The Deflationary Storm Continues To Grow

I have mentioned a number of times about the potential for a deflationary spiral. Back in March I warned that "The Fed Is Trying To Avert a Deflationary Spiral." In another essay I wrote "Inflation Will Vanish."

I was a bit early but it now seems to be happening. Deflation in asset prices (mostly housing and equities) is starting to effect the consumer. The US consumer has shut down and this is ripping through the economy causing waves throughout the world's economy.

For example on the Nightly Business Report this evening it was mentioned that some shipping rates which at one point were $150,000 are now down to $7,000.

A drop of that magnitude is shocking and very alarming. This example exemplifies deflation. Now what to do about it is the big question? Flood the system with cash makes sense until the US consumer can repair his balance sheet and pickup spending again. In the interim large government fiscal stimulus is needed to prop up the massive decline in US output / GDP. Lastly the government could offer incentives for people to buy homes. Offering cash rewards may make sense.

Eventually this beast will be put to rest but it is going to take some time for solutions to get traction and start working.