Deflation is the opposite of inflation!
In an inflationary situation level of prices for goods & services are rising. Therefore the purchasing power falls as inflation increases - meaning that there are more money chasing lesser goods. So Central Bank's will attempt to stop severe inflation by mopping up money through getting banks to increase their Required Statutory Reserves, increase interest rates etc. So it's an attempt to keep the excessive growth of prices to a minimum, as there will be less money circulating.
Recently the EU Central Bank (ECB) in January this year, after some deliberations, decided that it will do the noble thing of bond buying as a QE - right through to 2016 or in their well worded statement; ".. for as long as it takes to reign in deflation".
The effects are immediately felt as euro has dip against th US dollar. Same scenario as when US started their QE. The dollar kept dipping against all currency.
Some key things may manifest as the ECB QE kick-off. Mainly these questions:-
1. As bonds are bought will it effect EU nations like Germany bond yields?
2. With the 'cheap' source of monies what's gonna happen to the cost of conducting business?
3. Where will these €60 billion flow into on a monthly basis; commodities, equities, precious metals etc?
So many unanswered questions but like always a lot will be watching from the sidelines. Yeah these are the same group of people whom has being watching from the side lines since the Sub-Prime Loans Crisis.
My guess is as good as yours, the window of opportunity has begin to dilate and open.
Let's not miss this one again!
So till then and happy hunting - the season has started.
TJLim
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