Comstock Partners, Inc.July 07, 2005
Cycle of Deflation Revisited
We have been strong believers in the deflation theme since these comments began in February of 2000, and even before. We are attaching the chart showing the "Cycle of Deflation" at the end of this comment, so you might want to scroll down and print out the chart as you read this.
As you can see on the chart, the cycle starts with typical economic investment which during the "bubble" of the late 1990s evolved into over-investment (or malinvestment) and excess debt. This logically winds up with excess capacity and weakness in pricing power. This has been evident since the bursting of the bubble and continues to show up today (witness the GM incentive plan which allows the public at large to get the same discounts as the GM employees). Although there are remnants of the beginning and middle of the cycle as it evolves, the place on the chart that is the most dominant is Devaluation, Competitive Devaluation and Protectionism & Tariffs. We have had a few instances of some "beggar-thy-neighbor" policies (selling products to trading partners below cost in order to keep plants open and people employed). We can go back over a year to see the dumping of TVs below cost by the Chinese to the
To understand the consequences of attempting to promote lower currencies than your trading partners we will explain by an example. If the US dollar rises relative to the Euro currency or Asian currencies our goods would become more expensive and it would drive the current trade deficit to higher and higher levels as the dollar grows stronger. In other words if our currency declines relative to the Japanese Yen the Japanese goods become more expensive to Americans. The US dollar would have been able to purchase close to 400 Yen 35 years ago, while now it can purchase just over 100 Yen. The strength of the Yen from 400 Yen to the dollar to 130 Yen to the dollar in 1989 was, in our opinion, largely responsible for the depression and deflation
Treasury Secretary Snow states in just about every speech he gives, that the
The situation in
Clearly, the relationship of competitive devaluations between our country and