Deflation = Debt + Demographics + Disruption | Zero Hedge

To wit: The cyclical fallout from the Great Financial Crisis and the secular deflationary “D’s” of excess Debt, tech Disruption, aging Demographics have been the major catalysts for deflation.

 

The reason for this pervasive global deflationary tide was explained by Bank of America in very simple terms, or rather letters, as follows: Deflation = Debt plus Disruption plus Demographics.

 

With every passing day the Fed, which recently revealed that among its mandates are China, the VIX, the Dow Jones, and who knows what other market-driven indicator (a market which is also influenced by the Fed, leading to the mother of all nightmares), is realizing the trap it has set for itself with 7 year of ZIRP and QE, two policies which on their own would have boosted much needed inflation (because a world drowning in $200 trillion in debt can only survive if the debt is inflated away, otherwise mass defaults are imminent), and yet has seen inflation expectations recently tumble to lows not seen since the financial crisis.

 

We believe that the path of least resistance would be to effectively ban capitalism and by-pass banking and capital markets altogether. We gave this policy change several names (such as “Cuba alternative”, “British Leyland”) but the essence of the new form of QE would be using central banks and public instrumentalities to directly inject “heroin into blood stream” rather than relying on system of incentives to drive investor behaviour.

 

… the challenge is that ongoing flow of QEs prevents rationalization of excess capacity (in turn created through the process of preceding three decades of leveraging) whilst also precluding acceleration of demand (both household and corporate), as private sector visibility declines. Hence declining velocity of money requires an ever rising level of monetary stimulus, which further depresses velocity of money, and requiring even further QEs. Also as countries compete in a diminishing pool by discounting currencies, global demand compresses, as current account surpluses in these countries rise not because of exports growing faster than imports but because imports decline faster than exports. This implies less demand for the .

 

Leave a Reply