On the Money: Market Fears Flip from Inflation to Deflation

[Elmore Furth]

Source: Arizona Daily Star

In this erratic market, preoccupation with possible rising interest rates and inflation has flip-flopped to worries over an opposing force: deflation.

Economists are debating whether deflation, or widespread falling prices, could become a threat. Concern has intensified as data, ranging from slowing factory orders to another downturn in home sales and consumer spending, have pointed to a weaker economy. And the personal consumption price inflation index for June, released last week, showed inflation at a nine-month low of 1.4 percent, well below the 1.7 percent to 2 percent level the Federal Reserve wants to see.

That's "disinflation," not necessarily troubling deflation. Still, with economic indicators heading in the wrong direction, St. Louis Federal Reserve President James Bullard recently said the Federal Reserve needs to prepare for the risk of deflation, and some prominent professional investors, from Pimco's Bill Gross to GMO's Jeremy Grantham, have adjusted investments based on deflationary concerns.

"This will increase the number of defaults and cause banks to tighten up on lending," said Feroli. And if people and companies can't get loans, economic activity will become more depressed and add to the pressure to reduce prices further. Hence, a nasty spiral of deflation.


Read more: http://azstarnet.com/business/local/article_e974341a-ff8a-5314-b0f0-3669691f22a6.html

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What should investors do if deflation occurs?

-- high-grade bonds - Treasurys - are best, cash is next, stocks get killed.
-- avoid risky stocks
-- bonds are widely accepted as a haven during deflation


But the betting money is still that there is only a 25% chance of deflation. A senior official overseeing the world's largest bond fund, Pimco, says there is a 25% chance that the United States will encounter deflation and a double-dip recession.

http://www.bloggingstocks.com/2010/08/05/pimco-25-chance-of-deflation-in-u-s/

[PSPS]

1. "But the betting money is still that there is only a 25% chance of deflation"

Some bet, that is. Even Greenspan himself admitted that the ONLY sector of the economy that is currently providing any demand is the top 2% -- the same minuscule group that added $800 billion to their retirement plans last year.

Instead of actually addressing the fundamental changes that need to be made to the country's economy, all we get are cheerleaders.

[Warpy]

4. Let's take a closer look at that, please

While they might like to post the 25% figure for the rubes, the truth is that the big money boys are neither lending nor investing because they all expect deflation of some degree to occur and soon. Any loans extended at current prices will likely default as the air is let out of the inflated economy.

In so doing, of course they're pretty much insuring that such deflation will occur.

[nyy1998]

2. Gotta give Paul Krugman a lot of credit here. He's been harping on this for awhile.

And he backs it up with a lot of wonkish charts and policy recommendation.

Keep up the good work Dr. Krugman!!!

[Frisbee]

3. ..."cause banks to tighten up on lending," said Feroli.

banks are lending? Who knew?

[McCamy Taylor]

5. No duh! This is what "supply side" gets you. Too much stuff not enough money.

you do the math.

On the bright side, the uber rich are not going to be pleased when their property goes down in value.

[sendero]

6. Deflation...

.... is highly likely and is already occuring in some sectors.

The Fed and Treasury have been fighting as hard as they can, because deflation is even worse than inflation to the economy.

They need to get money into circulation, but handing out trillions to the banks has not accomplished that because the banks would rather play the markets than lend.

So, they need another way to get money into the economy but they don't seem to be smart enough to do it.

Obama's got about 1 month to make something happen here. I'm not holding my breath.

[glitch]

7. Unfortunately the solutions fall outside their ideology, IOW they are "impractical".

Or, saving this political-economy isn't what's really desired by the people running the show.

[Blackhatjack]

8. It's like being in a 5 player poker game and 1 player has taken 90% of chips off the table...

You have very little money, you can't meet a traditional ante amount needed to play.

So how does the 90% chip holder get that other 10% of chips held by the other players? He lowers the 'price'(the cost of the ante) needed to play.

THis is all about getting the last dollars from the fleeced citizens. And deflation plays its role in accomplishing this task.

[Blackhatjack]

9. DUPE