Friday, December 12, 2014

Deflation Everywhere You Look (Except Russia)

This post will just list the articles appearing today that talk about looming deflation just about everywhere we look. Everyone knows oil is plunging, but there seems to be more than that involved based on these articles. If this trend keeps up, what will Central Banks do? What will the US Fed do? Deflation is their mortal enemy and and puts debt laden countries under pressure. Below are the links and a quote or two from each story. Please take time to click on the links and read the full articles.


Business Insider - France is sliding into a Deflationary Vortex

"The French statistics agency INSEE said core inflation fell to -0.2pc in November from a year earlier, the first time it has turned negative since modern data began."
"The measure strips out energy costs and is designed to “observe deeper trends” in the economy. The price goes far beyond falling oil costs and is the clearest evidence to date that the eurozone’s second biggest economy is succumbing to powerful deflationary forces."

. . . . 
“Eurozone deflation is now inevitable. There is no way around it,” said Andrew Roberts, at RBS. “We think yields on German 10-year Bunds will fall to 0.42pc next year.”
The ECB is presiding over a deflationary disaster. They need to act fast and aggressively or else markets will start to attack Italian debt. Italy’s nominal GDP is falling faster than their borrowing costs and that is pushing them towards a debt spiral,” he added.
"The Bank of Italy’s governor, Ignazio Visco, said any further falls in prices at this stage could have “extremely grave consequences for economies with very high public debt levels, such as Italy”.

Mexico joins the global slowdown.

Bloomberg - Bank of Japan Rejects Stimulus

This article says the BOJ will not add even more stimulus due to falling oil prices (which is pulling down inflation). But they say they will change their minds if falling oil prices create too much downward pull on inflation.

BBC - The Global Impact of Chinese Deflation

"Is the "China price" back? After years of hearing about rising wages ending the era of the China price when cheap exports lowered the prices of global manufactured goods, it seems that China has a surprise for the world. Deflation, that is, falling prices, is an issue for the world's second biggest economy, just as it is for many others."

FT - Oil Slide Deepens, Deflation Fears Simmering
Eric Green of TD Securities wrote:
The optics of another cut in world demand for oil by the IEA today are sufficiently bad to push oil prices lower (yet again).
...With the demand equation in the headlines risk appetites continue to falter, and in a world where global growth feels wobbly this is a one-two punch that could reinforce deflation fears.
My added comments:

One thing we have been watching all year here on this blog is if the falling oil price could be a signal that deflation was overwhelming they system. Now it is pretty obvious that it is a big concern and Central Banks seem unsure what to do about it. The US Fed has spent all of 2014 trying to convince markets that things are improving so that they can end QE and raise interest rates. 

But these reports from all around the world suggest that the global economy is faltering and deflation is rapidly starting to take hold. The Fed and other Central Banks cannot allow this to happen because deflation destroys government budgets loaded with too much debt that MUST have steady inflation and cheaper currency to keep paying the debts off. A deflationary cycle causes everything to start falling including tax revenues and crushes debtors who have to pay back with reduced incomes and a currency that is more expensive.

So we will continue to watch this closely. Many voices are already callling on the Fed to forget about even thinking about raising rates. The ECB is under huge pressure to ramp up QE. China is cutting interest rates and lowering expectations. Japan is expanding QE. 

Both the IMF and BIS have issued repeated warnings about inflated assets and a fear of deflation (we will have a post out on that again soon). The fear of deflation is in the air and it appears to be a fear based in fact. Remember, a problem anywhere can lead to a problem everywhere now. It looks more like we have problems everywhere. What will the US Fed do about this? We'll see.

added note: 

A question I get here is how can the average person prepare for change given that so many different future scenarios are possible? On January 1st 2015 I will have an in depth article that talks about this. It will give the history for why this blog was started, what it hopes to do, and offer some common sense ideas that anyone should be able to use to prepare for whatever happens. This article will also be provided as a Google document in Word format so that it can be easily printed and given to anyone interested. Of course it will be free to anyone who can use it. Please do hand it out to anyone you think can use it.


  1. Catching up with your excellent research, I started to look into the idea that gold might be included in the SDR which the IMF might offer/impose after the next meltdown.
    Here’s an article written in January [perhaps you already saw it…] predicting the addition if the yuan into the SDR and why it would be gold backed:
    “…I believe that it is for this reason that China supports a Gold Backed SDR and that the SDR be comprised of a basket of currencies, with a particularly high weighting given to the Yuan (psudo-reserve status...better than!)…”

  2. I'm not sure that this comment I made yesterday got through to the blog:

    Snip "...It seems the one primary area that people disagree with the view of the future is the rise in the dollar that is on the horizon. I have warned that in discussions behind the curtain, there will be a move to replace the dollar as the reserve currency. I have also stated that the only possible solution will be a new world currency that is composed of a basket...."