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Deflation – Phobia Set to Bring on More Monetary Inflation

Deflation - Phobia Set to Bring on More Monetary Inflation

Deflation – Phobia Set to Bring on More Monetary Inflation

Deflation Meme Pushed in the Media

We keep wondering who edits Bloomberg’s confusing headlines. One really needs to strain one’s imagination sometimes to decipher their meaning. So it is with this one: Draghi to Bernanke Inflation Slump Dims BOJ Target”.

Say what?

Upon reading the article it soon becomes clear that the recent slowdown in the rate of change of CPI in the US and Europe is expected to make it more difficult for the furiously pumping BoJ to hit its ‘inflation target’, which consists of lowering the yen’s purchasing power by exactly 2% per year.

“Bank of Japan Governor Haruhiko Kuroda’s bid to end 15 years of persistent deflation is endangered by the failure of counterparts in the U.S. And Europe to meet their own price goals.

Citigroup Inc.’s Inflation Surprise Index for Group of 10 economies dropped to negative 21.80 in October, the lowest since April 1998 and signaling data fell short of analyst estimates. A BOJ board member was monitoring whether domestic consumer prices could keep rising with disinflation overseas, minutes of the Oct. 3-4 policy meeting released last week show.

Japan’s 10-year yield fell to a six-month low on Nov. 8 even after the BOJ restated its view that inflation will quicken toward its 2 percent target. Data this week may show the cost of goods traded among companies fell for the first time in almost a year in October. The European Central Bank unexpectedly cut rates last week as it failed to meet price goals.

(emphasis added)

What to do when faced with this ‘failure to meet price goals’? Pump more of course.

“The ECB lowered the benchmark rate on Nov. 7 to a record 0.25 percent, with ECB President Mario Draghi saying the currency bloc may “experience a prolonged period of low inflation.” The Federal Open Market Committee, headed by Chairman Ben S. Bernanke, refrained from reducing monthly bond purchases on Sept. 18, as policy makers recognized inflation below its 2 percent target could pose risks to the economy.”

Why would Inflation below 2% pose risks to the economy?

The probability that consumers may actually end up paying less rather than more for goods and services is anyway infinitesimally small. But if it happened, why should it be considered bad? Who doesn’t want to pay less for things? Our bet is that even central bankers consider lower prices in a favorable light when they go shopping.

The reality is that this is only considered a problem because there is such a huge mountain of unsound debt in the system, much of it incurred by governments. They naturally want to ease the burden on debtors, first and foremost the burden on themselves.

The Effect of Deflation-Phobia on Policy

Meanwhile the utter absurdity of ‘Abenomics’ becomes ever more obvious:

“Wages in Japan after adjusting for inflation slid 1.4 percent in September from a year earlier, marking a 10th drop in the past 12 months, according to labor ministry statistics.”

This is the ‘getting richer by becoming poorer’ effect in all its glory. In Japan’s case, prices are now rising faster than wages due to the big decline in the exchange value of the yen over the past year. So where will the boost in consumption come from that is touted as the be-all and end-all of these Keynesian schemes?

One thing seems already certain though, central banks are unlikely to concede defeat. Instead they are going to keep upping the ante until something breaks again.  The BoJ is a case in point:

“The BOJ may be forced to implement additional stimulus as early as January,” after the ECB cut interest rates and as U.S. growth slows, Hiromichi Shirakawa, the Tokyo-based chief economist for Japan at Credit Suisse Group AG, wrote in a research note on Nov. 8.”

(emphasis added)

The BoJ is the central bank that currently is buying so many bonds with new money from thin air that the Japanese bond market is said to have ‘ceased to exist’ by some observers. What these observers mean to convey is that the central bank has become the sole driver of prices –  i.e., JGB prices no longer reflect market forces, as liquidity and trading volumes increasingly evaporate.


10 year JGB, nearest futures contract – via BarCharts

At current prices, 10 year JGBs yield less than 60 basis points. That is well below the most recently reported annual rate of change of Japan’s CPI. What will come next? What is the BoJ going to do in order to ‘implement additional stimulus‘?

Whatever it ends up doing, we have a feeling that other major central banks are going to follow suit – their deflation-phobia will induce them to pursue ever more inflationary policies, with the attendant effects on asset prices. Eventually, the genie will be well and truly out of the bottle, and we will probably see an even larger version of the boom-bust iterations that have played out several times in the recent past. Since inflationary policies are unlikely to be abandoned voluntarily, a conflagration of the underlying currency systems awaits at the end of the road (whenever it will be reached).


Courtesy: Acting-man

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