What exactly causes deflation – and more specifically – debt deflation? It’s something few investors seem to have a solid grasp of.
Debt deflation sinks in when there is a lot of debt outstanding – and it goes unpaid, up to “money heaven” – never to be heard from again. Japan has been in a debt induced deflationary haze since 1990 – and has still not emerged out the other side.
Since 2007, the US has also been in a deflationary period, as evidenced by the overall drop in the money supply. Although money has certainly been “printed” by Big Ben & Co, the amount of money that is now “resting in piece” is greater.
This trend appears to be continuing, reports Vox Popoli:
The Federal Reserve Z1 report came out on Friday and the only surprise was that the decline in Household debt has not kept pace with the decline in Financial debt. However, the pattern to which I alerted you in RGD has continued; Federal debt has grown an astounding 48% since Q2 2008 while overall debt has fallen by 0.6%. Since G (government spending) is a primary component of GDP, this proves that there is no private economic growth, there is only a massive amount of government borrowing and spending being used to temporarily prop up the economy.
Note to inflationistas. Remember that the formal M2 money supply is only $8 trillion, so the central bank manages about 13% of the debt+M2 money supply in the US debt-money system. Even with the refusal to recognize tens of thousands of home mortgage defaults, (which is why household sector debt hasn’t declined as much as one would expect), private sector debt has fallen $2.5 trillion. As Robert Prechter has explained, debt is deflating faster than the central bank and federal government can inflate. This is exactly the process described in RGD as the Great Depression 2.0 scenario.
You can read Vox Popoli’s entire deflation piece here.
As long as debt continues to disappear at this rate, it’s hard to see inflation anytime soon.
For more from Robert Prechter on Deflation, here’s a piece he wrote about Surviving and Understanding Deflation.
Hat tip to the Deflation Bird for tweeting this piece along