Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
The Bad News About Record-Low Unemployment - 24th June 19
Stock Market New High, but…! - 24th June 19
Formula for when the Great Stock Market Rally Ends - 24th June 19
How To Time Market Tops and Bottoms - 24th June 19
5 basic tips to help mitigate the vulnerability inherent in email communications - 24th June 19
Will Google AI Kill Us? Man vs Machine Intelligence - 24th June 19
Why are Central Banks Buying Gold and Dumping Dollars? - 23rd June 19
Financial Sector Paints A Clear Picture For Stock Market Trading Profits - 23rd June 19
What You Should Look While Choosing Online Casino - 23rd June 19
INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - 22nd June 19
Here’s Why You Should Drive a Piece of Crap Car - 22nd June 19
How Do Stock Prices React to Fed Interest Rate Cuts? - 22nd June 19
Gold Bull Market Breaking Out! - 21st June 19
Post-FOMC Commentary: Delusions of Grandeur - 21st June 19
Gold Scores Gains as Draghi and Powel Grow Concerned - 21st June 19
Potential Upside Targets for Gold Stocks - 21st June 19
Gold Price Trend Forcast to End September 2019 - 21st June 19
The Gold (and Silver) Volcano Is Ready to Erupt - 21st June 19
Fed Leaves Rates Unchanged – Gold & Stocks Rally/Dollar Falls - 21st June 19
Silver Medium-Term Trend Analysis - 20th June 19
Gold Mining Stocks Waiting on This Chart - 20th June 19
A Key Gold Bull Market Signal - 20th June 19
Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - 20th June 19
Investing in APPLE (AAPL) to Profit From AI Machine Learning Stocks - 20th June 19
Small Cap Stocks May Lead A Market Rally - 20th June 19 -
Interest Rates Square Minus Zero - 20th June 19
Advice for Financing a Luxury Vehicle - 20th June 19
Stock Market Final Blow Off Top Just Hit… Next Week Comes the FIREWORKS - 20th June 19
US Dollar Rallies Off Support But Is This A Top Or Bottom? - 19th June 19
Most Income Investors Are Picking Up Nickels in Front of a Steamroller - 19th June 19
Is the Stock Market’s Volatility About to Spike? - 19th June 19
Facebook's Libra Crypto currency vs Bitcoin: Five Key Differences - 19th June 19
Fed May Trigger Wild Swing In Stock Index and Precious Metals - 19th June 19
How Long Do Land Rover Discovery Sport Brake Pads Last? - 19th June 19
Gold Golden 'Moment of Truth' Is Upon Us: $1,400-Plus or Not? - 18th June 19
Exceptional Times for Gold Warrant Special Attention - 18th June 19
The Stock Market Has Gone Nowhere and Volume is Low. What’s Next - 18th June 19
Silver Long-Term Trend Analysis - 18th June 19
IBM - Watson Deep Learning - AI Stocks Investing - Video - 18th June 19
Investors are Confident, Bullish and Buying Stocks, but… - 18th June 19
Gold and Silver Reversals – Impossible Not to Notice - 18th June 19
S&P 500 Stuck at 2,900, Still No Clear Direction - 17th June 19
Is Boris set to be the next Conservation leader? - 17th June 19
Clock’s Ticking on Your Chance to Profit from the Yield Curve Inversion - 17th June 19
Stock Market Rally Faltering? - 17th June 19
Johnson Vs Gove Tory Leadership Contest Grudge Match Betfair Betting - 17th June 19
Nasdaq Stock Index Prediction System Is Telling Us A Very Different Story - 17th June 19
King Dollar Rides Higher Creating Pressures On Foreign Economies - 17th June 19
Land Rover Discovery Sport Tailgate Not Working Problems Fix (70) - 17th June 19
Stock Market Outlook: is the S&P today just like 2007 or 2016? - 17th June 19

Market Oracle FREE Newsletter

Gold Price Trend Forecast Summer 2019

Central Banks Battling Deflation at Any Cost

Economics / Deflation Dec 05, 2014 - 10:12 AM GMT

By: John_Mauldin

Economics

Jared Dillian writes: When I was in junior high, my friend Scott had this Billy Crystal tape that we passed back and forth to each other. I still like Billy Crystal, but let’s just say he was truly hilarious when I was 13 back in 1987.

He had this routine about old codgers who used to tell you how hard life was in the old days.

“We had no air…” he’d say, in an old man voice. “No food. We ate wool coats and we were happy.”


Then he’d project into the future when he would be an old man, talking about what it was like in the Sixties, about Woodstock.

“We closed down the New York State Thruway, we were crazy… hippie… bastards.”

Battling Deflation at Any Cost

Today’s central banking world kind of feels like Woodstock to me. Lots of long hair, tie-dye, and perhaps a generous helping of body odor. Certainly hallucinogenics are involved.

Think about it. In the old days, as long as we could remember, the job of a central bank was to prevent inflation. Also, to promote economic growth and keep people in jobs, but they weren’t really serious about that. The only thing they were really serious about was preventing inflation—and sometimes they did a bad job anyway.

But around 1980, central banks got religious about inflation and started to do drastic things, like raising interest rates. It worked so well that every couple of years they would raise rates again. As a result, inflation went down over time, to the point where it became a negligible factor in economic decision-making, which was the whole point of the exercise.

Well, with price stability achieved, there wasn’t much left to do, but central bankers get paid too much money to sit around and stare at each other. And the one thing we learned over the last 20 years is that central bankers are only appreciated during a crisis, which is when they get to do stuff, whether it works or not.

So a new crisis was invented: deflation.

Now, you might ask why nobody thought of deflation as a threat before. There are several reasons, but principally, it hadn’t been around in a while until it reappeared in Japan.

The deflation in Japan was quite nasty. Everything was going in reverse. Not only was there deflation, but there were deflation expectations. People expected prices to go down, so they did. Wages went down, too, which sucks if you have a fixed mortgage or car payment.

In deflation, debt gets larger in real terms. But it’s great for savers. If you’ve got money in the bank earning 0% interest, but there’s 3% deflation, you’re actually doing pretty well.

This went on for years in Japan, and is still going on, although they are trying hard to get out of it.

I do find this sudden obsession with deflation peculiar. In the US, inflation has stayed positive except during the financial crisis. In Europe, it’s hovering around zero but is not really negative. There is plenty of inflation elsewhere in the world. And you can go into a spreadsheet program and see how 2% inflation compounds over time, and look at the loss of purchasing power, and you will realize that even low inflation can be quite sinister.

What’s Bad About Deflation?

But here’s the funny thing about Japan. Japan has probably had the biggest boom-bust cycle of any developed country in the modern era. The bubble was bigger than the dot-com bubble in the US in 2000, and the bear market continued for two whole decades. Plus, they’ve had years of this awful deflation, where it gets harder and harder to meet fixed debt service payments.

(Editor’s Note: We will be discussing Japan in some detail in a future issue of Bull’s Eye Investor. But don’t wait till then to join us. In the current issue, we have an in-depth analysis of why investing in airlines is the thing to do now, and a great pick of a hugely profitable airline with no debt and excellent earnings prospects. Click here to get it now.)

And yet, Japan remains one of the richest countries in the world, with a higher standard of living than just about anyone.

There are no shortages. They have plenty of food and fuel.

There have been no riots, no civil unrest.

Stocks were down 80%, but you didn’t hear anyone complaining.

So sure—deflation is annoying. And it’s not ideal. It’s not exactly price stability. But some things are worse.

So if you get too much deflation, you turn into Japan.

But if you get too much inflation, you turn into Weimar Germany, Zimbabwe, Argentina. People die in inflation.

I assure you that, given the choice, you would rather live in Japan than Argentina.

Asymmetrical Response

So the reason that central banks used to care more about inflation than deflation—and still should—is because high inflation has far worse consequences. Their approach to price stability should be asymmetrical.

Say there is 20% inflation. I need to buy some fertilizer for my lawn. I go to Lowe’s and get a bag of fertilizer, but I say to myself, “Wait, maybe I should get another one, because I’ll need it in a few months and the price will be higher. So maybe I should buy two.

“But wait—why don’t I buy all 20 bags of fertilizer sitting here, take them home, and when the price goes up, I’ll sell them to my neighbors?”

So I buy 20 bags of fertilizer and put them in my basement.

Then my neighbor goes to Lowe’s to buy fertilizer, but it’s gone, and the guy at Lowe’s tells him the jerk up the street bought it all. So now my neighbor is pretty angry at me.

There are a lot of angry people in inflation, and shortages of goods. One is related to the other.

Oddly, in deflation, everyone bands together.

Inflation Is Groovy, Man

Today, central bankers are trying to create inflation as fast as they can. It’s happening here in the US, in Europe, in Canada, now in China, even Australia.

They aren’t trying to create just a little inflation—they want above-trend inflation of 3%, 4%, maybe more. It’s like we have complete amnesia about how horrible it was in the Seventies. Nobody is asking the hard questions here. What if you succeed, but succeed too well? What if you can’t reverse it?

Just because we may be surrounded by deflationary forces doesn’t mean that QE isn’t a bad idea. Above all else, the central banks fear the “liquidity trap,” the point at which monetary policy no longer has any effect. They fear this more than anything.

I think one day, 20 or 30 years in the future, we will look back at this point in time and just shake our heads at what crazy hippie bastards we were, collectively. We will teach in freshman economics classes how we used to fight lower prices.

“Did you know there was a time,” the professor says,” when central banks were actually trying to create inflation?”

“Why would they do that?”

He shakes his head grimly. “Nobody knows.”


Jared Dillian

The article The 10th Man: We Were Crazy Hippie Bastards was originally published at mauldineconomics.com.
John Mauldin Archive

© 2005-2019 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