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Global Deflation Pandemic Begins to Brew
Old 07-24-2009, 11:04 AM   #1
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Global Deflation Pandemic Begins to Brew

  • JULY 24, 2009
Global Deflation Pandemic Begins to Brew



By Scott Patterson

In congressional testimony this week, Federal Reserve Chairman Ben Bernanke gave no indication that he planned to turn off the central bank's liquidity spigots anytime soon.


Critics howled that the Fed is risking runaway inflation. More immediately, however, the threat of deflation seems a bigger concern -- not just in the U.S., but also in economies around the world.





Last week, World Bank Chief Economist Justin Lin warned in a speech that a surge in excess capacity world-wide could lead to a global "deflationary downward spiral."


The Bank of Japan and the International Monetary Fund are forecasting two years of price declines in Japan, which suffered a serious bout of deflation in the 1990s because of a blowup in its banking sector and collapse in the real-estate market.


Recent data show that prices still are falling in fast-growing economies such as India and China. In the first half of the year, China's consumer-price index was down 1.1% from a year ago, and its producer-price index fell 5.9%, according to China's National Bureau of Statistics from last week. In India, prices have been slipping into negative territory for more than a month.


Broadly, prices in Europe are tipping into a deflationary dead zone. In the 16-nation euro region, prices fell 0.1% in June from last year, the first such drop on record. Prices have been flat or down in Finland, Portugal, France, Germany, Ireland, Spain and Switzerland, according to Moody's Economy.com.


There are a few caveats. Recent deflation data in part reflect the comparison with sky-high energy prices last year. And oil prices could spike again.


Ironically, that could potentially hurt companies' pricing power by taking spare cash out of struggling consumers' pockets.


But if deflation does take root, it could prove devastating for investors. Deflation can cause stock prices to decline as companies are unable to boost prices; corporate bonds also suffer from rising bankruptcies.
Behind a global deflation virus is a collapse of demand in the U.S. Unless the economic engine in the U.S. can get cranking again, deflation could keep spreading.


Global Deflation Pandemic Brews - WSJ.com



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Old 07-24-2009, 11:30 AM   #2
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I'll start drinking the deflation Kool-Aid when the stuff that represents the bulk of my consumption stops rising in price. In reality, I think we're heading for a stagflation scenario where the price of "necessities" keeps rising while the price of discretionary "stuff" keeps falling with lower demand. I'm sure not seeing my property taxes or my utility bills or my insurance costs or my grocery bills falling...
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Old 07-24-2009, 08:27 PM   #3
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Originally Posted by ziggy29 View Post
I'm sure not seeing my property taxes or my utility bills or my insurance costs or my grocery bills falling...
Ditto here in northern Illinois. Taxes, utilities, groceries all up. My latest observation......... 20# propane tanks (for the Weber gas grill) are now filled with only 15# of propane at the exchange places per a small notice on the tank storage cage. Irks me. It's not the cost so much as needing to drag the empty tanks back for exchange more frequently!

Other than housing and possibly cars, I don't see much here that has not risen in price this past year. And now our new governor in Illinois is demanding a 50% increase in our state income tax, not for new and expanded services but because the cost of providing existing services has increased.

Deflation........ where are ya?
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Old 07-24-2009, 08:42 PM   #4
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I live in Texas and I must say that
(a) utility costs are running much lower than last year
(b) gasoline is must less costly than last year
(c) my property taxes are going down, but not for my neighbors since they didn't protest their assessments
(d) our food budget is lower since restaurants are giving out lots of 2-for-1 deals
(e) 3 years ago we bought a new car and it cost less in actual dollars than the new car bought in 1995
(f) a gallon of milk is under $3
(g) I have a fixed-rate mortgage with sub-5% interest rate. It hasn't changed in years.
(h) Socks at Wal-mart and Target are still about the same.
(i) Health care is still a $20 co-pay

Anyways, you ask where deflation is: It's in Texas.
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Old 07-24-2009, 09:02 PM   #5
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I live in Texas and I must say that
(a) utility costs are running much lower than last year
(b) gasoline is must less costly than last year
(c) my property taxes are going down, but not for my neighbors since they didn't protest their assessments
(d) our food budget is lower since restaurants are giving out lots of 2-for-1 deals
(e) 3 years ago we bought a new car and it cost less in actual dollars than the new car bought in 1995
(f) a gallon of milk is under $3
(g) I have a fixed-rate mortgage with sub-5% interest rate. It hasn't changed in years.
(h) Socks at Wal-mart and Target are still about the same.
(i) Health care is still a $20 co-pay

Anyways, you ask where deflation is: It's in Texas.
On your utilities, have the utility companies actually decreased price per unit or are you just using less?

Gasoline is less here now than it was a year ago. I doubt, however, that we can look forward to shrinking gasoline prices for very long. We'll see I guess.

Sounds like your real estate tax rates are the same. Only the value of your housing has decreased. Housing is generally down here too.

We do have some "deals" at restaurants going on as you do. But like your area, they're not lowering base prices, just giving temporary 2 for 1 or 50% off on the second meal and that sort of thing.

Cars are one of the things I mentioned that do seem available at reduced prices. I don't need one, but prices do seem lower.

Milk as been under $3 here for years. Only the "quickie marts," gas station convenience stores, etc. can charge more than about $2.50. The last gallon of 2% I bought was $1.99.

The other items you mention staying the same, not decreasing in price. In any regard, if you're seeing some actual price reductions, that's great! Around here, prices and tax rates do not seem to be dropping in response to the recession.
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Old 07-24-2009, 09:12 PM   #6
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If deflation is in TX, someone forgot to tell my health insurer - premiums went up 6.8% this month. Our homeowner's insurance and auto insurance also increase. A couple of DW's prescription meds went up and so did dog food...

Our utility rate is unchanged yet our last bill was up 17% from a year ago - but it's a dry heat...
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Old 07-24-2009, 09:59 PM   #7
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FED FOCUS-

Possible wage deflation a cloud over recovery

Mon Jul 20, 2009



A jobless recovery and falling wages could rekindle the kind of negativity that raged for much of 2008 and has only abated in the past few months. At the least, falling real wages make a consumer-led recovery more elusive.

*

"We have already seen a noticeable slowdown in wage growth and reports of wage cuts have become increasingly prevalent," San Francisco Fed President Janet Yellen said in a recent speech.


*

In a worst-case scenario, Fed officials may fear that if consumer spending peters out, the positive inventory cycle that is expected to lead the nation out of recession is at risk of reversing as well.



entire article at link

FED FOCUS-Possible wage deflation a cloud over recovery | Markets | Markets News | Reuters



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Old 07-24-2009, 10:02 PM   #8
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I am no economist, having taken only 2 bonehead econ classes in college, but have read that deflation is a scarier thing than inflation. The title of the article is also eye-catching. So, my heart stopped for a moment.

Then, I saw this in the article: "Recent deflation data in part reflect the comparison with sky-high energy prices last year". That was what I thought and it provided some relief.

Still, I googled the phrase "global deflation" and came up with another article, this one from the International Monetary Fund (IMF). OMG! Following is the introductory paragraph.
The International Monetary Fund has recently issued a much-discussed research paper on global deflation. Although we view the risk of deflation in the United States as low, our indicators suggest that the prospect cannot be entirely dismissed, and the same would be true for the euro area as a whole, although there are higher risks for Germany. Given apparently tepid growth now in the United States, and with Europe virtually stalled, growing excess capacity is putting downward pressure on prices. Despite the recent rise in long-term rates in Japan, interest rates and inflation rates will remain near or at fifty year lows throughout the globe, and a sufficiently strong negative demand shock could tilt the balance towards worldwide deflation.
OH NO!





Then, I looked up and saw that the publication date was 2003! Phew!

It looks like that, at every recession, it's the duty of economists and central bankers to watch out for deflation risk and to take immediate measure, i.e. revving up the money printing press, to stem deflation.

This may be the reason why Buffet repeatedly lavished praises on Bernanke, saying there was nobody better for the job. And yet, my Libertarian friends kept calling Bernanke names!

As I said, I am no economist. Still, print as much money as they need, even drop it from helicopters if necessary, but bring back inflation to about 2% and everybody goes back to their own business like in 2004-2006. Will you pitch in to pay for the money printing cost?
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Old 07-24-2009, 11:41 PM   #9
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Things costing less this year:
Electricity (electric unit prices have been slashed by 20% in July to reflect lower energy prices)
Gasoline
Food
Travel (I booked a suite in a luxury hotel in San Francisco for less than $200 a night -over labor day week-end- and lots of cheap flights too, I booked a flight to Europe at prices I haven't seen since 2002)

Things costing the same:
Property taxes
Car and home insurance
Mortgage
Cable / Telephone / Internet
Health Insurance / co-pays

Things costing more:
Financial fees (ER have increased on many of my mutual funds)
Water
Payroll taxes

But I didn't see a shred of deflation in Europe, except for real estate properties.
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Old 07-25-2009, 07:29 AM   #10
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With all the money the Fed & treasury are borrowing and printing they just might succeed in re-inflating the bubble.If they succeed look out.They rarely have the will to remove the punch bowl.Unless deeply in debt , people would be better of with a Japanese style deflation than with a Weimar republic hyper-inflation. Yes it would wipe out the Federal debt but even people with jobs and money would have a hard time buying anything.At least with deflation if you could get your hands on money you could buy something.The feds,bankers and people with maxed out credit cards want inflation and unfortunately it could become more inflation than they bargained for.
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Old 07-25-2009, 07:42 AM   #11
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We have "Helicopter Ben" running things in the US, the Chinese spending money like water and even the Swiss are talking about weakening their currency. I think we can spend more time worrying about more important things than deflation, like Michael Jackson's autopsy.
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Old 07-25-2009, 10:15 AM   #12
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Hyperinflation is also a possibility. No one knows how it is going to work out. So, diversify and hedge.

About diversification or lack of it, I remember reading an article pointing out that one way to get rich is not to diversify. In 1999-2000, people did it by picking the "right" dot-com.

"Put all your eggs in one basket and watch it" - Mark Twain.

The above quote sounds reasonable, until one learns that Mark Twain had to file for bankruptcy due to his investing style.
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Old 07-25-2009, 02:26 PM   #13
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On your utilities, have the utility companies actually decreased price per unit or are you just using less?
Nope, actual prices per unit are down. Most of TX is set up a bit differently than many other states as far as electricity goes. Their prices follow market prices more closely, so they ran up really high and are now coming back down.

Many other parts of the US have actually had rate freezes in place for five and ten years . . . "real" prices have been in decline for that whole time. But don't expect any of the inflation exaggerators to have noticed. Now those rate freezes are coming to an end so people are crying bloody murder over the "rate shock" (Illinois, Maryland, Pennsylvania, and Ohio are the biggies).

In other places, utilities have locked in commodity supplies under several year contracts so they are still passing through the past year's high costs. But those should start to come down over the next couple of years.
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Old 07-26-2009, 08:40 PM   #14
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This is what the gummint says, if you believe it (to get back to, say 3% inflation, would take some time woudn't it?) :


CONSUMER PRICE INDEX: JUNE 2009


CPI for All Urban Consumers (CPI-U)


The Consumer Price Index for All Urban Consumers (CPI-U) increased
0.9 percent in June before seasonal adjustment, the Bureau of Labor
Statistics of the U.S. Department of Labor reported today. Over the last
12 months the index has fallen 1.4 percent, as a 25.5 percent decline in
the energy index has more than offset increases of 2.1 percent in the food
index and 1.7 percent in the index for all items less food and energy.

On a seasonally adjusted basis, the CPI-U increased 0.7 percent in
June after rising 0.1 percent in May. The acceleration was largely caused
by the gasoline index, which rose 17.3 percent in June and accounted for
over 80 percent of the increase in the all items index. The index for
energy rose 7.4 percent in June, with a decline in the electricity index
partly offsetting the sharp increase in gasoline. The food index, which
had fallen each of the last four months, was unchanged in June.

The index for all items less food and energy rose 0.2 percent in June
following a 0.1 percent increase in May. Most components of all items
less food and energy posted increases; the indexes for shelter and medical
care rose slightly, while the indexes for new vehicles, used cars and
trucks, recreation, and apparel all increased at least 0.5 percent. The
index for airline fares did decline in June, falling 0.6 percent.
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Old 07-27-2009, 12:49 AM   #15
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I observe the following,


... Over the last 12 months, a 25.5 percent decline in the energy index has more than offset increases of 2.1 percent in the food index and 1.7 percent in the index for all items less food and energy.

Note that during the last 12 months, oil at one point dropped to $30 some a barrel, if I remember correctly. So, isn't the cheap energy period already behind us? Because energy is also used to produce food and everything else and for transportation of goods, how much higher other items would be if we did not have the cheaper energy?

Alas, oil is now in the $60/barrel already, and these CPI numbers shown were for the last 12 months.
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Old 07-28-2009, 09:38 PM   #16
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Well, as I remember we went thru this before, after every Bear Market and Co.'s /business are just 'Waiting in the Wings" to start jacking Up Prices.. They're Dicounting Prices to get in Buyers and the have about 30-50% to make up for in the future..

Milk prices have been Artifically Too Low for YRS..Farmers are Killing their Cows earlier and going Broke.. An I don't blame them... Only reason Gas is Kept Under $3 gal is Over supply and Under Demand.. Wait, as soon as UnEmployement #'s Level off and start going Down? All will be back to "What the Market Can Bear" ...

They still want way too much $ for Most Cars, mostly due to Loading them up with what used to Be Options and making ( forcing) them to be standard now.. Who really needs 17" Wheels and $200 Tires on a Compact to Mid Size car? Who really needs a V8 in the same size cars? and do you really Need Outside Power Mirrors and Alloy Wheels? And the Big Mac is Up over 300% in the past 15 yrs..and try ordering Small Or Reg. Size fries with the Combo Meal..You can't have it, you Have to Take Medium or what used to be Large Fries.. another Con Game..

My Phone, Cable TV and HS Internet are all Up and they blame Higher Taxes.. yeah, right..So why do I have to pay for over 50% of the Channels I never use, nor want?
So it's Not Inflation, it's Force the Buyer to give them what they Don't want, nor Need ..trick..and you can claim your Not raising Prices, but giving you More ....

Our Town now wants to Force every RE tax payer to pay for Double garbage Pick up a Week, wether you use it or not.. since the Sales Taxes on that service would increase as well.. and the Phone Co.'s now want to try to get people to pay for Reciving Calls as well.Only charing 2 cents... Sure, that'll really stay at that level..
Just like taxes..

And our Elec. Bill per KW is Up 1.5 Cents per KW vs Last yr, and the reason? To provide service to the Poor...that can't afford it.. Isn't that nice..And you know that won't stay at that level for long..

I'm paying about +$25 more a Month vs Last yr, for the same Basic's and being forced to take More, but the prices haven't been raised on the former and less services and sinve your getting more, the price is higher and so are the taxes on it..

Slick Willy is at it again..
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Old 07-29-2009, 01:09 PM   #17
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Inflation/Deflation is a monetary phenomena. How can anyone say we should worry about deflation when the money supply growth has been off the charts? It is exponential growth and the result is not going to be pretty. You can count on it.
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Old 07-31-2009, 11:48 PM   #18
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Because of immigration and because people are living longer,
you may not realize it but the global birthrate is decreasing
even in third world nations.

Sometime in this century the population of the planet will begin
to decline. No more ever growing supply and demand... no more
ever expanding global markets... the future of the planet is deflation.


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Old 08-01-2009, 07:33 AM   #19
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Quote:
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... the future of the planet is deflation.
No, the world ends on December 12, 2012 - long before deflation can take hold.
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Old 08-01-2009, 09:28 AM   #20
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Quote:
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Because of immigration and because people are living longer,
you may not realize it but the global birthrate is decreasing
even in third world nations.

Sometime in this century the population of the planet will begin
to decline. No more ever growing supply and demand... no more
ever expanding global markets... the future of the planet is deflation.


~
I'm not sure which is preferable: continued, unchecked "growth", resulting in environmental havoc and wars over scarce resources, or the opposite...

But considering the billions on the planet living at a subsistence level, or worse, there's still room for growth via rising standards of living.
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