Gary Shilling: De-leveraging Likely to Continue for Five to Seven Years

Money manager and deflationist Gary Shilling believes QE3 will only delay falling consumer prices.

He sees a deflation rate of 2% to 3% a year for the next five to seven years.

In a Globe and Mail article, Shilling mentions what he thinks will bring deflation to the economic front and center. Here's an excerpt:

Mr. Shilling says investors should remain on deflation alert, believing that the Fed is only delaying falling consumer price levels through its latest effort at money creation, known as QE3.

The two previous rounds of quantitative easing, or QE, goosed stocks and commodity returns in the short term, but haven't altered the fact that global growth is anemic, he says.

"You get these [QE-induced] spikes in stocks that continue until some shock comes along. I rather suspect that's what will happen now," Mr. Shilling says. "I think that's when deflation would likely come back to the fore."

Among the possible shocks that could usher in deflation would be anything from the collapse of a major European bank with derivatives exposures that ensnares other institutions, to a blow-up in the Middle East that sends oil soaring, or a hard landing in China.

In his view, the Fed's money-printing hasn't led to inflation because the private sector is still deleveraging, or paying back debt, which suppresses money creation.

To read the entire article, please click here.