I’ve written in past blog entries that I believe excess debt in the system to be deflationary. The fact is that in order for inflation to exist, folks have to be spending money, which they’re currently not from my perspective.
Consumers and businesses are opting instead to save and retire debt – only the US Government has remained in spending mode – ramping up the money that has been pumped into the economy over the past 18 – 20 months. And, despite all this spending, which is really just borrowing against future production, the economy continues to sputter, unemployment still dominates the headlines and consumers continue to hang onto their money.
I don’t expect that to change anytime soon. It takes time to ‘deleverage’, or pay down debt. As much as the Federal Reserve might try, the deflation monster is going to be tough to tame. This from Bloomberg last week (March 17, 2010) (emphasis mine):
Wholesale prices in the U.S. fell in February more than anticipated, led by a drop in fuel costs and signaling there are few inflation pressures building in the early stages of the economic recovery.
The 0.6 percent decrease in prices paid to factories, farmers and other producers was the biggest since July and followed a 1.4 percent January increase, according to figures from the Labor Department in Washington. Excluding food and fuel, so-called core prices climbed 0.1 percent.
Companies will probably continue to hold the line on prices as the expansion has yet to soak up enough excess capacity or create jobs. The report bears out forecasts by Federal Reserve policy makers, who yesterday retained a pledge to keep the main interest rate near zero for an “extended period,” and said “inflation is likely to be subdued for some time.”
“Disinflation is going to be with us for a while,” Julia Coronado, a senior U.S. economist at BNP Paribas in New York, said in a Bloomberg Radio interview. “That’s going to allow the Fed to stay on hold for a lot longer than the market is expecting.”
Disinflation may be a friendlier sounding word than deflation, but the outcome is the same – falling prices and subdued consumer spending may become perpetual. I believe that this will have a negative mid-term effect on the US equity markets beginning this year (maybe soon) and continuing through 2012.
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