Who will suffer the most if world wide deflation sets in.


#1

Throwing a question out there?

If the current attempts to get people to borrow more and create inflation don’t work which are will suffer the most.
Will it be China and the developing nations of India and Brazil as their economies are just finding their feet and lots of borrowed money backing their foregin owned industry?
Will it be the USA with its massive public and private debt and falling exports?
Will it be the commodities producing countries e.g. Russia, Gulf states etc.?
Or will it be ourselves in Europe taken as a whole and disregarding Ireland’s particular problems but talking about the EU or Eurozone?

I am just curious to see what other people think as I have the feeling that the eurozone may just weather this storm somewhat battered and very possibly changed but better than most.


#2

Commodity producers and debtors will be the real sufferers. Although debtors that have a large commodity import bill will get some relief.

In our case we are a massive debtor but commodity deflation will cushion the blow to a small extent.


#3

Nations with the highest overall debt (public + private) would suffer the most, their agony being proportional to their level of debt. The cost of the debt will be increasing in real terms at the same time as the stock of money available out of which to make repayments is diminishing. It would be like a tightening noose around the neck of every debtor.

I personally don’t see worldwide deflation becoming entrenched. We are clearly in a period of aggressive disinflation. But in most major banking systems every weapon is or will be deployed to combat monetary deflation because it poses the gravest threat to the banking system. In the United States particularly, I believe the Fed is prepared to stop at nothing to avoid monetary contraction. This, while penalizing savers, is in the interest of the banking system and debtors.

Whether the ECB/Eurozone is as alert to the danger of deflation, I am not sure. I expect they may flirt more closely with deflation than the United States, but lower indebtedness in the Eurozone makes it less of a risk.

So I expect the world’s major currencies to escape monetary contraction, at least after a time. But I do envisage pockets of deflation within larger currencies zones. Nations where credit is contracting but which have abandoned control of their own currencies will have to battle with deflation. Ireland for example, I would see entering a period of protracted deflation potentially lasting for up to a decade.


#4

Is deflation a severe contraction of the money supply including credit?

Is it caused by a severe demand shock combined with large inventories?

Is it the bursting of asset bubbles such as housing resulting in a credit squeeze or is it the other way round?

There seem to be different definitions.Maybe someone would like to comment on the above.


#5

Deflation is too many goods chasing too little money.


#6

Just a technical question. Is it even theoretically possible for interest rates to be negative? has it ever happened? if prices were falling at 3pc a year, is there any technical reason why interest rates could not be -2pc?


#7

In reality you cannot have negative nominal interest rates, that is unless Central Banks are in the business of bankrupting themselves.


#8

I agree completely, fable. Enjoy this deflation, because something far worse is coming. M3 in the US since September is now growing at an annualised rate of almost 800%. It might take 12-18 months for this cash to reach the street, but sooner or later it will. I believe that the impact of this surge in cash will be massively inflationary. Global growth will be stimulated but coupled with the current commodity slump (cut in mining, exploration, production capacity etc), a perfect storm of inflationary pressure will severely depress the value of cash. Savers beware.

Unfortunately for Ireland, we will not be in a position to ride the initial wave of global growth, and will instead suffer it’s consequences.

(Disregard this post. I’ve never been right.)


#9

If that is so, where would savers put their money? Commodities! I can’t see stocks & bonds keeping pace and people will be circumspect of novel investment vehicles for a while.


#10

i think with all the bailouts in the US, their huge deficits and the massive increase in the money supply mentioned above u are talking about massive inflation in the US and other countries that tie their currency to the dollar. While asset prices will continue collapsing the CPIwill hit the stratosphere. So unless Trichet wants 20-30% inflation in the eurozone u are going to see the € rise a lot All sorts of commiodities , including oil are going to rocket especially with the aggressive approach being taken against Iran by the yanks and their watchdog in the middle east.

buy gold and the canadian maple leaf!!! 8DD


#11

i would buy oil stock PBR (Brazilian oil stock) george soros & warren buffet have heavily invested
the green energy rally will happen as well when oil is over $70 a barrel so clean energy stock will rallie along side oil
green energy is cited as the next bubble and has the possibility of creating millions of sustainable jobs for the future


#12

As with inflation, there are two major definitions of deflation: monetary and price.

Monetary deflation refers to a contraction in the money supply, while price deflation refers to a reduction in the cost of goods, either generally or in a particular asset class(es). It is monetary deflation that should concern us, as it is this that poses a threat to the banking system; And in any case, price deflation is a product of monetary deflation and productivity/inventory.

Monetary deflation is not necessarily a severe contraction of the money supply, but any contraction. Indeed, negative effects on the banking system will be felt even with insufficiently high positive inflation.

As most money is debt, it is the withdrawal of credit that causes deflation. This can be due to a severe reduction in demand for, or availability of credit. When combined with large inventories and continuing high production, price deflation follows.

Credit based asset bubbles such as housing typically deflate as a result of a contraction of credit (or some other external shock). However such speculative bubbles, once burst, then see a huge reduction in demand for credit, accelerating the downward spiral. Such is their nature, that once prices stop rising no one wants to get in the game anymore.


#13

Is it really that massive a threat in all cases? For example, suppose M3 grows at stupidly high rates for a while (be it years, months or days). What’s so bad about a move down somewhat ‘back to trend’?

Euro, Dollar and Sterling M3 have been in undergoing such ‘stupidly’ high growth for years - and surely a correction is not only coming, but necessary.


#14

Fable:

Thanks for that response.

another thing intrigues me; the US Fed is printing money like gangbusters increasing the money supply by 800%(as I saw posted elsewhere).

Most of this appears to be sitting in banks shoring up their capital base or is being used by banks to invest in treasuries.

So is this still deflation ,given this money has nt got into the main street economy even though the money supply has grown exponentially.?


#15

i agree with the green energy as the next bubble but as for oil there is a double bind. Some opec members will want to cut production to drive up demand as we have seen demand continue to fall, the recent pirate strikes off africa did nothing to oil prices whereas two years ago events like that did. the other option is to flood the market in the hope of speeding up the recovery.
don’t forget that a substantive amount of crude goes to the petrochemical industry which supply to producers of just about every consumer product going.
sales drops in the mall and at the pump are a double punch to opec and non opec members. investing on oil stack might only pay off in the long term.


#16

I also agree with oil as a long-term buy and hold, but I am a little concerned that weakness in the dollar will mean no upside (in euro terms) for a while. I agree with comments elsewhere that the euro economy is probably stuffed more than the US one in terms of recovery, but I don’t think that this translates into systemic weakness for the euro. Without huge fiscal stimulus by the euro economies, the euro is going to retain a goodly portion of its value (more hope than expectation, probably), but with the fiscal stimulus and quantative easing already in the US dollar and more likely to come, I can only see inflation in the dollar in the medium term.

I have been drinking, so treat with caution.


#17

Has anyone seen any figures estimating the amount of money that has been lost in equity markets over the last while? Looking at the previous values of some of the indices, and then taking into account the percentage falls, would this not be enough to counter the amount the CBs are pumping in? (tried to find figures on this but not immediately available - I did try!)

Anyone have any info on how much weight to put on “real money” v “paper/funny money”, and how this plays in the whole -flation issue?

Final question, is disinflation not really just a phase of deflation?


#18

Protracted deflation really is a severe threat I´m afraid, due to the nature of debt based monetary systems such as ours. These systems respond favourably under expansion, but cannot cope with contraction at all.

The reason is that debt is interest yielding. And since all money is debt, and must at some point in the future be repayed with interest, the money supply must continually expand to accommodate those interest payments. If the money supply does not expand at a sufficient rate, or worse contracts (deflation), the outstanding debt plus interest cannot be repayed from the available debt/money supply.

A debt that cannot be repayed is in default. And when debt defaults exceed a certain threshold, e.g. a bank´s provisions for them, that credit institution will collapse. If enough credit institutions collapse so does the entire credit system, and with it the currency itself.

A short period of deflation could be tolerated, as not all debt repayments are due in a given period. But protracted debt deflation would be intolerable to any debt based currency.


#19

Very good post.

Ireland’s big problem in the next 5 years will most likely be deflation as all the funny money finally drains from the system, there will be too many goods and services chasing decreasing money supply.

And of course we all know that we have a considerable amount of debt on the private books.

Practically all the cards are stacked against us at this moment in time.


#20

Money lost in equity markets does not have any direct effect on the money supply. The money ¨lost¨ when a stock falls is not lost in the sense of being destroyed or removed from circulation. It is transferred into the bank account of the seller of the stock. So the money is merely moving between asset classes.

It is only when debt is repayed to a bank that it is taken out of circulation. So a decrease in demand for or availability of credit leads to deflation. In that way, if a plummeting stock market or other asset class leads to a reduction in credit extended towards purchasing that asset the effect would be deflationary. But the sale of that asset at a reduced price is not in itself deflationary.

There is no distinction worth making between ¨real money¨ by which I assume you mean cash, and ¨paper/funny money¨ by which I assume you mean ledger or notional money as it exists in a bank account. They both have an equal weighting in the money supply, and are equally affected by inflation/deflation.
They are equally (in)secure in the event of a threat to the banking system/currency.
But it is typically through an expansion or contraction in notional money, not cash, that inflation is effected.

No. Disinflation is expansionary, just a reduced rate. Deflation is a contraction in the money supply.
It is the difference between braking in car and going in reverse. While braking you are still going forward.