Sightings of references to the term "deflation"

[tombat1913]

Re: "deflation" sightings

Where are all these deflating prices the media keep talking about? In the UK I don't see them. In fact, the cost of a single journey on the London Underground has risen to $8. $8!

Food prices have gone through the roof and the supermarket figures show that prices are still rising. Anyone have any evidence of falling prices?

My grocery bill was an unprecedented $237 this week. Granted I was stocking up a bit since I live outside of town but damn! I asked the clerk if she had noticed food prices rising and she said that the last few months have been the worst yet. Gas prices can rise and fall quickly but as far as food goes I think supermarkets are probably catching up with the inflationary events which occured several months ago.

[Guest]

Re: Sightings of references to the term "deflation"

Quote:

Originally Posted by Lukester How is it possible that 90% of the move up in the petroleum price since 1999 is "pure inflation" as you insist, when such massive real purchasing power has accrued in a mere 5 years to the oil exporting nations? … …Can you explain (in very simple, readily understandable terms) how there is no real increase in oil's value during this time period (the unit of account shrank) as you assert, and yet that same USD unit of account has accumulated in such a vast pile that some of these nations with a population of maybe 20 million and no national exports or industry other than petroleum have accumulated real purchasing power such that they today have the ability to buy a half dozen companys in the DOW outright?"

FINSTER: There’s no conflict. If your acquisition of currency was greater than its loss of value, you still come out ahead.
_____________

LUKESTER: How is an oil or commodity seller going to "acquire lots more *real* currency" without selling "lots more of the stuff" if the currency is rapidly shrinking against that commodity? Did the US and the entire world suddenly started consuming vastly greater quantities of oil and commodities after the FED started printing lots of inflationary money? No they did not. The world oil and commodities consumption volumes have incremented robustly but in measured way, not at any huge disjuncture to their late 1990's consumption trends. Your argument rests on the assertion that the sudden massive leaps in the purchasing power of commodites exporters, was due their acquiring lots more constant value dollars which by definition here with a rapidly shrinking USD, can only be accomplished via sharply rising VOLUMES of their commodities sold.

We must note the global trend emerging from the end of the 1990's to the present describes measured oil and commodity consumption increases, only small increment fractions of the five and tenfold increases in net purchasing power some of these commodity exporters accrued in five to seven years. In the absence of any other input to net sales proceeds, the only thing left allowing them to grow really rich as opposed to merely giving the illusion of rich, would be sharply rising REAL PRICES. Global consumption volume has risen at a solid but measured pace, while the USD was shrinking in purchasing power. Despite this unfavorable headwind in the unit of account, these commodities vendors in the space of five to seven years built up truly world class hard purchasing power.

I understand otherwise that you are referring to a "latency" in the USD process of devaluation, where a torrent of dollars flooded abroad to "facilitate" higher nominal oil prices, but that the degradation of purchasing power implicit in their issuance has not yet "fully materialised"? This argument ignores the rapidity of price arbitrage inherent in strategic commodities, and summarily excludes the possibility that supply-demand trend is a major factor. It also ignores that it's own arguments have asserted elsewhere, that the currency used has ALREADY devalued 600%-900% in this current span of time! Further ignored is the factor - that in the case of petroleum in a flatlining global production environment, discounting supply / demand as a powerful price input in favor of the "unit of account" being the sole price factor, suggests a synthetic and excessively monetarist viewpoint to the commodity. This seems to me therefore a nebulous argument with which to dismiss the very large real purchasing power these nations have accumulated in a very short time.

FINSTER: You cite here two effects of the same first cause. The net wealth transfer from the US to BRICOPEC was stimulated by the same phenomenon that caused the loss of purchasing power; the creation of money and credit from nothing. It facilitated consumption without commensurate production in the US, and, as the excess dollars piled up around the world, a loss in their value.
_____________

LUKESTER: This seems to be just corrolary to the examination above, but encompasses the mechanism of runaway US inflated currency exportation. That much is certainly a given.

Meantime, Oil's price rises because the USD (and all currencies) flood out to the world in big piles, and in the process the entire basket of currencies just massively shrank vs. oil's constant price. The whole lot of the paper monies just shrank by 600%-900% in eight years vs. oil, as they piled up ex-USA. Meantime those selling this oil and accepting rapidly shrinking dollars, "got rich" by taking in those shrinking bits of paper. But they could only seem to "get rich" here by taking in lots more shrunken dollars. Once again, your argument would seem to require that the rising volume of oil, or commodities sold by BRICOPEC and consumed in the world has A) been caused by rapidly shrinking (shrinks 900% in 8 yrs vs. oil.) exported US capital and B) that the quantity of rapidly shrinking currency caused a much greater demand for the oil - so much greater that despite that 900% shrinkage in the USD money's purchasing power, these vendors got "much richer" in net terms eight years later. It's possible, but one thing that stands out here is that the volume of the commodity sold clearly would have to rise sharply to facilitate this process, no?

Except that the net global volumes of oil, or commodities sold have proceeded fairly sedately.

In the process of making this assertion then, you've placed a large burden of proof on the global energy and commodity consumption trends, all sandwiched into a short handful of years, to account for this massive shift of global wealth. From what I've read of CIBC, or Jim Rogers, or Andrew McKillop, or Charley Maxwell, or a number of others with decent track records, they would discard your thesis and explanation as being too synthetic and monetarily derived.

Quote:

Originally Posted by Lukester How does a 40% decline in the USD against a basket of currencies square up with a 900% recent rise in oil's nominal price?"

FINSTER: The 40% only represents the excess of the loss of value of the dollar relative to other currencies. Those currencies lost value, the dollar more.
__________________
Finster

LUKESTER: I understand here in summary, that your thesis relies a great deal on the "latency" principle, otherwise maybe to be termed the "dark matter" principle of "delayed cumulative inflation" which gets "suddenly unlocked" from past decades? The conundrum of how BRICOPEC boosted their sales enough to overcome a 600%-900% devaluation of ALL currencies against oil (and commodities) in a mere 8 years, and how they then can sell their commodities for this vastly shrunken scrip and still proceed to come out 500% ahead in net purchasing power relative to 8 years ago - all this is still a mystery to me. And once again, it bears noting that you have CIBC, Jim Rogers, Andrew McKillop, Charley Maxwell, and a host of other stalwart analysts (among which, some storied investors) who do not buy into your thesis.

Their theses are not principally monetarily derived as yours is, hence theirs are more "porous" to multiple independent price inputs. They all certainly incorporate components of your positions in their interpretations, but you incorporate none of theirs. Consequently it is to be expected, that your position is a little tougher to defend. I am much appreciative of the robustness of your analysis virtually everywhere else Finster, but I do find this "universality of the fiat unit of measure which explains every price phenomenon" to be an expression of eccentricity on your part. It is a privilege to be able to discuss our disagreements (amicably, I hope).

Respectfully / Lukester

[metalman]

Re: Sightings of references to the term "deflation"

wow. a brilliant luke dissertation. too bad it's here not on a more appropriate thread.

so... seen any references to 'deflation' lately?

[phirang]

Re: Sightings of references to the term "deflation"

wow. a brilliant luke dissertation. too bad it's here not on a more appropriate thread.

so... seen any references to 'deflation' lately?

LEH common...

[we_are_toast]

Re: Sightings of references to the term "deflation"

This is an opposing view from Mike Swanson:

"This is deleveraging, not deflation"

"Deflation is normally used to describe a decrease in the general price level or a decrease in the money supply. I do not see either one of these happening right now. In fact consumer and producer prices are still growing while the Fed is printing more money and will print enormous amounts of money in the future as a result of its buyout of Fannie and Freddie.

That event is extremely inflationary, not deflationary."

Mike Swanson

It's not main stream press, but it kind of is for gold bugs.

[FRED]

Re: Sightings of references to the term "deflation"

This is an opposing view from Mike Swanson:

"This is deleveraging, not deflation"

"Deflation is normally used to describe a decrease in the general price level or a decrease in the money supply. I do not see either one of these happening right now. In fact consumer and producer prices are still growing while the Fed is printing more money and will print enormous amounts of money in the future as a result of its buyout of Fannie and Freddie.

That event is extremely inflationary, not deflationary."

Mike Swanson

It's not main stream press, but it kind of is for gold bugs.

Mish and many others are confused by this. A rush for cash (liquidity) during a deleveraging process causes some of the same apparent symptoms as deflation, such as falling asset prices – including gold – but is inflationary because all of the money that the Fed is shoveling out the door doesn't suddenly disappear as soon as the crisis ends.

[GRG55]

Re: Sightings of references to the term "deflation"

i'd like this thread to be dedicated to observations of the word "deflation" in the writings of financial journalists, MSM, speeches of politicians, and so on. i would exclude well known deflationista's like mish. on these grounds i'm also leaving off kevin depew at minyanville, who's been writing about deflation for some time.

my goal is to see if my prediction of a "deflation scare" comes true. as the deflation meme spreads, we can expect commodities to bottom. when and if the word "deflation" is on the cover of time or newsweek, we'll know we've nailed the bottom.

fred, if you find this worthwhile, perhaps you'd make this a sticky.

for my first example, randall forsyth of barron's has begun mentioning deflation lately. today's example:

The Desperate Dash for Cash

By RANDALL W. FORSYTH

As deflation takes hold, debt is out and cash is king. That means everything but Treasuries is for sale.

Here's another...

Goodbye Lehman, Hello deflation: James Saft

Tue Sep 16, 2008 7:51am EDT

-- James Saft is a Reuters columnist. The opinions expressed are his own --

By James Saft
LONDON (Reuters) - A few short weeks, a few banking failures, a massive fall in oil and commodity prices and deflation is back on the agenda.

The events of the weekend -- the failure of Lehman Brothers, the takeover of Merrill Lynch and insurance giant AIG's reported emergency appeal for Federal Reserve aid -- have given another kick to the vicious cycle of debts going bad and asset prices falling. More markers will be called, more assets marked down, more capital destroyed, less credit offered...

..."Deflation looms, it certainly does loom," said George Magnus, senior economic advisor at UBS and a man who has predicted both the credit bust and many of its implications...
More...

[jk]

Re: Sightings of references to the term "deflation"

Treasuries Irresistible as Deflation Trumps Paulson

By Daniel Kruger and Sandra Hernandez

Sept. 22 (Bloomberg) -- As details of Treasury Secretary Henry Paulson's plan to revive the U.S. financial system by pumping as much as $700 billion into the markets emerged Sept. 19, bond investor Michael Cheah was reminded of Japan.

When that country's real estate bubble burst, leaving a trail of bad real estate loans, officials flooded the economy with cash only to see banks hoard the money instead of lending it out. The result has been a series of recessions and persistent deflation for more than a decade.

``Although the government tried to debase the yen by printing a lot of government bonds, the economy went into a standstill,'' said Cheah, an official at the Monetary Authority of Singapore from 1991 to 1999 who manages $2 billion at AIG SunAmerica Asset Management in Jersey City, New Jersey. ``The banks used the money to buy safety. I see a repeat happening here. The banks will use it to buy Treasuries.''

While U.S. bonds tumbled on the plan to buy soured mortgage-related assets from financial institutions in the most far-reaching federal intrusion into markets since the Great Depression, they still ended the week little changed.

To investors such as Cheah, that's a clear sign the economy is facing many of the same risks that have afflicted Japan. The yield on the benchmark 30-year Treasury bond, which stands to benefit the most of any government maturity from a drop in inflation expectations, fell to 3.89 percent last week, the lowest level since the U.S. reintroduced the security in 1977.
`Same as Japan'

Only Japan offers inflation-linked bonds that pay lower rates than similar securities issued by the Treasury.

For maturities up to four years, the difference in yields between Treasury Inflation-Protected Securities and nominal bonds is 1 percentage point or less. The so-called breakeven rate represents the pace of inflation investors expect over the life of the securities.
``The current U.S. situation is the same as Japan's case,'' said Hiromasa Nakamura, senior fund investor at Tokyo-based Mizuho Asset Management Co., which oversees $36.5 billion as part of Japan's second-largest bank. ``The economic slowdown and credit crunch are creating a downward spiral.''

Nakamura, who correctly forecast the rally in Treasuries last year, said two-year note yields will fall to 1.1 percent by year-end, while the 10-year will decline to 3 percent.

The 2.375 percent note due August 2010 ended last week at 100 11/32 to yield 2.20 percent, while the 4 percent security maturing in August 2018 finished at 101 10/32 to yield 3.84 percent.

Two-year yields fell to 2.11 percent and the 10-year yield dropped to 3.78 percent as of 6:47 a.m. today in London.
Rate Expectations

Just last month, traders, concerned that rising food and energy costs were trickling into the broader economy, saw a 65 percent probability the Federal Reserve would raise borrowing costs by the end of 2008 to contain consumer prices. Now, there's a 100 percent chance its 2 percent target rate will either stay the same or be cut, futures on the Chicago Board of Trade show.

The Labor Department in Washington said last week that consumer prices fell 0.1 percent in August, the first decline in almost two years, as fuel costs dropped from record levels. The yield on the 10-year Treasury is 1.55 percentage points below the consumer price index, the most since 1980 and a sign that traders expect inflation to slow. The yield typically averages about 3.4 percentage points more than inflation.

Traders think ``they're looking at Japan,'' said Dominic Konstam, head of interest-rate strategy at Credit Suisse Securities USA LLC in New York, one of 19 primary dealers that trade with the Fed.

Far to Go

The U.S. has far to go before matching what Japan has gone through. Since 1995, inflation in the world's second-biggest economy after the U.S. has averaged zero percent, while growth has averaged 1.4 percent. The Bank of Japan maintained what it called a ``zero interest-rate policy'' from 2001 through 2006 to try to stimulate the economy.

The yield on Japanese inflation-linked debt maturing in 10 years averaged 0.59 percentage point since being introduced in April 2004 and is currently negative 0.21 percent. The comparable U.S. yield is 1.92 percent.

Rather than a decline in consumer prices, a more likely scenario is a slowdown in inflation, said Stewart Taylor, a senior investment-grade debt trader at Boston-based Eaton Vance Management, which oversees about $6 billion of taxable bonds.
``Do we move into full-blown deflation as opposed to disinflation? I doubt it,'' he said.

Seeking a Haven

Instead of a referendum on inflation, much of the rally in bonds may be tied to investors seeking a haven from financial market turmoil that led to the government's takeover of Washington-based Fannie Mae, Freddie Mac in McLean, Virginia, and American International Group Inc. of New York and the bankruptcy of New York-based Lehman Brothers Holdings Inc.

Some of that flight to safety was reversed Sept. 19 after Paulson and Fed Chairman Ben S. Bernanke announced a plan to buy troubled assets from financial institutions. The U.S. may have to borrow an extra $700 billion to $1 trillion to fund the rescue of the financial system, flooding bond investors with more supply, according to Barclays Capital Inc. interest-rate strategist Michael Pond in New York.
Bond bulls point to a still weakening housing market for why they expect inflation to slow and yields to remain low.

Home prices have plunged 19 percent on average from their peak in July 2006, according to the S&P/Case-Shiller index of 20 cities. Economists at New York-based Goldman Sachs Group Inc. said this month they expect prices to drop another 10 percent.

Cutting Back

Though consumer prices in the U.S. rose 5.4 percent in August from a year earlier, the Goldman economists noted it took almost four years ``from the bursting of the financial bubble in 1990 until prices first fell on a year-over-year basis'' in Japan.

The housing weakness is causing consumers to cut back on spending. The Labor Department in Washington said last week that new-vehicle prices dropped 0.6 percent in August, the most since November 2006, and hotel fares tumbled 1.1 percent.

``There are deflationary events out there and debt default is one of the primary drivers,'' said Jeffrey Gundlach, chief investment officer at Los Angeles-based TCW Group Inc., which oversees $90 billion in fixed-income. ``It's what they call a debt deflation cycle, and there's definitely one underway.''

The percentage of Treasuries in a diversified bond fund Gundlach manages is the highest it's ever been, he said.

The world's biggest banks have taken more than $500 billion in writedowns and losses on securities tied to subprime mortgages since the start of 2007, according to data compiled by Bloomberg. Almost a year ago, Goldman economists said just $400 billion of losses would cut banks' lending by $2 trillion.

``There's a huge amount of deflationary pressure when you get this kind of capital destruction,'' said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, another primary dealer.

http://www.bloomberg.com/apps/news?p...0Xg&refer=home

[FRED]

Re: Sightings of references to the term "deflation"

Another gret catch, JK. Comments:

Treasuries Irresistible as Deflation Trumps Paulson

By Daniel Kruger and Sandra Hernandez

Sept. 22 (Bloomberg) -- As details of Treasury Secretary Henry Paulson's plan to revive the U.S. financial system by pumping as much as $700 billion into the markets emerged Sept. 19, bond investor Michael Cheah was reminded of Japan.

Reminded of, because that's the recent previous history that comes to mind. But it's the wrong analog: Japan was a net creditor.

When that country's real estate bubble burst, leaving a trail of bad real estate loans, officials flooded the economy with cash only to see banks hoard the money instead of lending it out. The result has been a series of recessions and persistent deflation for more than a decade.

``Although the government tried to debase the yen by printing a lot of government bonds, the economy went into a standstill,'' said Cheah, an official at the Monetary Authority of Singapore from 1991 to 1999 who manages $2 billion at AIG SunAmerica Asset Management in Jersey City, New Jersey.

Wrong. The Japanese tightened at first to protect the yen. Then after inflation fell below zero, they could not lower interest rates below zero to stimulate the economy. (Actually, they could, but didn't because they were more worried about the yen. Their last currency failure was a hyperinflation, so they were inflation paranoid.

``The banks used the money to buy safety. I see a repeat happening here. The banks will use it to buy Treasuries.''

True.

While U.S. bonds tumbled on the plan to buy soured mortgage-related assets from financial institutions in the most far-reaching federal intrusion into markets since the Great Depression, they still ended the week little changed.

To investors such as Cheah, that's a clear sign the economy is facing many of the same risks that have afflicted Japan. The yield on the benchmark 30-year Treasury bond, which stands to benefit the most of any government maturity from a drop in inflation expectations, fell to 3.89 percent last week, the lowest level since the U.S. reintroduced the security in 1977.

`Same as Japan'

Only Japan offers inflation-linked bonds that pay lower rates than similar securities issued by the Treasury.

For maturities up to four years, the difference in yields between Treasury Inflation-Protected Securities and nominal bonds is 1 percentage point or less. The so-called breakeven rate represents the pace of inflation investors expect over the life of the securities.

``The current U.S. situation is the same as Japan's case,'' said Hiromasa Nakamura, senior fund investor at Tokyo-based Mizuho Asset Management Co., which oversees $36.5 billion as part of Japan's second-largest bank. ``The economic slowdown and credit crunch are creating a downward spiral.''

Wrong. Short term capital inflows and a domestic rush to liquidity is driving yields, not falling inflation. Our spiral will not be deflationary.

Trigger: Banking crisis
1. Economy slows <---------------------
2. Capital inflows spike then slow |
3. Capital inflows stop |
4. Capital inflows reverse |
5. Sudden Stop: |
6. Output falls |
7. Currency weakens |
8. Inflation rises |
9. Bond yields rise -------------------

Nakamura, who correctly forecast the rally in Treasuries last year, said two-year note yields will fall to 1.1 percent by year-end, while the 10-year will decline to 3 percent.

The 2.375 percent note due August 2010 ended last week at 100 11/32 to yield 2.20 percent, while the 4 percent security maturing in August 2018 finished at 101 10/32 to yield 3.84 percent.

Two-year yields fell to 2.11 percent and the 10-year yield dropped to 3.78 percent as of 6:47 a.m. today in London.

Rate Expectations

Just last month, traders, concerned that rising food and energy costs were trickling into the broader economy, saw a 65 percent probability the Federal Reserve would raise borrowing costs by the end of 2008 to contain consumer prices. Now, there's a 100 percent chance its 2 percent target rate will either stay the same or be cut, futures on the Chicago Board of Trade show.

The Labor Department in Washington said last week that consumer prices fell 0.1 percent in August, the first decline in almost two years, as fuel costs dropped from record levels. The yield on the 10-year Treasury is 1.55 percentage points below the consumer price index, the most since 1980 and a sign that traders expect inflation to slow. The yield typically averages about 3.4 percentage points more than inflation.

Confusing the lagging inflationary impact of dollar depreciation and short term liquidity driven rate effects.

Traders think ``they're looking at Japan,'' said Dominic Konstam, head of interest-rate strategy at Credit Suisse Securities USA LLC in New York, one of 19 primary dealers that trade with the Fed.

Trade against them for money.

Far to Go

The U.S. has far to go before matching what Japan has gone through. Since 1995, inflation in the world's second-biggest economy after the U.S. has averaged zero percent, while growth has averaged 1.4 percent. The Bank of Japan maintained what it called a ``zero interest-rate policy'' from 2001 through 2006 to try to stimulate the economy.

The yield on Japanese inflation-linked debt maturing in 10 years averaged 0.59 percentage point since being introduced in April 2004 and is currently negative 0.21 percent. The comparable U.S. yield is 1.92 percent.

Rather than a decline in consumer prices, a more likely scenario is a slowdown in inflation, said Stewart Taylor, a senior investment-grade debt trader at Boston-based Eaton Vance Management, which oversees about $6 billion of taxable bonds.

``Do we move into full-blown deflation as opposed to disinflation? I doubt it,'' he said.

If interest rates go to zero, the dollar collapses and inflation rises into high double digits.

Seeking a Haven

Instead of a referendum on inflation, much of the rally in bonds may be tied to investors seeking a haven from financial market turmoil that led to the government's takeover of Washington-based Fannie Mae, Freddie Mac in McLean, Virginia, and American International Group Inc. of New York and the bankruptcy of New York-based Lehman Brothers Holdings Inc.

Correct.

Some of that flight to safety was reversed Sept. 19 after Paulson and Fed Chairman Ben S. Bernanke announced a plan to buy troubled assets from financial institutions. The U.S. may have to borrow an extra $700 billion to $1 trillion to fund the rescue of the financial system, flooding bond investors with more supply, according to Barclays Capital Inc. interest-rate strategist Michael Pond in New York.

Bond bulls point to a still weakening housing market for why they expect inflation to slow and yields to remain low.

Home prices have plunged 19 percent on average from their peak in July 2006, according to the S&P/Case-Shiller index of 20 cities. Economists at New York-based Goldman Sachs Group Inc. said this month they expect prices to drop another 10 percent.

Cutting Back

Though consumer prices in the U.S. rose 5.4 percent in August from a year earlier, the Goldman economists noted it took almost four years ``from the bursting of the financial bubble in 1990 until prices first fell on a year-over-year basis'' in Japan.

The housing weakness is causing consumers to cut back on spending. The Labor Department in Washington said last week that new-vehicle prices dropped 0.6 percent in August, the most since November 2006, and hotel fares tumbled 1.1 percent.

``There are deflationary events out there and debt default is one of the primary drivers,'' said Jeffrey Gundlach, chief investment officer at Los Angeles-based TCW Group Inc., which oversees $90 billion in fixed-income. ``It's what they call a debt deflation cycle, and there's definitely one underway.''

The percentage of Treasuries in a diversified bond fund Gundlach manages is the highest it's ever been, he said.

The world's biggest banks have taken more than $500 billion in writedowns and losses on securities tied to subprime mortgages since the start of 2007, according to data compiled by Bloomberg. Almost a year ago, Goldman economists said just $400 billion of losses would cut banks' lending by $2 trillion.

``There's a huge amount of deflationary pressure when you get this kind of capital destruction,'' said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, another primary dealer.

http://www.bloomberg.com/apps/news?p...0Xg&refer=home

Look for our "End of capital flow bonanza: avoiding the sudden stop"

[jk]

Re: Sightings of references to the term "deflation"

Deflation May Be Next Threat as Commodities, Asset Markets Sink


By John Fraher


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.

A `Vicious' Cycle

``A vicious deflationary cycle'' could then ensue, says Tony Tan, deputy chairman of Government of Singapore Investment Corp., a sovereign-wealth fund that oversees more than $100 billion.

Prices are already falling in parts of the world economy. Home values dropped more than 10 percent in the U.K. and in the U.S. in the past year. Oil, copper and corn drove commodities toward their biggest weekly decline since at least 1956 on Oct. 3, with the Reuters/Jefferies CRB Index of 19 raw materials tumbling 10.4 percent. The Baltic Dry Index, a measure of commodity shipping costs, has dropped 75 percent since May.

``We are certainly more worried about deflation than inflation,'' says David Owen, chief European economist at Dresdner Kleinwort Group Ltd. in London. Central bankers need to ``get rates down and keep them there for quite some time,'' he says.

Aggressive Easing

Trichet said Oct. 2 that European policy makers have considered reversing their decision in July to raise their benchmark rate by a quarter point to 4.25 percent. Forty-six of the 61 economists surveyed by Bloomberg News expect the Bank of England to cut its key rate by at least a quarter point Oct. 9 from 5 percent.

The Fed has already responded to one deflationary scare this decade. With inflation approaching 1 percent in 2003, then- Chairman Alan Greenspan slashed its rate to a 45-year low of 1 percent and kept it there for a year, which its critics say helped fuel the property and credit boom that is now unraveling.

This time, the crisis is an increasingly dysfunctional banking system that may not be able to continue making loans that grease economic activity. Such a pullback, combined with slowing growth and falling asset and commodity prices, makes deflation more of a threat, Owen says.

Restricting Credit

friended by the collapse of Lehman Brothers Holdings Inc. and other institutions, banks are restricting access to credit. The London interbank offered rate, or Libor, they charge each other for three-month loans in dollars rose to 4.33 percent on Oct, 3, the highest since January.

Not all economists share Owen's gloomy outlook. Some say Bernanke and other central bankers have learned the lessons of Japan and the Great Depression so well they will do everything necessary to head off trouble.

Former Fed Governor Lyle Gramley says that while deflation is a risk ``if we were to go into a very, very prolonged recession and nobody did anything about it,'' he is ``not worried,'' because he's confident the Fed will act ``very, very, very aggressively.''

Bernanke, who has studied the Great Depression since he was a graduate student, has said that one key reason the U.S. stock- market crash of 1929 had such severe consequences was that lenders were forced to close and the banking system was deprived of liquidity.

`Lost Decade'

He has also studied Japan's ``lost decade '' of deflation, which was partly caused by a banking crisis, and has argued that its policy makers waited too long to respond to a stock-and- property price crash at the start of the 1990s. In a 2002 speech that earned him the nickname ``Helicopter Ben,'' he said governments and central banks must respond immediately to such a deflationary shock by dropping money into the banking system.

The caution of Japan's leaders -- who waited until 1999 before using taxpayers' money to bail out the banks -- cost their economy dearly. Lending shrank, unemployment more than doubled to 5.5 percent, and Japan experienced three recessions between 1990 and 2002. From 1997 to 2007, consumer prices dropped 2.2 percent. In the U.S., prices climbed 29 percent in the same period.

When credit markets started seizing up in August 2007, Bernanke set up $1.4 trillion in emergency borrowing for financial institutions. The ECB, the Bank of Japan and other central banks have set up similar lifelines. On Oct. 3, President George W. Bush signed into law Treasury Secretary Henry Paulson's $700 billion bank-rescue plan.

`Last Resort'

Commerzbank's Kraemer says the Fed might also consider further easing collateral requirements or purchases of government bonds ``as a last resort.''

Kraemer says he thinks a slowdown in inflation is more likely than deflation. The surge in commodity prices earlier this year drove inflation in the U.S., Europe and Asia to the strongest pace in at least a decade. Strategists have pointed to Paulson's rescue plan as an additional risk.

Japanese core consumer prices, which exclude fresh food, climbed 2.4 percent in August from August 2007. The U.S. core rate, which strips out food and energy, rose 2.5 percent from a year earlier.

Still, deflationary forces are mounting in the U.S. and other parts of the world economy. In Britain, the Nationwide Building Society says house prices have dropped 12.4 percent in the past year as banks restrict the supply of mortgages, putting the economy on course for its first recession since the early 1990s.

Deflationary Consequences

``The risk we must be careful not to underestimate is the deflationary consequences of the credit crisis,'' Bank of England Deputy Governor John Gieve said last month.

In the U.S., prices manufacturers paid for materials last month plunged the most since at least 1948, with the Institute for Supply Management's index dropping 23.5 points to 53.5 points.

The breakeven rate on U.S. 10-year Treasuries, a measure of price expectations, dropped to 1.5 percent from 2.6 percent in July. Japan is the only country whose bond market implies a lower inflation rate than the U.S.

All this is likely to make the Fed resume rate cuts, says Robert Dye, a senior economist at PNC Financial Services Group in Pittsburgh, Pennsylvania.

``If we're going over a cliff, we're not going to go over a cliff with a 2 percent federal funds rate,'' he says. ``What's the point of holding back?''

[emphases added]

http://www.bloomberg.com/apps/news?p...jwE&refer=home

[friendly_jacek]

Re: Sightings of references to the term "deflation"

If we can please return to the topic!
Looks like deflation is not well represented in news as per the Google trend search:






Inflation concerns are much higher and just peaked:






To me, this could be a contrarian sign that we can have a lot of deflation ahead. Maybe the Faber's call of $80 crude and $600 gold is not that far off?

When I posted the links a few weeks ago, there was low activity for deflation internet searches. Now it spiked dramatically. If the news volume spike as well (should happen soon), that will be the end of deflation based on the contrarian ideas.

[metalman]

Re: Sightings of references to the term "deflation"

When I posted the links a few weeks ago, there was low activity for deflation internet searches. Now it spiked dramatically. If the news volume spike as well (should happen soon), that will be the end of deflation based on the contrarian ideas.

$80 crude and $600 gold is deflation? are you kidding? crude was $20 and gold $260 last time we had a hint of deflation in the usa.

[GRG55]

Re: Sightings of references to the term "deflation"

$80 crude and $600 gold is deflation? are you kidding? crude was $20 and gold $260 last time we had a hint of deflation in the usa.

$80 crude brings it back to where it was in Sept last year. Some deflation...

[friendly_jacek]

Re: Sightings of references to the term "deflation"

Why you are attacking the helpless messenger?
Besides:
http://www.itulip.com/forums/showthread.php?t=5038

[GRG55]

Re: Sightings of references to the term "deflation"

Why you are attacking the helpless messenger?
Besides:
http://www.itulip.com/forums/showthread.php?t=5038

Not trying to attack the messenger f_ j, simply trying to put all this deflation into context.