Deflation
Q
What is deflation?
A
A fall in the total value of financial assets exceeding the fall in prices (if prices are rising, it is an inflationary credit contraction). Credit can contract even when prices rise - rising prices have to do with the dollar value of transactions the Fed "allows" by supplying liquidity for those transactions to take place.
Q
Is price deflation avoidable?
A
Not if the central bank wants to keep the government bond market intact while markets are rejecting both the currency and government bonds. That happens when markets are very worried about the potential for serious inflation.
Q
What happened in the late 1990s and was it deflationary?
A
The Asian governments (later involved in the Asian crisis) had not slowed their credit markets so that their dollar denominated financial liabilities matched their dollar denominated financial assets. When a correction occurred, they could not keep their currencies fixed at the old exchange rate to the dollar and their currencies collapsed in value. This caused a huge demand for U.S. dollars at the same time the U.S. stock market had been running for some time, pushing the markets to extreme heights.
Although it was price deflationary, the Fed should have remained tight instead of creating more credit and allowing greater asset inflation. Since one cycle leads to another by the subsequent bust and overaggressive Fed loosening, the Nasdaq bubble set the stage for the following run-up in real estate values.
Although it was price deflationary, the Fed should have remained tight instead of creating more credit and allowing greater asset inflation. Since one cycle leads to another by the subsequent bust and overaggressive Fed loosening, the Nasdaq bubble set the stage for the following run-up in real estate values.