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.