Friday, March 20, 2009

Its deflation now !

Well it is really a revealation for me to witness inflation and deflation in a span of less than 12 months. I had heard about the deflation that had hit Japan in the 1990s termed as 'the lost decade' and also of the Great Depression of the 1930s yet in one case I was geographically constrianed and in another case I was constrained by time to have a feel of it. Now both of them have come to visit India and analysing the consequences of these is really giving me a good chance to apply my knowledge in decoding the consequences. 

Inflation has caused deflation
Well the first thing first. Inflation is the reason for the current deflation level. The price rise had actually made many goods and services inaccessible to the consumers. And the credit crunch initiated by the RBI to fight inflation has actually decresed the free money available to peopel to splurge. People have become more concerned about savings than expending. Hence demand for goods and servies had gone down over time. Thus manufacturers have started decresing the price of the goods and servies to coax people in buying there products. This causes deflation in the economy.

What are the consequences?
Manufacturers start to decrese prices for they see infront of them inventory piling up. Hence they need to dispose them of to at least break even. Hence they stop production for time being. Workers lose pay and the economy slumps further. Long term deflation may end in manufacturers firing employees since labour accounts for the highest cost of production in any industry. Thus long term deflation may result in unemployement. 

Since internal demand is low, exploration to harness and supply to external demand may increase. Hence exports may proliferate. However it is yet to be seen whether increase export can counter the effect of low consumption. This also differs on the prevailing foriegn exchange.

Where to invest?
Invest in industries where the demand will never cease to decrease. For eg. telecommunications and healthcare. Good returns is assured. 


1 comment:

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