Have Central Bankers’ Worst Nightmares Just Begun?
Central Bankers are flummoxed.
Having cut interest rates over 600 times since 2009 (and printed over $15 trillion), they’ve yet to generate the expected economic growth.
This failure hasn’t produced any change in their chosen course of action. The Bank of Japan (BoJ) and the European Central Bank (ECB) are both currently engaged in QE programs. The US Federal Reserve is the only major bank not to be employed QE, though it does continue to expand its balance sheet every month during Options Expiration weeks.
Regarding interest rates, the ECB has already moved to employ Negative Interest Rate Policy (NIRP). The BoJ and the Fed are still at ZIRP, though the latter has several officials who have begun calling for NIRP.
Why, after six years, are we still seeing such aggressive policies?
Because deflation, the bad kind, is once again lurking around the corner.
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Anyone with a functioning brain knows that deflation is a good thing. No one complains when they are able to buy something at a lower price, whether it is a home, gasoline, or computer.
However, debt deflation is a different story. Debt deflation means that future debt payments are becoming more expensive. This means that debt servicing will become more difficult, eventually leading to default and debt restructuring.
It is debt deflation that remains the primary focus for the global Central banks. Indeed, if you consider the threat of debt deflation, every Central Bank move makes sense. ZIRP, NIRP, and QE all have the same goal in mind: to lower interest rates and push bonds higher (thereby making sovereign debt loads more serviceable).
With this in mind, even a whiff of debt deflation is enough to give Central Bankers nightmares. It’s also why they are so fond of inflation via currency devaluation, as it permits them to render massive debt loads more serviceable.
Unfortunately, the great “reflation experiment” is failing. Indeed, as Societe General has noted, it appears the developed world may be “turning Japanese” i.e. moving into a long-term deflationary cycle similar to that which has plagued Japan for the last 20 years.
This will eventually result in a stock market crash, very likely within the next 12 months… and smart investors would do well to prepare now before it hits.
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