Deflation on the prowl as Bernanke shuts down his printing press

The Telegraph ^ | 4/4/2010 | Ambrose Evans-Pritchard

[familyop]

"Deflation shakes out debt by default."

Yes. The consequent there may well follow the antecedent in this economic scenario. Debt incurred during an inflationary period involves larger dollar amounts. Then during a deflationary trend, revenues are lower. Here's an attempt at an analogy.

On the more personal level, one may buy a house during an inflationary period at a much higher price. If the purchaser's income is severely decreased during a following deflationary period, it might become impossible for that person to repay the debt.

As for chance of national sovereign debt crisis, GDP as a percentage of debt is high, and by projections that we've seen, going higher over the next four years. If that trend continues to the point of scaring investors away, a bond collapse becomes more likely.

"Sovereign debt shakes out with devalued currency."

Yes. Without the trust of investors, a nation's currency is avoided and becomes worth less to them.

"A run from bonds would mean selling bonds, increase in interest rates."

Yes. When government debt, and therefore, risk are high, investors will be offered higher interest rates for their riskier investments.

"So, with deflation, increased interest rates, a country would be in a world of hurt (like Greece?)?"

Yes, and circular patterns of decline might follow toward realization of such a debt crisis. In a deflationary environment government revenues follow business revenues by decreasing numerically. The government has less money with which to pay the debt (from inflationary times) and borrows more.

With riskier T-bonds, more interest on them must be offered. The government may even start buying its own treasuries. Suspicious investors are further scared into being enticed with higher interest rates.

With the government competing with consumers for debt in an already shrunken business environment, consumer interest rates are increased. Business revenues fall, followed by stock losses and more unemployment. ...and so on.

"During deflation, treasury bonds are a safe bet? Wanna buy a company's stock or bonds when they are going bust left and right?"

Agreed. We are seeing the risk of bond collapse. It's a matter of when investors get really scared and run from them. Especially investors who bought earlier could really be let down.

"Right now, a good bet is any new money going into cash and equivilents. And that doesn't help the liquidity or deflation problem."

That's true, as long as a steep inflationary trend doesn't follow. Steep inflation does not appear to be likely in domestic products, although fuel and other foreign product prices could possibly rise much in the future (due to western deflation, default, East Asia holding on, if that happens, and a dollar plunge,...).

Where we've seen enough historical causal relationships, what appear to be slippery slope arguments, to some, are not always fallacies.

[Former Proud Canadian]

You're kidding, of course. Perhaps he is using the English spelling?

AP did tremendous reporting during the Clinton administration. Far better than any US reporter.

[Agamemnon]

That "sissy boy", as you so elegantly call Ambrose Evans-Pritchard, was one of the few journalists who dared to go toe-to-toe against the Clinton machine in Arkansas

Don't you just hate it when tthe certifiably shallow posters show up here?

FReegards!