Deflation Threat Returns as Asset Markets Decline

[RedEarth]

Source: (Bloomberg)

Oct. 6 (Bloomberg) -- As Federal Reserve Chairman Ben S. Bernanke and his global colleagues fight the worst financial crisis since the 1930s, one danger is looming larger by the day: deflation.

With asset markets tumbling, commodity prices plunging the most in 50 years and banks keeping a tighter grip on credit, the ingredients for a sustained period of falling prices are coalescing. While inflation is still a concern for many policy makers only months after oil and food prices peaked, the risk is their patchwork of rescue and stimulus packages will fail, and prices will start to fall throughout the broader economy.

``The ghost of deflation could be dragged out of the closet again in coming months,'' says Joerg Kraemer, chief economist at Commerzbank AG in London.

A global recession is already looking more likely, with the credit freeze stirring memories of Japan's decade-long struggle with deflation in the 1990s. So European Central Bank President Jean-Claude Trichet and Bank of England Governor Mervyn King may be forced to follow Bernanke, whose Fed has chopped its benchmark rate by 3.25 percentage points since August 2007 to 2 percent -- its most aggressive round of easing in two decades.

The deflation scenario might go like this: Banks worldwide, stung by $588 billion in writedowns related to toxic assets -- especially mortgage-related securities -- will further reduce the flow of credit, strangling growth. That will push house prices lower, forcing additional losses and making banks even more reluctant to lend. As the credit crisis worsens, businesses will find it almost impossible to raise prices.



Read more: http://www.bloomberg.com/apps/news?pid=20601087&sid=azRTZ.U_ieuQ&refer=home

[barnabas63]

1. I don't understand deflation....

If I'm making 50K a year, and prices fall, how does that hurt me???

[TreasonousBastard]

3. Good chance yu won't be making 50 grand for long...

that's how.

[barnabas63]

4. Well...

...my job's pretty secure unless the state goes broke. Guess I'll wait and see.

[Tansy_Gold]

6. the state could easily go broke

Massachusetts & California are in the headlines right now.

[Winterblues]

12. Didn't California just lower state workers wages to minimum wage?

I seem to recall hearing something about that move...:shrug:

[TreasonousBastard]

7. In a deflation, no jobs are secure, and contracts...

can be negotiated to have wages going down.

State and local jobs are among the few things holding the economy up as it is, with the private sector pulling back on health and retirement bennies and forcing pay cuts. It's only a matter of time till tax revenues can't support the goodies in those contracts.

[Trajan]

5. Profits will be squeezed for producers ...

... who's margins will tighten .... If they have to drop prices, then they could reach a point where they have to decrease headcount, and hence, jobs .... Wage cuts would not be impossible, under threat of layoff ....

[Warpy]

2. As hellish as inflation is, deflation is worse

because it's always accompanied by massive unemployment. In fact, the two are inextricably linked, an undersupply of customers combined with an oversupply of goods and services driving down prices and reduced demand eliminating jobs. Unless there is intervention, it continues on until there is revolution--sometimes peaceful, most times not.

Right now, assets are deflating because our old friends, the hedge funds, are experiencing runs as people dump their riskiest investments. The funds are dumping their assets in order to allow people to cash out so they can stay in business. My guess is that most will go bust as Ponzi schemes always do.

There is no way to prepare for what's coming. Shiny rocks won't save you, nor will guns and ammo. We're all just going to have to figure it out as we go.

Fortunately, as Democrats, we all have the flexibility to do so.

[Changenow]

8. How can there be deflation with a massively increased

money supply? The value of the currency has to be reduced by its abundance.

Perhaps deflation in some areas and inflation in others. As we've seen in housing and energy?

[RedEarth]

10. Economies worldwide are slowing down

thus cutting the demand of commodities and in turn price of commodities are falling. All this filters through the worldwide economy and can result in deflation.

[Changenow]

11. But the money supply is increasing

at breathtaking speed.

Both can't happen at the same time.

[trthnd4jstc]

9. I own 90% and manage a tiny electrical contracting company.

I have had to lower my labor rate from $55.00 an hour on bid work, to $50.00 or lower, just to get work, and I have lowered my mark-up on materials about half.

This economy stinks. The big electrical contractors are still charging as much as they were, but in the St. Louis area we have some big utility projects, and some industrial projects keeping the big boys busy.

A lot of the little shops are experiencing deflation. I used to be able to employ one other person almost full time, and now only about 20 hours a week.

[bemildred]

13. Well, bubbles pop, and the popping is deflation of the bubble.

So if you like bubbles, you like deflation, because that is what you get.

[LeftHander]

14. I brought this up last week...in GD...

People don't seem to get it.

Once the commercial paper market suddenly shows a loss. And money, actual cash is harder and harder to come by,
prices will plummet first by wholesalers and retailers in attempts to keep sales moving. Any cash flow is better than no cash flow. If you have no access to reliable credit....then all businesses need cash now and the way to generate cash is to put deep discounts into effect.

In a way deflation is the economy healing itself. it is like shock. it can kill a economy, but to heal a damaged failing one compounded with multiple critical problems, deflation is pretty much a given.

[jdog]

15. Still trying to figure things out. Here's a good read about inflation v. deflation

http://www.itulip.com/forums/showthread.php?p=52281#post52281

[Bigmack]

16. Really intrigued to finally hear

some mention of deflation, as the possibility has been crawling around in my head for several weeks now. Sure seems like a logical possibility to this chile, tho ignorant memories (born of books, not, obviously, of personal experience!) of the horrific German inflation of the early twenties also keep waltzing thru my beaner. I wish I understood more about the CAUSES of that earlier bit of horrific inflation. Clearly this government is now trying to vastly increase the $ supply, which "ought" to cause some inflation, BUT we ARE seeing price declines in commodities, housing, etc. Ancient Chinese curse - "May you live in interesting times...." We do. Ms Bigmack

[Psephos]

17. One benefit: less hellfire and damnation sermons from the Peak Oilers lately n/t