The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

The Persistence of Deflation

07/20/2010

Tom Brokaw is the famed longtime anchor of NBC News and serious chronicler of generations. His recent study of the Baby Boomers found the belief common to most Boomers was that “things” would always get better, an undying sense of optimism.

As a Boomer myself, I plead guilty!

That’s why it is so important to closely examine the bad news. We have seen deflation for the last three months, which is not good. My favorite economic cycle predictor, i.e., ECRI, thinks a serious downturn is coming, perhaps as serious as last year. In other words, they think a “double-dip” is possible. One of my favorite economic indicators is the Baltic Dry Index, which is a rough measure of international trade. It has turned very ugly. http://www.investmenttools.com/futures/bdi_baltic_dry_index.htm

Despite my Boomer optimism, I have to say the evidence is grim. Nonetheless, unless we have a financial “heart attack” which would come through the banking system, I still see the market trading in a relatively wide range of, say, almost a thousand points until later in the year. There is a great sense of unease about the markets today for several good reasons. But, the most important reason is the volatility, which occurs within that thousand point range. Volatility almost always increases when trading volumes are low, and trading volumes are almost always low during the summer time.

Deflation is more problematic. Ben Bernanke is often called “Helicopter Ben”, resulting from a speech he gave a few years ago, quiping that deflation could always be cured by taking enough money up in a helicopter and raining dollars onto the economy. The classic Monetarist definition of inflation is too many dollars chasing too few goods. Raining dollars on the economy should cure deflation. That has not happened. Take a look at http://www.bullandbearwise.com/MoneySupplyChgChart.asp

If the economy softens this year, I’m not worried, because it will pass. If the market takes a swoon, I’m not particularly worried, because it too will pass. But, if deflation persists, I’ll be very concerned . . . unlike a Boomer!

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