This week's letter: (to read the entire letter, please enter your email in the box above)
| Some Thoughts on Deflation | July 24, 2010
 | | Some Thoughts on Deflation | | The Super-Trend Puzzle | | The Elements of Deflation | | Maine, New York, Turks and Caicos, and Europe |
The debate over whether we are in for inflation
or deflation was alive and well at the Agora Symposium in Vancouver this this week.
It seems that not everyone is ready to join the deflation-first, then-inflation
camp I am currently resident in. So in this week's letter we look at some of
the causes of deflation, the elements of deflation, if you will, and see if
they are in ascendancy. For equity investors, this is an important question
because, historically, periods of deflation have not been kind to stock
markets. Let's come at this week's letter from the side, and see if we can
sneak up on some answers. Even on the road (and maybe especially on the
road, as I get more free time on airplanes) I keep up with my rather large
reading habit. This week, the theme in various publications was the lack of
available credit for small businesses, with plenty of anecdotal evidence. This
goes along with the surveys by the National Federation of Independent
Businesses, which continue to show a difficult credit market. Businesses are being forced to
scramble for needed investments, generally having to make do with cash flow and
working out of profits. This is an interesting quandary for government policy
makers, as 75% of the "rich" that will see the Bush tax cuts go away are small
businesses. There was a great graphic (that I
now cannot find) showing that all net new jobs of the past two decades have
come from small businesses and start-ups. And yet as of now, when structural
employment is over 10% (if you count those who were considered to be in the
work force just a few months ago), we want to reduce the availability of
revenues to the very people we want to be hiring new workers, and who are cash-starved
as it is. It is not just that taxes will go
from 35% to just under 40%. It is the increase in Medicare taxes coming down
the pike, too. We are taking money from private hands, where it has the
potential to increase productivity, and putting it into government hands, where
it will do nothing for growth of the economy. There is no multiplier for
government spending. And tax increases reduce potential GDP by a multiplier of
at least 1 and maybe 3, depending on which study you want to cite.
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