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Coming Era of Deflation

Last updated: August 13 2009
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  • Coming Era of Deflation

    People in mainstream media like (1)TV channels (2) newspapers (3)magazines (4) media company owned websites

    are all talking about hyper inflation, prices increasing like never before, green shoots et al.

    These were the same people who told viewers or readers to take low interest home loans with 15% downpayment, invest in the next stock gem. After what happened in 2008, now the same people are saying we will see hyper inflation, stimulus from governments, green shots, consumer prices rising, et al.

    Do you trust mainstream media?

    I don't.

    There will be no hyper inflation. There is be no regular controlled inflation either.

    There will be only one forced choice which is : Deflation

    In deflation, prices of everything will come down in Rupee terms. Prices of food, oil, housing, education etc will come down. But even incomes will come down (ofcourse mainly in occupations where there is excesses).

    But for those who have always saved it will be really good news because in Deflation, you can buy for Rs.25000 what all you can buy now for Rs.50000.

    So Deflation is what will happen and if you (1) don' have debts (2) and have always saved money in banks in FDs, savings account and have cash: You will be happiest person.
    Last edited July 25 2009, 11:23 PM.
  • #2

    #2

    Re : Coming Era of Deflation

    Housing would become more affordable in such a environment.

    So better to save every rupee now than to (1)spend lavishly (2) pay high interest for loans.

    Comment

    • #3

      #3

      Re : Coming Era of Deflation

      ]http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/FQUMMDJ0709_F.pdf[/url]

      The above link is from RBI's website. ( I actually noticed this link posted by realacres in pune forum, thanks to realacres)

      There are some good facts in this doc.

      Personal loans disbursements in FY2008 was Rs72,777 crores. In FY2009 it was Rs.29,266 crores. That is ~60% drop in personal loan disbursements.

      Home loans disbursements in FY2008 was Rs31,735 crores. In FY2009 it was Rs.13,028 crores. That is ~59% drop in home loan disbursements.

      RBI's website gives accurate aggregate data.

      So don't be mislead by recent stock rally or by looking at earnings results of some specific banks.

      Credit in the form of home loan disbursements or personal loan disbursements falling by such huge percentage points ~59% is the classical symptom for Deflation. So we are in deflation.

      When credit is falling it means banks are not willing to lend (though media tells us a different story) and consumers (who are already in huge debt or job loss or bad credit history) are not eligible to take loans.

      This ultimately leads to drop in prices.

      Remember easy credit since 2002-03 caused a boom in prices 2006 onwards.

      Tightening credit since FY2009 will cause a drop in prices from 2011-2012 onwards. There is lag, and looking the speed at which credit dropped in one year, caution and patience is better.

      Comment

      • #4

        #4

        Re : Coming Era of Deflation

        contra,but i still think thers easy credit. for example we see home loan ads, calls for free credit card etc. infact i get sms/email to increase my credit limit on my credit card.

        Comment

        • #5

          #5

          Re : Coming Era of Deflation

          Yes Contra, I some what agree with you. We may go to deflation. Dont ever believe this Media. Media is just waiting for some Masala news to cover.
          How ever I really dont understand some figure like how the inflation is going -Ve where price of the most thing commodities are going up.
          Thoor dal touched almost 100/-. If the bank is not giving any money for lending then how they are showing this much of profit. I was shocked to see Kotak mahindra/ICICI profit Is they are faking as Satyam ?
          Either land or AIR and FOOD. Choice is yours.

          Comment

          • #6

            #6

            Re : Coming Era of Deflation

            Originally posted by arin_12 View Post
            Yes Contra, I some what agree with you. We may go to deflation. Dont ever believe this Media. Media is just waiting for some Masala news to cover.
            How ever I really dont understand some figure like how the inflation is going -Ve where price of the most thing commodities are going up.
            Thoor dal touched almost 100/-. If the bank is not giving any money for lending then how they are showing this much of profit. I was shocked to see Kotak mahindra/ICICI profit Is they are faking as Satyam ?
            arin_12,

            i understand your concerns. many people are asking the same questions. how can there be deflation when prices of food is going up, Tur dal prices have doubled in past 1 year.

            that too as i am south indian from tamil nadu, tur dal is very important commodity to me as tur dal is the primary ingredient for making sambar.

            Now back to our discussion,

            There is a lag between cause and effect.

            From 2001 banks eased credit and offered cheap credit with generous criteria. But after 3-4 years of easy credit since 2001 (1) from Q4 2004 onwards stock market went into a bull market (2) from Q1 2006 onwards real estate went into a bull market (3) finally in Q1 2008 commodities went into a bull market.

            From FY2009 banks have started tigthtening credit. But after 3-4 years effect will be felt (1) first in stock market (2) second in real estate (3) finally in commodities.

            Comment

            • #7

              #7

              Re : Coming Era of Deflation

              Originally posted by contra View Post
              arin_12,

              i understand your concerns. many people are asking the same questions. how can there be deflation when prices of food is going up, Tur dal prices have doubled in past 1 year.

              that too as i am south indian from tamil nadu, tur dal is very important commodity to me as tur dal is the primary ingredient for making sambar.

              Now back to our discussion,

              There is a lag between cause and effect.

              From 2001 banks eased credit and offered cheap credit with generous criteria. But after 3-4 years of easy credit since 2001 (1) from Q4 2004 onwards stock market went into a bull market (2) from Q1 2006 onwards real estate went into a bull market (3) finally in Q1 2008 commodities went into a bull market.

              From FY2009 banks have started tigthtening credit. But after 3-4 years effect will be felt (1) first in stock market (2) second in real estate (3) finally in commodities.
              Deflation in India is distinct possiblity given the amount of monetisation done by RBI and gdp growth around 6%.There are much more chances of inflation firming up in the coming months as a result of increased money supply all over the world.Already there are signs of inflation with increasing price of crude oil,copper,steel,gold,silver leave alone food prices.

              Comment

              • #8

                #8

                Re : Coming Era of Deflation

                Originally posted by contra View Post
                ]http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/FQUMMDJ0709_F.pdf[/url]

                The above link is from RBI's website. ( I actually noticed this link posted by realacres in pune forum, thanks to realacres)

                There are some good facts in this doc.

                Personal loans disbursements in FY2008 was Rs72,777 crores. In FY2009 it was Rs.29,266 crores. That is ~60% drop in personal loan disbursements.

                Home loans disbursements in FY2008 was Rs31,735 crores. In FY2009 it was Rs.13,028 crores. That is ~59% drop in home loan disbursements.

                RBI's website gives accurate aggregate data.

                So don't be mislead by recent stock rally or by looking at earnings results of some specific banks.

                Credit in the form of home loan disbursements or personal loan disbursements falling by such huge percentage points ~59% is the classical symptom for Deflation. So we are in deflation.

                When credit is falling it means banks are not willing to lend (though media tells us a different story) and consumers (who are already in huge debt or job loss or bad credit history) are not eligible to take loans.

                This ultimately leads to drop in prices.

                Remember easy credit since 2002-03 caused a boom in prices 2006 onwards.

                Tightening credit since FY2009 will cause a drop in prices from 2011-2012 onwards. There is lag, and looking the speed at which credit dropped in one year, caution and patience is better.
                As per the recent results of major Indian banks NPA's are increasing steadily and would have been more if not for restructuring allowed by RBI .
                for NPA.May be we need to wait for few quarters to know the real state of NPA's.

                Comment

                • #9

                  #9

                  Re : Coming Era of Deflation

                  Friends,

                  I have a basic question and hope someone could answer it.

                  Excess liquidity in terms of credit and increasing salary caused the high interest rates and high inflation during the last 4-5 years taking price to extreme levels and purchasing power diminishing gravely.

                  For the answer whether we are entering the era of deflation or not, I would like to see what the government's monetary policy is and how it is addressing the current economic situation.

                  Government along with RBI have taken lots of efforts to curb inflation by sucking out liquidity from the market and by themselves borrowing and trying to spend on reviving the economy.

                  To generate liquidity they are also looking to disinvest their holdings in PSU's also and attract more FDI.All these are going to be spend in infrastructure and industrial growth.

                  All these efforts seems to primarily focus on enhancing supply chain and enhance competitveness of India in the global market.We are looking to produce more in anticipation to meet the international and domestic demand, which is expected to increase with infused liquidity.

                  To me, all these looks like we are preparing for a stagflation kind of scenario in India than a deflation cycle that would push our economy towards recession or great depression.

                  Is there anything I am missing here?would appreciate your replies.

                  Comment

                  • #10

                    #10

                    Re : Coming Era of Deflation

                    Stagflation was mentioned in G8 summit.
                    And it seems more likely, when all big/small companies are taking cost-cutting measures to conserve cash.
                    Now no big investment in hope of great returns.

                    Comment

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