Best of the Week
Most Popular
1. Will Gold Price Breakout? 3 Things to Watch… - Jordan_Roy_Byrne
2.China Invades Saudi Oil Realm: PetroDollar Kill - Jim_Willie_CB
3.Bitcoin Price Trend Forecast, Paypal FUD Fake Cryptocurrency Warning - Nadeem_Walayat
4.The Stock Market Trend is Your Friend ’til the Very End - Rambus_Chartology
5.This Isn’t Your Grandfather’s (1960s) Inflation Scare - F_F_Wiley
6.GDX Gold Mining Stocks Fundamentals - Zeal_LLC
7.US Housing Real Estate Market and Banking Pressures Are Building - Chris_Vermeulen
8.Return of Stock Market Volatility Amidst Political Chaos and Uncertain Economy - Buildadv
9.Can Bitcoin Price Rally Continue After Paypal Fake FUD Attack? - Nadeem_Walayat
10.Warning Economic Implosion on the Horizon - Chris_Vermeulen
Last 7 days
What to Expect at a Critical Stock Market Point: End of a Wave 2 Rally - 26th Apr 18
A New Lithium War Is About To Begin, Modern Gold Rush! - 26th Apr 18
Silver, silver, and silver! There’s More Than Silver, People! - 26th Apr 18
How to be Financially Prepared When Purchasing Your First Home - 26th Apr 18
Is a Stock Market Crash Imminent or Does this Stock Market Bull Still Have Legs - 25th Apr 18
Gold Price Focusing on May Cycle Bottom - 25th Apr 18
Cash “Vanishes” From Bank Accounts In Ireland - 25th Apr 18
Is the Malaysian Economy a Potemkin Village - 25th Apr 18
Land Rover Discovery Sport Rattling / Knocking Sounds From Car Pillars - 25th Apr 18
China Takes the Long View on Gold-Silver... and So Should You - 25th Apr 18
Russia Buys 300,000 Ounces Of Gold In March – Nears 2,000 Tons In Gold Reserves - 24th Apr 18
Stock Market Study Shows Why You Shouldn’t “Sell in May and Go Away” - 24th Apr 18
CRYPTOCURRENCY MASTERCLASS #CRY90 - 24th Apr 18
UK Gambling Statistics - What the Numbers Say - 24th Apr 18
Chaos Capitalists Short Countries - How Chanos Got China Wrong - 24th Apr
Artificial Intelligence Defines the Political News Narrative - 24th Apr 18
Stock Market "Oops, They Did It Again" - 24th Apr 18
Fox in the Henhouse: Why Interest Rates Are Rising - 23rd Apr 18
Stocks and Bonds, This is Not a Market - 23rd Apr 18
Happy Anniversary Silver Investors! - 23rd Apr 18
The Hottest Commodity Play In 2018 - 23rd Apr 18
Stock Market Correction Turns Consolidation - 23rd Apr 18
Silver Squeeze, Gold Fails & GDX Breadth - 23rd Apr 18
US Economy Is Cooked, the Growth Cycle has Peaked - 23rd Apr 18
Inflation, With a Shelf Life - 23rd Apr 18 - Gary_Tanashian
Stock Market Predictive Modeling Is Calling For A Continued Rally - 22nd Apr 18
SWEATCOIN - Get PAID to WALK! Incentive to Burn Fat and Lose Weight - Review - 22nd Apr 18
Sheffield Local Elections 2018 Forecast Results - 22nd Apr 18
How Long Does it take for a 10%+ Stock Market Correction to Make New Highs - 21st Apr 18
Sheffield Ruling Labour Party Could Lose 10 Council Seats at May Local Elections - 21st Apr 18
Crude Oil Price Trend Forecast - Saudi Arabia $80 ARAMCO Stock IPO Target - 21st Apr 18
Gold Price Nearing Bull Market Breakout, Stocks to Follow - 20th Apr 18
What’s Bitcoin Really Worth? - 20th Apr 18
Stock Market May "Let Go" - 20th Apr 18
Overwhelming Evidence Against Near Stock Market Grand Supercycle Top - 20th Apr 18
Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - 20th Apr 18
The Incredible Silver Trade – What You Need to Know - 20th Apr 18
Is War "Hell" for the Stock Market? - 19th Apr 18
Palladium Bullion Surges 17% In 9 Days On Russian Supply Concerns - 19th Apr 18
Breadth Study Suggests that Stock Market Bottom is Already In - 19th Apr 18
Allegory Regarding Investment Decisions Made On Basis Of Government’s Income Statement, Balance Sheet - 19th Apr 18
Gold – A Unique Repeat of the 2007 and How to Profit - 19th Apr 18
Abbeydale Park Rise Cherry Tree's in Blossom - Sheffield Street Tree Protests - 19th Apr 18
The Stock Market “Turn of the Month Effect” Exists in 11 of 11 Countries - 18th Apr 18
Winter is Coming - Coming Storms Will Bring Out the Best and Worst in Humanity - 18th Apr 18
What Does it Take to Create Living Wage Jobs? - 18th Apr 18
Gold and Silver Buy Signals - 18th Apr 18
WINTER IS COMING - The Ongoing Fourth Turning Crisis Part2 - 18th Apr 18
A Stock Market Rally on Low Volume is NOT Bearish - 17th Apr 18
Three Gold Charts, One Big Gold Stocks Opportunity - 17th Apr 18
Crude Oil Price As Bullish as it Seems? - 17th Apr 18
A Good Time to Buy Facebook? - 17th Apr 18
THE Financial Crisis Acronym of 2008 is Sounding Another Alarm - 16th Apr 18
Bombs, Missiles and War – What to Expect Next from the Stock Market - 16th Apr 18
Global Debt Bubble Hits New All Time High – One Quadrillion Reasons To Buy Gold - 16th Apr 18
Will Bitcoin Ever Recover? - 16th Apr 18
Stock Market Futures Bounce, But Stopped at Trendline - 16th Apr 18
How To Profit As Oil Prices Explode - 16th Apr 18
Junior Mining Stocks are Close to Breaking Downtrend - 16th Apr 18
Look Inside a Caravan at UK Holiday Park for Summer 2018 - Hoseasons Cayton Bay Sea Side - 16th Apr 18
Stock Market More Weakness? How Much? - 15th Apr 18
Time for the Gold Bulls to Show their Mettle - 15th Apr 18
Trading Markets Amid Sound of Wars - 15th Apr 18
Sugar Commodity Buying Levels Analysis - 14th Apr 18
The Oil Trade May Be Coming Alive - 14th Apr 18

Market Oracle FREE Newsletter

Trading Lessons

Deflation By Any Other Name Would Smell As Foul

Economics / Deflation Jun 25, 2013 - 02:04 PM GMT

By: Raul_I_Meijer

Economics

Over the past two weeks or so, we've been seeing a very clear portrait of how sick our economies are. Not that you would know it from reading the press. The term deflation pops up only very cautiously. Could that be because people don't understand what's going on? Or are they simply afraid of the word? This is the real thing, guys. And it's going to hurt.

Money (actually: credit) has shifted out of emerging markets by the trillions. So where did it go? Not into bonds, stocks or precious metals. Money shifted out of there too, and also by the trillions. Money isn't going anywhere, it's going "poof". It's vanishing and will never be seen again.


Markets may still rise at times to some extent, but only if and when more stimulus is flooded into the system, or people think it will be. Markets have simply been undead for the past 5 years - or so -, as long as central banks have issued stimulus. Take that away and all you're left with is zombies. And even if markets rise, or "normalize", a little in the future, this genie's out of the bottle and won't get back in: bond yields and interest rates will not go back to the extremely low levels of the past few years. Central banks' longer term control of either has always been no more than an illusion. And as for another illusion: you can't call something a "recovery" if you pay for it with more debt, that doesn't make nearly enough sense.

People think they can find the reason behind the vanishing trillions in money/credit in things Ben Bernanke may or may not have said, and perhaps in a hard stance by the Chinese central bank. But they are merely small parts of a bigger story. The problem is not that the Fed hints at tapering, it's that the US economy is too sick to stand up straight without constant and/or increasing credit infusions. A zombie economy propped up with zombie money. And that can't last. It never could.

Nothing Ben does, whether it's issuing stimulus or hinting at less stimulus, represents real value. And that, to many people focused on the illusion of value, may have become clear only when Abenomics appeared on stage, seemed a success at first and then showed its true colors in a substantial Nikkei crash. Abenomics is the Fed's QE on steroids; both follow the same trajectory, but it's a matter of the harder they come, the harder they fall. Japan wanted too much too fast, and ended up shattering the stimulus illusion worldwide. As I put it three weeks ago:

What If Stimulus Is Self-Defeating?

... in today's world stimulus is self-defeating because it's stimulus itself that reveals the weak spots in an economy, and more stimulus reveals more weak spots.

Note: this is not the same as saying all stimulus is bad, or must necessarily defeat itself. But it is, and it does, in today's world, where stimulus doesn't serve to jolt the real economy into recovery, but to hide existing debt and create only the illusion of recovery. What makes it worse is that even just about everybody who should have known this instead elects to cling to the illusion. Well, your wake up call has come, and if you still don't listen it'll come back louder next time.

Today's stimulus is self-defeating simply because it is unleashed in a toxic financial environment, ridden with hidden debt. [..] ... it can only function when debts are properly restructured, defaulted upon, their holders bankrupted where applicable.

And there's no chance of that: the most prolific debt holders are Wall Street banks, and their debts have been made more secret than the latest whereabouts of Jimmy Hoffa. As long as that stays the way it is, QE is nothing but a very expensive - and very temporary - stop gap. Short term profits for the financial world, long term losses for you and me.

How much money/credit has evaporated into thin air in the last few weeks? It's impossible to even estimate, and nobody's trying, maybe because of a fear of some kind, but it's certainly multiple trillions. A Reuters article over the weekend stated that "global equity markets lost $1 trillion on Thursday alone". And Thursday was by no means the worst of the lot. The biggest losses have come not in stock markets, but in the bond markets, and these losses will continue. Not only did central banks never have control here, what's crucial is that nobody believes anymore that they have. More from the article:

The CBOE Volatility Index, a gauge of anxiety on Wall Street, jumped 23% on Thursday to 20.49, the first time this year it has exceeded 20, an often-used dividing line between calm and stressed markets. It closed at 18.90 on Friday.

Signs of concern about high-flying assets like emerging markets can be seen in the options market, where more than 1.35 million contracts in the iShares MSCI Emerging Markets exchange-traded fund traded on Thursday - 82% of which were put options, generally used to protect against losses.

The Merrill Lynch MOVE Index, a measure of expected volatility in the U.S. Treasury market, rose to 103.7 on Friday; that index sat at 50 in early May, a multi-year low.

Volatility, nerves, uncertainty. Deadly for an economy based on make-believe. The problem is not what Bernanke says or does not say, the problem is the debt still hiding underneath the layers of stimulus. Peel those layers away and guess what you see? And nerves or no nerves, bonds are losing value fast, the losses for institutional investors, governments, central banks and other parties will be enormous. And that is deflation.

Over the weekend, the BIS came with a curious number on the losses, as quoted by Reuters :

The BIS said in its annual report that a rise in bond yields of 3 percentage points across the maturity spectrum would inflict losses on U.S. bond investors - excluding the Federal Reserve - of more than $1 trillion, or 8% of U.S. gross domestic product.

The potential loss of value in government debt as a share of GDP is at a record high for most advanced economies, ranging from about 15% to 35% in France, Italy, Japan and Britain.

"As foreign and domestic banks would be among those experiencing the losses, interest rate increases pose risks to the stability of the financial system if not executed with great care," the BIS said.

Curious, because a 3 percentage point rise is a large number (so large it may well have been picked to throw people off) and losses will already be very substantial at a much lower percentage too. Moreover, in the $82 trillion or so global bond markets, a $1 trillion loss looks very low in comparison, certainly when you see the BIS claim that France, Italy, Japan and Britain can see their bonds lose a third of their value. But still, again, this is deflation.

Perhaps the clearest, most down to earth and black and white illustration of deflation comes from two graphs that Ambrose Evans-Pritchard posted overnight . Remember, deflation does not equal falling prices, they're just a consequence. Deflation is the combination of the money and credit supply with the velocity of money. We know what that means for Japan, where velocity is extremely low, and PM Abe finds out that he can try to increase the money supply, but he has no control over the velocity. Here are M1 and velocity for the US:

Not a picture that leaves many questions open, it would seem. Still, it would be good to note that these developments didn't start with the latest market turmoil. If anything, they're the best illustration we can hope for of the failure of QE and other stimulus to induce an economic recovery. It's still impossible for all intents and purposes to find even one single politician or "expert" who does not talk about a return to growth and recovery, and that, in view of what we see out there, is taking on a bizarre character.

Someone should start talking about what we're going to do if and when growth does not return, when recovery is not just around the corner. We've lost precious years in which we could have cleaned up our economies but didn't. We instead borrowed from the future to put lipstick on the zombie. And now, behold: we've run headfirst into deflation, the very dreaded enemy we all wish to avoid. Are the Bernanke's and Krugmans et al of this world simply not smart enough to understand what is happening, and why? Perhaps, but I'm not so sure of that. It's too obvious. Even if Krugman seems to genuinely think a federal government can never suffer from debt deflation.

You can call it something else, and everybody has until now. But that doesn't change a thing. Trying to solve a debt problem with more debt creates bigger bubbles. In the end, there's one rule that always applies: credit bubbles lead to debt deflation, and the bigger the bubble, the more deflation there will be. It's inevitable. And it's not all bad: it cleanses the system, albeit in a painful way. But the longer you try to postpone it, the more painful it becomes.

Just because our economies can no longer function without stimulus doesn't mean they can with it.

By Raul Ilargi Meijer
Website: http://theautomaticearth.com (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)

© 2013 Copyright Raul I Meijer - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Raul Ilargi Meijer Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules