Sunday, November 22, 2009

Deflation In The U.S: The U.S Follows the Japanese In Disastrous Path


Current global inflation rates.

The Telegraph in the U.K has an article about what is happening with deflation in the U.S. The so-called 'core inflation' for factory goods in the US fell to -0.6^ in October, "edging the country closer towards Japanese-style deflation despite massive monetary stimulus".

This is the problem: Factory gate inflation usually leads CPI by about six months. The Presidents of the Feds do not appear to agree on certain things:

The San Francisco Fed said that emergency measures prevented the U.S. from sliding into a “black hole of deflation”, insisting that it is still far too early to talk of tightening policy. “It seems probable that core inflation will move even lower over the next few years,” Janet Yellen said.

The most worrisome comment this week were from Dallas Fed's Richard Fischer, who said that the peak impact of the current fiscal blitz has already come and gone. “Several recent sources of strength are likely to wane as we head into next year. Cash-for-clunkers and the first-time-homebuyer tax credit have both shifted demand forward, increasing sales today at the expense of sales tomorrow. Neither of these programmes can be repeated with any real hope of achieving anywhere near the same effect. The more demand you steal from the future, the less future demand there is for you to steal,”

Mike Shedlock from Global Economic Analysis agrees with Mr. Fisher. He argues that the black hole is not deflation, "the black hole is fighting it like Japan did, or as the US is doing now. For the $trillions spent fighting this mess, all we have to show for it is a lousy bump in GDP at an annualized rate of 2.5%. Now, Fisher suggests (and rightfully so), that's all there is".

"Given that the US is essentially following the same idiotic path as Japan, there is every reason to believe the problem manifests itself in a similar fashion"

Please see our articles on Japan, "Will Japan default" and "The Land of the Setting Sun".

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