Fall in gold and oil prices with the collapse in equities worldwide will confirm deflation is the root cause of all troubles
Peter Oberois
Mar. 10, 2007

The debate is on. Some say it is inflation that is the root cause of all troubles. Some say stagflation. But how can we know it is really the deflation?

Deflation in the economies happens very rarely. When it happens though, it takes a very long time and a lot of efforts from the Government and private sectors to get out of it. We saw that in 1929. We saw that in Japan in the last eighteen years. Deflation causes the economic troubles and extreme austerity.

The biggest problem with deflation is that it is always hidden till it reaches a state when it cannot be reversed. That is exactly what is happening now. No one can even believe it is the deflation that is the root cause of all the troubles.

The only way to find it is to look for Government and Corporate actions. Outsourcing is a sign of deflation. It really means that the corporations do not have pricing powers and are restoring to cost cutting with any means to continue the profitability outlook of the company. When Government borrows to create massive budget deficits, it is the sign of trouble in the economy. The tax revenues are not enough over the long term to increase Government expenditures.

The stealth deflation is developing since 1982. But no one can see it really. If you look at commodities you see higher prices. You look at employment, you see lower rate of unemployment. But people forget, the biggest sector to watch is prices of finished goods. That is where deflation first develops. Then it spreads into capacity utilization and finally to the commodities and the job sector.

Eventually one thing will confirm that it was really the deflation that caused all the trouble. When oil, stocks and gold all make extreme lows in the market together, deflation will be confirmed. But that will be too late – deflation at that stage is very difficult to reverse. Japan is still struggling after eighteen years of deflation to get rid of it.

Deflation is caused by over borrowing. It is extremely difficult to reverse deflation once started if the budget deficit is very high. In 1929-33, deflation was reversed through massive sending by the Government. The budget deficit does allow the same repetition now!

Fall in gold and oil prices with the collapse in equities worldwide will confirm deflation is the root cause of all troubles
Peter Oberois
The debate is on. Some say it is inflation that is the root cause of all troubles. Some say stagflation. But how can we know it is really the deflation?
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