The last hurrah

According to the consumer price index, inflation is under control. Nonetheless, those numbers were “adjusted” for quality improvements, so the raw figures actually revealed that inflation was running about 7 per cent above the data reported.

Index accounts have been tampered with for decades, so there is not much new there. However, the current high tally is the last hurrah of significant price inflation. From here on, the trend is going into reverse, with deflationary pressures looming as a major threat.

According to The Economist, deflation is the big, short-term danger. The bond market seems to side with the view that inflation no longer is a threat, so interest rates react accordingly. The yields on U.S. 30-year bonds appear to confirm that view. The yields fell below 4 per cent, levels never seen before the worst period of the 2008 market turmoil. Clearly, if inflation were perceived to be a coming problem, interest rates would move higher to compensate for that.

The bond market’s moves signal that a growing group of highly regarded economists and investors are becoming believers in deflation. Albert Edwards, an official of Societe Generale and Nobel prize winner economist Paul Krugman argue that the world’s economy is on the verge of collapsing, and that we are seeing a future where deflation, the dangerous condition of falling consumer price levels, becomes the new norm.

David Rosenberg, an economist with an exceptional record of forecasting, has stated that the “Deflationary undertow threatens the U.S. recovery.” In the U.S. there has been a record 8.4 million decline in payrolls from the peak a couple of years ago. That has been accompanied by the decline in average hourly earnings.

The last time that occurred was in early 2003. The number who have stopped looking for employment reached the previous recession peak. The tragedy of rising, long-term unemployment leads to the conclusion that deflation will prove to be inevitable,

Charting the Shanghai stock index against the Reuters/Jefferies, CRB commodity index, a good proxy for global demand, it appears that Chinese stock prices consistently signal commodity moves a few months in advance. The fall in the Shanghai index implies that a deep slide in global demand is about to hit global markets.

Then, too, the commodity index here has gone from simply bad to downright deplorable. The price of the two leading growth components of the U.S. CRB Index, oil and copper, have fallen drastically. The last time a similar situation occurred, there followed a decline of epic proportions in the economy.

Overall, the secular credit expansion that fueled inflation has come to a halt. Debt destruction, not debt expansion, currently is underway. The debt contraction should not be a surprise as there literally is not the money available to expand demand or push prices higher.

This “deleveraging” usually lasts the better part of a decade. Hence, deflationary trends undeniably are real and should not be discounted.



Bruce Whitestone