Deflation Threatens to Swallow the World

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Why the Black Hole of Deflation Is Swallowing the Entire World … Even After Central Banks Have Pumped Trillions Into the Economy

[ repost:  http://www.zerohedge.com/news/2016-01-24/why-black-hole-deflation-swallowing-entire-world-%E2%80%A6-even-after-central-banks-have-pum ]

Deflation Threatens to Swallow the World

Many high-powered people and institutions say that deflation is threatening much of the world’s economy …

China may export deflation to the rest of the world.

Japan is mired in deflation.

Economists are afraid that deflation will hit Hong Kong.

The Telegraph reported last week:

RBS has advised clients to brace for a “cataclysmic year” and a global deflationary crisis, warning that major stock markets could fall by a fifth and oil may plummet to $16 a barrel.

Deflation-Cycle
[image source: learnbonds-com]
Andrew Roberts, the bank’s research chief for European economics and rates, said that global trade and loans are contracting, a nasty cocktail for corporate balance sheets and equity earnings.

The Independent notes:

Lower oil prices could push leading economies into deflation. Just look at the latest inflation rates – calculated before oil fell below $30 a barrel. In the UK and France, inflation is running at an almost invisible 0.2 per cent per annum; Germany is at 0.3 per cent and the US at 0.5 per cent.

Almost certainly these annual rates will soon fall below zero and so, at the very least, we shall be experiencing ‘technical’ deflation. Technical deflation is a short period of gently falling prices that does no harm. The real thing works like a doomsday machine and engenders a downward spiral that is difficult to stop and brings about a 1930s style slump.

Referring to the risk of deflation, two American central bankers indicated their worries last week. James Bullard, the head of the St Louis Federal Reserve, said falling inflation expectations were “worrisome”, while Charles Evans of the Chicago Fed, said the situation was “troubling”.

Deflation will likely nail Europe:

Research Team at TDS suggests that the euro area looks set to endure five consecutive months of deflation, starting in February.

***

“The further collapse in oil prices and what is likely spillover into core prices means the ECB’s 2016 inflation tracking is likely to be almost a full percentage point below their forecast of just six weeks ago.”

(Indeed, many say that Europe is stuck in a depression.)

The U.S. might seem better, but a top analyst said last year: “Core inflation in the US would be just as low as in the Eurozone if measured on the same basis”.

The National Center for Policy Analysis reported last week:

Medical prices grew 0.1 percent, versus a decrease of 0.1 percent for all other items, in December’s Consumer Price Index.

In addition:

Trucking freight in the U.S. is in steep decline, with freight companies pointing to a “glut in inventories” and a fall in demand as the culprit.

Morgan Stanley’s freight transportation update indicates a collapse in freight demand worse than that seen during 2009.

The Baltic Dry Index, a measure of global freight rates and thus a measure of global demand for shipping of raw materials, has collapsed to even more dismal historic lows. Hucksters in the mainstream continue to push the lie that the fall in the BDI is due to an “overabundance of new ships.” However, the CEO of A.P. Moeller-Maersk, the world’s largest shipping line, put that nonsense to rest when he admitted in November that “global growth is slowing down” and “[t]rade is currently significantly weaker than it normally would be under the growth forecasts we see.”

Indeed, shipping seems to have totally collapsed, and Bloomberg notes that “hiring a 1,100-foot merchant vessel would set you back less than the price of renting a Ferrari for a day.”

And the velocity of money has crashed far worse than during the Great Depression.

And see this.
Why Didn’t the Central Banks’ Pumping Trillions Into the Economy Prevent Deflation?

But how could deflation be threatening the globe when the central banks have pumped many trillions into the world economy?

Initially, quantitative easing (QE) – instituted by most central banks worldwide – actually causes DEFLATION.

In addition, governments on both sides of the Atlantic have encouraged bank manipulation and fraud to try to paper over their problems.

Why’s this a problem?

Because fraud was one of the main causes of the Great Depression and the Great Recession, but nothing has been done to rein in fraud today. And governments have virtually made it official policy not to prosecute fraud.

Fraud is an economy-killer, and trying to prevent deflation while allowing a breakdown in the rule of law is like pumping blood into a patient without suturing his gaping wounds.

The government also chose to artificially prop up asset prices … while letting the Main Street economy tank.

Governments also pretended that massive amounts of public and private debt are healthy and sustainable … but they are not.

And the trillions in central bank money never really made into the real economy, but were handed under the table to the fatcats. For example:

The Fed threw money at “several billionaires and tens of multi-millionaires”, including billionaire businessman H. Wayne Huizenga, billionaire Michael Dell of Dell computer, billionaire hedge fund manager John Paulson, billionaire private equity honcho J. Christopher Flowers, and the wife of Morgan Stanley CEO John Mack

The Fed also bailed out wealthy corporations, including hedge funds, McDonald’s and Harley-Davidson

The Fed has been bailing out foreign banks … more than Main Street or the American people.  The foreign banks bailed out by the Fed include Gaddafi’s Libyan bank, the Arab Banking Corp. of Bahrain, and the Banks of Bavaria, Korea and Mexico

The Fed has intentionally discouraged banks from lending to Main Street, in a misguided attempt to curb inflation

By choosing the big banks over the little guy, the government has doomed BOTH.

In addition, bad government policy has created the worst inequality on record … and inequality is an economy-killer.
What Do the Economists Say?

We asked three outstanding economists why central banks pumping trillions into the world economy hasn’t worked to prevent deflation.

Professor Michael Hudson – Distinguished Research Professor of Economics at the University of Missouri, Kansas City, and economic advisor to governments worldwide – told Washington’s Blog:

The debts were left in place in 2008 instead of being written down. So the economy is now in a classic debt deflation. QE seeks to inflate asset markets, not the real economy. The choice in 2008 was whether to bail out the banks or the economy — and the former were bailed out — the political Donor Class.

Economics professor Steve Keen – the  Head Of School Of Economics, History & Politics at Kingston University in London – has previously agreed, saying:  we’ll have “a never-ending depression unless we repudiate the debt, which never should have been extended in the first place”.

Professor Keen tells Washington’s Blog:

The simple reason is that, with the possible exception of the Bank of England, none of the Central Banks (and very few of the private banks themselves) understand how money is created. To create money, you have to put money into bank deposit accounts–thus increasing bank liabilities–at the same time as you expand the assets of the banks. [Background.]

QE hasn’t done that.

In the USA, they’ve simply bought privately created bonds–normally MBSs–off the banks. This shuffles the asset side of the banks’s ledgers (by exchanging government-created money for overvalued private bonds) but doesn’t change the liability side directly–so no money is necessarily created.

In the UK, the CB buys those bonds off pension and insurance funds, which does create money–but it creates it in the deposit accounts of companies who are legally obliged to buy assets with that money (shares and other bonds) rather than goods and services produced by the real economy.

So QE as practised has been irrelevant to the real economy, leaving the deflationary forces created by the huge private debt bubble to rage on free.

And Professor Bill Black – Professor of Economics and Law at the University of Missouri,  America’s top expert on white collar fraud, and the senior S&L prosecutor who put more than 1,000 top executives in jail for fraud – tells Washington’s Blog:

Everything that criminology and economics teaches is that if financial elites are allowed to cheat with impunity they will make themselves rich at the people’s expense and corrupt democratic government.

Black previously explained that we’ve known for “hundreds of years” that failure to punish white collar criminals creates incentives for more economic crimes and further destruction of the economy in the future.

23 thoughts on “Deflation Threatens to Swallow the World

  1. I have made a number of blogs on money (eg. Your fiat money). In my view, deflation or inflation is not important. The important point is the efficiency of the economy. When you have too many parasites (excessive bank charges, litigation) the economy may collapse.
    Deflation is only a scapegoat by the governments, as they always like stealing our savings with inflation.

    Liked by 2 people

  2. The Federal Reserve and economists will state that deflation needs to occur because of the incredible amount of money borrowed into existence. The Federal Reserve has not raised the federal fund rate in almost a decade; it is their only device for taking overly inflated money out of the system. Once interest rates rise to 1980’s proportions 12-18%, money will be quickly deflated. No new loans will be created and the people with any common sense won’t borrow money. On the flip side, savings accounts will have higher interest rates as wells as CD’s, savings bonds and T-Bills. However, fiat currency value is a fallacy and inflating and deflating a currency is designed to keep the haves with and the have-nots without. When economists and bankers inflate and deflate currency, they serious calculate an appropriate level “to them” of scarcity among the masses. This is why the government bailed out the banks instead of the homeowners through TARP and quantitative easements QE. The banks convinced our politicians that if all the homeowners’ homes were paid off, that would create a hyper-inflated currency, thus devaluing our dollar because the masses would of had more spending power (no scarcity). Instead the government chose to give that money and so much more to the insolvent banks, who foreclosed on the homeowners and seized their homes which has real value compared to the fiat debt backed currency. It seems that all monetary policies and trade agreements are intentionally killing the dollar to create a new currency.

    Liked by 2 people

  3. I think a lot of this has merit. Although, in the US our inflation is reported artificially low. The actual inflation rate would include goods like food, which are no longer calculated in the consumer price index. I think the volatility of certain major markets is the biggest concern, particularly in our globalized economy. Whether that leads to deflation or hyper inflation is the question. Either way, dependence on fiat currency is dangerous, especially with others backing with gold and non-dollar based trade agreements.

    Liked by 2 people

    1. Agreed. Deflation may be an issue coming up, but a correction in cost of goods has would have to drastically change in order for deflation to be an issue. We’ll have to wait to see how it all plays out. Meanwhile, we all can gather skills 😉

      Liked by 1 person

  4. The stock market goes crazy because the cost of gasoline is going down to a reasonable price. I mean OPEC and its cronies drove up the cost of a gallon of gas. (I was there when it happened. The price of gas shot sky-high within months.) So now I and millions like me are paying less for a tank of gas. Now we can spend that money on other things that should drive up the profits of the companies who are selling us stuff. Unfortunately the money that these companies that are selling us stuff are not lowering their prices. The cost of food and clothes and lots of other stuff we average folks buy are not coming down. They are going up. Just one example: the airlines haven’t passed along their saving to the consumer. And people say I am crazy. It was not deflation that brought about the great depression. It was the simple fact that a very small percentage of the population held a very large percentage (80% or 90%) of the wealth. This is what has happened to us recently. 1% of the population controls 80% or 90% of the wealth. If that 1% suddenly gets a truckload of fear rammed up its rear end, watch out.

    Liked by 3 people

    1. We will just empower more people to grab the bull-by-the-horns and provide for themselves so that the economy has less of an effect on them. It isn’t crazy to ensure that you can provide for your family, friends and community. I do believe that the “Go Local” movement will have a profound effect on our culture. Let’s all go local with our government as well. The federal government protects corporate interests and creates regulations making it very difficult for small businesses to survive, let alone thrive. 😉 Keep it small and it can serve the people.

      Liked by 1 person

  5. Pingback: 12 Life Lessons Learned From The Great Depression | Finding Richard at WordPress.com

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