Deflation: Here, Now

I’ve been warning of deflation for some time. Specifically, I predicted 1-1/2 to 2 years of deflation, followed by hyperinflation.

Well, deflation is here.

Specifically, consumer prices in the U.S. have declined the most since records began in 1947 (producer prices are also plummeting).

As Bloomberg writes:

Today’s report signals deflation, or a prolonged slide in prices, may become another hazard facing Federal Reserve Chairman Ben S. Bernanke and President-elect Barack Obama. Deflation could worsen what some economists already call the deepest recession in decades, by making debts harder to pay off and countering the impact of Fed interest-rate cuts.

“We are moving into an environment where prices are falling across the board,” David Resler, chief economist at Nomura Securities International Inc. in New York, said in an interview with Bloomberg Television. “That is going to continue. Deflation is spreading across the economy.”

***
Consumer prices were forecast to fall 0.8 percent, according to the median forecast of 77 economists in a Bloomberg News survey. Estimates ranged from a decline of 1.2 percent to a gain of 0.4 percent. Costs excluding food and energy were forecast to rise 0.1 percent, the survey showed.

Many leading economists have recently changed their predictions to forecast deflation in 2009. And central bankers, prime ministers, and big treasury bond investors are all very worried about deflation. But I agree with the analysts who say that deflation is here, now (see this and this).

The Austrian school of economics points out that inflation and deflation are really about the size of the money supply, and not prices. The reason we have deflation is that it is difficult to pump money into an airplane with a hole in its side.

Remember, “cash is king” during a deflation, but gold may do well during the later stages of deflation.

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