Deflation Definition

During his CFA speech, Grant offered a definition of deflation that I had not quite considered before. He argues that deflation is not simply falling prices. After all, prices are likely to fall in unhampered markets as productivity increases. Higher productivity means greater abundance. More supply of economic resources per monetary unit means lower prices.

Stated differently, lower prices are natural outcomes of free markets.

Instead, Grant suggests that deflation is 'too little income chasing too much debt. It is a disorder of lending and borrowing.'

He notes that in a credit crisis, inventories (whether they be hard goods or securities) cannot be financed and therefore are thrown on the market. Prices broadly fall as a consequence.

Deflation, therefore, is not the Wal-Marts (WMT) and tech hardware industries of the world getting more efficient. Rather, deflation is excess credit leaving the system.

What's particularly new and vivid to me about Grant's explanation is the notion of inventories of all sorts being thrown on the market because they cannot be financed.

When you hear market watchers gasp that 'they're selling anything that isn't nailed down,' deflation is likely at hand.

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