Salient to Investors:

A. Gary Shilling at A. Gary Shilling & Co. says 5 of the 7 varieties of deflation are present in the US economy.

  • Commodity price deflation will continue as oversupply continues to swamp demand amid weak global growth and a hard landing in China, which remains export-driven. The slow global growth of the last 6 years will persist, and US consumers will continue to retrench.
  • Wage-Price deflation. Wages are being cut due to excess capacity in the labor market, weak job growth and high unemployment.
  • Financial-Asset Deflation. Stocks will decline when investors realize that weakness in global economies can’t be offset by huge injections of liquidity by central banks. Speculation, especially in new tech stocks, simply switched after the 2000-2002 collapse from stocks to commodities, currencies, emerging-market equities and debt, hedge funds, private equity and, especially, housing. Financial institutions that greatly leveraged their balance sheets over the past three decades are now being forced to raise capital, while reducing risk and leverage.
  • Tangible-Asset Deflation. Inflation and deflation have occurred repeatedly in commercial real estate since World War II. The house-price deflation of the past 6 years is the first since the early 1900s and will continue because of the 1.7 million excess housing units in the US, over and above normal inventory working levels – before the housing collapse started, housing starts and completions averaged 1.5 million per year.
  • Foreign Currency Deflation. The dollar is reasserting its traditional role as a haven in a weak, and possibly recessionary, global economy.
  • Standard Deflation. Inflation is highly unlikely today as commodity prices collapse, high unemployment persists and deleveraging suppresses private demand. Persistent excess supply and weak demand for goods and services will cause the CPI and the producer-price index to fall 2 percent to 3 percent per year.
  • Inflation by Fiat will continue as government regulation and involvement in the economy are certain following the financial collapse, Wall Street’s dishonesty, and the worst recession since the 1930s.

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