elliott Wave Theorist says:

Easy credit has in turn created an unsustainable debt load throughout the society. Nothing can relieve that load except what has always done so: a deflationary collapse. You cannot avoid the consequences of easy credit, just as you cannot avoid the consequences of taking amphetamines for months on end.

Now, let's turn to Robert Barone (Ph.D., Economics, Georgetown University), an economist for a financial firm. In a Dec. 7 Forbes article, he also expressed a view about debt and deflation:

According to their own minutes, some Fed-governing members continue to hold to the academic view that the Phillips curve (i.e., inflation always rises when the unemployment rate is low) is alive and well. Under this view, inflation is just around the corner and the Fed had better be pre-emptive, lest inflation get ahead of them. The other view is that today's economy exhibits behaviors that are significantly different from those that dominated the 60+ years of post-WWII America, and that inflation is no longer the threat it used to be. In fact, deflation may be a bigger threat, especially given the high and rising debt levels. [emphasis added] …

In the U.S., Q3's real GDP growth rate was revised up from 3.0% to 3.3%, and Q4's growth also appears to be well on its way to a 3%+ print. Be careful here. Much of this has been from the "rebuild" after the hurricanes, and we are likely to see a continuation of construction spending well into Q1/18 (CA fires). But, the under-armor is weak. Not only have wages and incomes not risen in real terms, but the savings rate has fallen to the 3% range (normally 4%-5%). The last two times it was at these levels were in '00 and '07, and we know what happened to the economy and equity markets in the subsequent years.

Deflation, Deflation, Deflation

In my local area, the sign at the supermarket (a regional chain) reads: "Lower prices on 5,000 items," clearly a reaction to the Amazon purchase of Whole Foods. On Black Friday, signs at every major chain, department store, and in every mall in the U.S. announced "50% off." We live in a disinflationary world! From a business point of view, such discounting means lower margins. But, of more importance, 50% discounts pull demand forward. From a consumer's viewpoint, even if there is no current bank balance with which to pay, why wait to make the purchase, especially at 50% off? If credit card debt is available, it is used (debt grows, and the savings rate declines). Let's face facts: At the end of a cycle, demand is satiated. It does take extraordinary discounting to attract sales, and such discounting really borrows sales from future quarters.

Finally, debt levels have soared since the recession, and the proposed tax legislation only promises more.

You can read the entire article here.

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