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Deflation is Coming as the World's Largest Economies Deleverage
Pinnacle Digest writes: In Puru Saxena’s latest article he reiterates his belief that deflation is coming, and that it won’t be a flash in the pan. The world’s largest economies are de-leveraging right now. And Saxena believes this will lead to several years of deflation. A couple months ago, Saxena wrote in a report that he was selling his commodity assets as a strategy to combat the coming deflation-era.
Before the crash of 2008 and the collapse of Lehman, credit was given out to just about anyone who could sign a piece of paper, particularly in the US. Consumers felt it was their right to have credit and were living lifestyles that were unsustainable without these facilities. Once the crash occurred, a swift butt-kicking took place and consumers were scared into deleveraging. Now, as Saxena explains, the vast majority of households in the West have more in liabilities than they do assets. On top of that, in many households, at least one income has either shrunken or disappeared completely. This has created a serious problem for the Fed. Instead of being lured in by virtually free money from the Fed, the private sector is paying off debt.
Saxena states “Figure 1 shows that despite the Federal Reserve’s carrot of almost free credit, the private-sector in the US is deleveraging. As you can see, since the bursting of the housing bubble, America’s companies and households have been accumulating large surpluses. Make no mistake, it is this deleveraging which is responsible for the sluggish economic activity in much of the developed world. Furthermore, this urge to repay debt is the real reason why monetary policy in the West has become ineffective.”
Saxena believes this deleveraging process will go on for several years. Because of how long the deleveraging process will last, the monetary easing from the Fed will be virtually ineffective according to Saxena. While we disagree with that premise somewhat, the Fed’s policy will not ignite serious inflation until the deleveraging process winds down. So at the very least, the desired impact of QE3 from the Fed will not be achieved - at least not for a while to come.
Another important point that Saxena addresses in his article is the fact that all the monetary easing programs combined have not increased America’s money supply. Saxena states “over the past 4 years, the US monetary base has grown exponentially, yet this has not translated into money supply or loan growth.”
Click here to read Puru Saxena’s entire report on the subject with specific case studies explaining why deflation is coming.