"These Things Are All Fundamentally Deflationary"

Two colleagues at Agora Financial UK discussed their economic outlook for the United Kingdom and the United States.

Honing in on the U.S., the discussion turned to the Fed's mission to raise rates so they can cut them to fight the next recession.

But the raising of rates might bring on the recession that the U.S. central bank is trying to prevent, according to one participant in the conversation.

Further, the dialogue shifted to the incoming administration's policies and the specter of deflation.

Here's an excerpt of the conversation from a Dec. 30, 2016 Daily Reckoning UK article titled "Why You Shouldn't Forget Deflation":

Jim Rickards: Frankly, the US economy is fundamentally weak. The so-called Trump reflation trade will not play out as people expect because our debt to GDP ratio is already too high, over a 100%. $20 Trillion in debt. We’re not going to be able to spend as much as Trump would like.
So, when the reality check comes, the reflation trade does not work as expected; and you know, the Fed is on this tightening path, it’s going to slow the US economy, maybe even throw the US economy into a recession.
Tom Tragett: You know, beyond the reflation trade, the latest move in oil prices as a result of this latest OPEC agreement, and finally they’ve agreed to do something. Do you see anything on the horizon that domestically-wise in the US that could actually add to the inflation situation then?
JR: No, actually no, I see the trends adding to deflation. And the reason I say that: if you look at Trump’s appointments, Tillerson for secretary of state, he’s not the secretary of energy, but he’s an oil man. Rick Perry, former Governor of Texas, he’s our new secretary of energy. This policy will be what we call, drill baby, drill.
And Trump has said this, that they’re going to open up a new oil exploration offshore. Oil and natural gas in the United States. Connect natural gas pipelines to Canada. You know, invigorate the shale industry. Export abroad.
So everything, all the cards are kind of lined up to increase US energy production and increase US exports. Probably some deals with Russia. So all this will be very deflationary.
So I would view this expanded energy production as perhaps turning the oil price around. And deflationary. Not right away and not in the short run, but over the course of 2017.
So, you know, higher interest rates. A strong dollar, more energy production. Technology demographics. These things are all fundamentally deflationary.
Against that, you’re trying to get inflation with policy helicopter money, but we may be at the outer limits of that, with the Fed having a $4 billion balance sheet and the US with $20 Trillion in debt. And eight years into expansion. How much reflation can you really get?

You can read the entire article by following the link below: