Tuesday, November 18, 2014

Deflation Battle Still Raging

Monday Japan announces it has fallen into recession. This was a big surprise as growth was forecasted. And the NY Times article linked above points out the Eurozone is in danger of following suit and must decide what to do soon. Then we have this news that the US money supply has started to decline in growth on a year to year basis. We have noted here on the blog that the falling oil and commodity prices could be signs of deflation taking hold. This news adds to that trend. 

This is a very serious situation that all readers here should be following closely. If Japan is falling into recession, recall that a problem anywhere can lead to a problem everywhere. Japan has already tried massive stimulus. If that is failing this could become a serious problem for Japan, and then the world. 

The Eurozone is already concerned with low inflation and fear of falling into recession as well. If both Japan and the Eurozone head into recession, the risk of global contagion goes way up. Will the ECB crank up a massive QE of its own? If they do, what happens to the Euro? 

Keep in mind the Fed just finished up its QE stimulus program so that funding support is gone now. Everyone following all this understands that a lot of the Fed stimulus money ended up in the US stock market and in the US bond markets. The IMF and BIS (Bank of International Settlements) have both issued a number of recent warnings that stocks and bonds could be overvalued and are watching closely to see what withdrawal of QE does to those markets. The BIS even warned of possible panic selling if things go wrong. You can find these recent warnings in links to articles about them on the right hand side of this blog. Just look for article links for the past few months that have IMF and BIS in the titles. Jim Rickards went on Bloomberg TV today and warned of the possibility of a global depression picking up steam.

It should be clear to any readers who have been following this blog that we need to watch all this very closely. If things start to go south anywhere it can set off a derivatives chain reaction around the world. All this can happen very quickly even as we have had a fairly long period of stability and relative calm in the markets. Central Banks fear deflation like the plague because once it gets started it can move too fast for them to react. And of course if the public senses it that can lead to panic that makes things even worse.

What we need to watch is what happens in Japan and Europe. And how the central banks react there. If we see more massive money stimulus it will be a red flag. At some point the danger becomes that markets lose confidence in the currency (say the yen for example). If that ever happens we will see the central banks move into crisis control mode very quickly I would guess.

Of course let's hope none of this happens. Be we know from all we have been following here the threat is real and we must stay alert and informed. It is critical.

Added update: The Guardian runs this new warning from UK Prime Minister David Cameron. Lead paragraph from the article below.

" David Cameron has issued a stark message that “red warning lights are flashing on the dashboard of the global economy” in the same way as when the financial crash brought the world to its knees six years ago."

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