The Mechanics of Deflation in 2015

There are clear signs that private sector investment trends have been weakening at a time in which savings rates have been moving higher.  In theory, governments should have reacted to this situation by easing their fiscal policies so as to utilize and offset the ‘surplus savings’.  However, the authorities have in fact done the reverse; in most countries fiscal austerity remains de riguer.

This deflationary bias has in all probability been made worse by the US financial system’s inability to recycle the higher savings (i.e. the capital flows) that are being directed towards it back into the real economies.  The latter has increased the bias towards deflation within the global real economy yet further, although it is also apparent that some of these higher savings flows have hitherto been finding their way into some of the world’s asset markets with a favourable impact on prices.

We have therefore experienced a classic bad economy / good financial market environment but we are concerned that if the deflationary biases within the global economy continue to mount, even the liquidity flows noted above may not be enough to support the risk markets as corporate profits suffer in this adverse environment.  For more on this topic, please contact research@hunteconomics.com.