Markets want deflation, central banks want inflation

“The Bank of Japan is in shock at the latest deflation numbers. Despite their extreme efforts the past few months, prices dropped another 0.5% in March and were 0.9% lower than a year ago. Deflation appears to be accelerating….

“It is the central banks that are playing a major role driving the deflation by keeping producers in business that otherwise would have failed during the last business cycle decline and the one that should be underway. Thousands of factories and assembly lines are still humming that would have been shut down without aggressively lower interest rates and easy money. Artificial demand being created by all the aggressive QE, especially mortgage buying, and deficit spending is keeping demand higher than it otherwise would be in almost all industries. The strong producers should be capturing far more market share with pricing power. They are now in far more competitive environments without pricing power.

“In short, the central bank are producing the opposite of what they are intending. They are driving goods and service deflation - financial inflation.  The only way the central banks will get the inflation they are yearning for is to first give markets the deflation they are yearning for, restoring legitimacy to markets.”  [David Knox Barker, International Market Cycle Dynamics Letter, May 20, www.longwavedynamics.com]