Executive Summary

• What is 'deflation?'
• Why do central banks fear it so much?
• What falling prices really mean.
• Commodities are telling us that a global slowdown is already here.
• China's economic miracle is over.
• What happens next (please keep your preparations on track!)

If you have not yet read Oil And The Global Slowdown available free to all readers, please click here to read it first.

The title of this part says it all. So let's begin with an important definition. What is 'deflation'?

To hear the media and central banks tell it, it is something fearful and that must be avoided at all costs. Confusingly they then point to falling prices as evidence of the horror of which they speak.

The only problem is that you and I like falling prices. If my health insurance cost 10% less next year I’d be thrilled. But the central banks would be horrified.

The difference between these two positions lies in the definition of deflation. While the media always blindly regurgitates the central bank line that falling prices are an indication of deflation they really shouldn't.

They should ask instead what the central banks really mean by deflation and do they really fear falling prices?

To a central banker rising and falling prices are merely symptoms and not the things they actually care about at all. But people know if the price of bread is going up or down and so the bankers, for our own convenience, use the prices of things as a handy way to talk about their actual concerns which is what is driving the price of bread up or down.

Plus, talking about prices offers the added benefit of hiding the true concerns of the central bankers from the general populace who they rightly judge might not be too keen on the actual motivations of the central banks.

To begin to understand deflation as the central bankers know and fear it you have to understand one thing; the central banks are banks. They serve the banks specifically and the banking system generally.

You and your country are second to their primary clients which are other banks, who also happen to be their prime shareholders.