Gold and deflation (Japanese model)
Gold and deflation. (Japanese model)
Gold as we know all is the most important precious metal to the economy of any country,
So let's talk about gold and it's befits.
Conventional wisdom regards gold as inflation hedge.
The high rate of gold during the inflationary 1970s and its spectacular collapse during the disinflation 1980s is responsible for this thinking. When regarding the behavior of gold under the disinflation. Surely gold must do even worse under an outright deflation. No longer formally attached to currency through a convertibility mechanisim, gold is viewed as simply another asset to be sold in a deflationary spiral.
After all according to the conventional wisdom-gold only performed well under deflation when the convertibility mechanism was intact.
What is deflation?
Deflation is a contraction in the supply of circulated money within an economy, so it is the opposite of inflation.
In times of deflation, the purchasing power of currency and wager are rising. this distinct from but similar to price deflation, which is an general decrease in the price level, though the two terms are often mistaken for each other and used interchangeably.
Japanese model of deflation.
During the 1980s rise of japans' equity and real estate markets created an unsustainable speculative bubble.
Gains in the equity market affected credit expansion, in part, through direct ownership of equity shares Japanese banks. Very high stock price created a powerful bank balance sheet, And created an environment which allowed bankers to increase credit with a high level of confidence.
But confidence was shacked when japans' bank decided to raise interest rates in order to reduce speculative forces in the economy.
Finally early stage of japans' deflation was only disinflation allowed formation of the deflationary spiral , once started , it is difficult to stop .
Gold and deflation (Japanese model) Reviewed by Mahmoud Ismail on 8:53 ص Rating: