Deflation has become inevitable
For a while now I have been on the fence on the inflation/deflation issue – whether the massive monetisation of bad debts by central banks and governments will lead to rapidly escalating inflation as currencies are debased or, alternatively, lead to deflation as bad debts and illiquidity undermine all commercial and financial activity in the economy. I’m now coming down on the side of deflation for a very simple reason: there is no longer any incentive to save or invest, and so debt and investment cannot increase much beyond current bloated levels….
I think it took me so long to feel confident about predicting deflation because the floating currency system under dollar hegemony and Bretton Woods II distorts the workings of both inflation and deflation. Despite the US being the epicentre of all the failed debts, failed securitisations, failed credit derivatives, failed rating agencies, failed banking businesses, failed corporate governance, failed accounting standards, failed capital adequacy models, and failed regulatory forbearance, the US dollar has recently strengthened as deflation globalised. The US exported inflation in the boom years, and now exports deflation in the bust years.
While I can’t defend the practices of US business and government for getting us in this financial mess, the UK is no innocent victim. UK citizens went into credit card at a greater level than US citizens. They invested their money in Icelandic banks with high interest rates, ignoring the risk. Finally, the housing boom in the UK was as bad or worse than the US with overinflated housing prices and little or no qualification required for mortgages. Don’t throw stones if you live in a glass house!