Saturday, March 1, 2014

Is deflation a red herring?

Question: “What if the deflation scare is a big chimera with the purpose to justify money printing (i.e. social policy/wealth transference)?  No fear of deflation = no QE for the last several years.  No QE = no $$$ bilking of middle class in favor of corporate borrowing and Wall Street, OTC derivatives buffer.  The more I learned between the lines of heeding Faber and Jim Grant has led me to this conclusion.”

Answer: I wouldn't say the threat of deflation is intense right now, and it it's certainly not as strong as it was 2-3 years ago.  I think it's safe to say the Fed has pretty much beaten back the worst part of the long-wave deflation threat.  

I also don't think the deflation threat is chimerical.  Consider that it took a record amount of money creation to merely hold the line and put a floor under prices.  To me deflation has been the prevailing undercurrent since at least 2000.  If that wasn't so wouldn't we have seen rising bond yields over the last 14 years instead of record lows?  And wouldn't we be seeing runaway rising commodity and retail prices by now given all the money creation?  As it is, inflation is completely in check and according to central bankers dangerously low.

To me the final proof in the pudding will be what happens starting next year when a new long-term inflationary cycle kicks off.  I wonder just how fast all the bank-sidelined money will come out of hiding.  I think we have an exciting next few years ahead of us to say the least!