The worst of Inflation and Deflation - Together

[agisthos]

We will have Deflation - Falling asset prices, real estate, equities. Lower wages, lower commercial property rents e.t.c all the hallmarks of debt deflation.

But at the same time we will have the worst of Inflation - rising interest rates.

Why?

Putin had a point last week when he mentioned the US may suck all the liquidity out of the worlds financial system when running yearly trillion dollar deficits.
http://www.ft.com/cms/s/0/d0fac984-e...0779fd2ac.html

Every OECD country in the world, and most emerging markets, are going to increase deficit spending and hope to ride this out. Who is going to fund it all?

Everybody points to Japan as an example of a 0% interest rate regime with huge deficit spending, but the rest of the world was in inflation mode and willing to fund them with the carry trade e.t.c

Today it is different, there is a worldwide debt deflation and no money out there.
Interest rates are going to have to rise, as the limited pool of available capital seeks a higher risk premium to be put to work.

We could be in a situation where we still have falling wages/asset prices aka debt deflation but the world central banks are suddenly finding they have to offer a higher and higher interest premium just to run up a deficit to fund essential services.

It has already happened to those countries on the margin like Ukraine and Iceland. They have had to raise interest rates just when they want to be dropping them to zero.

Interested on you guys thoughts about this. Is it possible? It would be horrific if it were to happen. Nowhere in the financial blogosphere is there much talk of this, which probably means it is a possibility.

[FRED]

Re: The worst of Inflation and Deflation - Together

We will have Deflation - Falling asset prices, real estate, equities. Lower wages, lower commercial property rents e.t.c all the hallmarks of debt deflation.

But at the same time we will have the worst of Inflation - rising interest rates.

Why?

Putin had a point last week when he mentioned the US may suck all the liquidity out of the worlds financial system when running yearly trillion dollar deficits.

Every OECD country in the world, and most emerging markets, are going to increase deficit spending and hope to ride this out. Who is going to fund it all?

Everybody points to Japan as an example of a 0% interest rate regime with huge deficit spending, but the rest of the world was in inflation mode and willing to fund them with the carry trade e.t.c

Today it is different, there is a worldwide debt deflation and no money out there.
Interest rates are going to have to rise, as the limited pool of available capital seeks a higher risk premium to be put to work.

We could be in a situation where we still have falling wages/asset prices aka debt deflation but the world central banks are suddenly finding they have the offer a higher and higher interest premium just to run up a deficit to fund essential services.

It has already happened to those countries on the margin like Ukraine and Iceland. They have had to raise interest rates just when they want to be dropping them to zero.

Interested on you guys thoughts about this. Is it possible? It would be horrific if it were to happen. Nowhere in the financial blogosphere is there much talk of this, which probably means it is a possibility.

Six Questions for Eric Janszen on the Economic Collapse

5. How much worse will it get, and has anyone been able to beat this market?

It happens like this:

* the dollar, declining;
* import prices, rising;
* goods prices, flat to rising;
* wages, falling;
* asset prices (stocks, bonds, real estate), falling;
* long-term interest rates, low but rising;
* short-term interest rates, low but flat to falling.

[jk]

Re: The worst of Inflation and Deflation - Together

thanks for the link, fred. it's a handy little summary suitable for emailing to people who need to be clued in.

[*T*]

Re: The worst of Inflation and Deflation - Together

Six Questions for Eric Janszen on the Economic Collapse

5. How much worse will it get, and has anyone been able to beat this market?

It happens like this:

* the dollar, declining;
* import prices, rising;
* goods prices, flat to rising;
* wages, falling;
* asset prices (stocks, bonds, real estate), falling;
* long-term interest rates, low but rising;
* short-term interest rates, low but flat to falling.

Declining wages (which I am observing here in the UK) means that the debt is harder to liquidate or bear. This is a symptom of a classic (fischer-style) deflation. A falling currency causes the wrong kind of inflation -- in input and living costs. The currency adjustment is the right answer to the wrong question.