The Specter of Deflation

I have said before that deflation seems the most likely outcome of the current path the U.S. housing market seems to be on.

It comes down to spending. Americans do a lot of it, mostly on credit. This presents a problem. Over the last few years home prices in the U.S. have skyrocketed. This led to a psychological phenomenon we called the ‘wealth effect’.
Equity extraction, (liberation of that extra home value into spend-able cash) resulted and reached historical highs in 2005 and 2006.

The U.S. housing market began to show cracks in 2005 and that signaled an impending end to the equity cash liberation and the spending it was currently fueling.

U.S. domestic spending is 70% of domestic economy. Spending is now anemic and dropping faster than home values.
This is a major choke point addressed in Michael Nystrom’s article. Credit can not expand if no one is borrowing.

Mr. Nystrom goes on to predict how this end to credit expansion will most likely play out as deflation.

After all, if no one is buying, how does one raise prices on goods?
Vern


This peice on deflation from Bull Not Bull.com
http://www.bullnotbull.com/archive/deflation-1.html

From what we know of economic history, credit expansions lead to economic booms - this much is clear. What comes next is still up for debate. Austrian economist Ludwig von Mises tells us
"The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The credit expansion boom is built on the sands of banknotes and deposits. It must collapse. There is no means of avoiding the final collapse of a boom brought about by credit expansion."