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Deflation or Inflation (December 2010)

Deflation or Inflation (December 2010)

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Published by: bienvillecap on Oct 15, 2012
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CONFIDENTIAL
D
EFLATIONOR 
I
NFLATION
?
The most important question facing business owners and investors today…
December 2010
 
Deflation or Inflation?| 2
CONFIDENTIAL
D
EFLATIONOR 
I
NFLATION
?
I have yet to see any problem, however complicated, which, when looked at the right way did not become still more complicated.
-PoulAnderson, author
 
Deflation or Inflation?| 3
CONFIDENTIAL
D
EFLATIONOR 
I
NFLATION
?
 Thedisinflationaryboomthatexistedbetween1982and2007hasended
.Thisperiod,widelyknownastheGreatModeration,washighlybeneficialtoassetprices
Strangely,althoughtheincreaseinthemoneysupplyoutpacedeconomicgrowthoverthisperiod(Slide6),itdidnotincitehigherconsumerprices.Thisislargelybecauseproductioncapacitygrowthexceededconsumption(Slide7)
 Theresultwasarelativelysteadyandprolongeddeclineininflationandinterestrates(Slide8),whichreducedthecostof capitalforbusinesses,aswellasthediscountrateusedtovaluefuturecashflowsforfinancialassets.Aglobalassetboomensued
However,theboomwasunderpinnedbyanunsustainableamountofartificiallycheapcredit.Asthecreditbubblecollapsed,theauthoritiesaroundtheworld,particularlyintheUS,respondedinadisproportionateandunparalleledfashioninattempttoforestalladebtdeflation(Slide10)
 Yetdespitetheunprecedentedmonetaryandfiscalstimulus,therateofmeasuredinflationcontinuestodecline
(Slide11)whiletheprospectofstructurallyhighunemploymentintensifiesthecurrentdeflationarypressures(Slide12).Productivity-focusedbusinessesarealsodrivingdownwagescosts(Slide13)inordertoprotectprofits
EvenastheFedembarksonsuccessiveroundsofQuantitativeEasing,broadmoneysupplyisrisinglessthannominalGDP(Slide14),whilethevelocityofmoneyremainsdepressed
 Afteryearsofaccumulatingdebt,householdsarenowinadeleveragingmode(Slide15),aninherentlydeflationaryprocessthatremovescreditfromthefinancialsystem
 Asaresult,theeconomyisoperatingwellbelowitsestimatedpotential,resultinginanegative“outputgap”(Slide16)
E
XECUTIVE
S
UMMARY 
 Theultimateoutcomeoftheepicstrugglebetweendeflationandinflationisarguablyoneoftheworld’smostimportantquestions. Assetprices,businessprofitabilityandsovereigncreditworthinesswillallbeaffected.Ifeitheroccurtoasignificantdegree,thesocialfabricofsocietywilllikelybestretched,challengingexistingpoliticalsystemsandcurrencyregimes

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