Wednesday, March 18, 2009

Deflation here we come (in fact we are already there)

Those of you who remember my old blog, (which I deleted) will remember my frequent references to Galbraith and his bubble theories. We have now burst the ultimate credit bubble.

Previous bubbles were symptoms of excess credit and their bursting (eg the Dotcom bust) were solved by making credit even more lax.

This one is the big kahuna, and the Central banks and policy makers have no idea how big or bad things will get. If you had any doubt about how bad it is, today's announcements that the Fed will buy US treasuries, which follows the Bank of England saying the same a couple of weeks ago...should give you some idea.

We are already at near zero interest rates everywhere, and that wasn't enough. Then they bought damaged assets from the Banks and AIG and paid off their bad debts, but that wasn't enough. Now they are buying their own debt. This is a way of printing money.

So everyone today played the inflation trade- the $US dropped, Gold rose. However I think we are a long way from inflation. I could explain why, but Matt Stiles has done that very eloquently at the link below. He also describe the changes that are taking place in society where conspicuous consumption..big houses and cars are no longer as acceptable as they were.

I think Range Rovers are going to have quite a few years of weak sales.

1 comment:

  1. As an example of deflation, take a look at the foreclosure post below.

    The other 20 townhouse owners have lost (on paper) 20 X 500K = $10 Million. Add in the 40 apartments above and you are probably looking at an evaporation of $20 Million plus of wealth in one year- in one building- in one city!

    The multiplier effect of that is huge. So $20 Million has disappeared. The Bank of Canada can print 20,000,000 electronic dollars and there would be no net increase in money.