Inflation Deflation Switch Turns Entire Investment World Upside Down for 2009

I'm not sure I agree with everything it says but this article makes a number of points worth thinking about:

- Deflation is taking a firm hold on the US Economy and will last for some time.
- Deflation causes the value of most assets to decline, and the value of the dollar to increase.
- The size of the current and planned federal stimulus packages is barely significant when compared to the magnitude of the problem.
- We're currently experiencing destruction of wealth and liquidation of debt: debt collapse.

"The key is the debt liquidation. That's the main engine behind the deflation and a major element in vicious cycles that are just beginning to gain momentum. Consider the housing market, for example. The more debts are liquidated, the more prices fall … and the more prices fall, the more people abandon their homes and mortgages, leading to more debt liquidation."

- It may take years to flush out bad debt.
- While battered, the US dollar, will remain the favored global currency, and demand for it will remain strong.
- Sell whatever you can to raise cash.
- There will be opportunities in investments that increase when the dollar strengthens.

http://www.marketoracle.co.uk/Article7939.html

The only thing that's really happened over the last six months is that the price of a vital commodity, petroleum, has gone down by about 75%. We've seen oil prices rise and fall before without economists using the word 'deflation', the only difference here is that the speculation bubble burst as quickly or perhaps more quickly than it inflated. To the extent that energy prices are reflected in the prices of 99% of the things we buy, that sudden a cut in fueling prices will certainly show up in reduced prices for finished goods.

That's not necessarily deflation, just things correcting back to normal, or sub-normal since the bubble had such devastating effects on the world economy. Jobs will come back, but every nation's economy still has to recover from the shock of $147 a barrel oil.

We'll know in about six months if the "D" word should be used. My guess is that it won't need to be.

we are in a deflationary collapse, the price of oil has gone down as well as stock prices ( equities ) commodities other than oil have fallen well off their highs, ( with the exception of gold ) housing prices have fallen dramatically and continue to decline, auto prices are falling ( whole sale ) and retail. commercial and consumer credit is declining, people (consumers) are not spending but saving (trying to), the cost of rental housing is falling ( at least where i live ) and the price of clothing and electronics is falling.... so far the only thing NOT falling is the price of food!.. what we have seen in this area is a stealth increase in prices masked by smaller ( by weight ) packaged food selling for the same price! I see that EVERYWHERE! since deflation has a tendency to feed on itself things could ( and probably will ) get pretty nasty before they start getting better!!! 2009 is going to suck!!

and I can say that yes, 2009 will suck deeply. The second shoe of bad mortgage paper is going to drop and will likely be far heavier than the first shoe. This is all the mortgage and commercial paper that was written when everybody knew the bubble was about to pop but they were willing to commit fraud to keep it all pumped up a few weeks longer, to keep that illusion of never ending wealth alive.

The bad paper will be through the system by the end of summer, 2010. Unfortunately for us, it will take a lot of good paper with it. We are going to see a lot more mergers and takeovers and government bailouts just to keep financial institutions alive on life support so they'll be there if and when the larger economy is addressed by feeding the demand side of the equation.

It will most likely be bad enough for riots. The riots will be put down by government goons fresh from the battlefield. There will be a huge public outcry about overkill. Then the government, fearing that it's lost control of the situation completely, will allow itself to be dragged slowly toward a few of the reforms that are so desperately needed.

That's what history says will happen.

My own family rode out the Depression, taking their losses and adapting to privation the best they could by developing the skills that keep us alive during hard times.

Good luck to us all. We are certainly going to need it.

The stock market collapse hit about ten days after I took the job
Sales are still on going, but inventories are selling for 25% to 65% of what they were going for back in July.

Yeesh!!

And also that you are not in sales.

the world is very bleak for anyone in those situations.

and while I don't own any real estate, my twenty-plus years in the title insurance business (going back to 1976) certainly give me a sense of real estate values dropping. I did see somewhat the same thing back in the early 1980's (after my ex and I bought a house in 1979!) but the prices did not drop as far, I'll admit.

Still, if we view what is happening as a mere correction of bubbles, the housing and the oil bubbles should correct themselves rather quickly. With speculation driven completely out of those markets, real demand should assert itself once it is felt that the bottom has been reached.

As for retail sales, let's face it, that was also a sort of bubble. In my last year in title insurance (2003) I was able to see that people were using declining interest rates to refinance their credit cards into their home mortgages without an increase in the monthly payments. That had to stop eventually! There is so very much crap out there that is for sale, stuff that is made for a few bucks that sells for hundreds of dollars at full retail was just asking for the reality check to come back to be cashed. No, I'm not out there selling $250 Coach purses, I do feel for a friend in Florida who was doing so. But I could have told him to go find something else to do, if he'd have listened.

This response of yours makes it clear that you do understand that.

And it is sad when we can perceive soemthing that others wish to blind themselves to, and yet the other person willnot listen toyou, but only to the hype. Your friend selling Coach handbags being an example.

is not 'deflation'. As I said, we have seen fuel prices fall in previous times, admittedly not as fast. No economist used the word deflation then.

I also said that it will take time to determine if it is really here. In six months, we will know it. In any case, the economic stimulus proposed by the Obama Administration is the right course of action to get the economy moving again. It is deeply in the interests of that Administration to avoid the appearance of deflation, such a situation will really throttle the economy over the next few years, and make it impossible to recover from Bushco's wrongdoing.

...are often times, people who have lost a job and need to re-locate to a new
city--just to find work in their field.

I talked with an executive who worked in trans/log for a large company. He lost
his job, and he was making a six-figure salary.

He needs to move. He cannot sell his house though. He's totally stuck.

I don't hear people talking about that dilemma very much, but with many people
losing their jobs and houses not moving--this could really spell disaster for
families and for the economy.

Facing the fact that some people must sell their houses to work elsewhere and can't, why couldn't there be a central site where people could barter their houses? It could be for a period of time; it could be permanent. Wow, what a miracle it could be for some people.

As investor's and foreign consumers flee the dollar, I expect it to become utterly valueless, so the price of anything in dollars will be infinity.

The price gains over the years were INSANE. A basic house in my area is STILL $500k. If that had gone on much longer, we would have seen base house prices over $1 Million(and rent increases to match).

If that isn't out of control inflation, I don't know what is. The low income housing in our area starts at 200k- I can't afford that despite being employed(though underpayed).

The 1%ers keep inflating things to make huge profits off of us, and they are things we need- Housing, Energy, Food and probably next is water.

We have to stop paying these people to screw us.

Demand for it is temporary as the Fed's needing 700 billion-8.5 trillion for the bailouts/stimulus. But once all that stimulus money hits mainstreet - it will devalue, or dilute the purchasing power of the currency. The Fed's are generating another bubble - a bubble on the greenback itself. All bubbles collapse. Every single one of them.

What are they going to do - hit the delete button once the value begins to drop because there are too many dollars? Who is going to be left holding those dollars once the delete button is pushed???

Falling prices are a lagging indicator of deflation, which is be definition a reduction of the money supply. Since the global money supply consists mainly of credit and its inverse, debt, any widespread liquidation of debt or reduction of credit is deflation. The collapse of the world's stock markets, the evaporation of toxic derivative "assets", all contribute to the deflation. The drop in home prices and oil prices is symptomatic of deflation, and should not be confused with the actual deflation itself.

This is a truly excellent article, one that should be read carefully and thought about deeply.