Re: Charts & Comments - Deflation Risk
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Message: Charts & Comments
Deflation Risk
Its very difficult in Canada to assess the inflation risk, especially when the policy rate is set @1%.
The reason why we have higher interest rates for the moment than the U.S. is that the inflation of the corporate bond bubble with stimulus money(taxpayer loonies) probably dwarfs the U.S. effort on a per capita basis creating a mania in that sector. That means anyone involved in the corporate bond markets is making hay on taxpayer dollars while layoffs increase and impoverishment is the only guarantee for more and more people.
And yet, the public perception that the media portrays is that the rich have an unsupportable tax burden, especially in the U.S. In Canada, we have a corporate bond bubble along with a housing bubble yet to burst. This is remarkably similar to Sweden.
The following article is available for comparison:
Riksbank's Svensson Warns Against Rate Rises Amid Housing Boom
By Johan Carlstrom - Sep 17, 2010 6:49 AM ET
A flag of the Swedish Central Bank flies from a flagpole outside the building in Stockholm on Nov. 18, 2008. Photographer: Casper Hedberg/Bloomberg
The Swedish Riksbank’s most outspoken board member on the risks of deflation said central banks shouldn’t raise rates to curb asset-price growth when inflation is low -- a path his own bank is pursuing.
“The policy rate is an ineffective instrument for influencing financial stability,” Riksbank Deputy Governor Lars E. O. Svensson said in a speech delivered in Tokyo and published on the bank’s website yesterday. “The use of the policy rate to prevent an unsustainable boom in house prices and credit growth poses major problems for the timely identification of such an unsustainable development.”
Sweden’s central bank on Sept. 2 raised its benchmark repo rate a second time in as many months in part, it said, to cool the housing market. Inflation, which has lagged behind the bank’s 2 percent target since December 2008, slipped 0.2 point to 0.9 percent last month. Policy makers in Sweden, which emerged from an eight-month bout of deflation at the end of last year, may be underestimating the risk that price declines can return, some economists say.
Will The Onset Of Deflation Crash Gold Prices?
In a word, no. Because of low interest rates and deflation in the taxpayer-supported manias in the commercial banking sector(read: M&A activity, etc, etc.), Gold will remain the best available asset in the financial sector to protect against stimuli meant to prop up the flagging economy.
Aggregate demand propping up bond prices will likely continue to flow into bullion markets, especially as banks begin to realize that no deposit insurance is going to help them. Central banks anxious to prevent any currency rise will also look to gold as a way of diversifying forex reserves.
-F6
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