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Four years ago when the global financial regime began to crack rather forcefully, the debate amongst serious analysts, (not the empty suits with no weighty organs above their colorful neckties) was whether the synchronized world economy will enter a generalized deflationary spiral, a la Japan, or would it hyper inflate a la Zimbabwe, mostly as a result of panicky measures by governments/central banks. Since then however, what has been witnessed is neither a clear-cut inflationary nor a clear-cut deflationary scenario in the world economy. It seems what has prevailed is a bit of this and a bit of that, depending on where one situates oneself and where one is willing to look. In hindsight, we can conclude both phenomenon have been experienced, to some extent, both within and between countries!
In the rich countries of the OECD, the dominant trend in their real economies (not in the make-believe world of rarefied finance) remains deflationary, i.e. the underlying market/economic fundamentals all indicate the saturation of aggregate demand, without an appreciable and commensurate retrenching of economic activities (manufacturing, trade, services, real estate, etc.) Theoretically this is the fundamental reason why countries enter a deflationary situation in the first place, if one cuts out the crappy schemes high finance continuously and unsustainably puts in place to counter this underlying economic trend! To start with, basic needs in the OECD countries are/were mostly fulfilled ages ago; moreover, a number of these countries have also protracted demographic problem, which spells less demand (ageing population; chronically in Japan, but also in many of the other OECD countries.) Nonetheless, this concrete reality has been countered by delusional finance and its abracadabra.
The creation of money out of thin air (credit) is one way of countering deflationary trends and has been aggressively employed, since the early 1970s, to prop up falling demand/consumption for unnecessary/unwanted needs in the West. To facilitate the unsustainable schema, entrenched interests instructed covertly & overtly their indoctrinating factories (media-news, advertisement, entertainment & universities or as we affectionately call them, ‘the mills’, etc) to push the concept of growth as the alpha and omega of human existence; but we all know, uncontrollable growth is nothing more than cancer, be it in a body or in economics! This half measure – the credit binge, went completely out of control in the recent past and has now come home to roost as un-payable debts throughout the Western economies, (including Japan) thereby threatening to wipe out the banks and the financial system they erected. As a result, asset prices real/financial (housing, stocks, etc) have been plummeting and to save the day for the bankers, governments of the rich have been flooding their economies with phony money, yet again! Don’t let the skin dip confidence of these clowns (establishment elites, including their Ivy idiots) fool you, they have no clue whatsoever how to handle the prevailing situation, except to engage in their daft project of continuous printing! Inevitably, the reckless printing of money has and will result in price inflation for many of our daily consumables; fuel, food, etc. This is true in all countries of the world, the only difference being the varying capacity to withstand the continuous erosion of purchasing power.
The lion’s share of income in poorer countries goes to cover the basics (food, fuel, etc) and since there isn’t much of an ‘asset’ to generate other incomes within the custody of the multitudes, the inflationary situation can easily instigate a revolutionary situation, a nightmare to the politicos! Four years ago when the US central bank started to crank up the printing press, many countries literally went up on flames; Tunisia, Egypt, etc. Don’t forget almost all commodities (industrial, agricultural, etc) in the world are traded in the US dollar and when the value of the US dollar is systematically discounted as a result of reckless printing, there will always be consequences.Currently the EU, a bigger economic entity than the US, is in full print mode! Recently the European central bank announced the availability of unlimited funds to all European banks (almost) for the next three years at 1% interest rate. Before the announcement, countries like Spain and Italy were having difficulties raising funds, as the yield (interest rate) on their 10-year bonds skyrocketed to about 7%, a situation that is absolutely unsustainable in their current financial situations! Since the announcement of ‘unlimited funds to banks’, the banks have been rushing to buy sovereign bonds at varying interest rates, thereby calming the nervous governments of the core countries. As the banks are getting the funds at 1%, naturally they will make a lot of money by buying sovereign bonds, as well a speculating on all and sundry (oil, grains, stocks, etc.) If this scenario continues, it can again ignite inflation in the prices of commodities in the months to come. At the rate of 1%, almost any game in town is highly profitable! Don’t forget these institutions have also covered their behinds a la ‘too big to fail’ insurance policy, compliment of taxpayers sweat! What a tough job and no wonder why the honchos in the banks are entitled to such humongous bonuses! Adding insult to injury, some of the major countries are now forced to anoint ‘de banksters’ as heads of states/governments. Good-bye democracy and welcome plutocracy! See Chakrabortty’s article next column.
Even with all this pump priming, however, the bond market is not out of the woods, as the yields on many of the sovereign bonds still testify. For example, on Thursday the yields on the 10-year sovereign bonds were; Spain 5.8%, Italy 5.49, France 2.98 and Germany 1.73. Not a good omen and again if this trend continues it will spell a deflationary scenario that will further crash asset prices!
Ultimately there is no easy way out of the conundrum: “There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is whether the crisis should come sooner as a result of voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved.” Ludwig von Mises. Good Day!