Posted by: Dirk | August 25, 2009

Deflation in the US – 2009 edition

Deflation seems to be a problem in the US today:

Many commentators have blamed falling oil prices for deflationary developments, but this time it’s not supported by the data. Oil prices this year are up, not down, from around $50 to around $75.

Inflation in the European Union is also negative, standing at -0.6%. With the prospect of more unemployment in Germany after the elections in September and fiscal stimuli fizzling out, the overall picture looks bleak. While global stock markets are moving up, it is hard to find an explanation in the real economy. The financial side also looks bleak, and a return to recession would spell disaster for many US banks.

I would tend to support the theory that we are facing a W-shaped recession, which would mean that we have just completed the first dive and are set to enter the second. In case that happens, there should be a plan B available.

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