Deflation ahead?
Six central banks, in a co-ordinated move have cut interest rates by around 50 basis points. Will the bailouts combined with the interest rate cuts spur financial markets?Stock markets in Asia have taken major beating today falling to levels not seen in the past two years. Oil price has now settled at $90.06 a barrel .
With this kind of a global financial backdrop, are we looking at a 'deflationary' scenario, sometime soon? Seems so.
Comments
Deflation is considered a problem in a modern economy because of the potential of a deflationary spiral and its association with the Great Depression, although not all episodes of deflation correspond to periods of poor economic growth historically.
http://en.wikipedia.org/wiki/Deflation
As far as I understand, it can lead to stagflation at the best - high inflation accompanied by low growth rates.
I should have got that, considering the fact that you are a doctoral student in Economics....silly me...
Except for the interest rate cuts that are aimed at making borrowings cheaper, I see nothing else that raises investor confidence.
I speculated (note, speculated) on deflation due to this one phenomenon termed 'mood', which at the moment can be termed pessimistic to say the least.
Now what could that result in? As they say, the pessimistic mood can change the investor's, producer's and the consumer's orientation form one of 'expansion' to one of 'conservation'.
With 'money' not being 'spent', the toll it takes is on prices. Its dropping of prices that can get the producer to sell, the consumer to buy. Add to this the back drop of oil prices hitting an all time low.
The jury is still out on the 'stick' thing...
It aint a scenario of 'lower supply for same demand'; instead it is ' same supply for lower demand' ( segregation of markets don't matter). That's what 'Winter Rain' terms 'idle and excess capacity'.
Plus, check out what William Pesek says on Bloomberg;
'The big powers of the day cut interest rates this week to avoid another Great Depression. Joining the Federal Reserve, European Central Bank, Bank of England and Bank of Canada was the People's Bank of China.
Yesterday, South Korea, Taiwan and Hong Kong also got into the act, trimming interest rates. All Japan, which pretty much has nothing to cut, could do was pump 2trillion yen ($20 billion) into the financial system.
What can be made of this flurry of Asian activity? Two things come to mind. One, the inflation concerns that dominated the region just a few months ago are swinging toward deflation. Two, the balance of economic power in Asia is shifting faster than many observers expected....
With unemployment heading higher, oil prices coming down, wage and price pressures subsiding, U.S. consumer-price inflation is ``set to collapse over the coming year, from about 5.5 percent at present to maybe 1 percent or less,'' Robertson says. ``Within a year, U.S. discussions will again have turned to the growing risk of deflation.'' ...
For now, though, deflation concerns are taking center stage in Asia. In Tokyo, for example, a precipitous decline this week in the Nikkei 225 Stock Average and movements in prices of government bonds adjusted for inflation ``bred nervousness over Japan's potential return to a deflationary environment,'' says Naomi Fink, senior currency analyst with Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo....
http://www.bloomberg.com/apps/news?pid=20601039&sid=a.9SRJ2gfyWs&refer=home