Monday, March 8, 2010

King's case for deflation

Stephen King of HSBC writes: "... I do not think that the biggest influence on prices will be supply-side bottlenecks – notwithstanding the evidence of supply problems on either side of the Atlantic. We are living in a world of deleveraging and debt repayment: it might be a world that damages supply potential but, for me, it's a world which ultimately is deflationary. That, I think, will be the big surprise in the years ahead..."
Read full text
Comment: King provides a well-spun argument and makes his point very clear that rather than inflation, deflation may lie ahead. He bases his argument on asset valuations and debt consolidation in contrast to the supply-side model of the stagflationists. Unfortunately, King leaves out the joker in the game: government. Of course, when the economy will shrink and asset prices fall, the strife for debt consolidation will increase, yes, but this holds only for the private sector. The public sector, however, will increase ever more its expenditures, as it is already being done. While the productive part of the economy is shrinking and less goods and services are being produced, active spending on the net is increasing through government. More demand hits less supply. The consequence is stagflation.

No comments:

Post a Comment