In one of the most recent press releases from Bank of Canada Governor Stephen Poloz, deflation risks were brought up as key hurdles for the Canadian economy moving forward. Since we haven't really seen deflation risk materialize in the modern world for the better part of a century, let's explore what it is and why it matters for the average investor.
The idea that prices could go down seems like an excellent idea for most, from a practical point of view. Paying less for a loaf of bread or one’s grocery bill stretches the value of one’s dollar further. That said, when prices continually drop due to demand declines and oversupply, new business investment and risk taking by entrepreneurs, key drivers of innovation long-term, dry up.
This furthers an economic depression which only reverses course once the general public consumes mass consumption rather than saving. Central banks around the world, therefore, may attempt to continue to discourage saving via zero interest rates, or even negative interest rates,
I do believe we're headed for another global depression which may indirectly be caused by central bank interventions. From commodities to consumer staples to housing, the world is largely oversupplied.
Government action to enforce ever increasing consumption when natural market forces are tilting towards sustainability and moderation of consumption mean we are likely inflating a massive bubble which, when popped, will be far worse than what was seen in the 1930s.
Deflation is now the primary enemy of central banks so investors ought to keep an eye on the medicine said banks impose to adjust investment decisions.
Invest wisely, my friends
