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Deflaction by A.Gary Shilling

Deflaction by A.Gary Shilling

Southeast Asia has been the focus of attention since October, but it’s not the only game in town. Looking at the situation more broadly reveals that the financial crisis in that region of the world is to global deflation what the 1973 oil embargo was to inflation: it concentrates and amplifies the numerous factors already in motion. Governments, businesses, and emerging technology have supported activities that, in response to specific triggers, will drive costs down for the past 20 years.

A. Gary Shilling examines the global deflationary dynamics at play, the effects of the Asian financial crisis, and the type of deflation that is most likely to develop in his exhaustive new book, Deflation.

For instance, governments have contributed by cutting expenditure and decreasing deficits. US defense spending has decreased steadily since the conclusion of the Cold War, from 7.4% of GDP in the third quarter of 1986 to 4% in the first three months of 1998. Governments across the continent put up with double-digit unemployment rates in order to achieve the Maastricht aim of GDP deficits of no more than 3%. Prices are being reduced via deregulation of utilities and services. According to Citizens for a Sound Economy, a Republican think group in the US, deregulation of the energy industry would result in a reduction of customers’ electricity rates of “at least 43%.”

The final conflict, inflation, is still being fought by central banks with higher interest rates. With the reorganization that began in the US and UK in the 1980s and has now extended to other English-speaking countries, corporations are accelerating the deflation. Global outsourcing increasingly offers less priced services, such as computer programming and credit card processing, in addition to less expensive commodities. Computer and information technologies are ripe for deflation. Users purchase the products to lower their own expenses because hardware and software are notoriously susceptible to price reductions.

Outside of the US, freshly industrialized nations as well as those that were just liberated from communism are gaining significant market share. As a result, there are too many goods on the market and no one to buy them. Southeast Asia’s customers aren’t much of a market due to its financial problems, and the US, the world’s happy dumping ground, can only spend so much. Countries that want to use exports to strengthen their economies are more likely than ever to devalue their currencies in response to the growing global surplus. A rising currency is undoubtedly deflationary for the US, albeit Washington is now supportive of it. But what happens when the tight US labor market, a worldwide surplus, and weak US exports collide head-on? What happens if expensive US equities are killed by a profit squeeze, resulting in significant losses for individual investors who rely on their equity portfolios to supplement their savings accounts?

Consumer spending cuts. Then, as they observe price decreases, they wait for prices to drop even more before making any purchases, which is a common strategy that feeds the deflationary cycle.

If the Asian crisis ends up having little impact on the US, the Federal Reserve will undoubtedly tighten credit and most likely cause a recession, which will be followed as usual by a bear market in US markets. The overall impact on consumer behavior would be the same, and just like in the case of a bear market started by Asia, deflation would be the final consequence.

In the US, the 1930s come to mind when we think about deflation. Any other concept of deflation pales in compared to its visions of shanty settlements and soup queues. However, there was deflation following the American Civil War without the 1930s financial crisis. It is more likely that the impending deflation would resemble the overstock of the late 19th century than the unemployment of the Great Depression.

How deflation will impact you is covered in the last few chapters of Deflation. Should you continue investing in stocks or go to bonds instead? Will your business require another restructuring? How should inventory be handled? Have you individually saved enough money? Dr. Shilling offers you five personal tactics, 18 company strategies, and 13 investment strategies that will be effective in the coming years of deflation.

Get ready. In the future, we could come to the conclusion that Asia was the cause of the worldwide deflation that summer of 1997.

Salepage : Deflaction by A.Gary Shilling

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