Try
as it may, the Federal Reserve can’t seem to patch all the holes in the leaky
inner tube that is the U.S. economy.
While Fed chief Bernanke is credited for pumping up the deflated tire
since 2009, each time he succeeds in patching one hole another leak takes its
place.
While
all eyes are on the soaring U.S. stock market and rebounding housing market,
few commentators have drawn attention to the remarkable weakness in the
commodities market. Consider that in the
last 1-2 years bear markets of varying magnitudes have overtaken the markets
for “softs” including coffee, sugar and cocoa.
More recently grains prices have taken a tumble. Corn prices are in free-fall and wheat prices
are also in steep decline. The price of
corn crashed recently when a USDA report revealed much higher corn supplies
than the market anticipated.
To
make matters worse, deflation has again reared its ugly head in Europe as
Cyprus became the latest victim of the European sovereign-debt crisis. The revival of the deflationary scare in
Cyprus has had a spillover effect on several countries and has resulted in
falling stock prices across the euro zone.
Greece’s stock market has retraced more than half its gains since August
while Spain and Italy’s equity markets have also recently stumbled. The declining value of the euro currency
meanwhile suggests that Europe’s troubles are far from over.
Adding
to the difficulties in containing the global deflation problem is the threat of
an economic contraction in China. The governor of China’s central bank
issued a warning over the country’s high inflation rate of 3.2 percent (as of
February). The People’s Bank of China
also released a survey saying that 68 percent of the Chinese households believe
that housing prices are “too high.” The
government is widely expected to tighten money supply in an attempt at curbing
the housing market again. This will have
an adverse impact on the Chinese economy with possible spillover repercussions
for the global economy.
What’s making it difficult for central bankers to
completely contain the deflationary threat is that the fiscal policy of several
major nations is at odds with what Bernanke and Draghi are trying to do. While the Fed and the ECB are committed to ultra-loose
money policies, the governments of leading nations in North America and Europe
have embraced austerity and/or fiscal tightening. Such fiscal policies will only serve to
counteract much of what the central banks of the U.S. and Europe are trying to
accomplish in the way of re-inflating the global economy. It’s like trying to mix oil and water – it
simply won’t work.
Since lawmakers are stumbling over their own feet
in this matter we can expect that at some point – probably later this year – the
momentum from the 2009-2013 financial and economic recovery will wane. When it does, it’s only a matter of time
before the downside pressure from the bottoming long-wave deflationary cycle
takes over and reverses much of the gains of recent years.
Governments, it seems, never can learn from the
mistakes of the past and are indeed doomed to repeat them.
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