The Labor Department today reported a dramatic drop in producer prices or prices at the wholesale level, raising risks we may be headed for a liquidity trap or downward deflationary spiral, or the possibility we may already be stuck in one (more on that later). The core PPI was still up -- barely -- but that doesn't mean as much if we're in the midst of a widespread fall of the general price level and oil and other commodity prices continue to sink. Check out the many PPI subcategories that registered declines. Here too. The report suggested more, big price declines are coming in the months ahead. The intermediary and crude PPI -- gauges for prices further up the production pipeline -- were also way down.
Global Insight's Brian Bethume mentions the "T" word and warns:
Deflationary pressures continued to intensify, with sharp declines in prices of intermediate and crude goods for the fifth consecutive month. These underlying deflationary forces will continue to put downward pressure on producer prices in 2009...monetary authorities in major industrialized countries have fallen so far behind the curve that we have seen strong evidence of a generalized global credit crunch and liquidity trap....Extracting ourselves from this trap will require an immense amount of macro policy force around the globe.
It could be time for us dilettantes to bone up on those two terms -- deflationary spiral and liquidity trap (I posted those links yesterday, so pay attention next time). I gave a general definition in the last post -- a vicious cycle of falling prices, production, profits coupled with subsequently rising real (inflation) interest rates and debt burdens -- but click the links for more detail. Nobel Prize winner and New York Times columnist Paul Krugman is considered one of the top authorites in exploring how this happened in Japan, so check out his work on this topic as well, particularly this.
Are we liquidity trapped or not? Downwardly deflation spiraling or not? What are the key leading indicators?
