We see world markets drop on deflation scares, we see tents in the woods behind every Wal-Mart or Library in the country, homelessness is getting to frightening levels like it has never been seen before. In our daily alerts we have seen more European home foreclosures then ever before, not hundreds, but literally thousands per week in places like Ireland and England. Deflation is real and is happening right in front of us. We could look at what happened with the famous Deflation in Japan as shown on this chart.
Americans have been getting hit with smaller products and corporate inflationary practices for the last couple years and many have been preparing for a massive inflation in order to get back to somewhat normal rates which will not happen anytime soon.
What is deflation in a nutshell
Deflation can be compared to a terrible winter: The damage can be intense and be experienced for many seasons afterwards. Unfortunately, some nations never fully recover from the damage caused by deflation. Hong Kong, for example, never recovered from the deflationary effects that gripped the Asian economy in 2002.
Deflation may have any of the following impacts on an economy:
1. Reduced Business Revenues
Businesses must significantly reduce the prices of their products in order to stay competitive. Obviously, as they reduce their prices, their revenues start to drop. Business revenues frequently fall and recover, but deflationary cycles tend to repeat themselves multiple times.
Unfortunately, this means businesses will need to increasingly cut their prices as the period of deflation continues. Although these businesses operate with improved production efficiency, their profit margins will eventually drop, as savings from material costs are offset by reduced revenues.
2. Wage Cutbacks and Layoffs
When revenues start to drop, companies need to find ways to reduce their expenses to meet their bottom line. They can make these cuts by reducing wages and cutting positions. Understandably, this exacerbates the cycle of inflation, as more would-be consumers have less to spend.
3. Changes in Customer Spending
The relationship between deflation and consumer spending is complex and often difficult to predict. When the economy undergoes a period of deflation, customers often take advantage of the substantially lower prices. Initially, consumer spending may increase greatly; however, once businesses start looking for ways to bolster their bottom line, consumers who have lost their jobs or taken pay cuts must start reducing their spending as well. Of course, when they reduce their spending, the cycle of deflation worsens.
4. Reduced Stake in Investments
When the economy goes through a series of deflation, investors tend to view cash as one of their best possible investments. Investors will watch their money grow simply by holding onto it. Additionally, the interest rates investors earn often decrease significantly as central banks attempt to fight deflation by reducing interest rates, which in turn reduces the amount of money they have available for spending.
In the meantime, many other investments may yield a negative return or are highly volatile, since investors are scared and companies aren’t posting profits. As investors pull out of stocks, the stock market inevitably drops.
5. Reduced Credit
When deflation rears its head, financial lenders quickly start to pull the plugs on many of their lending operations for a variety of reasons. First of all, as assets such as houses decline in value, customers cannot back their debt with the same collateral. In the event a borrower is unable to make their debt obligations, the lenders will be unable to recover their full investment through foreclosures or property seizures.
Also, lenders realize the financial position of borrowers is more likely to change as employers start cutting their workforce. Central banks will try to reduce interest rates to encourage customers to borrow and spend more, but many of them will still not be eligible for loans.
Japan falling into deflation
Why America is different today then just shorting bonds or stimulating the economy
Between printing money and this fake economy that has been propped up so long, the reality is that jobs are going rapidly, whether it be increasing regulations from an economy deafening administration or simply the major lack of job growth has created a domino effect moving forward.
People simply buy what they need, there is little demand and if a product is cheaper online then what it is in the store down the road, unless the product is needed now, why spend the gas money and save a few bucks while you are at it.
It is the perfect storm for deflation moving forward a storm that will top the great depression due to the fake economy holding on so long, this deflation is about to collapse and hit all at once. Even a stimulus wouldn’t matter at this point because habits are formed and people will continue to buy only what they need until security once again comes around.