Is Long-Term Deflation US Economy’s Inevitable Danger?

July 25th, 2013 | by Morris Beschloss | Comments

The main shortfall in predicting the evolution of future events is that they are usually measured by past experience. Today’s conventional economic wisdom tends to be focused on past crises that most analysts identify with, as they either were in the midst of collegiate educational development or were in the early stages of professional experience.

Consequently, the experience factors that impact today’s forward-looking visionaries are the 20 or so years that occurred during the post 1960′s-1970′s-early1980′s inflation; and the dynamic aftermath that led to the “bubble that popped with the advent of the “Great Recession.” That’s why current economic columnists and opinion shapers have become concerned as the yields along the U.S. Treasuries’ yield curve rise. This has taken a remarkable turn upward after the Federal Reserve Board hinted at tapering off, and eventually terminating its current monthly $85 billion quantitative easing.

This additional currency provided by the Fed’s printing presses has added over $3 trillion to the Reserve Board’s balance sheet. It is leveraged primarily by U.S. treasuries and mortgage-backed derivatives. After the mid-June Fed meeting, Chairman Bernanke panicked the financial markets by indicating that tapering off was on the horizon. A whiff of inflation suddenly became pervasive, as fear of higher interest rates struck a pessimistic chord. However, both global and domestic current U.S. circumstances make deflation a much more likely possibility in viewing the future. The following points are the main reason for these conclusions:

1) With structural unemployment remaining the main concern, especially when abetted by the number of new job-seeking personnel exceeding work openings, wages will likely not rise significantly. There is no sign of any employee shortage either in the U.S. or most of the rest of the world.

2) Commodities, whether agricultural, or natural resources, are available in abundance around the world. Therefore, with spot exceptions, these will put little, if any, pressure on overall costs.

3) Technology has never evolved more quickly than now, with subsequent cost-saving techniques making businesses less reliant on hands-on-labor. This will be increasing the bottom-line cash of successful operations, industries and financial institutions.

4) With major developed, and even developing nations also becoming more technologically and industrially productive, the traditional definition of inflation— too much demand (whether employees or products) chasing too few goods has been totally reversed in today’s global economic arena.

This means slow economic growth and over-abundance in workers, products, and monetary liquidity in the years ahead. Altogether, this represents a clear definition of events leading to a disinflationary evolution. Although this may eventually work itself out, the example of Japan’s 20-year “zombie” economy is much more likely than a return to America’s 1960-1985 inflationary experience.

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