Salient to Investors:

A. Gary Shilling at A. Gary Shilling & Co writes:

The current fiscal and monetary offsets to the powerful deflationary forces are temporary. When deleveraging ends and normal economic growth resumes, the Fed will be forced to eliminate the huge excess reserves.  General price deflation is the likeliest scenario in the US in future years.

A decade ago, 12 of the Fed’s top economists studied deflation in Japan and concluded that the best way to combat chronically falling prices was to initiate a huge stimulus, and quickly.

The Fed is concerned that if chronic deflation sets in, it will be unable to raise interest rates or cut rates when the next bout of economic weakness occurs.

The Fed is always concerned that deflation will increase the real value of debt.

Washington hates deflation because it reduces nominal revenue as corporate profits and household incomes fall, and taxpayers descend into lower tax brackets.

Deflation causes the real cost of federal debt to rise, and undermines taxpayers’ ability to service and repay it.

Have see no evidence of a government conspiracy to promote inflation to reduce the real value of debt. There is far more fear about the disruptive effects of inflation on the economy.

Aggregate price deflation results from an excess supply of goods and services compared with demand. Belief that inflation or deflation is always and everywhere a monetary phenomenon ignores the supply-demand balance that is the foremost determinant of the money supply.

In Japan, both monetary and fiscal stimulus has been swamped by increased savings by Japanese consumers and subdued spending by households in the 1990s and, more recently, by the business sector.

In the US, monetary and fiscal actions have not overcome private-sector deleveraging. so economic growth remain weak and inflation has essentially disappeared.

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