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Monday 6 January 2014

The Great Depression – Is it Coming?

Deflation is looked at by economists in different ways.  The most appropriate definition for deflation is ‘a contraction in the supply of money and credit’.  It is not falling prices, although falling prices are a consequence of deflation.  

One should not confuse the two concepts as prices can decline without deflation.  Inflation is the opposite of deflation, in that it is an expansion in the supply of money and credit.   Clearly we are in a period where falling supply of money and credit is real and probable.

 Inflation is all most people know as it was part of our lives each year from 1933 to 2008.  Many analysts and economists still call for the return of inflation and potentially hyperinflation.  Reality is, the signs are not there for inflation but deflation appears to be the most likely probability.  

There is a strong historical basis for this belief as well as many economic and fiscal signs pointing strongly towards it. 

Most of the arguments for inflation are based on the US Federal Reserve and other major world Central Banks continuing to inject monies into world economies through quantitative easing programs.  So far the amount Central Banks have injected into the economy is unprecedented.

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