Busted: Bankers and The Global Economy

November 24, 2008

Monetary Deflation a Current Danger

banking-gamble-2Concerns about inflation have changed to deflation, considering the sudden drops in many prices, mostly energy, and the radical increase in joblessness. Interestingly, this economic downturn has bad company in the Great Depression, with the Consumer Price Index plunging by 1 percent last month, the largest single fall since 1938. However the extent and breadth is still nowhere near the Great Depression with years of falling prices. The core economic index has declined for six months, the only time since the Second World War.
Most economists aren’t forecasting that 2009 will present persistent price declines that made the Great Depression what it was, but the fact remains that any recovery is largely determined by consumer spending which accounts for two-thirds of the U.S. economy. Barack Obama is preparing to arm his economic arsenal with a major economic stimulus that includes job creation in the expectation of overcoming recent heavy job losses this year. Gordon Brown is already doing similar things in Britain to spice up the economy there.
Meanwhile, a global slump is in process which could easily hold the world in its clutches despite attempts at stimulus. Central bankers and ministers of finance are up nights massaging interest rates, shoring up banking and creating new stimulus programs.
The worse the economy gets, the more banks are battered by loan defaults and the falling value of collateral. Credit becomes less available which further restrains consumer and business activity, grinding the economic action down more. What we have now is classic debt deflation. Debtors across the board are reducing or eliminating debt. When everyone acts at once, prices for capital assets fall precipitously, even below what concerned pundits call market value as consumers wait for better pricing.
The current risk of deflation is compounded and amplified by the global nature of the current crisis. Commodities have fallen hard and fast as investors have bailed out, comeuppance for years of abusive futures investing, albeit legalalized gambling, through investing on the global scene that many believed would never end. ~ E. Manning

Blog at WordPress.com.