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VIDEODeflation Delusion Continues as Economies Trend Toward High Inflation, Part 2
By
Nadeem Walayat Aug 27, 2010 1:45 pm
Investors should invest in inflation wealth protection and growth such as agricultural commodities, gold, silver, metals and mining, TIPS, emerging economies, and developed economies.
Editor's Note: This is Part 2 of a two-part series. For Part 1, click here. The full article was originally posted on The Market Oracle.
The Myth of Japanese Economic Depression and Deflation
Deflationists in the mainstream press and blogosFear constantly perpetuate the myth that Japan has been in a deflationary depression since the housing and stocks bubble burst in early 1990. One would imagine that the Japanese economy is perhaps 30% smaller with prices 30% cheaper given the repetitive mantra. But what about the facts? The facts are that the Japanese economy has not crashed by 30% and it wasn't in depression during this time period; it actually grew in virtually every year up until the 2008 global recession to stand at a GDP of some 20% higher than where it was when the bubble burst.
Price Deflation? Another myth. Despite the fact that innovation and increases in productivity should drive prices down, Japan's consumer prices have haven't fallen but are in fact marginally higher than where they were in early 1990. Therefore, what Japan has experienced is stable prices, not deflation.
Yes, Japanese asset prices, namely stocks and real estate, have suffered greatly, however this is a consequence of the bursting of the bubbles that saw prices triple during the preceding five years and turned safe assets such as houses into over-bid gambling casino chips that were priced to discount a perpetual never-ending boom. Therefore, prices fell to reflect reality such as that it was ridiculous for the city of Tokyo in 1990 to be priced to have a greater value than the whole of the United States!
So when you hear about the US following a Japanese-style deflationary depression, what you really need to understand is that it's for one of low economic growth with stable prices. However, the US isn't going to follow that model as it doesn't have the demographics of a shrinking, aging Japanese population, which really should result in deflation and a contraction in GDP -- which Japan, through continuous innovation, hasn't suffered. If there are far less workers generating more economic output then is that really an economic depression?
Commentators have been pointing to Japanese debt soaring to 200% of GDP as highly deflationary when the opposite is true, as when the Japanese debt bubble bursts, which it surely will, it will be highly inflationary if not hyper-inflationary, as Japan is forced to wipe out the value of its debt
Japanese Are the Real Gold Bugs
While in the West buying gold for wealth preservation has yet to impact ordinary people to any significant degree, ordinary Japanese, recognizing that their ever-growing debt mountain would ultimately destroy the Japanese currency, were buying gold nuggets from their local gold dealers in preparation for hyper-inflation five years ago! Needless to say, despite that not having happened to date, the gold price rising to $1250 reflects the increased global risks of debt bubbles bursting into high inflation.
Bottom Line -- There has been no Japanese deflation or economic depression. Western countries such as the UK and the US aren't destined to follow the Japanese experience as their demographics are primed both for greater nominal GDP growth and price inflation.
Delusional Deflationists Point to Treasury Bond Market to Illustrate Deflation
Deflationists point to imminent deflation and a double-dip recession by pointing to the treasury bond market yields plunging toward the credit crisis lows while at the same time continuing an 18-month mantra of the stocks' bear market rally, whose end is always imminent, with the most recent plethora of commentary concluding that it has ended (again) and the bear market has resumed.
However, it's bonds and not stocks that are in a bull market coming to the end of its life and entering the final manic stage that tends to see markets go parabolic. I'm sure in recent weeks you've heard at length as to why bond investors are smarter and thus why the bond rally will go on and on. To me that sounds a lot like the tech stock investors during 1999; they too saw themselves as very smart, just as the bubble popped. Every bubble participant thinks it's different for them than every other bubble that's popped before, however it never is! The bond market investors are in total denial of the fact that the US is firmly on the path toward bankruptcy because it's given no sign that it intends on bridging the forecast $200 trillion fiscal gap between future revenues and liabilities, a gap that can only be filled by printing huge amounts of money, triggering very high inflation, which will destroy the real value of bonds and in purchasing-power terms they'll just become confetti paper. Against this, stocks that consistently pay high dividends can be expected to retain much of their purchasing power, where my focus is on dividend-paying stocks because it's more difficult to engage in corporate fraud Enron-style if a company is actually making dividend payments.
The Global Bond Market Bubble
The key drivers for the global bond market over the past 20 years has been China and other emerging markets, such as India, exporting deflation abroad as they industrialized and produced ever-cheaper goods and services to drive down costs, thus enabling prices in the West to fall. This has now reversed, where China is exporting inflation abroad as its workers start to demand a higher standard of living and the country increasingly looks toward domestic consumption to generate economic growth. On top of this we have the ever-expanding supply of bonds that, no matter what, the central bankers' state isn't going to diminish (pay down the debt) for either the UK, US, or most of the developed countries during the next five years.
The Myth of Japanese Economic Depression and Deflation
Deflationists in the mainstream press and blogosFear constantly perpetuate the myth that Japan has been in a deflationary depression since the housing and stocks bubble burst in early 1990. One would imagine that the Japanese economy is perhaps 30% smaller with prices 30% cheaper given the repetitive mantra. But what about the facts? The facts are that the Japanese economy has not crashed by 30% and it wasn't in depression during this time period; it actually grew in virtually every year up until the 2008 global recession to stand at a GDP of some 20% higher than where it was when the bubble burst.
Price Deflation? Another myth. Despite the fact that innovation and increases in productivity should drive prices down, Japan's consumer prices have haven't fallen but are in fact marginally higher than where they were in early 1990. Therefore, what Japan has experienced is stable prices, not deflation.
Yes, Japanese asset prices, namely stocks and real estate, have suffered greatly, however this is a consequence of the bursting of the bubbles that saw prices triple during the preceding five years and turned safe assets such as houses into over-bid gambling casino chips that were priced to discount a perpetual never-ending boom. Therefore, prices fell to reflect reality such as that it was ridiculous for the city of Tokyo in 1990 to be priced to have a greater value than the whole of the United States!
So when you hear about the US following a Japanese-style deflationary depression, what you really need to understand is that it's for one of low economic growth with stable prices. However, the US isn't going to follow that model as it doesn't have the demographics of a shrinking, aging Japanese population, which really should result in deflation and a contraction in GDP -- which Japan, through continuous innovation, hasn't suffered. If there are far less workers generating more economic output then is that really an economic depression?
Commentators have been pointing to Japanese debt soaring to 200% of GDP as highly deflationary when the opposite is true, as when the Japanese debt bubble bursts, which it surely will, it will be highly inflationary if not hyper-inflationary, as Japan is forced to wipe out the value of its debt
Japanese Are the Real Gold Bugs
While in the West buying gold for wealth preservation has yet to impact ordinary people to any significant degree, ordinary Japanese, recognizing that their ever-growing debt mountain would ultimately destroy the Japanese currency, were buying gold nuggets from their local gold dealers in preparation for hyper-inflation five years ago! Needless to say, despite that not having happened to date, the gold price rising to $1250 reflects the increased global risks of debt bubbles bursting into high inflation.
Bottom Line -- There has been no Japanese deflation or economic depression. Western countries such as the UK and the US aren't destined to follow the Japanese experience as their demographics are primed both for greater nominal GDP growth and price inflation.
Delusional Deflationists Point to Treasury Bond Market to Illustrate Deflation
Deflationists point to imminent deflation and a double-dip recession by pointing to the treasury bond market yields plunging toward the credit crisis lows while at the same time continuing an 18-month mantra of the stocks' bear market rally, whose end is always imminent, with the most recent plethora of commentary concluding that it has ended (again) and the bear market has resumed.
However, it's bonds and not stocks that are in a bull market coming to the end of its life and entering the final manic stage that tends to see markets go parabolic. I'm sure in recent weeks you've heard at length as to why bond investors are smarter and thus why the bond rally will go on and on. To me that sounds a lot like the tech stock investors during 1999; they too saw themselves as very smart, just as the bubble popped. Every bubble participant thinks it's different for them than every other bubble that's popped before, however it never is! The bond market investors are in total denial of the fact that the US is firmly on the path toward bankruptcy because it's given no sign that it intends on bridging the forecast $200 trillion fiscal gap between future revenues and liabilities, a gap that can only be filled by printing huge amounts of money, triggering very high inflation, which will destroy the real value of bonds and in purchasing-power terms they'll just become confetti paper. Against this, stocks that consistently pay high dividends can be expected to retain much of their purchasing power, where my focus is on dividend-paying stocks because it's more difficult to engage in corporate fraud Enron-style if a company is actually making dividend payments.
The Global Bond Market Bubble
The key drivers for the global bond market over the past 20 years has been China and other emerging markets, such as India, exporting deflation abroad as they industrialized and produced ever-cheaper goods and services to drive down costs, thus enabling prices in the West to fall. This has now reversed, where China is exporting inflation abroad as its workers start to demand a higher standard of living and the country increasingly looks toward domestic consumption to generate economic growth. On top of this we have the ever-expanding supply of bonds that, no matter what, the central bankers' state isn't going to diminish (pay down the debt) for either the UK, US, or most of the developed countries during the next five years.
No positions in stocks mentioned.
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