How would global deflation work?

[feargach]

We saw a localised deflation in Japan, so clearly it can happen in at least one place.

But can it happen globally?

Of course, global deflation happened in the 1930s, but back then the "international currency", such as it was, was precious metal, an inherently rare physical item.

But nowadays we don´t peg our currencies to any finite resource. It´s just electrical pulses in computer memory (i.e: it´s not even paper any more).

Seeing as there will certainly be no shortage in electrical pulses, can some of the more economically astute people give specific reasons as to how a general global fall in overall prices can occur, and be sustained over some years?

[kerrynorth]

Deflation is presently taking hold in Western countries. You have both asset and commodity prices deflating in a recessionary era where demand for these same assets and commodities are also falling. In an open market this will lead to a full blown deflationary period in the developed world that will probably last a decade or more. However, what may prevent full blown deflation, and a consequent depression, is if commodity suppliers act to cut supply but there is not much chance of that as the most important one, OPEC, fight and cheat each other on production quotas like a bag of cats and other main commodities do not even have an OPEC type equivalent. There have been moves of late by Russia, Iran and Qatar to set up a Natural Gas 'OPEC' but even that can have only limited affect as LNG is not massive in the Natural Gas market.

[ZANU-FF]

deleverage

thats whats happening right now

thats why the banks shares are worthless

they will have to be nationalised and no stakeholders (bar deposits) should be protected.

[junketman]

There would definately be advantages to it, especially for consumers, but definately not for retailers.

If you had 10,000 in the bank this year and deflation was at 1%, next year it would be worth 10,100 in real terms, so the next year you could get that bit more for your money than the year before.

For retailers, example a car salesman, he bought a car for 10,000 euro and if he doesnt sell it for a year its worth 9,900 the next year.

[Duth Ealla]

KN,

In the recent period when commodities such as Oil, gas, corn, beef, rice and many minerals etc all increased very dramatically due to an increased demand for all of those products by China and India (maybe not beef) as they increased production and lifestyle demands.

Now as the world economy pulls the handbrake is it not to be expected that these various commodities will return to earlier levels simply because demand will slow down. Is that deflation or just marginal utility.

thanks,
Duth Ealla

[kerrynorth]

KN - wouldn't this mean that somebody with, say, €100k in the bank will see an increase in spending power, even if interest rates remain at 0%?

The converse would also be true would it not - i.e. that somebody with a €100k mortgage would see the value of that mortgage increase in real terms? This would be the opposite of the 70's where high inflation wiped out debt.

Yep all that is correct. And deflation is potentially worse for an economy than a bout of inflation. With inflation you can introduce policy measures to counter it whereas thse measures will have no impact with deflation. If people collectively believe that prices will be lower tomorrow than today then big spending decisions will be continually put back....and back....further deflating the economy. Japan arguably has not even yet come out of its 1980's 'lost decade' of deflation.

[feargach]

Well, the oil economies have different dynamics going on. The oil is controlled by oligarchies without elections to worry about.

The electoral nations which are export-oriented will have something to say about this.

A significant fall in the dollar price attained for their exports, combined with no fall in their dollar-denominated debt, will cause major humanitarian disasters, provided they still accept US paper in exchange for their exports.

[Sidewinder]

KN - wouldn't this mean that somebody with, say, €100k in the bank will see an increase in spending power, even if interest rates remain at 0%?

The converse would also be true would it not - i.e. that somebody with a €100k mortgage would see the value of that mortgage increase in real terms? This would be the opposite of the 70's where high inflation wiped out debt.

Yes, that's exactly right. That's why I've spent the last year paying off every single debt I have.

Debt-free with a modest store of cash is where you want to be for the next 5 years.

I think TPTB were trying to engineer a 70s style inflationary episode in order to inflate all the debt away, but they have been shocked at the sheer scale of the deleveraging going on in the derivatives markets. Even though the central banks have pumped in about $2 trillion in imaginary liquidity over the last year or so, this has been and will continue to be dwarfed by the $45 trillion or so in exotic derivative instruments that are being marked to their true value now (i.e. nothing)

If you have a reasonably steady job - and remember some industries do better than normal in recessionary times; no debts; and a few grand in savings, you should get through this period relatively unscathed.

Canny McSavvy is massively f***ed though. There's a whole world of extreme pain about to fall on his head.

[kerrynorth]

KN,

In the recent period when commodities such as Oil, gas, corn, beef, rice and many minerals etc all increased very dramatically due to an increased demand for all of those products by China and India (maybe not beef) as they increased production and lifestyle demands.

Now as the world economy pulls the handbrake is it not to be expected that these various commodities will return to earlier levels simply because demand will slow down. Is that deflation or just marginal utility.

thanks,
Duth Ealla

I think what we have been finding out of late is that much of this new demand from the BRIC countries was not near enough to justify the rise in price i.e. speculative bubbles in all types of commodites ran riot for about a year on the back of relatively marginal in global sense increases in demand while at the same time massive amounts of hoarding was going on by speculaors. That bubble has well and truly burst and it is deflating real demand for commodities worldwide with it.

Just consider this one figure. The US is now consuming over 5% less oil than it did this time last year even though price has almost halved from its peak and oil prices affect prices at the pump directly in the US where there is very little tax. Even so, the US is consuming 1.25million barrels of oil a day LESS than it did last year. That is a serious commodity demand deflation where at the same time price has come down rapidly and where demand for oil products is usually considered to be one of the most ill-elastic i.e. demand does not respond much to changes in price.

[snacksandfizzydrinks]

deleverage

thats whats happening right now

thats why the banks shares are worthless

they will have to be nationalised and no stakeholders (bar deposits) should be protected.

November 2008 !

politics.ie - read it before it happens...