Nouriel Roubini's bond market analyst worries about the debilitating affects of deflationary trends just as today's PPI falls by 50 BP. This has been my major concern for going on two years now because I've lived through such a period once on a relatively small scale compared to the great depression - which my parents lived through and carried the scars from for the rest of their lives. Problem is... once people get it into their heads that purchases put off till a future date will result in lower prices for those capital goods or cars or homes or WHATEVER - it becomes impossible for government to do much to motivate buying once again. On the other hand, inflation is much more "manageable" due to the fact the Fed (for example) can simply cut back on credit and/or raise rates to slow rampant purchasing velocity. No such mechanical means can be applied to consumer psychology. This comes just at the time the political right wing is pushing for limiting what they see (rightly) as profligate government spending. It seems to me we're coming perilously close to an abyss from which we will retain no remedy to crawl out, except for time itself. And once this psychology sets in, it can take twenty years (or a full generation) to subside of its own accord. To be sure, this is an over-simplification - but one which doesn't require too much additional explanation to fear - which I do!!
Roubini's bond-meister comments (click the graphic to view the video):
"Many emerging markets are resisting changes in nominal exchange rates. Higher inflation is causing some correction in real terms but it is too little and may turn out to be too late," he added. China is the key to correcting this problem, according to Motianey. He warned that the challenges facing the developed world look even more problematic. "Financial markets have become intolerant about governments acting as a source of final demand in the developed market," he said. "We are seeing this most dramatically in the European sovereign debt crisis that is now mutating into a European bank crisis." With both these factors hitting growth, the threat of the world economy folding in on itself is now ever-present, Motianey said...
