The Deflationary Sucker Punch

Hey Jessinflationists

The debate on whether we're getting inflation or deflation is very confusing, listing to various points of view, I've come to realise that it's not a blanket state of the economy to be in deflation or inflationary.

Some things may deflate, and others inflate, we're all standing on one angel of the economy based on our understanding of the market and how we invest or purchase goods and services, so we're all affected by inflation and deflation differently.

As South Africa is finally out of lockdown, I see so many people hopeful that the economy will come roaring back and everything goes back to normal. People are going out, booking holidays, having parties and going about their routines, and I feel this is all the hope phase before we get sucker punched.

Balance sheets are severely impaired

What people don't seem to realise is these lockdowns have left governments with less money, corporates with less money as well as individuals. Savings were tapped into, debt was put on hold, and this slow down of economic activity not only damaged the current balance sheet but the ability for consumers and companies to attract revenue in the future.

If fewer consumers are working, they have less to spend, meaning businesses have less income, meaning governments have fewer tax returns and everyone has to get by with less as the rate of exchange for goods and services slows.

It took the country years to ramp up to that level of activity, and you don't simply move back to all-time high activity overnight, not even over a year. Even with the uplift in activity now some businesses ran such thin margins that 1,2,5,10% slow down will see them shut their doors for good.

Insolvencies don't play out over a short period of time, they are death by 1000 cuts, and each day is one more than a certain business can take.

If you're not cash-rich on your balance sheet or have access to capital markets to borrow the money you're probably not going to survive for very long without customers coming through your door at the pace they used to flow in.

Insolvencies drive deflation

The bubble has been pricked, the air is slowly being let out, and as more air escapes the bubble gets smaller, it deflates, so how does deflation happen when a bubble is compromised?

In several ways, such as:

Job losses

This one is a bit of a no-brainer, as more companies try to remain within their new operating capital, they're going to shed jobs, people will be retrenched, and as more people lose their jobs and access to income, they spend less. Less spending leads to money becoming more valuable than things that are for sale, this causes price deflation in certain goods and services.

Debt default and repayments

As people and companies cannot service their debt and begin to file for bankruptcy, on the other end, some are looking to remove these liabilities from their balance sheet and paying down their debt. When debt is paid back or written off, it destroys capital; it means there is less money in circulation.

Less money in circulation means scarcity, this drives up the strength of a currency, and when a currencies strength increases, people tend to save it.

Savings during times of uncertainty

As things remain uncertain people are going to put off certain purchases, they first want to feel confident in their ability to earn in the future before they spend now. They are going to look for ways to earn on their capital, looking for ways to save or simply saving as a protection against uncertainty.

The more people save the less capital chasing goods and services, the more money increases in value as companies need to provide additional value or deep discounts to attract sales, this is naturally deflationary.

Cost-cutting, wage deflation & Technology Automation

As companies lean up operations as the job market becomes more competitive for the remaining jobs we'll see companies cut costs, employees forgetting about increases and bonuses and even taking pay cuts, anything to maintain steady cash flow.

Companies can and will continue to drive automation to remove staff from the payroll to increase margins and make more money from less expenditure.

Innovation drives deflation, as the better a company becomes at good or service, the more affordable it becomes as tey pass those gains in productivity on to the customer.

Makes impossible debts more impossible

As deflationary pressures remain and continue to force down prices, governments will have to step in with bigger and bigger measures. Allowing deflation to take place means debts will not be paid back and you have to pay it back in nominal terms with a stronger and stronger currency.

The pressures of sovereign debt, corporate debt and household debt means liquidity has to be pumped in to offset this deflationary spiral.

What I am wondering is how much new money is needed to counteract deflationary pressures and how far can we take it? Can we escape it for another few years? Or will we get sucker-punched into a deflationary spiral?

Have your say

What do you good people of HIVE think?

So have at it my Jessies! If you don't have something to comment, comment "I am a Jessie."

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