Do the Pundits Have it Wrong? Deflation on the Horizon.April 17th, 2012 by David Waring
Best of the Bond Market for April 17th, 2012
Tweet by @Munisrgood Research by Hoisington Investment Management
“Time to Face the Facts. We are Japan” Our Take: I’ll leave it to people smarter than myself to predict where the economy is headed but what I would appreciate is a two sided debate. Everything you read these days is about inflation with very little at least that I have seen making the other side of the argument. This piece explains the deflationary argument as well as any I have seen. At the crux of the argument is that all the debt we are taking on is going to choke off growth for years to come, an effect which is more likely to be deflationary rather than inflationary. A few highlights:
- Since 1989, Japan has provided an excellent but highly disturbing example of the debilitating effects of a prolonged period of taking on additional debt while shifting more of the debt into unproductive uses.
- At the end of the day, more debt and increased interest payments would translate into lower productivity, lower income, and higher unemployment”.
- …if the U.S. economy is unable to deleverage, then the already long cycle of an abnormal, or negative, risk premium will be extended. A negatively correlated asset, such as long-term Treasury bonds, will continue to generate positive returns, while serving to minimize the volatility in a diversified portfolio.