Markets and spectre of deflation

Wednesday Nov.18, 2008 9:00 p.m.

The US Bureau of Labour Statistics announced its latest inflation data today. It showed that in the month of October the consumer price index fell by 1 % the largest   monthly decline since the index was first introduced in 1947. Core inflation that is inflation once you strip out energy and food prices fell by 0.1 % , the first decline since December 1982. Disinflation is now a reality and actual deflation where the CPI drops into negative territory is now a real future worry.
Stock markets reacted predictably with a massive selloff, the Dow Jones dropping by well over 400 points. The price of oil also dropped further falling to just over $ 53 on NYMEX.The Dow has now fallen to the 7900 range an enormous fall from its 2007 peak at 14,000 plus.(As of Friday it has fallen further to the 7590 range)The market was also driven down by short sellers, rumours of further sales by hedge funds and the testimony of the Detroit auto manufacturers who are very close to the edge of bankruptcy and were appealing for aid from the US government and the congress.

The immediate outlook continues to be gloomy although all parties seem committed to reaching a deal on saving the industry provided certain conditions including diluting the share ownership by the issuance of warrants for shares in exchange for the aid, restructuring and reform of management and union practices   are met.

It was against this background that the Conservative Harper government in Canada had their throne speech read by the Governor -General to open a new session of Parliament. Despite its fiscally conservative commitments in the past the Harper Government stated its willingness to tolerate a budget deficit to stimulate the economy including aid for manufacturing and for families and individuals. But despite this newly found wisdom there were all the usual noises about running a tight ship and cutting expenditures wherever possible. The conservatives will soon discover that this attempt to marry fiscal prudence and austerity with demand stimulation is an unworkable package that presses on the brakes and the gas petal at the same time.

The Liberal critics for their part were living in an even bigger dream world
by insisting in their statements that deficits would not be necessary if the government had behaved more fiscally conservative in the past thereby showing that a number of them still don't understand the necessity of deficit stimulus to prevent and limit the biggest economic slump since the great depression. Only the NDP and the Bloc leaders seemed to understand that the game had changed and that Canada like most countries in the developed world was on the edge of a potential abyss and large well directed stimulus spending and investment in infrastructure was now very necessary and sound public policy. The Conservatives referred in the throne speech to an infrastructure program but spelled out few details.

Ottawa sleepy Bytown full of pomp and circumstance from a bygone era is slow to catch up to the rest of the world. Events will force them to shortly.