Understanding "Deflation"
Merriam Websters online resource states the definition of Deflation as "a contraction in the volume of available money or credit that results in a general decline in prices."
For many years, government policies have been introducing rules and regulations that have increased the available money and credit to allow for economic expansion. In other words, inflation, the "increase of available money and credit" by definition.
For comparison, think of the tech bubble (tech crisis) of the late 1990's. Technology was advancing at such a rapid pace, that policies allowed for an almost unlimited supply of funds and loans to continue the cycle. More money to research, produce and market meant higher prices which drove up the values of tech companies to the levels that to this day have not been reached again, over 8 years later.
Now look at the US housing bubble (housing crisis). Policies allowed for the ever increasing available money supply and credit advanced to a broad spectrum of buyers, many of which only qualified for loans due to lowered lending requirements, which led to higher and higher home prices.
As more people were able to purchase homes, the demand increased. As the available credit increased, the demand went even higher again. As the demand increased, so did the prices, inflation.
The tech Antique Markets Paris bubble started deflating in February of 2000 and has been deflating ever since.
The housing bubble started deflating in late 2005, early 2006 and is still deflating Antique Shaker Furniture almost 3 years later.
The current economic cycle is considered to be the "Financial bubble", or "Financial Crisis". The financial crisis started around 2007, almost 2 years after the housing bubble started to deflate.
Why so long after the housing bubble started to deflate? Because as housing prices started to decline, investors and speculators were saying that housing was a good buy due to the drop in prices. Loans continued to be issued, at lower credit requirements to try and prop up housing on its way down.
Investors and speculators continued buying, lending and using leverage, to attempt to reap greedy profits in a battle they could not win.
Finally, after realizing housing prices were not going back up any time soon, houses started to be sold at losses, driving prices lower. Lending institutions, hedge funds and brokerage firms who were engaged in mortgage backed portfolios started to liquidate positions at losses, further driving down prices.
Remember the definition of Deflation at the top of this article? "A contraction in the volume of available money or credit that results in a general decline in prices." Tech stocks have been declining in price for 8 years now, in other words deflation. Housing prices have been declining for about 2 years so far, deflation.
Financial stocks have been declining for just over 1 year now, deflation. Since the financial system is what is needed to help expand the available money and credit, as they have gone lower, so have the rest of the markets.
The entire US stock market has been declining since 2007 and investors and financial "experts" are trying to assess the real value of assets that are declining in value on a daily basis. A pretty tough thing to accomplish.
So, just as tech prices continue to deflate, housing prices continue to deflate, and financials continue to deflate, so will the stock markets in general. Just as prices went too high, they quite possibly will go too low below true values. Determining when that bottom occurs, is almost impossible.
Just as after housing prices started to deflate, investors kept buying and loans were still being granted to non-creditworthy people because Antique Fire Alarm was saying that housing was cheap and would go back up soon. We now are hearing that stocks are cheap and will go back up soon.
The reality is that the people saying this have a 50-50 chance of this happening. Stocks will either go up or down from here. If stocks go up, they will look brilliant. If stocks go down, they will look foolish. It's true that the stock market has turned higher in the past before the economy turns higher, but it is also true that the markets tend to over extend themselves. This happens to the upside and the downside.
Recession, deflation, depression, these are all troubling terms, I understand. But if you become aware of what is happening and what could happen, you can make adjustments in your life, and those close to you that can help minimize possible problems.
I have another great article on Deflation on my website at: The Precondition of Deflation
Larry Both runs a website to help educate beginning and intermediate stock traders and investors. I enjoy helping other people in any way that I can, so running this website is one way I can do just that. The website provides information, tips and resources that I have gathered and learned while trading stocks online since 1997. I invite you to visit my site and take some time to look around. I am always adding new information that I feel may be useful to my visitors and my Free "Market Trader Ezine" subscribers.
Larry Both Online-Stock-Trading-Guide.com
