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DEFLATION

November 16th, 2010 · No Comments

We’ve been warning for years. It’s now arriving in the US. Core PPI down by 0.6%. So much for those arguing QE would be inflationary..
And if you still don’t get it, the money supply is continuing to CONTRACT.

Deflation is about the worst thing that can happen right now:

  • It increases the real value of outstanding debt, leading to forced asset sales and further asset price deflation and bank troubles (loans not being repaid, etc.)
  • It increases real interest rates as nominal ones can’t be negative, automatically tightening monetary policy

With fiscal politics in political gridlock, the only thing that can be done is massive QE, but this ain’t the most effective policy, if at all. But doing something, even something with as dubious effectiveness as QE, is better than let this thing rot the system from within.

Tags: Credit Crisis