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QE and ZIRP Are Deflationary...
The Fed and other Central Banks have shifted away from focusing on growth to focusing on inflation.
The explanation here is as follows: they’ve failed to create growth, debt deflation is their worst nightmare, so the best they can hope for is inflation to make debt servicing easier.
However, by leaving interest rates at zero, the Fed has unleashed its worst fear: deflation… particularly deflation in consumer spending and consumer psychology… the lifeblood of the US economy.
It sounds totally counter-intuitive, but let’s consider the following.
If you are retired or close to retired, your primary concern is having enough money to enjoy retirement and possibly leave a little something for your children/grandkids.
Since you will no longer be working (hopefully), your money will come from interest income on the pool of capital you have accumulated by now.
If you’d saved $1 million, and interest rates are 4%, you’ve got interest income of $40,000 per year. That’s not bad at all if you’ve paid off your house and accomplished the other items associated with “the American Dream.”
However, if you’ve saved $1 million and interest rates are 0.25% as they are today, your interest income is $2,500 per year.
This is HIGHLY deflationary because you are making next to nothing, which means that in order to survive you have to spend your savings.
This reduces your total capital, as well as the potential for greater future interest income (the amount of capital you have to produce interest income down the road is shrinking).
If this scenario, you’re not going to go out and start living high on the hog. You are going to start being more frugal and careful with your expenses because money is not coming in at the pace you’d hoped.
Consequently, your spending goes down and you enter a kind of “capital hibernation.” You’re not going to start plunging your money into risky investments because you are more averse to loss of capital than potential gains.
Again, your primary focus is on monthly payouts on interest income, NOT capital gains. How many 60+ year old day traders are there really? How many individuals dream of working their whole lives just so they can retire and start gambling in the stock market?
The answer is next to none. The Fed, by cutting rates lower and engaging in QE, has crippled the potential returns for the Baby Boomer generation. This has killed off consumer spending (baby boomers are the single largest pool of capital in the US) and hampered anything resembling an economic recovery.
And all it’s done is result in active investors taking on more and more leverage to increase returns. Today the financial system is even more leveraged than it was in 2007.
And we all know what came after that.
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QE and NIRP are not deflationary. they are adding currency into the economy. interest is the problem when you create money through banks they charge interest, they create the principle but the interest has to come out of the principle. its this reason that the economy always out of balance. the idea that banks will spend the interest payments back into the economy is the biggest load of shit ive ever heard. i've yet to see any law requiring banks to do this. ive also yet to see a non-profit bank. the government creates currency by issuing bonds again normally with interest attached. this is a bit different as the government taxes the citizens to pay the holders of bonds the interest. so what you have their is the majority paying interest to a small few who hold bonds. see the connection ? the receivers of interest are the ones stealing from the money supply.. deflation is exactly the process of the money supply shrinking from the interest payments eating the principle
QE and NIRP have saved us and we learned nothing. INTEREST = USURY
Legalize ‘Death with Dignity’.
If two family members will sign-off, Sayonara!
I agree with Phoenix's thoughts but think our words do get in the way.
In a free market, inflation should result in higher interest rates. But the Fed Market is not a free market, because the Fed can create trillions of dollars out of thin air and at the same time mandate next-to-zero interest rates. This prevents retirees (loaners) with CDs and so forth from charging higher interest rates to people that borrow their money. Retirees must therefore seek out other markets which are free. Three markets which are still free are the stock market (because 2/3 of the money in the stock market is foreign money) and, similarly, the corporate bond market and the real estate market. I believe that is why these three markets have soared even as the income from fixed-income investments of retirees has declined.
Words. It is too bad that we have only the words "inflation" and "deflation", and are therefore forced to choose between them. It's like the term "middle class". In European countries, there is a real, proper Upper Class, and it is comprised of titled Kings, Queens, and Princes, Earls, Dukes, Marquis and Marquesas, and Lords and Ladies. In the USA, no such titles exist, and therefore no proper Upper Class exists, and therefore Bill Gates, Rockefeller, Waren Buffett, the Koch Brothers, and other billionaires, though richer than many proper Upper Class persons, are all members of the "middle class". (Unless they find a way to buy a title from someone who has one.) And... therefore anyone in politics or economics can, unfortunately, truthfully say that things which help only billionaires "help the middle class".
Amazing how Phoenix has gone from a hyperinflationary view to one of deflationary crash. Either way, he sells the end of the world which we already know is coming.
Do you all realize that this was the same discussion in Germany in 1922 and Zimbabwe in the 2000's? The endgame is complete losses of fiat purchasing power but before that happens, the global "one currency" reset will be enacted and what will ANCHOR that new currency will be gold.
Stocks are moving to record highs because the big money views cash as trash, just as occurred in the Weimer and Zimbabwe and more recently Venezuela. "Stocks" are not "cash"; and savers have been DIRECTED into stocks as a "debasement hedge" rather than traditional hedges such as gold, silver, and income properties.
NEVER underestimate the replacement power of equities within an inflationary spiral.
Which is exactly the policy money managers of yore (circa 2005) used to advise. But, many are now trying to push retirees as they get older and live longer into high yield bonds, stocks and other risky investments to generate growth and income. It’s all hypocritical bullshit of course, and completely against the clients best interests. But, these financial gurus have to sell something to make a living that is consistent with the Feds abusive policies towards savers, and the more desperate savers become the more likely they are to buy into the bullshit.
I’ve resigned myself to a long term budget that assumes my investments will decline in purchasing power by 1-2% after inflation and taxes. With that assumption, I can invest within the boundaries of my risk tolerance. It’s a sad state of affairs, but, I really don’t see a better solution for the vast majority of people over the age of fifty who are counting on their savings to fund their retirement. You can imagine the blank stares I get when I tell my friends that.
Ya know what else is crippling consumer spending?
The $1 TRILLION in taxes sucked out of the economy in the first quarter of the gov'ts fiscal year! In just ONE quarter!
I believe it's not the rate policies that bring on deflation. Central banks are very reactive. They implement these asinine policies in reaction to the deflation. Deflation or disinflation already reached the shores of developed economies. The very purpose of these policies is to encourage spending via borrowing (i.e. debt) but that's not working.
Why? Because consumers are already levered to their eyeballs in debt. Governments are no different. Like Hugh Hendry said about the low GDP growth, "it's like I ate your sandwhich yesterday." Today's growth was consumed 10 years ago.
What ‘Escape Velocity’? December Business Sales And Inventories Repudiate The Money Printers’ Myth http://davidstockmanscontracorner.com/what-escape-velocity-december-business-sales-and-inventories-repudiate-the-money-printers-myth/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+Mid+Day+Friday
Lower Fed funds will bring savings rates lower, but the lower inflation is actually a positive in terms of purchasing power. The rapid increase of those 55 and up in the workforce have been going on for decades.
NIRP sucks, but what will suck more is NIRP with 4-5% inflation. Even if the Fed rose rates 1, 2, or 3% (bringing savings up with it), purchasing power would be erroded.
Problem is the Fed and risk assets are so intwined, it's too late to normalize rates.
Also, I have a hard time linking NIRP as deflationary because savigns are being spent. What's deflationary is the lack of demand, there is no spending going on. The lack of spending is driving prices down.
It's a good point.
But remember, it's an item of faith in the government that those with savings are hording money, not spending like they should, so it's for the good of the people to steal it from them and pay it out to illegal aliens and stuff, use it to run Air Force One to carry Obola to another golf course, etc. Not to mention sending 4,000 barefoot troops to Kuwait to stand around in the hot sand.
http://finance.yahoo.com/news/european-easing-sends-gold-soaring-1806409...
This is bullshit. Nobody is being frugal because of low interest rates. Most retirees don't have that much cash in the bank to make any meaningful difference in their spending. It's the skyrocketing inflation we have had the last 6 years.
I am 55 an saving every penny I can because future looks doubtful.
Got rid of my car.
Walked away from home.
Am advising my son, an A student, that college (more than 2 year) is not worth the cost and teaching to avoid debt.
Will always vote - never red or blue ever under any circumstances.
Plan to emmigrate when shtf.
I feel pretty good all things considered.
I'm absolutely hit by this.
Fed is stealing fifty grand a year from me easy, compared to what I expected.
Remember, those low rates extend out to return on any kind of investments, especially stock market dividends, growth, and valuations.
No bullshit at all. I know retirees who have say 1 million cash, NO debt, own a house and 2 cars and now calculating how long they can last living while spending their savings at their current lifestyle. They are 60 years old. When they have the luck to live to see age 90, they are BROKE and that's without any medical expenses. And WITHOUT any hyperinflationary accidents happening - then they are busted.
Right on. Those of us who are retired aren't being frugal because of low interest rates. We are scrimping and saving to try to make whats left of our savings last longer than we will.
The cost of everything is going up and the value of our savings and assets are being destroyed.
Taxes are definitely going higher.
"... A reference point might be something like the income level to which one has grown accustomed and therefore the amount that one spends in day to day life, the expenditure associated with a lifestyle that is more or less adjusted to the income. ... a fall in income is not welcome not only because one has less but because the organisation, the management of life’s details, must be adjusted so as to create an adjusted expenditure pattern and this requires thought and attention. One spends less money but spends more time thinking about what one spends money on. This is unwelcome extra mental effort. For a significant change one must adjust a whole pattern of hourly, daily and weekly purchases with possible consequences for habitat, relationships, routine transport arrangements etc. ... Most individuals whose lives are in balance will be living in a set of circumstances where their income is more or less appropriate to match their habitat needs, which must match their relationships (accommodation suitable to living with their partner and dependents). These must match their job with its income – and with its time and travel commitments. These must match their job skills and domestic commitments. There is mental and emotional work involved in balancing one’s life and it is scary if it seems like unravelling. The biggest fear is of a generalised life crisis in which all of these things unravel together. For example because they lose their job a person might find that they cannot service their debts (mortgage) or pay the rent and thus lose their accommodation. During the stress and practical chaos of this their relationships might break apart. During the last crash many ended up homeless living in tents or cars on their own. Many people also lost their minds – i.e. became totally disorientated, extremely emotional and unable to function."
The whole idea was to drain off the savings of the boomers and give the money to the .01% bankster criminals. If it ruins everyone else in the country, who cares? That's their funeral.
All you need now to put the scam over is a few trolls to demand you throw Granny under the bus.
Disagree.
QE and ZIRP were unleashed to generate an inflationary environment.
Deflation already existed at a level but was being masked by lending and allowing increasing debt *the easy money times*.
The rate of deflation has now grown exceeeding the inflation created by the leveraged lending.
More QE will be needed to make up the shortfall in the lending of money?
So what came first QE/ZIRP or deflation?
Deflation occurs when you reach a level of production where you do not have enough demand to keep the price elevated.
What you do if you are a central banker seeing this deflation you now focus on using QE/ZIRP as in Mervyn King (BOE) relaxed the rules on the level of leverage on loans hence the UK have not had to use QE again YET!
Goverment also pumping liquidity into the economic system (increasing debt if you do not get out more than you put in) through capital projects trying to outrace the deflation.
The system through advancement is deflationary those more entitled lose the most if deflation kicks in and why it will not be allowed.
This is king canute trying to hold back the tide of deflation by building walls of inflation that just increased the deflationary pressure.
Expanding the monetary base is the definition of inflation and will lead to rising prices at some point. It's already doing it to stocks and housing.
http://www.shadowstats.com/charts/monetary-base-money-supply
The debt is being inflated not the value of the house.
Darn right the speculators want oil back to 140 a barrel...
I believe the analysis misses the big point - QE does not work because it is funding degenerate gamblers to speculate, and as with all degenerate gamblers, they never come out of the casino laughing. Each round of QE is yet another set of bad IOUs.
That's why you don't put your money into a savings account. You BTFD, and BTFATH.
The Fed has pumped trillions of dollars into the economy which has had almost no real effect of any kind other than to feed the coffers of the banking elite. Deflation has negated any impact of the Fed’s monetary inflation .The deflationary environment we are experiencing today was caused by many years of inflation which created the conditions and set the stage for the crisis that awaits us. It is important to understand inflation because without an understanding of inflation and how it has affected our economy for decades, it is not possible to truly understand deflation.
http://www.globaldeflationnews.com/inflation-vs-deflation-part-1which-on...
If we're paying down our national debt it would stimulate sustained growth. Keeping interest rates low will not accomplish this growth. One should be cautious at these higher price levels as deflation a very probable factor in limiting further higher stock prices. My advice to people is to be out of market.
national debt
Just keep growing....
The post is spot on in terms of the way the Fed's actions have not only obliterated retirement accounts, but any form of fixed income account.
I have a fixed income annuity that was supposed to last me for 20 years at least, but due to the actions of these jerk wads it's only going to last 5.
I'm glad I was able to make use of it to pay for grad school while I had the chance, and now have the ability to turn around and park the funds elsewhere. The problem now, I don't see anything safe enough to park the funds in, so I'm just putting it in savings accounts.
Bad news dude, if that's a serious amount of money go talk to someone, you've probably missed some windows of opportunity and it's not risk free but still the most conservative move is investing that in something like the "dividend aristocrats" in the stock market. That's what Bernanke said we must do, and he wasn't kidding.
Then slightly riskier (or not, depending on who you ask) is putting at least some into gold and silver. Not a lot, if you ask me, but some is a good insurance policy.
And if course if it's a LOT of money, also buy yourself a refuge in New Zealand and have a jet and a yacht standing by in case they're needed.
One of the few things on monetary policy and business cycles that Milton Friedman was correct about is that "inflation is everywhere and always a monetary phenomenon." QE and ZIRP, by definition, are inflation. Inflation is the expansion of the currency supply, an effect of which is rising prices in the specific industries where the new currency ends up. This can cause a general rise in prices or substantial price increases in particular industries relative to smaller price increases or even decreasing prices in other industries to greater degrees than the market otherwise would have set them.
Debt deflation only occurs when credit expansion is voluntarily abandoned or slowed enough for accurate market prices to partially or fully reassert themselves (i.e. reflecting the true supplies of resources, particularly of savings to justify the artificially low interest rates) and the malinvestments are revealed as unsound. Prices then have to fall to reflect written off debts and decreased supply of currency and credit if the economy is to correct without prolonged depression.
Consumer prices (the most visible) have not increase as much (assuming the CPI is designed well and accurate, which is highly questionable at best) because the currency has mostly ended up at banks, capital goods in energy, and at the Fed earning 0.25% interest. The inflation is in the equity and debt markets for now. That will occur when the capital structure becomes unsound even by current "standards" due to capital consumption.
The end of QE in the US represents a voluntary slow down of credit expansion in terms of dollars, which will be deflationary. But that is not QE and ZIRP being deflationary. It's the subsequent lack of QE (i.e. the opposite of QE) that is. If and when they ramp up and escalate the magnitude of QE, eventually, runaway price inflation will result in the "final and total catastrophe of the currency system involved" that Mises warned about.
TL;DR: you're putting the cart before the horse.
Inflation benefits creditors. Deflation benefits debtors. With that in mind, the bankster own the debt so which scenario will they push?
In any event, the markets are all manipulated beyond belief. Primarily to steer capital to insider sinkholes while breaking non-compliant govts and you and me. Toast!
Edit - got it bass-ackwards on the benifit situation so with a beer in my hand, I changed it
Good stuff. I agree completely.
Inflation is a function of money supply AND velocity... so even though they have dramatically increased M, V has decreased, and we are not seeing inflation.
Obviously, M and/or V could dramatically change and alter the equation.
(meant as a reply to creepy cracker)
The variables are not independent. V is a function of M, amount of debt, and the rate of interest. If you increase M in a ZIRP environment, you force V down. The only sure way to create inflation is for governments to finance massive expenditures through direct seigniorage, without creating debt.
I would like to suggest that V is a function of confidence. Money can be printed in a quantitatve number easily measured. However, velocity depends on whether a person or business decides to to spend, thus velocity. Tha tis harder to measure and why so many get it wrong.
I agree, which is what I meant by it taking time. At some point I believe that V will pick up. Or, can it stay low forever as M increases?
How does V pick up if no one is an elegible borrower, or if no one wants to take on moar debt (because no one's income is increasing)?
Not sayin' it won't happen, I just can't see how....any 'splanations?
If you ask that question to 4 economists, I am sure you will get 5 answers! lol
(not sure why I was downvoted on my previous post?)
Your article makes an excellent point, Phoenix. Thanks.
If the FED stopped paying banks interest on their excess reserves, velocity would turn up as banks sought to lend that money. The prices on necessities would shot, again. Wages would still stay low and go lower, thanks to excess of workers in China. We'd all just be poorer. Deflation is good for the average person who didn't write trillions of dollars worth of bad loans.
Neither deflation or inflation is what we want. It just shows that there are massive imbalances in the economy.
Yes these monetary periods correct the problem if they aren't interferred with, it does hurts the average person in the meantime. This is also why the problem never get addresses. No one wants to tell you that you'll have to take a bit of this shit sandwich (especially the politicians).
How does deflation hurt the average person. Because it squeezes wages. It also means more companies close because they can't be competitive (their margins get squeezed), thus more unemploymnent for the average person. And it doesn't matter that the average person didn't write trillions in bad loans. What good is lower prices if you have NO money and NO job. Welcome to the soup line or today's EBT system.
Deflation - a decrease in the amount of available money or credit in an economy that causes prices to go down.
Deflation and inflation seem to be getting redefined on a regular basis. Printing money **is** inflation, not deflation. It may take time for the inflation to hit but it is the definition of inflation.
This is exactly what they want people to believe.....money printing is a way to mask deflation which is happening due to (true) falling employment, stagnant wages, increasing tax pressure (Obamacare, income tax, etc) and ZIRP/NIRP.
Trouble is that eventually you can't hold the dam back forever and when it breaks a whole lot of water comes pouring out all over the place and makes a huge mess.
The FED and Treasury have heaped over $5 Trillion onto the taxpayers' back to fill the credit gap left by the de-leveraging private sector. Do that long enough and the taxpayers can't support the debt load. Budget deficits say we're already there. They haven't even created enough Fed. debt to replace what has been lost, fortunately for us. At the same time, they are paying the banksters .25% on their excess reserves that are kept at the FED. So, the banksters can get rich while we're all sent to the state-run Section 8 housing projects(poor house).
unless the money is destroyed, not debased, but lost.
Bad debts aer a problem for ZIRP and deflation (somebody has to eat them)
...and we can have rising prices with deflation, you can increase competition for everything and raise prices for food water electricity shelter and still have deflation in wages
NIRP can do that. Negative interest can destroy the units of fiat currency as fast as it can be created, or even faster. And going into NIRP is like crossing the Event Horizon. There is no way out.
You certainly reduce savings and there for money available for investment....yet consumption does move somewhat in the negative direction as you eat into your principal to live you most likely cut around the margins to make your remaining principle last longer.
Finally! Someone figured it out! Yes, they are deflationary, just look at the money velocity.
Of course if you pay mortgage interest then low rates are inflationary because you have more money left over to spend in the Obama 'recovery'.
This isn't deflation it's the death of the real (as opposed to financial) economy.