Bloomberg Writes: Japanese Ask, What’s Wrong With a Little Deflation?

 

As Haruhiko Kuroda tries to spur Japan (JGDPAGDP)’s inflation rate, he faces a worrying question: What if his Bank of Japan predecessor was right about why he will fail?

In June 2011, then-BOJ Governor Masaaki Shirakawa faced extreme pressure to double the monetary base, a step Kuroda took just days after replacing him in March. When Shirakawa, a University of Chicago-trained economist, was asked why he’d refused to budge, he offered a surprising excuse: Japan’s aging population, whose fixed incomes would be eaten away by rising prices. Politicians thought the rationale was a copout. Shinzo Abe’s first act as prime minister was to dump Shirakawa.

 “The only easy part is starting to print the money because it does not hurt anyone for the first year,” Schulz says. “But after that, when prices start to go up, it really depends on the view at that time: Will people only see the higher costs, or will they see the brighter future that the government is selling with its money? If they don’t, a turn in public opinion will stop the BOJ before expectations have changed enough to get the economy on an inflationary track.” Kuroda could yet prove his predecessor wrong, but he’s going to need help from his prime minister — and soon.

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A superb article on deflation and I definitely recommend reading it in full.  

I have been a proponent that the US has been in a deflationary environment since at least the early 2000’s. I know there are a lot of people running around screaming inflation, but we must first define what inflation and deflation is. While there are many definitions, mine is …..Inflation is expansion of credit, while deflation is contraction of credit. Simple as that.

The reason most people believe we are experiencing or will experience inflation and/or hyperinflation is because of FED’s massive infusion of credit into the system over the last 10 years. Without it, we would have already seen concrete evidence of deflation all over the place.

Here is the situation. Deflation is destruction of credit and subsequent decline of prices due to defaults, overcapacity and the self feeding trend it generates. We have already started the process of deflation in two very important areas as % of GDP. Financial and real estate sector in both 2000-2003 and 2007-2009.

However, due to the FED’s crazy insistence on inflation they did paper over any sign of deflation by infusing massive amounts of credit and money supply into the US Financial system. What you have to understand is that such a move didn’t fix anything, it only made things worse and the upcoming recession more severe. Now with velocity of bailout money slowing down, more defaults and deflation is unavoidable.

That is where we find ourselves today. So, will the US experience a Japan style deflation? Yes and No. I will talk about it in more detail in my future writings.  

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