Financial and risk bubbles don't pop in a vacuum--all the phantom collateral constructed with mal-invested free money for financiers will also implode.
If there's one absolute truism we hear again and again, it's that central banks are desperately trying to create inflation. Perversely, their easy-money policies actually generation the exact opposite: deflation.
The central banks have been frustrated in their insane and misguided aim to increase inflation because QE and ZIRP actually foster the opposite of what central bankers expect. Central bankers and conomists think that to get inflation they only need to print more money, not recognizing that the inflation that does result from money printing, asset inflation, leads eventually to consumer goods deflation. ZIRP and QE cause malinvestment and overinvestment that leads to excess productive capacity.That leads to overproduction and oversupply. Oversupply puts downward pressure on prices. That spurs a vicious cycle where the central banks print more money to try to create inflation. That puts more cash into the accounts of the leveraged speculating community and off we go again.While ZIRP and QE encourage waves of excess speculation and malinvestment, they do so at the expense of investment in labor. Businesses become speculators in their own stocks and products rather than in costly and uncertain investments in labor. The value of labor falls in the marketplace. Mass wage and salary incomes fall. Consumption falls. Demand trends weaken, putting downward pressure on the prices of consumption goods.That causes a vicious cycle in business where executives perpetually look for ways to shrink costs, exacerbating the economic decline of middle class working people. The "middle class" can increasingly no longer afford to buy the products of those who employ them. Thus we get the spectacle of things like WalMart holding charity food drives to benefit its workers, who are not paid enough money to feed their families.The oil price experience is a perfect illustration of what happens when central banks promote over speculation in commodities and commodity production. A boom built on virtually free and unlimited financing becomes a ticking time bomb when the value of the collateral collapses.
"Virtually unlimited cheap finance on a global basis has over recent years certainly spurred unprecedented capital investment. And, importantly, ongoing technological innovation and the “digital age” have played a momentous role in creating essentially limitless supplies of smart phones, tablets, computers, digital downloads, media and 'technology' more generally. Throw in the growth in myriad 'services', including healthcare, and we have economic structures unlike anything in the past."
So go ahead, central bankers: tell God about your plans to generate inflation.