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Sunday, September 27, 2009

Is Deflation Really Coming?

Items of Interest:

Ambrose Evans-Pritchard / Telegraph.co.uk:
Money figures show there's trouble ahead -- Private credit is contracting on both sides of the Atlantic. The M3 money data is flashing early warning signals of a deflation crisis next year in nearly half the world economy. Emergency schemes that have propped up spending are being withdrawn, gently or otherwise...

Western central banks will have to "monetize" deficits on a huge scale to stave off debt deflation. The longer they think otherwise, the worse it will be.

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Mr. Practical / Minyanville:
The Lowdown on Deflation -- Deflation is the contraction (reduction) of money and credit. It occurs when the economic system is carrying too much debt to be supported by the level of income generated by economic activity. It occurs because too much debt has been incurred to create unproductive assets that don’t generate income. Deflation is a corrective process, it’s simply the market (you and I) not being able to service debt, so we must forfeit...
related:
Mr. Practical / Minyanville:
Government's Money-Manipulating Wizardry -- There's great debate about inflation versus deflation...

In order to clarify my position, I want to describe to you some mechanics of Federal Reserve operations, the wizardry behind the curtain...

The first red flag is this then: A government, which has no capital of its own, which produces nothing on its own, cannot lend money unless it borrows that capital from another or takes that capital in the form of taxes (but taxpayers must have capital to pay taxes)...
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Greg Feirman / SeekingAlpha.com:
The Inflation/Deflation Forces Battles On -- There is a great debate raging between students of monetary economics. On the one hand, there are the deflationists who point to the massive deleveraging in the housing, mortgage, credit and stock markets. The fall in prices in these asset markets, at least through March 2009, was devastating and destroyed trillions of dollars of wealth and credit.

On the other hand, there are the inflationists who focus on Fed policies and the money supply...

This has been a very thorny debate, with good arguments and respected voices on both sides. But little ground has been given and little progress made as participants of both camps seem unimpressed by the arguments of the other side...
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Peter Coy / Business Week:
"This Time Is Different": Reinhart and Rogoff worry about future financial crises
-- When you've studied "eight centuries of financial folly," as international economists Carmen Reinhart and Kenneth Rogoff have, patterns begin to emerge. The most striking pattern they've found is that people never learn. We gullible humans make the same mistake time after time, which is believing that the laws of financial physics have been repealed for us.

Thus, Americans proclaim confidently that there's no chance the U.S. will get caught in Japanese-style stagnation. Sure, deflation became entrenched in Japan starting after the stock-market crash that began in 1990. But this time is different, right?

Don't be so sure. Reinhart says Americans seem to be unwittingly repeating the mistakes of the Japanese, including propping up "zombie" banks that aren't healthy enough to make new loans and get the economy growing again. Americans kid themselves, she says, by saying, "These are not zombie loans. They're just non-performing."

Summarizes Reinhart: "We're speaking Japanese without knowing it." (I love that quote.) ...
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David Goldman / Inner Workings:
All New! Dave’s (additional) 10 Reasons Why the Recession Will Last Forever -- There just isn’t any way to square the circle within the US as such: households have lost too much wealth at the cusp of a gigantic retirement wave, so that demand for savings is virtually limitless. That’s one reason why bond yields remain so low (another is that the cheap dollar makes them attractive to foreign investors). Americans are locked into a vicious cycle: as their wealth collapses, they must save more; that reduces sales and output, and leads to unemployment; unemployment causes more home foreclosures and keeps the housing market weak; wealth continues to fall; returns to prospective retirement assets decline, forcing households to save more; and so on, ad infinitum, or at least as far as the eye can see.

The only way to break out is globally, and Obama is getting colder rather than hotter.

zero hedge

Calculated Risk

Mish's Global Economic Trend Analysis

Paul Krugman - NY Times

The Big Picture - Barry Ritholtz

naked capitalism - Yves Smith

Pragmatic Capitalism

Washington's Blog

Safe Haven

Paper Economy

The Daily Reckoning - Australia