The causes of deflation are linked directly to inflation and the only cure for inflation is a deflation. The following is a list of causes of deflation and manifestations of deflation leading up to the GREATER DEPRESSION that started in 2000 and may not end until 2020 (end of the mania).
When seeking the causes of deflation we need to remember that the real cause was credit inflation. Many items on this list are manifestations of the credit bubble popping. What is remarkable is the depth and number of related items on the list.
1. Growth of government at all levels federal, state, county and city. Money sucked away from the market economy to fund inefficient and bloated programs reaches one third of the economy and then causes it to get top heavy and crash.
2. Military waste. Wars and much of the money spent by all the different divisions of our defense departments is poured down a whole in the ground-never to be seen again. Oil, food, materials, manpower, blood and lives.
3. Governments support of (favorite) industries that would not make it in a free economy. Real estate bubble – unwise lending practices.
4. Real estate deflation leading to reduced wealth and reduced taxes to government due to lower revenue from both capital gains tax and real estate property taxes. 90% drop by 2018
5. Stock market losses. People feel poorer so the don't spend. Pension and retirement accounts lose money on stock and bond investments hurting ability to pay those retiring. 90% drop.
6. High petroleum prices sucking money out of peoples pockets that could have gone to purchasing goods and services in the market. We are all on an oil food chain using dead dinosaur deposits for our energy instead of whale blubber like we we used to. Money sent to foreign entities that in some cases is used to pay for attacks on us. Inefficient gas guzzling autos, appliances, lighting and phantom loads on TVs, computers, microwaves etc. Heat rises right? Why is the working parts of refrigerators underneath the area meant to be cooled. Heat rises up through the whole refrigerator or freezer box. A waste of trillions of dollars in oil all these years.
7. Job losses – high unemployment meaning less money is around to buy goods and services. Causes businesses to layoff more workers in a vicious cycle snowball effect.
8. Collectibles, antiques, art and possessions in general losing value. Lower prices when people try to sell. They feel less wealthy and cannot buy as many necessities. There will be many bargains in all kinds of property and possessions at the bottom as people sell assets to stay alive
9. Credit tightens up. Bank and lenders fears lead to strict standards. Low interest rates are a sign money is on sale. It is a sign of weak demand and deflation. 10.The internet. Lower cost of doing business online means it is easier to startup a business. Business and jobs go offshore to cheapest providers.
11. Farm commodities prices drop. Small farms get hurt most. Reduced income means they cannot buy as many good and services as well as new equipment.
12. PIIGS. Portugal, Ireland, Italy and Greece. Inefficient government leads to high unemployment causing spreading malaise in Europe and a spreading banking and labor crisis.
13. Interest rate drops. Savers and retired people counting on a safe return on their money have less money to buy goods, services and to make rent or house payments.
14. Saving rate climbs from 0 to 7% already in 2010. Means there is less money for purchases. Hurts business.
15. Increases in debt and credit card repayment means there is less money for purchases. Hurts business.
16. People travel, eat out and vacation less. Companies are cutting way back on first class airfare People are cutting back on their vacation plans. 106 motels are in foreclosure in the summer of 2010 here in the San Francisco Bay area.
17. Auto sales & leasing down. Bailout of GM and Chrysler. People are keeping their cars longer and fixing them. Stock price of Auto Zone parts store (AZ0) at a high point.
18. Clothes and retail stores hurting as people cut back and do with less. Japan is in a long term deflation. Property values just hit a 36 year low – summer of 2010. Japanese wear their clothes longer. We are catching their disease.
19. Bank bailouts and freeze up. Trillions of derivative dollars disappear despite government intervention to try and fix the problem. Roaring 20's inflation of up to 10% a year had bankers back afraid the money they had lent out would be close to worthless in just 10 years. They clamped down and stopped lending causing the economy to go into a tailspin. The same thing is happening right now only worldwide. The Greater Depression will be 3 times as long and 3 times the size of the 1930's depression.
20. Spending on entertainment and sports event attendance declining. Robert Prechter sees sports star salaries slumping from here on.
21. State, county and city cutbacks and layoffs due to both lower sales tax and real estate property tax revenue. 46 states are in the red already. California has a 17.3 billion dollar deficit. Illinois has a 13.5 billion dollar deficit. 5 states are technically bankrupt.
22. CPI drops. Consumer Price Index chart on a down trend. Index does not include energy and food. Crazy.
23. Socialized medicine. 16% of a once vibrant American free market economy planned to be controlled and micro managed by government. A job killer and an incentive killer.
24. Cap and Trade. More restrictions on business mean business gets cautious and pulls back. A job and incentive killer.
25. Baby boomers retire. They draw out their savings quit buying bigger homes. They start sucking social security and medicare monies out rather than contributing.
26. Bankruptcies grow. People give up and default. Business and lenders are weak – they write off losses and retrench.
27. Volatility increases. Flash crash of 998 points in the Dow. Fear increases. People pull money out of the markets and park it in safe 90 day government T Bills at almost zero interest.
28. Gold to silver ratio bottoms April of 2006 hits 80 to 1 October of 2008. Silver is an industrial commodity. Weaker economy means weaker demand as evidenced by top in price.
29. Margin debt on stocks tops out at $ 384.1 Million-Sept. 2008.
30. OTC, over the counter stock prices and share volume peak in 2000 with lower peaks in 2004 and 2006. Lesser total dollar amount traded shows trend of disappearance of market froth at the same time as what has turned out to be a 13 year head and shoulders topping formation.
31. Tea Party. People are cranky these days. Mood change to pessimism about government and elected officials. Surge in conservative talk radio (Rush Limbaugh, Mark Levine) and conservative TV shows (Genn Beck).
32. Crime, Gangs and Mexican Boarder and Mexican drug cartel problems. Fear and higher cost of law enforcement and border patrol.
33. Video gaming. Non productive. Reduced exercise leading to obesity and health problems. Addiction to the point of flunking out of school.
34. Fishing license sale soar in Michigan. People trying to catch a source of protein to supplement their diets.
35. Private pay colleges. People out of work try and retrain in a different industry. Some end up with a big pile of debt and no real job opportunity.
36. Medical tourism increases. As much as one third cheaper cost for medical and dental procedures.
37. End of throw away society. People search the net and publications like Consumer Reports to find the best and longest lasting products. Companies build better products.
38. Sales of Kubota and other small tractor companies sales. increase – a back to the country – back to the farm trend. Worry about crime and food availability. People seek "elbow room".
39. Xenophobia – Gated communities. Fear others. Fear of strangers. People that can afford it seek sanctuary in upscale living. Immigration uproar at our Mexican boundary. Fear of the crime wave.
40. Solar efficient home systems purchases – safety & savings.
41. Disintermediation. Borrowing short-term money to turn around and lend it longterm. If interest rates go up faster on the short-term money than the loans they have made with the money, they are caught again like what happened during the savings and loan crisis back in the mid 1990's.
42. Socialism Gains. Wasteful growth of government allocating scarce resources instead of the free markets. Dangerous.
43. Barack Hussein Obama – socialist president hires and appoints all leftist / liberal thinking people. Only 10% of them have any business experience. None have any economic savvy. Gets business worried, uncertain and cautious. A freeze up.
44. Peoples mood wanes. NewsTV talk of "these troubled times." and now "these bad times." A negative social mood started 2000. Realism and skepticism morph intorealization and outrage ..
45. New Tariffs and trade sanctions. Smoot-Hawley bill passed in June of 1930 raised tariffs on 20,000 imported goods during FDR's Presidency. Delayed the US economy rebound from the 1930's depression.
46. China & other growth economies. Providing cheaper goods and services thereby taking jobs and market share. Communist capitalism. They don't care if they make a profit. They want market share.
47. Terrorism. Extra money spent trying to protect us- a drain. Patriot act. Hiring more government employees.
48. Regulations. Uncertainty is a business and job killer. Every minute congress (and every other government group) is in session we lose more freedoms.
49. Taxation. Canceling the Bush tax cuts. A business killer. Bailouts mean US taxpayers take on trillions of risk.
50. Problems in Persian Gulf. A nuclear Iran. Hisbola and Hamas hatred of Israel. Oil from area is lifeblood of the West.
51. Federal Reserve Bank. An immoral monopoly and cartel. Bad timing now means its portfolio is now 50% mortgage securities and other types of riskier bank debt. Its bag of tricks is empty with short-term interest rates near zero. Helicopter Bernanke (We can take helicopter loads of money and dump it on any problem) is a gradualist. In truth he inherited this whole problem from Alan Greenspan and past fed heads and their bankster friends. The Fed cannot stop the deflation and Greater Depression.
52. Interest rates rise. Next everyone that ran to the safety of bonds gets caught. As interest rates rise the price of the bond drops causing capital losses. Robert Prechter thinks many corporate and state and municipal bonds will be worthless at the depths of the Greater Depression. States, counties and cities experiencing reduced revenue due to drops in peoples income along with drops due to decreases in property values are already seeing their bonds reduced to junk status by the ratings agencies.
53. M-3 down. The government does not publish total money supply figures anymore. Why? Maybe deflation shows up there first. M-3 is estimated to be down 9.7% a big deflationary drop.
54. Bank Failures. We are having bank failures at rates not seen since the 1930's. 1,000 banks a year and more. So far the government regulators have swooped down and either taken over or arranged a merger of troubled banks. This will change as the numbers of bank bankruptcies increase. They will be out of money and forced to just let them fail.
55. FDIC now taken over by our government. The Federal Deposit Insurance Corporation idea has a fatal flaw. Propping up troubled financial institutions makes them take chances an engage in unsafe banking practices because they think the government will always be there to bail them out. Now, you and I the taxpayer will be saddled with trillions in debt in the aftermath of the washout coming to the FDIC.
56. Peak oil. The year 2005 is being called the year when petroleum production peaked. High oil and energy costs suck money right out of peoples pockets. They forgo purchases of other products and services causing those industries to contract. Deflationary.
57. Debt stress. 46% in a recent poll are debt stressed out.
58. Credit card pay downs. For families making $ 50,000 or more 50% are paying down their card debt.
59. Unemployment close to 10%. Don't forget this does not count those that stopped looking for a job, went back to school, retired or on unemployment. Maybe another 15%
60. Commodities prices dropping. Oil, many grains, lumber, silver, copper etc. dropping in price. Housing and automobile manufacturing use a lot of copper. Down trends.
61. Real estate deflation. 50% drop in prices in some areas. Builders confidence index is at new low. Many, many layoffs Many housing and commercial loans written on adjustable of interest terms back in 2005 to 2007 are coming up for their rate reset or coming due and payable. Many may not qualify for a whole new loan or be able to make the new higher payment. The Austrian school of economic thought says each and every time there is a mania with credit inflation at it's root there will be a big crash.
Every time Robert Prechter says the bottom of the GREATER DEPRESSION will not be until 2016 or so. He thinks prices will be down 90% on most assets, Cash will be "King." If you have cash at that time your money will buy a lot of things at a discount. PS If you can think of more causes of deflation please write them in the forum area below. Copyright 2010 – http://www.deflationeconomy.com Reprint rights allowed with attribution back.