... And will the U.S. and global economies soon face sharp deflationary pressures? The answer: Deflation and stag-deflation will, in six months, become the main concern of policy authorities.
Why?
First, the U.S. has entered a severe recession that is already leading to deflationary forces in sectors where supply vastly exceeds demand (housing, consumer durables, motor vehicles, etc.). Aggregate demand is falling sharply below aggregate supply. The unemployment rate is up sharply, while employment has been falling for 10 months in a row. And commodity prices are sharply down--about 30% from their July peak--in the last three months, and are likely to fall much more in the next few months as the advanced economies' recession goes global. So both in the U.S. and in other advanced economies we are clearly headed toward a collapse of headline and core inflation.
Is there any doubt about this ongoing inflation capitulation and the beginning of sharp deflationary forces? Take the current views of the economic research group at JPMorgan Chase. This group was, in 2007-08, the leading voice arguing about the risks of rising global inflation and the associated risks of a global growth reflation, and that policy rates would be sharply increased in 2008-09.
This week, however, the JPMorgan research group published its latest global economic outlook, arguing that we are headed toward a global recession, negative global inflation and sharply lower policy rates in the U.S. and advanced economies--a 180-degree turn from its previous position. What a difference a year makes!
Do you have any further doubt that we're headed toward a global deflation or--better--a global stag-deflation? Read on: Aggregate demand is now collapsing in the U.S. and advanced economies, and sharply decelerating in emerging markets. There is a huge excess capacity for the production of manufactured goods in the global economy, as the massive, and excessive, capital expenditure in China and Asia (Chinese real investment is now close to 50% of gross domestic product) has created an excess supply of goods that will remain unsold as global aggregate demand falls.
Commodity prices are in free fall, with oil prices alone down over 50% from their July peak (and the Baltic Freight Index--the best measure of international shipping costs--is 90% down from its peak in May). Finally, labor market slack is sharply rising in the U.S., and rising, as well, in Europe and other advanced economies.
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http://www.forbes.com/2008/10/…ed-cx_nr_1030roubini.html