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US Now Importing the World’s Deflation

With US QE about to end, the rest of the world faced the prospect of another “taper tantrum” financial crisis, one that this time around could suck the major economies into a deflationary vortex. So it should come as no surprise that the end of QE was countered with a series of offsetting treats for the global financial markets:

• The US Fed promised to keep interest rates low for a really long time.

• The European Central Bank announced that in November it would start buying asset backed bonds, in effect beginning an open-ended, potentially huge debt monetization program of its own.

• Japan’s version of Social Security is massively increasing its equity purchases:

Japan’s public retirement-savings manager will put half its holdings in local and foreign stocks and start investing in alternative assets as the world’s biggest pension fund seeks higher returns.

The 127.3 trillion yen ($1.1 trillion) Government Pension Investment Fund set allocation targets of 25 percent each for Japanese and overseas equities, up from 12 percent each, it said at a briefing today in Tokyo. GPIF will reduce domestic bonds to 35 percent of assets from 60 percent. The new figures don’t include an allocation to short-term assets, while the previous targets did. Analysts surveyed by Bloomberg this month had anticipated levels of 24 percent for local stocks, 15 percent for global shares and 40 percent for Japanese bonds, taking short-term holdings into account.

And last but definitely not least:

Japan central bank shocks market with fresh easing

LOS ANGELES (MarketWatch) — In an unexpected move, the Bank of Japan’s policy board voted by a 5-to-4 margin to expand the pace of its quantitative easing, sending Tokyo stocks soaring and the Japanese yen falling sharply.

The central bank expanded the size of its Japanese Government Bond purchases to the equivalent of “about 80 trillion yen” ($727 billion) a year, an increase of ¥30 trillion from the previous pace. It said it would also buy longer-dated JGBs, seeking an average remaining maturity of 7-10 years.

Concerns about dwindling inflation appeared to drive the move, with the Bank of Japan saying that “on the price front, somewhat weak developments in demand following the [April 1] consumption-tax hike and a substantial decline in crude-oil prices have been exerting downward pressure recently.”

The equity markets loved all this, of course. Japan’s Nikkei index rose an amazing 4.83% on Friday. The S&P 500 is up about 3% on the week and most emerging markets are soaring. From the point of view of bureaucrats attempting manipulating formerly-free markets, this is a ringing success. Unfortunately, like most attempts to mess with the laws of nature, it contains the seeds of its own demise.

First and foremost, the end of QE in the US coupled with a ramp-up of bond buying in Europe and Japan has the dollar up sharply:

US dollar index Oct 2014

A surging currency is functionally the same thing as rising interest rates in that it tends to cut corporate profits while making debt harder to manage for pretty much everyone. So it’s good for savers (who see the value of their savings rise) and bad for borrowers, both individual and governmental. And that — more onerous debts and plunging corporate profits — is what the US is looking at in 2015.

This is coming at a really bad time for some crucial parts of the economy. Housing, for instance, is looking like the end rather than the beginning of a recovery, with mortgage purchase applications at 19-year lows (chart courtesy of Zero Hedge):

Mortgage purchase applications Oct 2014

The upshot: As good as things feel right now in the stock and bond markets, they’ll feel that bad or worse when it dawns on the leveraged speculating community that the rest of the world is exporting their deflation to America.

20 thoughts on "US Now Importing the World’s Deflation"

  1. Pingback: The Küle Library
  2. Good article. Global deflation is indeed setting in and the 100 year super-bubble created by central banks and fractional banking is starting to burst. There is an excellent book on this called (I think its available on Amazon):

    “The Seismic Shift In Finance: The Tectonic Move From The Era Of Inflation To One Of Deflation”

  3. Japan then EU and lastly the US will all collapse from the weight of all the Debt. The ultimate destroyer of 5000 Govts and their currencies before them. Many of them repeating the same mistakes

  4. One thing about this collapse that many forget including myself.
    –> Nobody wants to be blamed for this.

    So enters Japan.
    Japan will be the contagion effect and the ostensible overt reason for the collapse whilst falsely absolving the FED’s parasitic owners of responsibility where it SO FULLY DESERVES TO BE.

  5. Wow! Just admit you FUBARed the financial system and let it cleanse out the bad debt. Why drag millions of people along with a zombie economy? Just to save the pensions? Just to save face? You blew it! It’s high time you paid the piper.

  6. I think this is a matter of perspective. Big business see deflation, thats what the media will report. We the people only see inflation. If big busness says we have inflation, then the people will expect wages to go up to keep pace, that’s not going to happen.

  7. Plunging corporate profits? Really? they’re sitting on trillions off shore and buying back their own shares when that money could be taxed and pay down the debt and used to stimulate the economy in the private sector and the public sector. The US Corporations are a bunch of Pirates and might as well just host up the jolly roger while the rest of the country falls on hard times. The government has become inept at keeping the country falling into the hands of the oligarchy.

    1. The government and certain corporations ARE the oligarchy. The government will always afford its expenses and salaries and raises because it will borrow (from “you”) whatever shortfall there might be. And why would a corporation want to give its money to the government (who really doesn’t need it)? Would you do that if you could “shelter” your income?

  8. It’s stagflation as in the 1970’s. Wages have been stagnate for a long time and the cost of living in real terms continues to go up. Although oil is coming down food, health care, and housing in some areas continues to outpace incomes, except the wealthy who continue to see record income growth, even faster than before 07. You can’t have inflation without incomes going up, consequently all the FEDs men and all the FEDs houses couldn’t put humpty dumpty back together again. The austerity crowd continues to restrict growth when there are low interest rates, and continue to not address the debt with getting the tax burden off of the middle class by closing the loopholes congress has doled out over the years that has led to the large debt, and they haven’t addressed the too big to fail fraud and abuse of the stock market and the banks ability to plunder the economy with derivatives. We are mirroring the UK.

  9. If we were experiencing anything like deflation shouldn’t the markets be crashing? Doing a bit of shopping lately, nothing I buy is cheaper than it was a year ago, 6 months ago. QE ended officially on Wednesday and Thursday and Friday were major ramp up. What am I not understanding?

    1. Point 1: One of the perversities of fomenting inflation expectations is that businesses can increase prices to take advantage of that. Did you actually not buy what you were shopping for? My guess is you did anyway. That is how inflation (and deflation for that matter) can become self-fulfilling just by central banks’ “jaw-boning.” The Fed has said it wanted to create inflation using QE so why should “you” be surprised? “Deflation” is a “red herring” excuse for more meddling in the future.

      Point 2: The Fed (nor any other central bank) has done nothing to quell the belief that they have the backs of the financial markets. The Fed says the US economy is improving so it doesn’t need any more QE – “bullish”. Then US GDP is reported to be 3.5% – “bullish”. Corporate profits are still rising – “bullish”. So the BOJ takes the “QE” baton from the Fed and doubles down on its asset buying program, increasing Japanese stock prices because of mandated demand and weakening-the-yen/strengthening-the-dollar even more.

      If “we” continue to see price increases in a rising-dollar global economy then get ready.

      1. For the record, yes the inflation we are seeing has had a very real impact on how we shop, particularly for food. We rarely buy beef anymore, have switched to brands that haven’t inflated or haven’t inflated all that much. We’ve also cut back on where we shop for other household items. We are doing this not so much because we can’t afford it, primarily because I’m pissed-off with what is happening. We choose not to give manufacturers a free ride, there are alternatives and we find them.

        And yes we are “getting ready”. GGG!

    2. “QE ended officially on Wednesday and Thursday and Friday were major ramp up. What am I not understanding?”

      Maybe it is not understanding you are lacking, but just patience!

      1. I am reminded of a cartoon I saw years ago. Two buzzards were on an old wood snag hanging over an empty highway. One buzzard looks at the other and says, “I’m tired of waiting patiently, I wanna go out and kill something.”

        🙂

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