Indeflation.
That is the word we have given to this curious creature in front of us. Neither inflation nor deflation... indeflation is a ghastly unnatural hybrid, with rising consumer prices (caused by a drop in the dollar, not by economic growth) in the middle of a long, drawn-out Japanese-style slump.
Presently copper and oil, for example, are going up - typically, signs of inflationary pressure. Copper is at an 8-year high. And gasoline rises about 3 cents every week.
Copper is often referred to as "Dr. Copper... the metal with a Ph.D. in economics" because it is said to predict trends.
When copper goes down, the economy follows. When it goes up... the economy soon gets "overheated," with rising consumer prices.
But the bond market is no dope either, and it continues to forecast (with low and falling yields) a sluggish economy with declining prices.
Who's right? Could it be they both are... or, that both are heralds of this new indeflation we're worrying about?
For several years now, we have noted the way in which the U.S. economy seemed to follow the Japanese model - with a 10-year lag. Asset prices rose on Wall Street throughout the '90s... and peaked in January or March of 2000... .just as they had in Japan 10 years earlier. Even the 'recovery'
that we see today still looks a lot like the 'recovery' in Japan in 1994... just before the stock market headed down again, and the nation slipped into deflation.
Of course, America isn't Japan - in one especially potent particular. Savings rates in Japan never fell below 10%.
And, 10 years ago, Japan was still the world's biggest creditor. America enters its decline with savings rates near 1%... and as the world's biggest debtor.
For most economists, this nuance is not only telling, it is conclusive. Ben Bernanke and the Fed have already pledged to do what they have to do to save a nation of debtors from getting what they deserve. They've announced that they will inflate the nation's money supply as much as necessary to avoid Japan's 10-year-long deflationary slump. Almost everyone takes them at their word. Besides, America can't stand deflation, they point out.
But wanting isn't getting, we counter. Every debtor in America may crave inflation... but that doesn't mean they will have it.
The world is even stranger than it seems. What is said to guarantee inflation - America's lack of savings - may be what actually seals the deal for deflation... or this new indeflation we have been describing.
The Japanese did not have to borrow from abroad to fund their businesses, households or government. They 'owed it to themselves' and could simply hunker down - even for 10 years - until the mistakes were gradually written off and cast away.
But America depends on the kindness of strangers in order to pay for its War on Terror, its big screen TVs... even for drugs for its old people. The nation and its currency are vulnerable to foreign lenders in a way Japan never was. The dollar has lost 40% against the euro already. As kindness becomes more costly for them, you can expect even the nice Japanese and Chinese to turn away from it. There is no law that says the dollar has to fall further... but with an unresolved current account deficit of nearly 5% of GDP and the U.S. national debt rising by about $2 billion every business day... the dollar could still lose 50%... or more... of its value.
A falling dollar increases prices for imports - notably oil
- and thereby increases Americans' cost of living. It has the probable additional consequence of destroying the U.S.
economy... which lowers employment and many domestic prices... while collapsing stock and real estate markets.
Indeflation, in other words.
