Employment Cost Index will remain at 1% in spite of shortage of skilled workforce - another sign of deflation – what happens to bond yields?
Special Correspondent
Jan. 31, 2007

The deflation is here, Employment cost Index will remain at 1% in spite of shortage of skilled workforce . It is another sign of deflation.

The stagflation has slowly changed into deflation. The lower energy, metal and real estate prices in conjunction with the non-accelerating Employment Cost Index are signals of lack of pricing capabilities.

The Corporations are fighting hard to contain the labor cost through alien workers and outsourcing. They know very well that they cannot raise prices due to deflation.

Once the debt driven liquidity falls apart, deflation will show its teeth. The effect will be much worse than that of Japan. The reason is that Japan has massive trade surpluses. They buy US Treasuries. During deflation driven depression they will sell US Securities. The long bond yields may rise to nine or ten percent as the economy starts contracting. It may seem strange but Bond market today is like any commodity market – an instrument to hide the surplus wealth generated from trade surplus of the Asian economies.

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