Competing spirals

It’s probably too soon to tell, but maybe we’re about to enter a deflationary spiral. The low and falling costs and pricing of the digitizing world had for a long time contributed to the pressure – a driver of stubbornly low inflation overall – even as certain categories in certain parts have seemed like outliers to the trend at certain times. A spiral, though, is something different.

In this, spending and investment get defensively pulled back, causing demand to fall and thus also prices, which leads businesses and consumers to wait in anticipation of further declines and to hoard cash in the meanwhile. In a falling price/demand environment, the buying power of money increases over time. You wait for the next sale, you wait for the free trial, you wait for the higher yield and in the meantime… you buy stocks?

Perhaps, and if liquidity permits (a big if) sure and why not. If cash gets piled up on the sidelines waiting for consumption, maybe there’s a case that one can reasonably make to chase the return potential. How much worse than zero can it be? The answer, in theory, is “a lot”, but if everyone at once piles in to form a counter-spiral up the other way?

WSJ Investors Get Ready for the Fed to Cap Rates

For now, perhaps, this may be what is happening already. And if the trend persists, there may be two competing spirals up ahead, both of which cash enabled… until the cash runs out, for some perhaps, because you can’t live on apps and stocks alone. But cash doesn’t run out at once for everyone. It’s only transferred, bridged, sometimes it’s assembled. There is no end to cash, not in the aggregate, and no end to imagination.