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Reflation or Deflation
There is a major debate between the bulls and the bears on the U.S. economy and the U.S.
markets. This is a status report on the debate between the optimists and the pessimists about the
U.S. economy and the U.S. markets. The optimists expect reflation in the U.S. economy and the
pessimists expect a destructive deflation.
Reflation or Deflation?
Issue 6
Leverage
World Reflation
World Reflation
The stock market and debt cost of capital channels for
transmission of monetary ease were largely blocked until
the fourth quarter of 2002. The confidence crisis in the
honesty of financial reporting postponed the cyclical
improvement in the cost of risk capital. As of early
October, stock prices were at multiyear lows and the
spreads of high-risk and medium-risk bond yields above
Treasury yields were at multiyear wide levels even though
yields had dropped for the highest-grade bonds. The cost
of risk capital (both debt and equity) was at crisis levels
relative to corporate sales growth. Since then, conditions in
the financial market channels have begun to improve, as the
stock market has risen and corporate bond spreads have
begun to narrow. The Fed eased aggressively enough to
generate an uptrend in stock prices and a narrowing of
credit spreads. The case for eventual reflation rather than a
drop into full-scale deflation has improved as conditions in
these two key financial channels have begun to improve.
U.S. Reflation
U.S. Reflation
This report represents the general economic overviews of Mr. Richard Hoey, Chief Economist of Mellon Financial Corporation, and
does not constitute investment advice, nor should it be considered predictive of any future market performance.