Copyright (c) B.Achutha 1992 - 2000 Malaysia

Inflationary Crash

Basically, when there is a big difference between what consumers can afford and what they have to pay, the purchasing power or the number of consumers active in the market shrinks considerably hence marrkets crash.

Lets call this an  INFLATIONARY CRASH ..

In stock markets there are additional patterns that are observable. When markets saturate due to inssufficient supply of money to push prices higher, speculators loose interest in the markets hence a sell-off begins and markets crash. Inflation is not hte sole culprit for markets to crash. Increase in the interest rates on loans for purchase of goods can make the perceived prices of goods increase and divert the flow of money to other "more real" sectors. This shall be covered in the Distribution of Wealth section.

In stock markets there are additional patterns that are observable. When markets saturate due to insufficient supply of money to push prices higher, speculators loose interest in the markets hence a sell-off begins and markets crash. Inflation is not hte sole culprit for markets to crash. Increase in the interest rates on loans for purchase of goods can make the perceived prices of goods increase and divert the flow of money to other "more real" sectors. This shall be covered in the Distribution of Wealth section.

Stock markets bottom every few years. These bottoms are indicative of the non inflated, non speculative, settled price of stocks. Hence are indicative of the general rate of inflation of stocks. These appreciated or depreciated values over the number of years will give us the rate of inflation or deflation.

For example the KLSE Composite Index in December 1992 was 640 and it was 300 during mid 1998. Hence the fraction change is 300/640 = 0.47. This chage occured of a period of six years, hence the rate of deflation would be 0.47 to the sixth root, which is 0.88 . That is a rate of deflation of 12% per annum.

Lets take another example, if the CI had been 470 in 1988 and 640 in 1992 the fractional increase would be 640/470 = 1.36, over a period of 4 years the rate of inflation would be the fourth root of 1.36 = 1.08. That is the rate of inflation being 8% per annum.

It is interesting to note that the rate of inflation of the Composite Index is very close to the GDP growth figures. Also do not confuse the inflationary or deflationary trend lines with the upward or downward trend lines in American Bar Charts.