Deflation - what risks does it pose to investors?

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apater
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Re: Deflation - what risks does it pose to investors?

Post by apater »

Wallace wrote:I think the answer lies in the expansion of the money supply. The Great Depression of the 1930s was a deflationary trap, but the dollar was hobbled by the gold standard at the time, so there was little leeway for the government to expand the money supply. Now that currencies can float independently of the POG, governments have that option, which they've been rather freely exercising over the last few years.
It's been a long time since governments have controlled the money supply.

Independent central banks, perhaps, but never the government.
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ghariton
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Re: Deflation - what risks does it pose to investors?

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Statistics Canada:
The Consumer Price Index (CPI) rose 2.4% in the 12 months to October, after increasing 2.0% in September.

<snip>

The Bank of Canada's core index rose 2.3% in the 12 months to October, after increasing 2.1% in September.
Something to keep an eye on.

George
The juice is worth the squeeze
Shine
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Re: Deflation - what risks does it pose to investors?

Post by Shine »

ghariton wrote:Statistics Canada:
The Consumer Price Index (CPI) rose 2.4% in the 12 months to October, after increasing 2.0% in September.

<snip>

The Bank of Canada's core index rose 2.3% in the 12 months to October, after increasing 2.1% in September.
Something to keep an eye on.

George
Further cuts to Statistics Canada in December are expected. :wink:
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Re: Deflation - what risks does it pose to investors?

Post by FuzzyLogix »

Deflation is picking up strength with the end of QE. QE was financial life support for the economic system, which was just switched off.
You want to see the result of deflation? Look at Calgary, Alberta. Deflation is resulting in falling oil prices.
The result is layoffs, housing price declines, reduced revenue for governments.

It is a vicious cycle. As layoffs have a cascading effect throughout the economy. Recession, and possibly depression as the money supply contracts.
Governments scramble to prop up revenue, usually borrowing until bankruptcy. Then we are looking at a sovereign debt crisis.

Deflation is usually a good thing for consumers, unless they are in debt, then it becomes poison.
Debt becomes unserviceable as falling prices make the debt balloon in value.

If interest rates climb, and they will soon, deflation will hit real estate. For Canada, this will pop a 30 year housing bubble, and will make any illusions of a recovery vanish. Right now real estate is hot, red hot, as prices are rapidly inflating. When that trend reverses, investors will dump everything, compounding an already bad situation.

Deflation is the death of a debt based monetary system. Without new capital flowing in, the debt consumes the available money supply and the whole thing collapses. So for investors, deflation means lube up your anus because you are about to take it hard.
OnlyMyOpinion
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Re: Deflation - what risks does it pose to investors?

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Deflation is resulting in falling oil prices. ?
Right now real estate is hot...When that trend reverses, investors will dump everything ?
So for investors, deflation means lube up your anus because you are about to take it hard. ?
Sorry, I don't follow this line of reasoning.
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newguy
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Re: Deflation - what risks does it pose to investors?

Post by newguy »

FuzzyLogix wrote:Deflation is the death of a debt based monetary system.
Good, we need a new system.
So for investors, deflation means
My bonds will do well.

newguy
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ghariton
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Re: Deflation - what risks does it pose to investors?

Post by ghariton »

The Economist forecasts for 2015 and 2016, as of March 2015:
Economist forecasts March 2015.png
Note that the consensus forecast shows negative price changes in two countries in 2015, Switzerland and Spain, each with CPI forecast at -0.7%. None of the country forecasts show deflation for 2016.

In Canada, the latest inflation report shows the CPI increasing by 1.0%. This was largely due to a decrease in the price of gasoline, which fell by 26.9%. Excluding gasoline, the CPI rose by 2.4%. I would think this latter number is the better predictor of the future -- unless it is thought that gasoline is going to keep falling by 20% to 30% a year.

This might be an appropriate time to bring up the belief of some people that governments systematically understate inflation, for nefarious purposes of their own. If true, that 1.0% should really be more like 3% to 7% inflation -- who knows, 10% to 20% inflation if using SGS methodology -- and we can all stop worrying about deflation.

George
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SoninlawofGus
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Re: Deflation - what risks does it pose to investors?

Post by SoninlawofGus »

ghariton wrote: ...and we can all stop worrying about deflation.
In this age of European negative rates, I stumbled across this older article which notes that the ECB cannot go too low for fear of bank runs. I had not considered that possibility: once common bank interest is negative people end up going with shoeboxes and mattresses after all. Nobody wants bank runs. This might put a floor on how low it is practical to go. With new higher thresholds for no-fee banking at places like TD (or just higher fees), maybe we are effectively there -- but give the average person a -0.1% rate and the psychology changes. Maybe we really are close to the bottom, even in Europe.
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