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Are Central Banks Creating Deflation?
Last week we noted that with the start of Q€ just around the corner, the ECB finds itself in a rather absurd situation. In what we called the ultimate easy money paradox (or, alternatively, the ultimate Keynesian boondoggle), Mario Draghi and crew are doomed to trip over their own policies as they (literally) attempt to monetize twice the net supply of eurozone fixed income this year.
The problem is two-fold: 1) the central bank’s adventures in NIRP-dom mean anyone willing to sell their EGBs would face the truly silly prospect of sending the proceeds right back where they came from, except at a cost of 20 bps (negative deposit facility rate), and 2) because the central bank’s easy money policies have compressed credit spreads, sellers who wanted to reinvest the cash they would theoretically receive for their EGBs would have to do so at ridiculously low rates, a scenario that would compound QE’s already negative effect on NIM for banks and would be absolutely untenable for insurers. So what we have “is one deflation-fighting policy stymying another [and] the central bank’s previous efforts to drive down rates thwarting its current plans to … drive down rates.”
Now, courtesy of Citi’s Matt King, it’s our distinct pleasure to present yet another wonderfully ridiculous paradox inadvertently created by central banks who apparently aren’t capable of understanding when they’re just pushing on a string: manufactured deflation or, more poignantly, just what the doctor did not order. Here’s Citi:
It’s that linkage between investment (or the lack of it) and all the stimulus which we find so disturbing. If the first $5tn of global QE, which saw corporate bond yields in both $ and € fall to all-time lows, didn’t prompt a wave of investment, what do we think a sixth trillion is going to do?
Another client put it more strongly still. “By lowering the cost of borrowing, QE has lowered the risk of default. This has led to overcapacity (see highly leveraged shale companies). Overcapacity leads to deflation. With QE, are central banks manufacturing what they are trying to defeat?”
Ultimately, the question is whether the ceaseless printing of money is actually creating any demand, and for King, the answer is pretty clearly “no”:
QE, and stimulus generally, is supposed to create new demand, improving capacity utilization, not reducing it. But ... it feels ever more as though central bank easing is just shifting demand from one place to another, not augmenting it.
This point is nicely illustrated by Citi in the following two charts (from a previous note) showing the evolution of inflation expectations over the last several years:
And so, stuck as we are in what looks like a chronic condition of oversupply and as it increasingly appears, in King’s words, that “the decoupling between EM GDP growth and global trade growth over the past decade [now looks] less like a benign shift away from exports to domestic consumption, and more like a world where GDP was temporarily boosted by a surge in credit, where suppliers ramped up capacity in anticipation of 10% nominal EM/Chinese demand growth continuing indefinitely, but where the limits of such credit-fuelled demand are suddenly being exposed,” more QE simply won’t move inflation expectations and certainly can’t do much to further stimulate aggregate demand (assuming it’s done anything in that regard thus far).
In other words, we’ve reached the limit of what can be accomplished and with NIRP creating new market perversions on an almost daily basis, the unintended consequences of continuing to delve deeper into the new paranormal are making the game ever more dangerous as we now have central banks accidentally creating deflation while simultaneously embedding enormous amounts of risk in fixed income markets by sapping every last vestige of liquidity.
Soon enough, expect the rest of the world’s central banks to one by one meet their own Waterloos just as the SNB did in January. In fact, the ECB is on its way there now as it appears everyone is coming to realize that Q€ simply cannot work as designed. On that note, we’ll give the last (rather depressing) word to King:
By definition, races to the bottom are not very positive affairs. And as the sell-off in commodities shows, at some point they can lead to casualties. But the lower yields go, the longer even previously unsustainable debt burdens can be sustained – just look at Japan. Competitive easing may do little to improve long-term growth prospects, but it should make the hunt for yield more powerful still. Even if QE does prove deflationary, until we start running into actual defaults, it is hard to see what stops this.
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nothing gonna stop this till we all see a mushroom cloud over some country. I dont think there is a certain amount of 000000 you can add to every countries debt so why stop. we will be paying the banks 20 percent to even think about taking our worthless paper and merchants won't accept the almighty dollar either that's where the precious comes in.
That "spectacular development" earlier in Austria is so "spectacular" that all the futures are showing green now. Up we go tomorrow. It's all Bullshit!!!
Why not?
If one's money is at risk of being "bailed in" at the bank, it will be completely safe in "the market", and Tuesday is just around the corner.
And besides, the market ALWAYS goes up on Tuesday.
http://www.zerohedge.com/news/2014-04-29/its-not-economy-stupid-its-tuesday
these dickheads dont realise that suppressing the price of gold is deflationary. How the F%&^# do they hope to acheive inflation they crave to dodge their debts, when they are simultaneously keeping a cap on gold?
morons seem genius by comparison
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If they REALLY wanted inflation, they would buy the entire commodity complex.............guess they don't.
Push that string!
The causal variable (economic crisis) brings the easing, which in normal cyclical downturns seeds an ensuing recovery.
During structural downturns, the easing in response to crisis oddly shifts into the causal role and protracts/deepends the crisis.
It's sort of a paradox.
The Fed can't do this.
Only the Federal Government can.
How is that for "paradoxical reasoning." Higher prices with zero interest on savings.
Well nigh zero growth too.
Plus the prices paid for actual good has soared for the Government.
All Government actually.
"Government orchestrated anarchy."
It's all being sucked into the black hole.
Printing to oblivion is all they know to do, in hopes supply will over engulf their deflationary monster.
Said deflationary monster, or inflationary salvation, lies in 1 thing.
And that one thing is velocity of money...
http://research.stlouisfed.org/fred2/series/MZMV
http://research.stlouisfed.org/fred2/series/M2V
The risk of default has not only soared it has in fact happened (Detroit, Puerto Rico) and continues (Chicago.)
It is possible that the Bank of North Dakota is buying gold trying to create "anti-money" as it were and thus pave the way for a private currency/gold certificates. If so start dumping muni debt.
That would force Wall Street to start to reward savers of actual cash...let alone job creators...with actual cash.
Who knows...maybe the price of WTI would even normalize then. 20% discount to Brent truly is absurd.
NO SHITSKI!
Finally the counter-intuitive argument to get out of this fucked-up mess: raise interest rates
[do they know it's the 21st century, with all the new-fangled techno-stuff, that wasn't around, circa 1935?]
Biflation: you gonna eat it for breakfast lunch and dinner. It's gonna last the rest of your life.
Prices for all necessities will rise high.
The value of work Will fall.
Buying power of whatever you make will decline
This is interesting. Central Banks want people to expect inflation. If deflation is expected, because rates are zeroed, then they have to raise rates to get people to expect inflation.
Is Red Queen Trap, Bitch people.
In order to get people to borrow money, they have to raise interest rates! People will expect interest rate inflation, and borrow now!
Brilliant.
Stupid, but brilliant.
+1
Maybe they just realized that tax revenue increases when interest rates increase.
Duh.
If they really wanted inflation it would be simple to accomplish. Print the money and lower taxes so the proles could keep, and spend, more of their meagre wages. Or even lower their own debt burden. Imagine that.
Of course, giving the proles more to live on or less debt to service is the last thing our masters want. The proles are poor, miserable and in debt up to their eyeballs. That's how the PTB want them.
I've been thinking that for years .. I don't get why they didn't do it..
Things seem to be approaching a destruct point.
As I understand it, a high amplitude of deflation will destroy capital investment, as companies go broke trying to get rid of excess inventory; Larger fish try to eat the smaller ones in order to survive to be able to pay off their credit notes.
Companies go bust, jobs are lost. The busted firms might have had profitable ideas they cannot implement. Sure, for a short time, products are cheaper. Oil has crashed: how about the junk bond financing these shale guys have handcuffed themselves to? The layoffs and any innovation are now toast.
The most prominent event this weekend though, IMHO, is the collapse of the Austrian Heta bank.
Monday should be interesting as we begin to find out how much contagion the default will spread to other institutions. I have to admit I was an idiot putting more into physical PMs when 3 years ago I could have bought into the SENSEX and now would have been the time I would be cashing out as I have a project needing cash (I do not like to carry notes).
I should have hedged my PMs with the SENSEX.
Of course, coulda woulda shoulda. I have been into PMs for 45 years, trying to buy dips and stack.
You won't get my fizz w/o prying out of my cold dead hands, just like my SS109 and my rifle.
One silver lining: I stocked way up on M855/SS109 a few years back. If I wait until the next gun show, I should be able to double my investment (pun intended).
The dumb Banksters don't realise what they done!
Maybe it is just too simple for them to understand. I will attempt to make it simple for them.
It may take one craftsman several months to build a very expensive table with simple tools. It may take one smart person one week to build a table with electric tools therefore it stands to reason the price of the table should get cheaper.
It may take one even smarter person one day to build a table with more powerful (advanced technology) commercial tooling. Share the tooling, add a few more people and a few more hours work and you may get several hundred tables built in a month.
Every time you increase production and buy fixings in bulk, it stands to reason that in theory the price of the tables should decrease substantially so the tables should get much cheaper to buy (deflation). If you introduce robots and a 24 hour operation the tables should cost very little (deflation) and even more so if the factory owner plants his/her own wood, makes their own fixings, and so on (based on pile it high and sell it cheap mentality).
The factory workers are now unemployed and require welfare. There are only so many tables one family wants at any one time, can fit into their homes and can afford. Maybe the global market has been saturated?
The middle men who bought tables cheap in bulk thinking they could get an easy profit are now disappointed with excess stock. The retail stores are going out of business. The parasitic stock market and Banksters who want something for nothing have no more blood to feed off but themselves.
Governments make most inflation by adding to debt, but even they have had to cut-back their spending (austerity) otherwise it would be obvious to everyone they are spending above their means and are morally and financially bankrupt. Their massive hidden tax increases for everything, and increased bureaucracy they have introduced to pay for themselves and keep themselves in business have eaten away at 99% of peoples income.
End of the line me thinks!
The original craftsman (and his family) is probably happier and healthier working by himself, for himself and at his own pace of life. Wealth (& control) comes at a costly price.
Get your kid to law school to become a bankruptcy lawyer. If the incomprehensible mess that is Caesars represents the ultimate endgame, your elderly years would then be secure.
brilliant idea, actually
OK, this is so funny to me. The gubbermint wants to stimulate the economy, so they "print" digital dollars and hand them to the banks, and the Fed also goes on a bond buying spree.
The banks start speculating in stocks, so I sell them my stocks at a very high price, thank you very much. The Fed wants my bonds so I gladly sell them at a very high price thank you very much.
Then I take the proceeds of selling my securities and pay off bank debt. Paying off bank debt destroys currency. I have paid off A LOT of debt since 2008, more than 2X my annual income.
Now I'm waiting for the banks and the Fed to realize they overpaid for their securities. I'll buy them back, but at a price much lower than I sold them for, because they aren't worth as much now.
I know alot of people playing the same waiting game as you (with a similar mindset as to the current value of securities). I usually ask: "What if prices never fall to where you want to buy? Will you stay in cash forever?" They always seem convinced markets *will* eventually crash...but what if not?
The value of companies is knowable ... and it doesn't change instantaneously on quarterly boundaries. Mismanagment of the MOE is distorting markets and the view of companys' values, right now to the high side. Thus, they must come down in time (and will overshoot on the low side) when it is clear the companies are not as valuable as the "manipulated" market says they are. Before the Weimar Republic's hyper-inflationary collapse, their stock market was going through the roof ... until it, and it's mismanaged MOE, totally collapsed.
"What if not?" is not sustainable because hyper-inflation of the MOE (that which distorts values) is not sustainable.
Cash? Who said anything about cash?
After I paid off my debts from a combination of selling my house, stocks and bonds and earned incom, which extinguished currency the Fed is trying desperately to create, I had some cash left over so I bought a couple of chickens and a bag of rice.
When I can buy stock in a lot of great companies for cheap, I'll sell the eggs from my hens and buy some stock.
“By lowering the cost of borrowing, QE has lowered the risk of default."
Oh if these people in control could just understand how to control!
In any properly managed Medium of Exchange, DEFAULTs must be monitored and, when experienced, must be immediately recovered by a like amount of INTEREST collections. This guarantees zero INFLATION, all the time, everywhere, by the relation INFLATION = DEFAULT - INTEREST. With this mechanism, money (which is just a certified promse to complete a trade) is always in free supply (does not inhibity responsible trader's propensity to trade) and supply and demand for money is always in perfect balance ... it's the basic nature of a trade.
Knowing this, observe just how ridiculous the above quote is. The so-called "cost of borrowing", which is INTEREST collections and is zero to responsible and reliable traders who "don't" DEFAULT, must "follow" DEFAULTs experienced. Employing actuarial tools can shorten the lag but cannot and should not eliminate it (otherwise they "over control").
Two things to always remember: (1) a "rollover" is a DEFAULT. (2) A properly managed MOE leaves no room for "subjective" analysis. It's simple arithmetic ... monitor DEFAULTs; collect an equal amount of INTEREST.
Yellen and its crew of central banksters are living week to week.
No strategy, no plan. Two hopes. Bob Hope and no hope.
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Not in the Beef market.
Any time you subsidize something you make it cheaper than it should in the short term. ¿How deflationary where comunist policies in the medium term? I hope my point is clear. Even if central banks subsidize oil they are disturbing price discovery, long term investment signals and, of course, stimulating demand above "natural" level. Or other way of putting it: Imagine how interesting will be when raising rates implies banckrupcies of oil and commodities producers. Raising rates to control inflation, even mild, would create... (yes, you guess right) ... more inflation!!!! As usual, hope my logic is flawed, really hope to be wrong.
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