Wednesday, April 15, 2009

Is a Depression Upon Us?

The BLS released the monthly CPI report today: 0.1% drop from February.

This brings the year over year drop to 0.4%, the largest annual decrease since 1955. The above graph goes back to the early 1970s and it is easy to pick out the recent trend. Although PPI has, from time to time, breached the zero barrier, CPI has not. Deflation is upon us.

Going back to Irving Fisher's piece, "The Debt-Deflation Theory of Great Depressions", the pairing of overindebtedness and deflation leads to depressions. I think the case for too much debt is clear:

- Federal debt to GDP ratio is at a generational high

- Homeowners now face negative equity

- Corporate borrowing spreads at multi-year highs

Fisher came to the conclusion that, if acted upon soon enough, the government can reflate the economy. I do not believe that this is the case today. He may have been writing with a different monetary/banking system frame of reference, the Fed was still brand new at the time. But as I have mentioned, debt is money in our world. The paradox will prohibit reflation from happening. We are staring into the abyss.

Link to Fisher paper:

No comments: