We’re in a deflationary environment. There are some very, very big building blocks of this. Just before I go into those, the reason why we in recent times have deflation is not because supply is bigger than demand. That’s not the dangerous deflation. You might actually say that might be a good deflation. It’s because at some stage in that transition process from inflation downwards, we have a credit event which creates a shock for the financial system. Of course, that’s famously what happened in 2008-2009. But that also happened in 1998 with Russia and LTCM [Long Term Capital Management, a hedge fund investment firm that collapsed after the Russian government bond crisis] and it happened in 1982 with Mexico and their banking system. So, when we talk about deflation, people say, “What’s so wrong with falling prices?” The answer is that usually that undermines somebody’s corporate cash flow. Somebody goes bankrupt and we get a credit event. That’s the likely way it goes forward. If it happens to be a big one, a country, a very large financial institution-we could name a few. So, that’s why it’s important. That’s why it’s likely to happen. In terms of the big deflationary forces, there’s a significant overproduction in China. It’s very well-documented. I think potentially the biggest one is the ageing of the Baby Boom generation and their move away from consumption to saving and perhaps even more important, they’re de-gearing and what that means for the efficacy of monetary policy going forward. And just in the short run, a strong dollar has always been bad for people who link to the dollar. It forces them to run a tighter monetary policy.
Posted on: Mon, 01 Dec 2014 14:46:35 +0000
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