Deflation is on the Cards..............

The deterioration of the global economy in the wake of the ongoing U.S. housing bust and subsequent credit crunch is accelerating at a frightening pace. In the U.S., nothing captures the concussive force of the downturn better than the Consumer Price Index issued Wednesday, which showed prices falling by one per cent in October after being flat in September. Suddenly, the prospect of outright deflation in the U.S. economy — and all the risks that entails — is a clear and present danger. "With the unemployment lines growing ever-longer there is a genuine risk that the U.S. economy could fall into a corrosive deflationary phase," says Sheryl King, Senior US economist at Merrill Lynch.

At the core of the mounting global concerns about deflation is this: the global financial system is going through a vicious process of deleveraging: financial institutions are reducing debt and raising capital, either directly from governments or from private sector sources. By desperately trying to rebuild their battered balance sheets and regain some semblance of investor confidence, banks and investment banks are not doing much lending.

The result — a deflationary bust — is evident everywhere. On Thursday morning crude oil prices — as good a barometer as any for global economic activity — plunged below $50 a barrel. In July crude peaked at $147.