Deflation Front

Since, I have started up with explaining carry trade , I want to continue to write on the various financial terms .The next big term concerning currencies and markets is deflation.

Deflation is the economic and financial phenomenon which represents declining prices particularly for goods and services. It can occur in countries with strengthening currencies. Here, the cost of imports would tend to decline. It can also occur in countries which are experiencing depressed economic conditions. At such times of declining output, sales of assets generate considerable downside pressure on prices. Deflation can be viewed in monetary terms when the money supply is constricting to such an extent that one unit of currency purchases increases to the amount of goods and services.

Generally Deflation occurs when the supply of goods rises faster than the supply of money which is dependable on the following four factors.

Factors which may cause Deflation:

1. The supply of money goes down.

2. The supply of other goods goes up.

3. Demand for money goes up.

4. Demand for other goods goes down.

The Third factor of Deflation supports this following example, the Euro-Dollar duos have been doing mixed fluctuations till 15th June 2007. But there were chances for Dollar-Yen and Dollar-Swiss to make marginal new highs. . The dollar-yen and the dollar-Swiss currencies were expected to go up. But the dollar gains are always risky because there is always a concern of deflations in U.S.D. And with concern to the Euro, the Dollar has faced deflation on June 15th, 2007. As of now, they are no reasons for deflation but there is a speculation that the dollar deflation may occur.

So, every Deflation has two sides to talk about. Sometimes Deflation is good and sometimes it is bad. Good Deflation is when any company produces the goods at the lowest cost. When there is Good Deflation it helps the Country’s GDP growth to remain constant and strong, profit growth to surge and unemployment to fall without inflationary consequence. On the other side, Bad Deflation occurs when the companies cannot reduce the cost structure while producing the goods. Thus Bad deflation occurs when there is relative decline in the supply of money.

http://economics.about.com

http://www.google.co.in/

http://en.wikipedia.org

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