The meltdown in the financial sector and the massive deleveraging taking place in various markets has pushed concerns about rising inflation to the back burner.

For Fed officials who have long been fighting "the last war," that is not such a good thing. In spite of the fact that contractionary winds have increasingly wended their way through Wall Street and Main Street, these policymakers persist in believing that a return to the inflationary conditions that prevailed in the late 1970s is the biggest economic threat we face.

In reality, recent events seem to make it clear that such fears are off the mark, at least in the short run. In "Goodbye Lehman, Hello Deflation," Reuters columnist James Saft offers up his thoughts as to why this is so.

A few short weeks, a few banking failures, a massive fall in oil and commodity prices and deflation is back on the agenda.

The events of the weekend -- the failure of Lehman Brothers, the takeover of Merrill Lynch and insurance giant AIG's reported emergency appeal for Federal Reserve aid -- have given another kick to the vicious cycle of debts going bad and asset prices falling. More markers will be called, more assets marked down, more capital destroyed, less credit offered.

As for recapitalizing the banking system, sovereign wealth funds and anyone else with eyes and ears will be waiting on the sidelines for things to look slightly less grim.

Meanwhile, back in the real economy large swathes of the developed world from Tokyo to Berlin to Los Angeles have been hurt badly by the credit crunch and are very likely already in recession.

Oil and commodities prices are falling rapidly in response. Oil at about $95 a barrel is 35 percent below its summer peaks and the benchmark commodities index .CRB is down by more than 25 percent since July.

So even with inflation still at heady levels, the chances that we slip close enough towards deflation that it becomes a concern have increased markedly in recent days and weeks.

"Deflation looms, it certainly does loom," said George Magnus, senior economic advisor at UBS and a man who has predicted both the credit bust and many of its implications.

"The cycle in which debt destruction and asset price destruction reinforce each other clearly has a very, very strong negative effect on the economy. This effect is both direct and on banks, who are supposed to try and create the credit that makes economic growth possible."

Government bonds are certainly not showing a lot of worry about inflation, though this in part reflects a flight to safety as investors seek to hold the most secure instruments. Treasury futures had their biggest gain in 20 years on Monday and two-year yields dropped 40 basis points. A look at inflation protected bonds shows that market pricing in the least amount of inflation since 2003, when the Federal Reserve was last actively fretting about deflation.

A real estate bust and systemic banking crisis in Japan helped usher in a period of recession and deflation -- falling prices -- starting in the early 1990s. As production and consumption are delayed to take advantage of future lower prices, deflation can feed upon itself and be difficult to stop.

Japan resorted to extraordinary measures to halt the price drop, slashing interest rates to near zero and force feeding liquidity into the banking system. Inflation finally revived only with the help of the global commodity price boom.

WHAT INFLATION THREAT?

It certainly looks as if the threat of inflation being exported from emerging markets has now diminished. China's central bank cut interest rates on Monday by 27 basis points and eased reserve requirements it places on banks, moves taken out of concern for deteriorating growth. Inflation in China has eased markedly in recent months; consumer prices actually contracted slightly during August.

To be clear, inflation in the United States still has a way to fall; consumer price inflation was 4.5 percent in July, the highest since 1991, and food prices may stay stubbornly high for some time to come.

So why will the demise of Lehman make price contraction more likely?

An enormous amount of leverage is being taken out of the system suddenly, prompting new sales of assets into a market already suffering indigestion. This will drive prices for many assets lower, which will in turn force other firms holding those assets on their own balance sheets to mark the value down. This creates even more need for new capital, and makes further failures of banks and insurers more likely.

Companies will find it tougher to get loans and will be more prone to throw people out of work.

The authorities have powerful weapons with which to fight deflation. They are already using one, having effectively nationalized the U.S. mortgage sector.

And there are also interest rate cuts. Then there is the currency printing press. We are of course nowhere near that, and in some ways if inflation ebbs away the Federal Reserve will have a less complicated job than if they were trying to aid the recapitalization of a banking system with one hand and fight inflation with another.

Russell Jones, global head of fixed income research at Royal Bank of Canada in London, points out that CPI in the United States tends to fall by half or two-thirds following a recession and that its successive troughs have been lower and lower.

"At the very least the inflationary risk has diminished very sharply, at the most we could be moving to a problem of the opposite kind," he said.

olja  oljekrig  oilwars  USA  FED  nyliberalism  nyliberal  neoliberal  skojare  liberaler  kollapsen av nyliberalismen  militär keynesianism  Bush  Clinton  McCain  Förenta Staterna  George W Bush  liberal kris  den osynliga handen  globalisering  internationella förhållande  amerikansk ekonomi  dollar collaps  the invisible hand  neocons  militar speditures  structural crisis trade balance  Globalisation  Globalization  globalism  Globalisering   IMF  world bank  corporate bond equities markets  disarray; the banking system  collapsing  consumer spending  tax revenues  national debt black holes  krigsförbrytare  war criminals  Democracy  liberal democracy  dictatorship  fascism  McBush  11/9  9/11  Palin terrorism  War on terrorism Russia  Georgia  Bush  Putin  south Ossetia  War nuclear  Nato  Election 2008  Obama  McCain  Iran  11 september   Accounting    Asset    Asymmetric information    Autarky    Average cost    Average propensity to consume B   Barter system    Bonds    Budget    Business economics C   Call money market    Capital    Capital Asset Pricing Model    Capital market line    Commerce    Commodity    Company    Corporate finance    Credit    Currency D   Depreciation    Diversification    Duty E   Economics E cont.   Efficient frontier F   Finance    Main Page    Gini coefficient    Microfinance    Price floor    Equity    Financial economics    National stock exchange    Budget deficit    Sample    Financial instrument    Fixed capital    Foreign exchange rate    Future value H   Hedge funds I   Industry    Inter-connected Stock Exchange L   Lending    Loan M   Macroeconomics    Money Supply    Money changer    Money market N   Normal distribution O   Option    Over-The-Counter Exchange of India P   Present value    Price    Product    Profit R   Repo rate    Return on investment    Risk    Risk management S   Secondary market    Security Market Line    Sell    Share    Share certificate    Standard deviation    Stock    Stock market T   Tariff    Taxation    Time value of money  Treasury bonds Y   Yield Z   Zero-coupon bond  Foreign policy law of the United States  imperialism  noninterference  nonintervention  regionalism  axis-of-evil  Bill of Rights  blow-back  budget  capitalism  caucus  civil rights  collateral damage  depression  disinformation  doublespeak  fascism  free speech  free enterprise  Federal Reserve System  FDIC  globalization  mpeachment  inflation  laissez-faire  MSM   Mainstream media  Neo-liberalism  Neo-conservative (Neocon)  New World Order  outlays  POTUS  propaganda  privatize  recession  revenue enhancement  republic  SCOTUS  Supreme Court of the United State  SEC  social security  subsidy  think tank  tyranny  terrorism  unilateralism  Weapons of mass destruction  antiterrorism  expansionism  geopolitics  neocolonialism  neoliberalism  ultraconservatism  Dollar Collapse  Credit Default Swap  CDS  Credit derivatives finance  Credit-default swaps on Fannie and Freddie  Credit Default Swaps and Financial WMDs trade  quote market  dealer  the bid  strategy  investors  lower the overall cost  shares   principal  mortgage  outstanding. Average life    weighted-average time   receipt   future cash flows  using as the weights the dollar amounts  principal paydowns. Average maturity The average time to maturity  securities  mutual fund  Changes in interest rates  bondholders and stockholders  Dow Jones Industrial Average  contract  financialoptions contractstraded  Corporation  financial institutions   bids  offers  tradedbonds  bond government agency   corporations created  manage a revenue-producing public enterprise. authority bond  municipal bond  margin protections  incorporated  authority bond contract  institutional investors  transact block business  purchase  sale   security  Markets   price   free interaction of prospective buyers  sellers floor  stock exchange  stocks preferred  dividend discount model   share  equity  low price-earnings ratios  high dividend yield  futures and options  contract  executed  exchanges   closing period  taxpayer  cash flow   risk  profit   asset value exceeds market value  A security  collateralized  Stock Price Riskless Indexed Notes. Zero-coupon four-year bonds repayable  security   commodity  financial_institution   syndication. This implies the entity that agreed and negotiated the project financing structure  bank  underwriter entitled to syndicate the loan or bondissue  convertible arbitrage index arbitrage  and international arbitrage  profits differences  price  extremely similar  security  currency  commodity  traded  two or more markets  Lower-rate refunding issue proceeds  invested Treasuries  first call date  interest rate Preferred Stock  equities  call provision in a municipal bondindenture   right of redemption  issuer  interest payment  general equities  order to buy or sell  quantity of stock  convertible securities. Interest  accumulated  market value  discount bond  liability  pension plan  strategy  available information forecasting techniques  better performance  buy  holdportfolio  asset  protected  potential loss  insurance  hedging Adjustable rate   convertible securities  interest rate   dividend adjusted standard market rate  outside control of the bank or savings institution  Treasury bonds  notes. Bush  McCain  Obama  Imperialists  hegemony  american century  pax americana  Palin  Finanskris  kreditkris  dollarraset  olja  oljekrig  oilwars  USA  FED  nyliberalism  nyliberal  neoliberal  skojare  liberaler  kollapsen av nyliberalismen  militär keynesianism  Bush  Clinton  McCain  Förenta Staterna  George W Bush  liberal kris  den osynliga handen  Bernake  Greenspan  kreditkrisen  finanskrisen  bankkrisen  konsument krediter  skuld  nationell skuld  räntenivå  recession  konjunktur strukturell kris  national debt handelsbalans utlandsskuld  nykeynesianism; internationell ekonomi  ekonomiskt läge  globalisering  internationella förhållande  amerikansk ekonomi  bankväsendet  finansmarknad  avreglering  pension  globala rånet  nyliberal skojeriet  neoliberalism  neocons  financial crisis  bank crisis  recesion  depresion  economics  voodoo economics  freakonomics  Federal reserve  Dollar Collapse  neokeynesianism interest rate  obligations  CDOs  state obligations  economic colapse  the dollar empire  monetary policy  national debt  state debt  credit crisis  credit card  mortgages structured investment vehicles   financial asset   credit crunch  Bank of England   financial panic   Individual Voluntary Agreement   toxic packages   sub-prime mortgages  privatization  deregulation  foreign debt  dollar asssets  dollar collaps  the invisible hand  neocons  debt mortage loans  mortage debt  consumer debt  bonds  trasure bonds inflation  consument price index  producent price index  energy price  oil price  bonds price  stocks  stock  Wall Street  financial markets  militar speditures  structural crisis trade balance  Globalisation  Globalization  globalism  Globalisering   IMF  world bank  corporate bond equities markets  disarray; the banking system  collapsing  consumer spending  tax revenues  national debt black holes  Closed Economy The Black Economy  Recession  Leverage  Treasury Bill  Asymmetric Information  The Long Tail  Demand Forecasting  Monetization  Monopoly  Monopsony  Duopoly  Oligopoly