Loan Modification

Deflation is real and it?s spreading

By Constantine von Hoffman

So far Spain, Ireland and the UK are already seeing it and Japan is teetering on the brink.

• “Ireland, struggling with a ballooning budget deficit and record unemployment, has been at the vanguard of Europe?s economic collapse. Now deflation threatens to push the country deeper into its worst recession in eight decades.” (Bloomberg)
• “Britain’s statistics office says the country’s retail price index is falling for the first time in nearly fifty years.” (FoxNews)
• “VALENCIA, Spain ? Faced with plunging orders, merchants across this recession-wracked country are starting to do something that many of them have never done: cut retail prices.” (NYTimes)
• “Japan starts with significantly greater deflation risks” than the U.S. or Europe.” (IMF report via Wall Street Journal)

All of this as the IMF predicts the global economy will shrink for the first time since 1949. The US will provide a fascinating case study on possible causes and effects of deflation. No one really knows what will happen now that we’ve flooded our economy with faux dollars. The standard behavior of more dollars chasing fewer goods is, of course, inflation. A best case scenario for us then is a collision of inflation and deflation — resulting in the ever-dreaded stagflation. I said it was a best case. I didn’t say it was a good case.

My own observation sees more things coming down (housing, clothes, consumer electronics, automobiles) than are going up (food seems to be increasing slightly).

Even more scary news from the UK: “University students could earn, rather than have to pay, interest on their student loans from September now Britain has gone into deflation.” Yes, they will pay you to borrow money. Ouch.

Constantine von Hoffman is a veteran business journalist and social media consultant. He write the blog CollateralDamage, a satirical look at marketing and business.

Full post as published by Blown Mortgage on April 23, 2009 (boomark / email).