Monetary Masturbation No Match for Deflation

European bond yields went negative last week, saddling big investors who want to sit on cash with a weighty surcharge for the financial luxury of idling. While this abnormal state of affairs is not proof in itself that deflation has finally begun to overwhelm the central banks, we’ll lay odds that it’s not going to extract Europe’s economy from quicksand, let alone ignite an increasingly prayed-for inflation.  As much could be said of Japan’s latest attempt to dynamite itself from the bog of deflation.  BOJ announced it was raising its annual monetary target to $724 billion from around $580 billion. Twenty years of such shenanigans has produced no successes — unless you regard bear rallies in the Nikkei as productive. Still, because it’s more about enlarging expectations than about growing the money supply, perhaps there’s still hope for the Masters of the Universe, more than a few rubes actually seem to believe inflation is on the verge of breaking out. There’s “Jay,” for one, who took me to task at Korelin Economic Report for my hardcore-deflationist views: “Ridiculous… still wailing on about deflation, Rick??  It’ll never happen for more than brief flashes in time. Japan is answering your deflation as we speak.  And 5,000 to 10,000-contract dumps on Comex precious metals have ABSOLUTELY NOTHING to do with gold signaling deflation…. Preposterous, imo.”

Now, I’m not about to get into another pissing match with anyone misguided enought to think that serious inflation is about to return when it’s obvious the deflationary vise is tightening on the global economy.  If you want to put your money where your mouths is, try shorting long-term Treasury Bonds and we’ll compare results in a year, okay?  But considering the economic state of things in Europe and Japan, as well as the feeble delicacy of the U.S. recovery, the burden of proof has shifted entirely onto the inflationistas’ shoulders. Let them look silly trying to argue that Japan’s latest monetary blowout will succeed where a dozen earlier attempts have failed. And let the pundits and Keynesian pied pipers like Paul Krugman scream “Inflate!!” at Europe, as though it could possibly make any difference at this point. Listen up, you monetary onanists: Although printing-press money may be fungible on Wall Street, where it is mostly hot air that is being bought, sold and traded, it will not suffice to pay the very real costs of Europe’s bloated welfare state, nor to prevent the eventual bankruptcy of Greece, Portugal, Italy, Spain — and, ultimately, France.

U.S.-Style Monetization Won’t Work

There are additional reasons why American-style monetization would be an economic bust for Europe. Consider the ways in which Americans “actualize” credit shoved in their faces. In a big way, they plunk down 3% to buy homes they could not otherwise afford. And those who own homes use whatever equity they’ve accumulated to pay their kids’ college bills, remodel kitchens, install home entertainment centers, take cruises and vacation in…Europe. They dine out three nights a week, and buy gargantuan SUVs financed over five to seven years. All of this has boosted consumption’s share of GDP in the U.S. to 70%.  However, none of these conditions even remotely obtain in Europe’s culture of austerity, where children are voluntarily rationed at sub-replacement rates, and where water is conserved so diligently that utility pipes in some German towns reportedly are growing impacted due to underuse.  Perhaps such behavior is a throwback to the years when Europe received CARE Packages during the Marshall Plan? Whatever the case, don’t expect Europeans to shop-until-they-drop, as Americans are wont to do, merely because money is practically free for the taking. At best, a monetary shot-in-the-arm would simply push European shares higher.  And that would surely make Germans who know better and who are already nervous about bankrolling the drunken sailors of Europe even more nervous about where the folly of monetization might be leading.  Anyone who doesn’t know where it’s leading, and who believes stocks can only continue to move higher, deserves to reap the disaster that’s coming.

  • Michal Rost November 7, 2014, 9:20 pm

    Great article

  • Andy Gutterman November 5, 2014, 3:14 pm

    If one uses the price of gold and silver as proxies for inflation/deflation then I would say deflation is heading our way. Gold is heading for $700 and silver for $5 or less. Both are leading indicators so the actual deflation numbers may not have arrived, unless you look at oil and gas, at the pump.

    Whether or not we will see actual deflation in grocery prices is problematical, since so much of what we buy today is processed. Meat and dairy are high now, but high prices begat high supply so its only a matter of time before they will fall also.

    In the meantime the record debt is still present and it would not take much of a rise in unemployment to really put the squeeze on the consumer.

    The FED is now out of the picture, having discovered QE does noting but artificially raise asset prices way beyond the fundamentals.

    Yet the happy days can go on for a lot longer. Barring a sudden overwhelming default somewhere this situation of 2% growth could last for quite awhile. There are enough consumers in decent shape to carry the ship forward, and of course in the beginning deflation is very beneficial.

    Its what happens later that we have to worry about.

    My guess? 2018 is when the economy falls off a cliff, barring some black swan event that takes it down sooner. Momentum can keep an economy going for a long time, and the recent new highs in the stock market, especially after testing long term support going back 15 years, implies a lot more movement to the upside.

    The wealth effect could carry us forward for along time, Dent, Prechter et al notwithstanding.

    Even I’m feeling much better. 90% of my limited savings are in one stock, VTSI, and its looking to shoot for the moon, even though my online book sales are faltering. The day may arrive when my book sales don’t matter to me, as it has for a lot of other folks. And of course the software side of my business keeps growing, albeit slowly.

    Andy

    • Squire Danaher November 8, 2014, 3:34 am

      “Testing” long term support? I disagree. It’s well known that the PPT stepped in that Wednesday to assure that the LT trend remained unbroken. They step in at every key LT technical juncture to prevent technical damage that would naturally bring out more sellers. It’s engineered bullshit plain and simple. The rise from those lows, the way it has has transpired, is not even a 1 in 25 year occurrence, yet it just happened. I’m tired of reading commentary from anyone that omits references to the VISIBLE HAND…

  • tommyd November 5, 2014, 12:26 am

    I see the everyday inflation thing happening right now about which most posting here are also experiencing. But I also envision Rick’s deflationary scenario as a very real possibility, though perhaps for a much different reason.

    ‘Our ability to PAY for healthcare is decreasing…..’ on my annual motorcycle trip around the good ol’ USA this year met a lady married to a doctor. I won’t go into her explanation, but her husband was basically quitting and walking away from his practice, the details of which substantiates Rick’s statement here. And btw, have heard similar sentiments this lady expressed from other health care personnel. Without trying to be an alarmist, the sum of it all can lead down a very precarious road, IMO……..

  • Robert November 3, 2014, 4:50 am

    Deflation…? Hmmmm, Let’s do a little comparative analysis…

    All prices listed below come from http://www.infoplease.com/ipa/A0873707.html

    In 1930, 5lbs of flour was 23 cents. in 1940, it was 21 cents (10% less)

    a Dozen eggs in 1930 was 45 cents, in 1940, a dozen eggs was 33 cents (26% less)

    a pound of bacon in 1930 was 43 cents. In 1940? 27 cents (37% less)

    I could go on… Sugar, coffee, gasoline, milk, potatoes… EVERYTHING was less expensive at the end of the Great Depression than it was at the beginning.

    Fast forward:

    Eggs in 2010: $1.47 per dozen. Eggs in 2014: $2.00
    5 pounds of flour in 2010: $2.36, In 2014: $2.50
    Bacon in 2010: $4.77/lb. In 2014: $5.93/lb

    I could go on… Sugar, coffee, gasoline, milk, potatoes… EVERYTHING is MORE expensive in 2014 than it was in 2010.

    The only thing “deflating” in the global economy is the price of labor, and the cost of government debt (aka the cost of usury); but this alone does not a deflation make.

    (never mind the fact that deflation means decreasing the supply of real money- something else that has not been happening over the past 7 years)

    You see, in a true deflationary depression, the cost of living DECREASES, and it usually decreases at a rate QUICKER than the rate of decrease in the price of labor. This is why even though gainful employment was a luxury in the 30’s, and even though more people lost their homes and harbored concern about where their next meal was coming from, the TRUTH is that nobody starved to death during the 1930’s

    Today, labor prices are under significant pressure due to little more than the low rate of employment (supply and demand 101), but fear not – For the Democrats have a plan: They are going to push to legislatively raise US national wages, starting at the bottom; in a move that is sure to ring the final bell for the great Golden Arches (Shorting McDonalds might be the trade of the decade for reasons BEYOND the mere renaissance of better, cheaper burgers from other, younger burger joints)- McD can not reduce their prices any lower to induce additional sales; and a 25% increase in mandatory labor costs will crush McD’s already laser thin margins into negative territory.

    But, back to the cost of living: It is increasing – There is nothing I can see that even presents the PERCEPTION of deflation in this regard, and as these idiots in Washington begin succeeding in raising minimum wages across the US, the CPI is going to go on a rocket ship ride….

    Buckle up.

    &&&&&&&&

    I do not see “grocery bin” inflation as even a little significant, Robert — not in comparison to the mounting, deflationary burden of debt. If you take deflation’s measure from that perspective — AN INCREASE IN THE REAL BURDEN OF DEBT — you can observe a deflationary dynamic that vastly overshadows whatever it is your $2.00 carton of eggs is signaling. Mainly, it is a no-growth economy and a middle class that can no longer afford middle-class amenities without going deeply in-hock.

    Some might say that medical costs are inflating; I say not. Our ability to PAY for healthcare is decreasing, and so we’re getting less and less of it. We’ve hit a wall not only there, but in the cost of government, and the cost of education. Both can purport to rise all they want, but it is an illusion, since wages and savings to pay for them are not growing. Home values and share prices are growing, yes, but it’s not as though we can all cash out of them at once to pay our future bills. Those bills, including hundreds of trillions of dollars in unaccrued Social Security and healthcare liabilities, so hugely exceed our ability to pay for them that there can be no doubt about which — inflation or deflation — will rule our economic future. RA

  • John Jay November 3, 2014, 3:56 am

    I forgot a category for my Fiat list.
    Fiat Citizens by Executive Order!
    Printing Citizens!
    Why not!

    • BDTR November 3, 2014, 4:07 pm

      Indeed, JJ, why the hell not?

      And why then not print them already in space, as an expressed epitome of virtually wealthy humanity? Thereby sparing, as well, the said ‘phyzz’ citizen specimen both an inordinate and, however nominal, fiat expense of risk in painful, public indignity falling from near-nirvanic heights of weightless-wellness elitism, ..to terrestrial bug-splat stainedness of reality?

      Really, nothing less tolerable, less necessary, or messy than allowing real percussive failure in an even realer HD cartoon universe. Ask Disney, or Yelle. Nothing! Sir Richard’s reality-vanity, by comparison, has so much to teach both him, Hollywood, ..and us all, about physics at the very least.

      And, speaking of real unfortunate and virtually hand-held rhythmic failures, the shameful and egregious lack of creative attribution by a certain resident author in borrowed usage of suggestive title metaphors. Should be maximum ashamed.

      Bye ..y’all.

      • John Jay November 3, 2014, 6:27 pm

        BDTR,

        Fiat votes/citizens are already here.
        Some districts show that 118% of registered voters cast ballots.
        Obama to Wisconsin audience:
        “This isn’t Chicago, you can only vote once here.”
        We are now in an Political/ Economic “Heart of Darkness”

        If true Deflation rears it’s head, that means the System has failed, and what follows will be ten times worse than what we are enduring now.
        I will say it once more, we all had better hope they can keep this mess staggering down the road.
        What happens when all the Government largess stops?
        Warlords, technicals in pickup trucks, rogue military units battling for control.
        Mogadishu, Lebanon, Belfast, Weimar Germany at their most unstable and violent, all rolled into one.
        I will never forget a TV news show with footage of the insane violence in Lebanon.
        A guy with only one leg was hopping along in the ruins, firing his AK-47!

        The post WWII demographics and economy of the Eisenhower Administration are never going to return here.
        We are stuck in the present, let’s hope it doesn’t get a whole lot worse.

  • John Jay November 3, 2014, 3:48 am

    I can only speak to the economic situation here in the United States.
    Fifty years of inflation in home prices, college tuition, automobile prices, energy prices, etc., exacerbated by stagnant wages is the reality here.

    Deflation equals doom for TPTB.
    So they will print, print, print to avoid it.
    Print equals Fiat, both real and virtual.
    Fiat money.
    Fiat debt.
    Fiat Government jobs.
    Fiat EBT cards.
    Fiat stocks.
    Fiat gold and silver.
    Fiat interest rates.
    Nothing is real anymore in our economy.
    Except of course for the brutal Police State, and our bloodthirsty MIC.
    Those are very real alright!

    And I predict you will see 2% thirty year mortgages with nothing down from Fannie/Freddie/FHA/VA before you will ever see home prices fall to match wages.
    They will never let home prices deflate.
    That would mean doom for them.

    As Other Paul above has noted, Japan has been doing it for decades.
    We can and will go them one better in the future.

    I have no idea what the rest of the world will do.
    The EU may just fade away.
    Russia and China might more or less rule over Asia/Eastern Europe.
    It’s only one hundred years since WWI.
    As Mao is supposed to have said about the French Revolution, “Too soon to tell”.

  • Rick Ackerman November 3, 2014, 3:18 am

    All along, Japan has had an ace in the hole that U.S. did not, does not, and never will have — i.e., an insatiable U.S. consumer to export stuff to. (Similarly, Stockton and Detroit could not have worked their way out of bankruptcy if the rest of the U.S. were not so relatively prosperous.)

    Regarding the Fed’s ramping up monetization Japanese-style, have you seen a graph lately of GDP growth vs. debt? It is taking quite a few dollars of new borrowing — does $9 sound right? — to generate a single dollar’s worth of economic growth. Stimulus wasn’t getting much bang for the buck to begin with, as witness the weakest recovery in U.S. history. But with China and Europe starting to sink as well, the odds of a U.S. hyper-stimulus succeeding are growing increasingly remote. RA

    • mario November 4, 2014, 2:48 am

      Rick, oh man how could you forget…I feel slighted. 🙂

      It might not be that bad, while the U.S has a demographically tough decade in front of it, we do have what I won’t hesitate to call the Chinese consumption miracle. The U.S. DOES have an insatiable money laden consumer to sell to and its the largest group of such people on a scale never seen before to the tune of 500 million, with the tech revolution leading the parade. The unthinkable is happening again and again and yes, I’ll say it again, it very well may be enough to keep the lead boat afloat. Recently, led by the BABA revolution, all the major tech companies announced availability of their products to each other globally with far less restriction than ever before. Chinese consumers will be able to buy on Amazon.com, etc. and direct purchase products globally more and more. No more details here, but we are staring at yes, an unthinkable global economic revolution and in ten short years it is going to look nothing like it looks today. Caveat: American business and govt must respond accordingly. Let me emphasize I am not speculating, I am stating what is happening as clear as the blue sky. So on this count, its the biggest bad ass steamroller train ever in history barely out of the station gaining momentum as it flies down the tracks, relax folks.

      Cheers, Mario

      • Iro Noiro November 9, 2014, 9:38 pm

        Thank you.

        _Iro

    • John Jay November 7, 2014, 4:34 pm

      Re: Deflation

      Well, the width of a roll of the brand of TP I buy has shrunk by another 1/8 of an inch!
      And the boxes of the Triscuit type snacks at the store are down to 9 oz. size!
      Very amusing to watch it all unfold!

      There are now websites dedicated to this very phenomenon.
      Here is just one, google the topic for fun!

      http://consumerist.com/2012/04/24/nabisco-zaps-triscuits-with-grocery-shrink-ray/

  • Other Paul November 3, 2014, 2:11 am

    Why can’t the USGov’t do what Japan is doing times x, by not only indirectly buying stocks, but tangibles, too, to support prices of “favored” products and services?

    As Cheney said, deficits don’t matter. No one cared about the US deficit doubling during the current administration, why not quadrupling? There’s no worry about current deficits, no less the $100-200T future obligations, by 99.9% of the population. It’s hard to start a currency run with those “stats.”

    Japan has survived decades of no growth/deflation. Why can’t the USGov’t do better? Have the Fed, or better yet the USMint, create enough or more money to support prices and demand. Welfare, food stamps, free phone service/cable TV (free TVs, why not), etc., for everyone, well, except for the .1%ers. That’s only fair.

    I am only half-kidding about direct printing by the USGov’t. So what if the USGov’t and others wind up owning all stocks and bonds, ala the Japanese Pension Fund?

    Honestly I don’t know why governments or their proxies, central banks, can create money out of thin air and use it to buy real assets. But it works. Oh, you say, the BRICS have other ideas. Tell me when hazmat suit manufacturers are going to accept “Bricos” instead of dollars. Tell me when hospitals won’t accept direct government payments for most or all of their services?

    Deflation hasn’t killed off Japan, I can’t see it killing off the USA. Don’t even need paper, just digital dollars made at the Fed or the USMint. You’ve already seen a dozen sci-fi movies where it works.

    • Jason S November 3, 2014, 7:52 pm

      Government contrived inflation measures never work, not mostly don’t work, or rarely work; they never work. For the roughly 5000 we have financial recordkeeping, governments have gone the path of spending more than they can produce and worked to inflate their way out of the predicament. All have failed. Some took hundreds of years to do so, others a decade or less. Deflation and degradation wiped them all away.

      In fact, you can look at the basics of economics as the reason. Economics, boiled down to its most basic principal is the study of how to allocate resources in the face of unlimited wants with limited resources. When populations give in to the unlimited wants it works for a little while but the math (and reality) always win. The limited resources become strained/stretched (like a spring being pulled too far) and then force contraction for as long as it takes to restore those resources to sustainable levels. That contraction is deflation in its various forms.