Deflation Hitting New Records

Japan’s Deflation Deepens as Prices Fall Record 2.2% (Update1)

“Nothing can stop prices from falling now, given that demand has deteriorated so much,” said Masaaki Kanno, a former central bank official and now chief economist at JPMorgan Chase & Co. in Tokyo. “Consumer-price declines threaten to squeeze corporate profits because material costs are edging up” and companies are unable to pass them onto customers, he said.

That's worth reading twice.

I remain braced for deflation AND inflation as best I can. You may note that my short-term inflation mood (as seen in the upper left corner of my blog) remains neutral (roughly 0% overall inflation). It almost seems permanently stuck there.

TIPS (treasury inflation protected securities) offer some inflation protection AND some deflation protection. On the inflation side, their value tracks the CPI (consumer price index) while offering additional interest payments. On the deflation side, bonds bought today will will pay at least face value upon maturity (just like buried cash would if held for the full duration).

This isn't investment advice. It's simply an observation.

If you believe that our economy and our standard of living cannot stand the strains being imposed on it long-term such as I do, then a "Not Losing" investment strategy may just beat the historically highly leveraged "Gamble More" strategy. I will grant you that the latter strategy worked out exceptionally well from 1980 to 2000. However, the former strategy has been the clear winner since 2000 (and that includes the most recent stock market rally).

Californians face another tax hike — thanks to deflation

Earlier this year, the governor signed a budget proposal that included more than $10 billion in temporary tax hikes to help erase the state's colossal deficit.

That's probably worth reading twice too.

The government gets first dibs on any extra money the tapped out consumer may be holding. There are roughly 37 million people in California. $10 billion represents $270 per man, woman, and child. It is also worth mentioning that California's unemployment rate is currently a whopping 12.1%. A good chunk of those men, women, and children don't have jobs to pay those additional taxes.

The additional "temporary tax hikes" represent $810 to a family of three. That's a high end washing machine. No worries. China has that missing demand covered.

Even China faces meltdown

From the excesses now seen in the Chinese economy, that meltdown appears now to be impending. Companies have more liquid assets than they can usefully invest and have been gambling with them in the stock market, a phenomenon last seen in size in Japan in the late 1980s. Shipments to retailers have increased by 15% in the first half of 2009, an increase reflected in the gross domestic product statistics but not necessarily in sales to final consumers, although households without electricity or running water have reportedly been dragooned into buying washing machines.