The
fear of deflation has become the cornerstone of Keynesian economic thought. A
lack of inflation has been used to explain periods of economic weakness from the
Great Depression of the 1930's, to the Great Recession 2008-2009. And now,
that philosophy has been adopted as gospel by those that control the Federal
Reserve and virtually every central bank on the planet.
In
reality deflation is cathartic, and a necessary condition to heal the
economy. If deflation were allowed to naturally run its course, as it did in
the brief Depression of 1920-21, depressions would be sharp but fairly short
in duration. And the economy would find itself on firm footing fairly quickly.
However, Keynesians view deflation as the source of a destructive cycle in
which; asset prices plunge, companies cut jobs, spending plummets, and a
permanent recession sets in. Therefore, the prevailing current view maintains
that deflation is something that needs immediate intervention of massive
monetary stimulus--you can say they have become deflation phobic.
This is
why I find it fascinating that Keynesians, who proliferate in central banks
and in the financial media, are relentlessly cheerleading the recent spate of
deflationary data. And, just to be clear, deflation has not been limited to
the New England Patriots' footballs--it is everywhere you look.
However,
it is the height of hypocrisy that Keynesians use the specter of deflation to
frighten us into believing we need to endlessly dilute the value of our
currencies and take the rate on our savings to zero percent. But then, at the
same time, take every data point that points to falling prices as another
reason to be bullish on markets and the economy. Their mantras are: Lower
commodity prices--a boost to the consumer, plunging interest rates--an
increase in mortgage refinancing, I actually heard a commentator suggest
crumbling copper prices were a boon to minting pennies--he obviously didn't realize
pennies have been minted mostly with zinc since 1983.
How can
Keynesians celebrate deflation, while at the same time use it to scare us
into accepting ZIRP forever? The easy answer would be, they are cheerleaders
for the stock market...and I believe they are. But a more compelling reason
is these individuals have convinced themselves that a group of 12 academics
can arrive at better conclusions than the free market. So enamored are they
by the collective wisdom of our men and women who occupy the Federal Reserve,
that they can't bring themselves to imagine there may be some unforeseen
negative consequences to their actions. And, because for a moment it appeared
as though the Fed would have a graceful exit from QE, their blind faith in
micromanagement of markets appeared to be warranted.
Keynesians
are unable to acknowledge that printing and borrowing money has simply been a
failure in bringing sustainable and vibrant growth back to economies.
Unfortunately,
we are just beginning to experience the pain associated from believing
central banks can obliterate the free market pricing of stocks, bonds,
commodities and currencies for seven years with impunity. Most importantly,
there is an inherent danger in basing investment decision on the
capriciousness of a handful of individuals, as opposed to economic
fundamentals and markets.
For
example, Mario Draghi is doing his best imitation of the Fed and the Bank of
Japan in promising to buy at least 1.1 trillion euros worth of public and
private debt over the course of the next year and a half.
However,
much like in the U.S. and Japan, Europeans will find that monetizing debt
will do little in the way of engendering growth; but will be remarkably
successful in destroying the purchasing power of the middle class.
The
ECB's bid to monetization massive amounts of Eurozone sovereign debt won't
rescue the economy or do much in the way of creating inflation. This is
because sovereign bond yields are already close to zero percent, and even
have negative yields in some cases. Once the ECB buys debt from private banks
they will likely sit on most of that new central bank credit. Why would
private banks buy new government bonds that offer no interest and have
tremendous downside risks to the premiums? And why take the risk of making
new loans to unqualified borrowers when the interest rate they can charge in
nearly zero percent?
In
fact, the private banks that already front ran the ECB's bid could very well
just unwind their positions to Mr. Draghi and then sit on that cash. And the
hopes of "saving" the European economy from the disastrous fallout
of deflation will go down in history as yet another failure of central banks
to manipulate markets.
Central
bankers tend to be duplicitous and incompetent plutocrats. Investors would be
far better off placing their faith in markets and real money instead of fiat
currencies and empty promises. Of course, this misplaced faith will
eventually lead to the biggest shock of all...the soon to arrive collapse of
paper currencies and the insolvent sovereign debt backed by central banks.
