A consistent theme of my publication has been the argument that inflation fears are overstated and that deflation is a much more likely outcome at least initially. Talk of economic recovery is continuing to add fuel to the inflation argument. The Sentinel's  Economic Law #1 states, Credit = Confidence. Credit is a precursor to inflation so without credit creation, it is difficult to have inflation. There are other causes for inflation though our inflation is a product of credit. Economic Law #2 states, deflation is a lack of confidence. The amount of credit in the economy is shrinking (lack of consumer and creditor confidence) on a macro level and that is the definition of deflation. The Sentinel's social cycle model, Saeculum, notes how society is undergoing a transformational shift from consumption towards greater conservation. The consumption of the previous Saeculum was based on credit and its associated component, debt. With a trend towards conservation, it will be difficult to have the same amount of credit floating around the system to create inflation. 

Inflation observers point out that government debt will be the catalyst for hyperinflation. While government can be a catalyst for inflation, their actions come in the face of massive asset deflation in financial assets and home values. Government spending is replacing spending not occurring at the consumer level. Given the amount of government spending occurring and pledged, it is interesting why inflation has not taken off already. The reason for this lack of inflation ignition is that government efforts are dwarfed by the much-diminished asset values causing deflationary forces. Government also will have their limits in regards to how much debt they are capable of creating. The credit markets will ultimately provide this regulation.


Earlier this year, Securian, a financial services firm, conducted a study focusing on the debt habits of a multigenerational sample of Americans. It paralleled a similar study they conducted in 2007 immediately preceding the top in the stock market. In 2007, they polled all four generations (Silent, Baby Boomers, Generation X, and Generation Y) to assess how attitudes and debt usage varied among the age groups. This analysis fits well with our Saeculum model since those groups represent the generational components of the previous Saeculum. The 2009 study observes how attitudes changed in the nearly year and a half since the first survey. The survey will confirm our hypothesis of a greater emphasis in conservation and in turn, solidify the argument, from a personal consumption level, of lessened inflation risks.


The survey excluded very low-income participants and the self-employed who might mix business and personal debt. Minimum income thresholds applied depending on the generation to which the respondent belonged. For example, Generation Y and Silent had lower income thresholds while Generation X and Baby Boomers had higher thresholds based on the assumption that the latter groups, on average, experience higher income during those years. The analysis focused on non-mortgage debt. Non-mortgage debt typically has higher interest rates and the interest expense is non-deductible. Often times, if the debt is of the credit card variety, it is harder to extinguish.

The study concluded that Americans recognize their crushing debt burdens need to diminish. The prevailing attitude is now of conservation rather than spending. Consumers are starting to take steps to reduce spending but due to other economic pressures (wages, job security, diminishing home values) they have been unable to reduce debt. Again, the important point is not the inability of Americans to reduce their non-mortgage debt burden but rather their psychology of how they view debt. Debt is much more cautiously viewed and eventually will have fewer adherents. The new psychology and the present debt burdens only add further weight to the argument of a public that is reluctant to spend. This reluctance manifests in a lesser appetite for credit and lessened demand, both of which are deflationary in nature
 

Jim Mosquera publishes The Sentinel Economic and Financial Newsletter.