Let me open by disclosing that I am not a financial or economic professional in any way. However, given that I have a portfolio I need to have an understanding, even if it’s a qualified understanding, of what is going on and what is going to happen.
The big words are deflation and inflation. The recent news is operation twist from the US Fed. The ugly consequences of deflation are constricted business activity and the ugly consequences of inflation are tremendous uncertainty. Operation twist seems to have lead just ahead of a shift in perception from fear of inflation towards fear of deflation.
I gather the US Fed went with an operation twist to attract borrowers – why that would work whilst they simultaneously make lending less profitable is beyond me. I would think for every bonified new credit customer they would drop a customer deemed too risky when profits are depressed – though I suppose in the extreme short-term the flow of new customers would be greater than the ebb of risky customers.
Despite the drop for gold in the market for fear of deflation, I believe the situation has not much changed. I think currencies will continue to fall – namely the Euro, with the central banks in charge of more resiliant currencies, such a Pounds and US Dollars – as a function of demand by virtue of not-being the Euro -chasing the devalued currencies. As well, I expect the ongoing accumulation of debt by the US, specifically the high rate of accumulation, to fuel inflation (two major upcomming events – the default spending cuts taking affect, and raising the ceiling again during the next presidential term in 2012), and more government manipulation to get credit flowing (be it the fed or regulation – did I just lump the ‘independant’ fed in with the US federal government? yes I did). There is plenty of US dollars to fund inflation sitting in excess reserves.
For the side of deflation, there is the pain of structural regulation for the banks – at a time when banks need to innovate. As well, there are the capital requirements for banks looming in the future. I do not write these factors off, I merely think they are on the lighter side of the scale.
Full disclosure: I’m long on the PHGP (London Stock Exchange).