Investment

» Jas_Jain - Where Is Deflation?

"Acerbic George Department "What Deflation?"
I forgot to hand out the gold stars this week for consumers in America who are managing to keep the world's economic game of musical chairs going by sinking beyond their eyeballs in debt. Saving me a bottle of wine on a long-ago bet.

"The G.19 Consumer Debt Report out from the Fed (which they call Consumer Credit to make sounding in debt like it's good thing) shows that debt is going up at a rate over 7% per year.

"I haven't mentioned this to my deflationist pal Jas Jain because I don't want to ruin his weekend, but I have written down a note to myself to ask Jas "Where's that deflation?" when the Consumer Price Index figures come out next week. A "surprising" increase (to economic idiots) is my bet, and that ought to relaunch metals like gold and silver. We can't have gold and silver dropping and oil rising to this extent without a great chance at a straddle play....

"Meantime, here's economics unbundled for you: Debt's going up and that means INFLATION. As Jas is so fond of saying "It's the Debt, stupid!" That part he's got right, even if I may get my crack-up boom before the incipient deflation to come this winter...."

http://www.urbansurvival.com/week.htm

The consumer credit is rising at a faster rate but far more important, and larger, mortgage debt is not growing as it was. The Total Household Debt is growing at a much lower rate that was the case during 2007.

On the subject of inflation/deflation I have two Georges to contend with. Let me quote Richard Bernstein of ML, "There is lot of impatience about time lags in the economy." I was early in my estimation of when the recession would begin, but now there is no doubt that the economy is in recession. Inflation rate peaks 4-6 months into a recession and that means it is peaking during 2008Q2. The drop in inflation rate from the current rate of 4% to 0% should take nine months, plus or minus three months. Therefore, the latest target date for outright deflation that I have is 2009H1 as opposed to my earlier target date of 2008Q4.

It is easier to predict what will happen but lot harder to pinpoint the when it will happen. The YoY CPI rate will not cross the 17-year range of 1-5% (3%, average for the past 20 years, plus or minus 2%) on the upside.

Jas

-- posted by Jas_Jain