Welcome to illuminati Silver, we tell you
the truth about silver. Today is Monday 28th September 2015 and we
are briefly going to address the issue of deflation and QE
In order to keep our videos brief, this is just a short introduction to Deflation and
QE, a subject we shall return to many times over the coming months, with each video offering
a little more depth. So, to start, let’s consider the definition
of the word deflation. Deflation means “reduction of the general level of prices in an economy”.
So as a consumer you may very well ask, well why is that bad news? If prices are falling
then goods become cheaper and one is better off – right? Well not necessarily.
The major problem associated with deflation is that the real value of debts grows.
So if you borrow say $100,000 from a bank and deflation is 3%, you still owe the bank
the same $100,000 but the inflation adjusted value of the debt is now rising.
This generally means that you tend to spend less, and you become less confident about
the future. The same equally applies to businesses with
large borrowings. The second issue which is a little more subjective
is that of deferred purchase. If you as a consumer are considering purchasing say a
car, and you believe that the price will fall by a couple thousand dollars in 6 months to
a year time, you may indeed consider delaying that purchase, which then has an overall negative
effect on demand, thereby creating a supply surplus and thus causing the very reduction
in prices you were predicting. You will then experience a vicious circle of falling demand.
Take Japan for example. Since the early 1990s, Japan’s has endured alternating periods of
very low inflation, and deflation. During this time, they’ve had sluggish economic
growth and very disappointing stock market performance.
One of the reasons that policymakers were so worried during the 2008 Financial Crisis
was that they thought we could be heading into deflation if events continued. That could
lead to a 20-year economic slump, an economic malaise like that experienced in Japan.
The Central Bankers first policy weapon was to lower interest rates as far as they could
go. That way, they stimulated the economy. That’s fine, but of course, inflation reduced
also. If inflation is just 1% and interest rates
are 0.5%, then ‘real’ interest’ rates aren’t as low as you think, and therefore
there isn’t such a large economic stimulus. That’s known as the liquidity trap: if you
can’t cut interest rates any lower, below 0%, the impact of low interest rates is less
than you might expect. That’s why, because of this liquidity trap,
quantitative easing (QE) – money printing – was introduced. What policymakers were
very aware of is that the problem of the liquidity trap would become even worse if we moved into
deflation. Imagine if the interest rate is 0.5% and prices
are falling at 2%. In reality, interest rates are rather high, even if they don’t look that
way at first glance. That’s another sign of how damaging deflation can be. It can make
life very difficult for policymakers, governments, and for central bankers. That’s why they try
to avoid it. Another consequence of deflation is that lower
prices mean less corporate profitability and generally lower, or at best stagnant, wages
and increased unemployment. This then affects demand further, thereby again entering that
vicious circle of entrapment. So one asks are the USA and the rest of the
Industrial World in a state of deflation? Well, there has certainly been commodity price
deflation. Whether its oil, silver, iron, copper, sugar etc., etc., prices have been
falling. Incidentally, only today a large steel plant in the UK announced its closure,
laying off some 1700 jobs in a community dependent on that Industry – the reason? – falling
steel prices as a result of a reduction in demand.
Food prices have fallen in many countries, though the US have experienced rising prices
in certain staples. The one area that has not fallen is that of property rents, though
this has been, to a large extent, the result of a climbing property price market in recent
years. In many European countries, housing shortages have fuelled house price inflation,
in addition to investment capital being poured into ‘buy-to-let’ mortgages and properties.
Unemployment and consumer price indices are useful tools to provide an indication as to
whether deflation is on the horizon. However, as each country evaluates these differently,
and many have changed their calculations and assessments over time, it is difficult to
tell the true nature of the World’s economy with precision.
What one can say with a degree of certainty, is that very few economies are booming right
now, QE is not resulting in increased consumer demand and commodity prices continue to fall.
So, are we in a state of deflation? We believe so, which is why Governments around the World
have been, and are continuing to adopt aggressive QE measures and devaluing their currency in
the hope to bring ‘inflation’ back into their economies. Time will tell whether this
works or just lead to the economic Armageddon that a number of commentators are predicting.
We hope you have found this video useful and informative. If so, please give it a thumb
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helpful if you could share this on twitter and follow us @illuminatisilv1. Disclaimer: Silver Illuminati owners come from a background
of Banking, International Wealth Management and Economics. Having now retired from these
worlds we are not qualified to give investment advice. Therefore, this and other productions
must not be deemed to be giving such advice and merely represent the personal views of