“Deflation fear is alive and well,” said Wan-Chong Kung, who helps oversee $76 billion in fixed income as a money manager at FAF Advisors Inc. in Minneapolis, the asset-management arm of U.S. Bancorp. “The constant parallels being drawn to the Depression era as well as to the Japanese experience leads to the feeling we’re looking at a pretty gloomy period for a long time.”Again (and again and again) we see prospects for economic contraction conflated with prospects for deflation. In fact, (and in fact and in fact), most periods of economic contraction are associated with inflation, not deflation.
A longer piece is needed to contrast the Japanese situation from the current US situation, but suffice it to say for the moment that a) the Japanese government debt was largely funded internally, unlike the US, which must go cap-in-hand to foreigners and 2) relatedly, Japanese households are rich whereas US households are in hock and 3) the export-oriented Japanese economy contrasts sharply with the US economy, which substantially consists of hair salons and riverboat casinos, hardly the basis for sound lending. As for the Depression, well, Mr. Kung seems to have overlooked the fact that the dollar was devalued by 40% and that bonds proved a terrible investment (h/t Jesse's Cafe):
Meanwhile, also from Bloomberg today, we see that the credit crunch is placing upward pressure on prices elsewhere:
The global credit crunch is a boon for rig operators such as Transocean because the lack of financing is preventing smaller rivals from following through with plans to build new vessels. As many as one-fifth of the new deepwater rigs on order in shipyards from South Korea to Norway will be canceled or delayed because of capital constraints, Uhlmer said in October.Net result?
Transocean Inc., the world’s largest offshore oil driller, agreed to lease its C. Kirk Rhein Jr. rig to Burgundy Global Exploration Corp. for $550,000 a day, a 52 percent increase from the previous rate, according to a public filing today.
And from a couple weeks back, we see the same phenomenon in agriculture, namely, a lack of credit impacting supplies:
In the 30's, cheap credit was directed at productive capacity buildouts. By contrast, over the last two decades, cheap credit was directed at a massive consumption binge, all while productive capacities atrophied. Add debt monetization to the mix of constrained capacities and what do you think is going to happen?The collapse of global credit markets that is pushing the U.S., Europe and Japan into simultaneous recessions for the first time since World War II also threatens farmers in Brazil, the world’s biggest grower of coffee, oranges and sugar cane, the second-largest producer of soybeans and third-biggest of corn. Smaller harvests in Brazil may increase costs of commodities next year, said Andre Pessoa, an analyst at Agroconsult who conducts the country’s broadest crop survey.
“When we look ahead, we see demand continuing to grow, while supply will face difficulties,” Pessoa said in an interview from the Florianopolis, Brazil-based company.
The critical differences between then and now, between here and there, blithely overlooked in the rush to board the deflation bandwagon, will have investors rue the day of simplistic analysis and pat comparisons.
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