Daily Archives: February 20, 2015

Enduring Deflation.

I hope readers enjoyed the Sirtaki video in my last post. I found the last scene of “Zorba the Greek” inspiring. It’s nice to relax every now and then, notwithstanding full awareness of the global debt pile. Unfortunately, at the end of the day, we all need to remain focused on the affair of wealth preservation. This post will be on the serious side.

I’ve writen on the matter of deflation before. But that was months ago, and both posts were in Spanish. My views, however unconventional, have not changed. The degree of conviction behind them is high. Deflation is a negative outcome only because of accumulated debt. In a debt free economy, supply side induced deflation is a “goodie”, not the ogre they try to sell us. It might as well be a “goodie”, because deflation will be a lasting episode, and not the fleeting situation politicians try to convey.

Sick aggregate-demand induced deflation, is certainly not as good. But it is the pathology of aggregate demand itself that should worry us, and not merely deflation. Deflation is only one of its various negative consequences. Actual deflation has roots both in the supply and demand side. Deflation is a undeniably a relevant phenomenom, but it is over-rated as “crucial”, because it impacts the effectiveness of traditional keynesian monetary easing recipes. ¡Isn’t that a pity!

Yes, deflation is relevant as a game spoiler for keynesians and Princeton sect economists. And it influences both the long term investment strategy, and the tools available to politburos of Central Banks. QE is doomed in this context, because any new money that we generate, has flown, and will flow, into financial markets, parking itself either in bank reserves, bonds, or equities. It will not access the real economy. It will not reflate the stream of goods and services, unless we accept Weimar style money printing (and thankfully we are not there yet). There is no glide path to debt reduction with mild reflationary policies. We have to focus on the real stuff. In a deflationary environment, money printing only gives your some extra time.

I see five reasons for sustained deflation in developed countries, and they are endorsed and validated by Japan’s empirical evidence over the last two decades (in chart).japdeflation

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