Don't start calling your therapist for some more benzodiazepines. They might give you Alzheimer's later in life.
You'll get over it pretty much by sundown unless, that is, you live in the European Union.
According to a recent study by the those bond rating mavens, Fitch, any further move toward deflation in the good old EU could set up: "A classic debt deflation feedback loop could ensue," according to the authors. Among economists, that's better known as the "doom loop."
Quoting from a recent study, Fitch says low inflation coupled with lack of growth could "put pressure on national budgets and cripple the ability of governments to assist struggling banks, with credit ratings slashed all around."
The term "doom loop" was first coined in 2009 by the Bank of England. Simply stated, doom loop, according to Fitch, "means any government help for banks would raise their debt, making the countries themselves less stable."
It's hardly a pretty picture because if "banks deteriorate and finance ministries have to pick up the bill, they risk being downgraded themselves....(and) unemployment would rise to about 12% and stay there. That’s more than twice the rate Japan recorded when inflation went into reverse there.
Deflation, unlike inflation, punishes the borrower not lender. When a sovereign floats debt investors become the lender and the sovereign the borrower. The example Fitch uses is a "French government issued a 10-year bond in 2007, an investor expecting 2% inflation might want a 2.5% yield. Nobody likes losing money.
If
inflation then dropped to -1%, the investor would be getting a much
better deal on his bond, relative to other options. But the French
government would not be happy — it would be paying a much higher real
rate of interest to make that bondholder whole."
Recall during the Japanese lost decade investors there loaded up on government bonds. Weak GDP growth would usher in another problem: property, equity and other non-fixed income assets would suffer.
Beyond that there are tax revenue consequences. When prices fall sales tax revenue declines. And as Fitch points out it wouldn't take much from here to bring this scenario about.
Beyond that there are tax revenue consequences. When prices fall sales tax revenue declines. And as Fitch points out it wouldn't take much from here to bring this scenario about.
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