Deflation

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SeekingAlpha  Aug 18  Comment 
By Stefano De Caterina: Deflation can be defined by a general price decline across all assets and consumer goods, most times caused by a contraction in money supply. That could happen in the foreseeable future in the European Union (EU) if the...
SeekingAlpha  Aug 17  Comment 
By Calafia Beach Pundit: 10-yr sovereign yields in Germany have plunged to just under 1%, and Japanese yields are a mere 0.5%. U.S. 10-yr yields seem to be following suit, dropping from 3.0% at the end of last year to 2.34% today. Is the U.S....
Japan Today  Aug 15  Comment 
Japan hasn't emerged from years of deflation quite yet, the country's economy minister said Friday, after a sales tax hike sparked a sharp decline in second-quarter growth. The comments from Akira Amari came two days after fresh data showed the...
TheStreet.com  Aug 14  Comment 
LONDON (The Deal) -- Europe’s economies are sleepwalking toward recession and deflation, with eurozone gross domestic product stagnant and inflation at a troublingly low level. But markets have chosen to interpret the latest figures as a sign...
Clusterstock  Aug 14  Comment 
A slew of ugly data came out Thursday morning. The German economy shrank 0.2%. And the eurozone as a whole didn't grow at all. But there's more than just bad growth going on.  Inflation numbers are going in the wrong direction, and there's a...
TheStreet.com  Aug 13  Comment 
LONDON (The Deal) -- Many European markets bounced back this morning, ignoring the geopolitical gloom and, for the moment, even the troubling economic climate. Germany seemed more interested in first-half results from its biggest utility E.ON ...
Japan Today  Aug 12  Comment 
Japanese companies, long bedevilled by deflation, are finally starting to pass on higher costs to their customers just as the economy stumbles, potentially complicating decisions for Prime Minister Shinzo Abe and the central bank. Early signs...
SeekingAlpha  Aug 11  Comment 
By Dr. Duru: Last month, I wrote about the strong sales activity in million dollar plus homes in Canada that are occurring despite poor jobs growth in the country. It was an interesting study in the growing dilemma facing major central banks who...
Gold Stocks Today  Aug 11  Comment 
Inflation is a lagging indicator even over a short-term, lagging by 6-12 months with respect to the GDP growth rate when the cyclical turns take place. Long-term inflation pressure has a very long lag time of 6-10 years. In the advanced...




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Deflation happens when prices of goods and services are falling in an economy. It is the opposite of inflation.

Causes of deflation: In mainstream economics, deflation may be caused by a combination of the supply and demand for goods and the supply and demand for money, specifically the supply of money going down and the supply of goods going up.

From a monetarist perspective deflation is caused primarily by a reduction in the velocity of money and/or the amount of money supply per person.

In modern credit-based economies, a deflationary spiral may be caused by the (central bank) initiating higher interest rates (i.e., to 'control' inflation), thereby possibly popping an asset bubble or the collapse of a command economy which has been run at a higher level of production than it could actually support.

Effects of deflation: Deflation increases sales and economic activity by making essentials (food, housing, fuel etc.) which cannot be delayed, more affordable to struggling consumers, thereby reducing severity and duration of recession.

In more recent economic thinking, deflation is related to risk: where the risk-adjusted return of assets drops to negative, investors and buyers will hoard currency rather than invest it, even in the most solid of securities. This can produce the theoretical condition, much debated as to its practical possibility, of a liquidity trap.

Deflation is, however, the natural condition of hard currency economies when the rate of increase in the supply of money is not maintained at a rate commensurate to positive population (and general economic) growth. When this happens, the available amount of hard currency per person falls, in effect making money more scarce; and consequently, the purchasing power of each unit of currency increases. The late 19th century provides an example of sustained deflation combined with economic development under these conditions.

Counteracting deflation: Until the 1930s, it was commonly believed by economists that deflation would cure itself. As prices decreased, demand would naturally increase and the economic system would correct itself without outside intervention.

This view was challenged in the 1930s during the Great Depression. Keynesian economists argued that the economic system was not self-correcting with respect to deflation and that governments and central banks had to take active measures to boost demand through tax cuts or increases in government spending. Reserve requirements from the central bank were high and the central bank could then have effectively increased money supply by simply reducing the reserve requirements and through "open" market operations (e.g., buying treasury bonds for cash) to offset the reduction of money supply in the private sectors due to the collapse of credit (credit is a form of money).

With the rise of monetarist ideas, the focus in fighting deflation was put on expanding demand by lowering interest rates (i.e., reducing the "cost" of money). This view has received a setback in light of the failure of accommodative policies in both Japan and the US to spur demand after stock market shocks in the early 1990s and in 2000 - 2002, respectively. Economists now worry about the (inflationary) impact of monetary policies on asset prices. Sustained low real rates can be the direct cause of higher asset prices and excessive debt accumulation. Therefore lowering rates may prove only a temporary palliative, leading to the aggravation of an eventual future debt deflation crisis.

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