Salient to Investors:

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

There is an important distinction between good deflation caused by excess supply – as after the Civil War and in the 1920s – and bad deflation created by deficient demand – as in the 1930s and Japan over the last two decades.

In the Japan deflation, the lack of demand was not caused by a dearth of employment and income, unlike the US in the early 1930s, but by government delay in cleaning up financial institutions and consumers and later businesses not spending their incomes.

Expect chronic good deflation of excess supply because of productivity-enhanced technology continuing to increase output.

Bad deflation of deficient demand could result from severe and widespread financial crises or global protectionism.

Expect slower global economic growth during the next 5 years or so  2 percent in the US – because of deleveraging, to be followed by the quick shrinking of the federal budget deficit and long-term trend growth returning to 3.5 percent a year driven by biotechnology, robotics, the Internet, telecommunications, semiconductors, computers and other relatively new technologies.

When Wall Street gets the slightest hint that the Fed is thinking about removing the excess liquidity, interest rates will leap and the danger of an economic relapse will seem very real. A la the 1937-1938 deep recession due to tightened monetary and fiscal policy.

Robert J. Gordon at Northwestern University says that all the growth-driving technologies, such as cheap energy, urbanization, the railroad and electricity, are fully exploited, while the Internet, computers and mobile phones, have induced only short-term growth spurts with no big new technologies likely.

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