Actions taken by central banks all over the world seems to be focusing on preventing deflation and providing liquidity to the banking and financial system to allow credit to flow normally. Interest rates in Japan and the United States, two of the largest economies have virtually dropped to 0%, which indicates that cash can be borrowed at virtually no cost. Japan tried this a decade ago, with no avail, leading to deflation in Japan and causing a long drawn recession in the country. Would this step thus prove successful for US, Japan and the world? Or could it look to result in deflation in the next few years?
Year 2007/2008 would perhaps be remembered as a period of time where inflation around the world accelerated at a pace which was unprecedented in decades due to the rapid rise in oil, corn, soybean and other commodities prices. Bubbles in property sectors around the world also contributed to the virtual wealth which vanished overnight as the subprime crisis in the United States brought down financial insitutions and hedge funds. Investors portfolios world wide have been down by half or some might have even lost all their savings. Looking at such a situation, deflation might be a probable scenario, due to the large amount of paper wealth that has been wiped out in equity and property markets over the last half year or so.
Now, with multinational companies like Sony, Toyota, General Electric announcing layoffs while the 3 giant carmakers of the United States looks towards bankruptcy, increasing unemployment is more likely that possible. No jobs, drop in incomes, drop in retail expenditures and increasing reliance on pensions, unemployment benefits will squeeze the flow of credit. This situation will worsen the already dampened sentiments on the economy, which will only increase the probability of devaluation of asset values. And when asset values drop, do note that book values of every company out there is expected to go down with it. End result? Deflation. After all, when your balloon has too much air, you have to remove the excess air, before things will go back to normal once again. This by the way, is just my personal honest opinion and should not be used as a guide or advise for financial investments of any sorts, and I do look forward to any honest and straightforward comments on my viewpoints.