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This
analysis seeks to get to the heart of the matter to answer the question - Have we experienced Deflation and
IF we have are we still in Deflation Now ?
This
is the next in a series of articles as part of my unfolding inflationary
mega-trend scenario that is an important stepping stone towards the
formulation of a inflation forecast for 2010 and beyond. I am to complete the
whole scenario and implications of before the end of December which will be
published as an ebook that I will make available for FREE. Ensure you are subscribed to my always free newsletter to
get the latest analysis in your email box and check my most recent analysis
on the probable inflation mega-trend at http://www.walayatstreet.com
What
is Deflation ?
http://en.wikipedia.org/wiki/Deflation
In
economics, deflation is a decrease in the general price level of goods and
services.[1] Deflation occurs when the annual inflation rate falls below zero
percent (a negative inflation rate), resulting in an increase in the real
value of money – allowing one to buy more goods with the same amount of
money. This should not be confused with disinflation, a slow-down in the
inflation rate (i.e. when inflation decreases, but still remains
positive).[2] As inflation reduces the real value of money over time,
conversely, deflation increases the real value of money – the
functional currency (and monetary unit of account) in a national or regional
economy.
http://www.investopedia.com/terms/d/deflation.asp
A
general decline in prices, often caused by a reduction in the supply of money
or credit. Deflation can be caused also by a decrease in
government, personal or investment spending. The opposite of
inflation, deflation has the side effect of increased unemployment since
there is a lower level of demand in the economy, which can lead to an
economic depression. Central banks attempt to stop severe deflation, along
with severe inflation, in an attempt to keep the excessive drop in prices to
a minimum.
Deflation
is the decrease of general prices in an economy. The
most widely recognised measure of which is the Consumer Price Index (CPI),
the composition of which aims to standardise the measure of prices of
economies across the world to enable easier comparative analysis.
Unfortunately
many analysts mistakenly pick and choose alternative measures against which
to support their own point of views at a particular point of time. This pick
and mix attitude to analysis is not just limited to deflationists, but
inflationists also have been seen to seek propaganda over facts. Inflation or
Deflation is not measured by comparing one asset value against another i.e.
Comparing Gold Prices against House Prices. Whilst they may form PART of a
deflationary or inflationary scenario, they ARE NOT AT THE CORE of Inflation
or Deflation, so such arguments as if they represent Inflation or Deflation
are NOT analysis but rather PROPOGANDA.
Now,
whilst my Inflation mega-trend analysis is primarily focused on the UK
economy for obvious reasons as that is where i reside, however the same could
apply to the United States and most other Western developed economies.
UK
Consumer Price Index (CPI)
 
The UK
Consumer Price Index (CPI) clearly illustrates that all we saw from mid 2008
and into early 2009 was a minor deflationary corrective wave amidst an ocean
of year on year inflation. Subsequent inflation has far surpassed the
in-consequential deflation seen during 2008 and into early 2009. Therefore
the facts are completely contrary to the headline grabbing mainstream press
and blogosphere scare mongering of price deflation.
There
has been NO SIGNIFINCANT DEFLATION, despite economic contraction of more than
5% GDP, despite Unemployment soaring to above 2.5 million, despite asset
price destruction ranging from between 25% and 50% into the early 2009 lows.
In fact the deflation that we witnessed is probably mostly due to the sharp
drop in commodity prices such as Crude Oil's collapse from mid 2008 into
early 2009.
What
does this suggest?
It
suggests that severe economic contraction, debt deleveraging and asset price
destruction only succeeded in generating a minor corrective wave against the
inflationary mega-trend, which therefore looks set to return with a vengeance
over the coming years which my Inflation Mega-trend scenario analysis
continues to conclude towards as the Government and the Bank of England as
with other central banks is mistakenly continuing to be fixated with fighting
deflation.
UK
Retail Prices Index (RPI)
Whilst
the CPI is the governments preferred measure of UK inflation i.e. because it
is less volatile then its predecessor the RPI index, which is the more
recognised measure of UK inflation by the people of Britain as it pre-dates
the CPI by many decades.
The
above graph shows that the RPI has experienced stronger deflation than that
seen in CPI. However this is due to government intervention, specifically in
forcing UK interest rates down to an artificially low rate of 0.5%, coupled
with funneling near unlimited tax payer cash to the bailed out banks by means
of quantitative easing, capital injections and bad debt loan insurance has
created an artificial banking system that generates huge unprecedented profit
margins for the banking industry for the purpose of the banks to rebuild
their balance sheets, though as we have seen with bank bonuses this is not
what the bankster's are actually doing instead choosing to pay out artificial
profits as bonuses, which is tantamount to more fraud on the tax payer.
Basically
the artificial banking system has forced mortgage costs artificially lower to
enable the bankrupt bailed out zombie banks to survive, and it is this which
is reflected in the RPI Index, accounting for much of the extended downtrend
into early 2009 coinciding with the low in UK interest rates of 0.5% and the
start of the bounce in UK house prices.
The
subsequent trend looks set to complete the process of retracing the whole of
the deflationary downdraft during the coming months as the RPI also confirms
that the deflation of 2008-2009 was just a corrective wave amidst an ocean of
inflation.
My UK
inflation forecast for 2010 and beyond will be completed during the coming
week which will aim to project the likely trend for both UK CPI and RPI,
ensure you are subscribed
to my always free newsletter to get this in
your email box.
UK
Inflation Forecast 2009
The
Inflation mega-trend scenario is now starting to manifest itself in UK
Inflation data for November which shows the Governments preferred measure CPI
inflation surging higher to 1.9% up from 1.5% and RPI reversing October
Deflation of -0.8% to now stand at Inflation of +0.3%.
Deflationary
forces as a consequence of the the bursting of the asset bubbles has
fulfilled the deflation forecast for 2009 as per the original analysis of
December 2008 - UK CPI
Inflation, RPI Deflation Forecast 2009 that forecast
RPI Deflation into Mid 2009 targeting -1.2% and CPI Inflation of +0.9% to be
followed by an uptrend into year end back into RPI inflation of +0.9% and CPI
of +1.6% as illustrated by the below graph.
U.S.
Consumer Price Index (CPI)
Just
to make sure that the UK economy is not experiencing a case of freakanomics,
here is the CPI inflation graph for the United States for the past 10 years.
Leaving
aside the conspiracy theorists that say that real U.S. Inflation is at 7%
rather than that of official data, U.S. CPI Inflation has followed a similar
trend to UK RPI Inflation in that real deflation from mid 2008 into early
2009 has subsequently reverted back to the long-term inflationary trend. The
U.S. CPI deflationary corrective wave was due to the exact same influences as
that witnessed in UK RPI i.e. housing bear market and the commodity price
crash (primarily crude oil).
However
the graph does not support the deflationist argument that has in some cases
been in existence for more than 10 years with a cluster following the dot com
bubble bursting, following which time inflation has continued to erode the
value of money at trend.
I need
to remind readers again that the inflationary uptrend from early 2009 has been
during a period of severe economic contraction and weak recovery, if we were
in a deflationary environment then U.S. CPI should be either declining or
flat-lining. Which suggests that if the U.S. Economy stagnates then the
INFLATION trend will continue upwards, however should the U.S. economy
surprise to the upside then the Inflation trend will accelerate even higher,
either way there is NO DEFLATION at the present nor in the coming years which
just leaves me shaking my head at Deflationists that continue conjuring
deflationary outlooks that have little if any basis in the actual data.
Japan
Deflation?
The
only major economy that is said to have experienced general price deflation
is Japan, but even there when we take a close look at this so called Japanese
price deflation all I see is overall FLAT general prices i.e. neither
inflation nor deflation. Therefore a worst case scenario for the Inflationary
mega-trend would be along the lines of Japanese style outcome of flat prices
over the next decade rather than REAL deflation.
The
Illusion of Deflation
The
corrective deflationary wave has suckered many, many analysts and perma academic
economists into the deflation argument, perhaps
rather than harking back to 1930's deflation the deflationists need to take a
step back and look at big picture of the inflationary mega-trend. This is NOT
the 1930's, unlike the 1930's the bankrupt banks are not being allowed to go
bankrupt. Instead governments are hell bent on inflating their way out of the
crisis which means even higher inflation, more so than trend inflation.
The
flaw in the deflationists argument is staring them right in the face, in that
during the 1930's the academic economists looked to the series of economic
crisis following the Great War, and therefore their proposed actions resulted
in the deflation of the 1930's. Whereas today's academic economists look to
the 1930's as though it is a caste in stone road map of what is to follow,
whereas it is the same academic economists that are feeding input into
Governments of Deflation that surely will result in the contrary outcome,
just as the deflation of the 1930's was contrary to the high inflation of the
early 1920's.
In
Britain at the time of writing the National Audit Office has declared that
the British tax payer has assumed a liability of £850 billion as a
consequence of bailing out the bankrupt banks. When a country effectively
doubles its national debt within a year is that the sign of Deflation or
nearer Zimbabwe style inflation? No i am not saying Britain is heading for
hyper inflation but the trend is strongly in favour of inflation much more so
than the illusory Deflation trend that is taken as fact when it only really
exists in the ivory tower of academics.
The
Markets Discount the Future
Whilst
debt deleveraging continues in the present, however market participants
should be reminded of the fact that the market discounts the future and not
past or present!, Therefore the whole debt deleveraging scenario should be
IGNORED, much as I voiced in March 2009 that the whole scenario of
contracting corporate earnings should be IGNORED, in that is not what the
market will discount next, In March my view was that stocks will discount a
flood of liquidity and economic recovery ( 15th Mar 2009 - Stealth
Bull Market Follows Stocks Bear Market Bottom at Dow 6,470) and
has subsequently soared by as much as 60% during 2009. Now my analysis continues
to converge towards the inflation mega-trend which the market will again
start to discount well in advance of.
UK
Interest Rates & Economy
The UK
base interest rate is being kept artificially low so as to enable the
bankrupt banks to rebuild their balance sheets by overcharging customers
against the base interest rate and the interbank market rate of 0.59% as the
real market interest rates have been in a steady climb since March 2009 which
has increasingly meant that the base interest rate has become irrelevant to
the retail market place as explained in the article - Bailed
Out Banks Not Lending, Sitting on Tax Payers Cash.
The
outlook remains for rising market interest rates charged to retail customers
regardless of the base rate having been held at 0.5% into the end of the
year, which is inflationary in terms of rising mortgage costs.
Savers
Forced to Pay for Bankster Crimes
Savers
are being hit by the double
whammy of 1.9% Inflation plus the 20% tax on savings and
therefore require a minimum interest rate in the order of 2.30% just for
savings to keep pace with inflation and taxes. This is set against the tax
payer bailed out banks such as the Halifax paying a pittance of just 0.1% on
across the range accounts from current accounts to savings accounts with
other mainstream institutions not far better, which is a consequence of
bailout out the bankrupt banks that has resulted in an artificial market
heavily skewed in favour of the bailed out bankrupt banks making huge profits
so that tax payer capital injections can be repaid, in-effect the government
giving free cash to the banks to enable the banks to repay capital for
political reasons. In
effect the Banks and the Labour Government are systematically stealing the
value of Savings.
The
situation is even worse for Cash ISA holders as the tax payer bailed out
bankster's hit new depths of paying ISA holders typically 20% LESS than
comparable accounts, therefore are defrauding Cash ISA holders of their tax
free allowances.
Under
a free market system the banks would be forced to raise interest rates paid
to customers to entice savers, however in today's market the Treasury and the
Bank of England fund the banks to the tune of liabilities of £1.5
trillion that has resulted in the countries liabilities doubling from
£1.7 trillion at the end of 2007 to £3.4 trillion by the end of
this year on route towards liabilities of £4.75 trillion.
Debt
Fuelled Economic Recovery Heading for Double Dip Recession
The UK
economy remains on track to bounce back into the 2010 election, as indicated
by June's in
depth analysis, however this economic recovery is based
purely on debt as shown by the graph below, as the Labour government's
strategy is to deliver the next Conservative government a scorched
earth economy.
Alistair
Darling's forecast for government net borrowing for 2009 and 2010 in November
2008 totaled just £70 billion. However, since the amount of projected
borrowing has mushroomed to £350 billion, which is set against my
November forecast of £405 billion for 2009 and 2010
alone, with continuing subsequent large budget deficits thereafter of well
above £100 billion a year.
Whilst
many economists were surprised by Alistair Darling's April forecast that the
UK Economy would grow by 1.25% in 2010 and 3.5% in 2011. However we need to
consider the following in that 1.25% growth on the annual GDP of £1.2
trillion equates to growth of just £15 billion and for 2011; 3.5%
growth equates to just £42 billion. Therefore the government is
borrowing a net £175 billion for 2009 and £175 billion for 2010
to generate £15 billion of growth, and then a further £140
billion for 2011 for £42 billion of growth. Thus total net borrowing of
£490 billion to grow the economy by just £67 billion, (£595
billion my forecast) which shows the magnitude of the scorched earth economic
policy now implemented that literally aims to hand the next Conservative
government a bankrupted economy that will be lumbered with the consequences
of continuing huge budget deficits and therefore necessary deep cuts in
public spending.
Whilst the OECD
and other mainstream organisations / press have been busy in recent months
revising their economic forecasts, my forecast remains as is and continues to
project towards post general election tax hikes and deep public spending cuts
that will in my opinion trigger a
double dip RECESSION during 2011 to 2012 as illustrated by
the graph below.
Bankrupting
Britain Debt and Liabilities
The
total liabilities as a consequence of bailing out the bankrupt banks and debt
fuelled economic recovery remains on target of £4.75 trillion by the
end of 2013/14, which confirms that Britain remains firmly on the path of a
probable decade of economic stagnation coupled with high inflation i.e.
stagflation.
For
more on my inflationary mega-trend ensure your subscribed to my
always free newsletter, especially as I converge towards
including major forecasts for all key markets for 2010. I.e. what will become
of the stocks
stealth bull market that has soared during 2009 ? What about
the debt fuelled UK housing market and economic bounce.
Are
GLD and SLV ETF's Good Proxies for Gold and Silver Bullion Investing?
My
recent analysis on Natural Gas and UNG ETF (22 Nov 2009 - Natural
Gas Screaming Long-term Inflation Mega-trend Buy, But UNG...)
concluded:
The
second chart illustrates that there exists a perpetual tendency for the ETF
to under perform the futures over time, which deploys a similar trick to the
Leveraged ETF's in utilising % of daily movements. What this means is that
UNG IS NOT A GOOD LONG-TERM INVESTMENT ! If you invest in UNG, you have to
get your timing right, else TIME will erode the value of your investment even
if Natural Gas DOUBLES in price! However on top of this we have PROFITS which
are SKIMMED from investors as indicated by UNG that FAILS to rise when the
Natural Gas price goes up!
This
analysis continues the study of the price trend relationship between Gold :
GLD and Silver : SLV as part of the inflationary mega-trend investing as the
following graphs illustrate:
Both
graphs show that during the past 3 years and at the present time, the spot
prices of Gold and Silver are highly correlated in terms of trend with their
GLD and SLV ETF equivalents for a similar period of time.
ETF
Expenses
Investors
should note that both GLD and SLV ETF's deduct annual expense ratio's of 0.4%
for GLD and 0.5% for SLV which over time will erode the value of the funds
and result in a significant discount to the spot price for investments
spanning several decades, though it should also be noted that the expense
ratios compare favourably to the fees charged for bullion storage that can
amount to more than 1% per annum. For instance Gold is up approx 20% over the
past 12 months, against the expense ratio of 0.4%, therefore is not of any
real significance for medium term investments (upto 5 years).
ETF
Risks
I
understand that a number of rumours are doing the rounds during the past few
weeks of potentially 1.4 million fake tungsten gold bars in existence, of
which many form part of the GLD ETF holding.
However
the GOLD:GLD price trend relationship suggests that there is no substance to
these rumour's for if these rumours were true then GLD would be trading at a
significant discount to the spot Gold price. Though that it is not to say
that some future event may bring about such a large discount.
Leaving
aside the risk of fake gold, there is also the risk of that during a currency
crisis the U.S. Government seizing the Gold held in New York, maybe if it
were disbursed across several vaults in several countries this would ensure
greater security. Other risks exist as with all ETF's i.e. that of the risk
of theft and fraud.
Though
as I have pointed out earlier, if in the future a problem with the GLD and
SLV did start to occur, we would see it manifest itself in the spread between
GLD and Gold, as the smart money would start to exit the fund first.
Recent
articles on the unfolding inflationary MEGA-TREND outlook include :
Source: http://www.marketoracle.co.uk/Article15836.html
Nadeem Walayat
Market Oracle.com.uk
Nadeem Walayat is
the editor of MarketOracle.co.uk.and has over 20 years experience in trading
and investing.
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