I suspect we are headed for long term deflation. The reason is the engine of demand, the individual, in all Western economies has been severely damaged (potentially irreparably since there are no mechanisms to extract them from their peril, in fact, most actions being taken are increasing the risks/damage) and individuals are now aware of it (the psychological shift I have been waiting for for years). That damage alone is so central that all other factors, from monetary policy to stimulus to what have you, is merely noise. It dictates a deflationary spiral.
This is what happens when a functional social contract goes bust (the one that we had, unwritten and unstated, that people will share in the additional wealth generated by improvements in productivity). It's clear that the new social contract, one that is based on massive oversupplies of globally fungible labor at a globally normalized price, won't generate any meaningful increases in wealth, only volatility.
This and Matt Taibbi's note about the end of transparency at the NYSE makes the future of Banking look like the revolutionary front .
ns
Posted by: radicalc | July 05, 2009 at 12:26 PM
Deflation, as in the 1920 downturn, might be the right course. Deflation is poor inflation leaving the economy to paraphrase the USMC line about pain being weakness leaving the body.
Posted by: John Minehan | July 13, 2009 at 12:03 PM