Deflation is your friend only when you are holding cash
By Daniel at 29 June, 2009, 11:24 am
Deflation is not a decrease in the general price level of goods and services. Deflation is a decrease of the total amount of currency in the economy. The resulting decrease in prices is a symptom of deflation. The total amount of currency includes debt because debt when one takes it on becomes a credit to some others account. Debt ,credit, and cash all spend the same. With layer upon layer of debt on personal, corporate and government balance sheets the inflation has already happened. That is why asset prices including homes, fuel, commodities etc., rose so high so quickly. As all that debt is paid down or DEFAULTED it removes currency from the total economy. As the total system shrinks asset prices fall as have houses, commodities, oil, etc. The FED and Treasury are trying to reinflate by flooding the system with liquidity but as more debts are defaulted more and more is drained from the system still. There are many defaults left to come and those that see this are those that believe we will have deflation.
Deflation will only be good for those holding cash and equivalents. Many with debts will drown in it as they lose jobs or take cuts in pay but must continue to service the debt on assets that are worth less than what they owe on them. Many are already in this situation as they try to make mortgage payments on homes that have lost 40% or more of their value.
Be very careful what you wish for. Deflation can be unbelievably bad.
Mc
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