The General Macroeconomic Trend Right Now is Deflation

Desmond Lachman write in WashingtonTimes.com:

"It is often said that generals tend to fight the last war. Judging by their continued pronouncements about inflation risks, one has to wonder whether the same might not be said of central bankers."

"Despite ever-increasing signs that the global economy is in the grips of a vicious process of financial market de-leveraging and asset price deflation, central bankers continue to fret about the threat of rising price inflation. They do so at the very time they should be worrying about the risk that a deep and prolonged recession could raise the specter of deflation of the sort that long plagued the Japanese economy after the bursting of its asset price bubbles in 1989."

"Looking in the rearview mirror, there can be no doubt that over the last year inflation has risen to levels that must give rise to concern. Indeed, U.S. headline consumer price inflation has now risen to around 5 percent or to a level not experienced in the last 25 years. Similarly in Europe, headline inflation has ratcheted up to almost 4 percent or to a level that is approximately twice the European Central Bank's inflation target of "close to but under 2 percent."

"Looking forward, as central bankers should do in setting interest rate policy, one has to be struck by the extraordinary bust in international commodity prices over the last four months. Since July 2008, international oil prices have about halved from $145 a barrel to around $70 a barrel, thereby totally reversing their earlier run-up. For their part, international food and metal prices have dropped by around 40 percent."

"This extraordinarily rapid bust in international commodity prices has occurred as markets have rapidly internalized the ever-increasing signs that the global economy is more than likely headed for its worst economic recession in the postwar period."

"Sadly, a deep economic recession will hardly be confined to the United States. For a similar equity market bust and a similar vicious credit crunch has also occurred across the globe. In those circumstances, one must expect that the international commodity price bust of last four months will prove to be anything but ephemeral. Rather, one should not be surprised to see international prices drift even lower in coming months as commodity demand wanes as the global recession takes hold."

"In the same way that the earlier spike in international commodity prices caused headline price inflation to rise substantially above core inflation up until July 2008, one must now expect that the recent dramatic bust in international commodity prices will cause headline inflation to decline substantially below the core inflation rate."

"At the same time, one must expect that, over the next year, core inflation will gradually decline in both Europe and the United States as a deep recession opens up large gaps in labor and output markets. As a result, there is every prospect that headline inflation over the next year could very well be negative in the United States and Europe."

"The prospect of falling headline inflation should make both the Federal Reserve and the European Central Bank more mindful of Japan's painful experience with price deflation in the 1990s after the bursting of its asset price bubbles. More to the point, it should alert them to the folly of insisting on fighting past inflation battles when the real risk to the global economy is that of a deep and prolonged deflationary recession."


Byron King in Australia's Dailyreckoning.com.au:

"The price has bounced all over the charts lately, from the mid-$800s per ounce down to $750 and below. The thing is, the 'paper' price from gold has just plain disconnected from the price - and the availability - for the real stuff."

"Have you tried to buy real gold lately? Many dealers are just out of bullion and coins like the U.S. Gold Eagle and Krugerrand. The U.S. Mint has customers on allocation. The only way to get real gold is to pay a premium over the 'paper' price, and I don't mean the former $20 markup per ounce."

"As far as I can find out from a spokesperson, the SPDR Gold Shares does have physical gold to back up every ounce on the books. The only other way to find out is to go tour the vault and count each gold bar."

"The other gold and precious metals miners in the Outstanding Investments portfolio are all way down. It's a combination of low metal prices and the market meltdown. I know that it's frustrating to watch these gold miners decline. It's painful. What ever happened to the 'dollar down, gold up' thesis? I'm just going to wait it out. Unless I absolutely needed the money right now - and if I did not come up with the money, there would be a severed horse head in my bed - I would not sell the gold shares."

"I'd like to think that the current share prices are absolute bargains. I'd like to think that we would all kick ourselves in five years for not buying up all the shares we can get hold of right now. But then again, this market is confounding. There always seems to be another down day. So my advice is to hang in with what you've got. And buy shares only with your speculation money, not any funds that you cannot afford to tie up for a long time."

"And speaking of long times, I believe that the current banking 'bailouts' (pardon me, 'rescues') are going to be inflationary. The general macroeconomic trend right now is deflation. And the U.S. and most other central banks of the world are fighting that with inflation of the money supplies. This can only be bad news for the dollar. And it should be good for gold."


The New York Fed has dismal news on manufacturing:

"The Empire State Manufacturing Survey indicates that conditions for New York manufacturers deteriorated significantly in October. The general business conditions index dropped 17 points to a record-low -24.6. The new orders index also fell to a record low, and the indexes for shipments, unfilled orders, and inventories all declined sharply. The prices paid index eased significantly, to its lowest level of the year, while the prices received index also fell, although less sharply. Employment indexes were negative. Future indexes declined markedly with exceptionally large declines in the future new orders and shipments indexes."

"Roughly 22 percent of respondents in the current survey said that their need for borrowed funds had increased over the past year, but a larger proportion, 31 percent, indicated that their need had decreased. When asked about changes in borrowing needs since July, 20 percent of respondents reported higher borrowing needs and almost the same percentage reported lower needs."

"The prices paid index moved downward for a third consecutive month, dropping 13 points to 31.7, its lowest level in more than a year. The prices received index also fell, although to a lesser degree, shedding 3 points to reach 20.7. Employment indexes were negative. The index for number of employees, at -3.7, remained close to last month’s level, and the average workweek index fell to -9.8."