Debt Deflation Update June 1 2008

Debt Deflation---In his debt-deflation hypothesis, Fisher asserted that (nominal) over-indebtedness and deflation are the dominant forces that account for "great" depressions. Specifically, he argued that given nominally denominated debt contracts, a protracted fall in prices and nominal incomes substantially increased real debt burdens, led to debtor
Insolvency, lowered aggregate demand, thereby contributed to a continuing decline in the price level, and thus further increases in the real burden of debt.

 

"The very effort of individuals to lessen the burden of their debts increases it, because of the mass effect to liquidate. The more the debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip. It is not righting itself, but is capsizing."    Irving Fisher 1933 The Debt-Deflation Theory of Great Depressions

 

Model update

 

Interest rates- Are moving back higher, I would caution that if inflation hold and interest rates would spike, the OECD countries Real Estate and stock market would correct massively...this is NOT the seventies...The consumer it up to their eyeballs in debt

House prices are accelerating to the downside, home prices around the world are peaking and more are rolling over, Canada will join the list within this quarter

Credit growth- slowing and decelerating

Wage growth- rolling over OECD countries

Bank Lending- The markets are doing much of the tightening, and many global banks are raising lending standards. (Not what you want to do in a the global credit cycle)

Gas and food- I understand that many think that this is inflationary, but unless wage demand picks up around the world, it forces consumers in the industrialized world to curtail discretionary income. The other half of the world economy spend an inordinate amount of their incomes for the necessities of life, they can least afford higher gas and food prices.

Business cycle- If we understand one thing about business cycles and recessions is that they cure inflation very quickly... all of the world economies are approaching the end of their prospective business cycle.. I would watch once it is evident that Asia is rolling over, probable after the Olympics, that commodities will correct, that will be the signal the deflation is on its way.

 

Variables -China and Asia – Chinas growth rates will slowly decelerate. Here is why, The US is headed into a recession, so is Europe, gas prices were raised yesterday, China is increasing reserves, the Yuan is headed higher, so are interest rates, and lastly the stimulus of the Olympics will be gone