Watch Out For More Deflation

One of the consequences of all the stimulus and subsequent QE is that long time traders of our markets know they are screwed up. Consistent printing of money and 0% interest rates world wide have created their own economic imbalances. As the saying goes, there is no free lunch.

Economists such as Taylor, Cochrane, Zingales, Rajan and Murphy have said as much over the past four years. Turns out, they were right and the Keynesians are wrong.

The government stimulus had a multiplier effect of 0. It did nothing for job growth or GDP growth in the US. Combine the inefficiency of US fiscal policy with the continued implosion of Europe, and you have a world wide malaise. In China, because of macro economic effects, wages are rising, costs to produce are increasing. Companies are also wary of both the poor property rights system and the lengthened supply chain. China is slowing down.

The economies of the world aren’t going to contract because of government spending decreasing. They are going to contract because the continued machinations of the world’s central bankers have screwed up the costs of capital normally paid by the markets. The money that they have printed hasn’t gone into the productive marketplace. Instead, it went to shore up balance sheets and sits.

Money isn’t turning over. There is no velocity.

Notes From the Underground has an excellent post this morning on it. Here are some of the salient words that send a chill up my spine.

If the impact of FED QE is played out and little to be gained by continued new programs, what will the impact be for the markets going forward? The investor world should be very concerned about an impotent FED and an intransigent CONGRESS, especially with a very anemic global economy. At what point will the FED be forced to seek new tools to ease the BALANCE SHEET RECESSION?

Maybe we should all buy some long dated out of the money puts on the S&P ($SPY, $ES_F)? The whole world has become Japan.

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Thanks for the link Instapundit.

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  • Helicopter Ben

    Oh, pooh, I am an expert on the Great Depression and I know how to stop deflation just like the French generals knew after WWI the way to stop a German invasion was with the Maginot Line…

    • General Fred

      The Maginot line may well have stopped the 1940 German advance…if it had extended over the portion of the frontier that the German’s used to invade. The odd thing is, that in WW1 the Germans violated Belgium’s neutrality and invaded France that way, a vast “right hook” movement to outflank and round up the French army. Why did the French assume that in any subsequent war that the German’s would ignore the tactic that brought them so close to victory in 1914 ?

      The French were strategically in lala land in early 1914 until Joffre had a sudden fortituous flash of inspiration despite the fact that the Schlieffen Plan was well enough known to feature in a major article in the Times newspaper (article by Colonel Reppington) earlier in the year. That delusion was only really bettered by their state of mind in 1939-40.

      • John Hasley

        To be fair, General, the French did consider the Germans’ invasion of Belgium in WW1. They decided that they couldn’t afford to have a line of fortifications turning their industrial strongholds in the north into a battlefield. They planned to fight in Belgium. Since they couldn’t ask Belgium “Can we build a string of forts in the middle of your country so the next war can be fought there?”, they planned on moving their forces forward when the Germans invaded Belgium. (I think they planned on setting up along the Dijle River.)

        When the French and British did this, the Germans went through the Ardennes to the Channel, cutting off the force that had gone into Belgium. (Von Bock commanded the force that repeated the WW1 maneuver and von Rundstedt commanded the force that went through the Ardennes, if I remember correctly.) The French may have not made the correct decision, but they did consider it.

  • HSmith

    The Keynesians were wrong, were they? The Keynesians are always wrong. There are many of us out here in fly-over country who knew this because it always happens this way.

    • geek49203

      No, the Keynesians were right — as I recall, Keynes was alarmed at spending in his day? Those who scarcely understand the economic thought, but used it for political power and monetary gain, just hijacked whatever science there is in Keynes’ work. Kinda like people did for climate studies I think.

      • pointsnfigures

        the keynesians believe in pump priming, They believe in government spending as a multiplier effect. It has a multiplier effect is 0.

        • Max Mulvihill

          Especially in a nation with the worlds greatest infrastucture, physical and financial

      • richard40

        Good point. Keynes actual theory is fairly good. It is the fraudalent dem interpretation and application of that theory that has caused havoc. For example:
        1. Keynes advocated extra spending in recessions, but only if it was later repaid with surplusses during booms. Dems forgot about that last part.
        2. Keynes said fed apending could create net jobs, but only if the multiplier for the fed project had more economic benefit that the private sector spending it displaces. But of course we know that rarely happens. Perhaps it can with essential infrastructure like good roads and dams, but definitely not with the Green Energy job scams and transfer payments.

  • TheAbstractor

    Exponentially increasing technology does two things: It creates much less work for people and makes goods and services much cheaper. Sounds great, except that in traditional economic terms, these effects translates in mass unemployment and huge deflation.

    If technology is fundamentally redefining what it means to be human, then our economic understanding needs to be fundamentally redefined as well. The triangular trade of Work-Money-Goods/Services is starting to break down, and society needs to adjust accordingly. We need to create economic institutions where either (1) a person can honorably not have to work yet still be materially provided for, and/or (2) a distributist system where each person is given the capital means to live self-sufficiently. I’m sick of talking about debt and lack and recession when humanity, at long last, has the tools it needs to create a paradise on earth.

    • grichens

      What radically new thinking!!!

    • Deoxy

      Goods, at least, should get cheaper faster than services – that is, it should take less and less work to afford what it takes to live.

      What you’re describing might theoretically happen at some point, but we are FAR FAR FAR from that – what’s killing us right now is the ridiculous monetary policies of most western governments, which can be most easily summed up as “Print, borrrow, tax, and spend/waste as much as possible as long as possible.”

    • cas127

      Right…thank god we gave all involved in buggy whip manufacturing permanent life support – otherwise who knows what might have become of them.

      But for the last 100 years they have been financially safe in their sinecures provided by the incorruptible political process.

      Thank goodness.

  • Mike55_Mahoney

    The banks used the QE to self insure their red balance sheets having recognized FDIC was wholly inadequate. I felt this was evident when it was reported that banks were parking deposits with the FED and paying rent to do so. I am also not too sure this wasn’t Bernanke’s intention in the first place; protect the banks. If the banks couldn’t earn their way out due to the Depression, then QE could not function as a poolof cheap lending because, who was going to borrow? So it must be used like the paying of an insurance claim. If, in this supposed scenario Bernanke really wanted to stimulate consumption, reflate the economy, he would have made direct tax rebates to taxpayers. But that would have left the banks to die on the vine.

    • pointsnfigures

      If banks went out of business because of bad business practices, what’s the harm?

      • Mike55_Mahoney

        There is always harm. Creative destruction and free market forces may have their upsides, but they also have downsides. I wish no business or sector any harm out of some kind of self righteous malice. But, I do think it is healthier to let markets work. Banks are always pleading to be held sancrocanctly off limits. I don’t believe it is good. We already have atrophied moral hazard in the sector to geat disruption.

  • drkennethnoisewater

    What correlation is there between velocity and (mis)pricing? Presumably, if prices are too high, velocity goes down, and if prices are too low, velocity goes up. As long as pricing is propped up, velocity gets squelched. Then you get more money pumped in until the nominal price is close enough to reality that velocity increases, at which point it gets wildly out of control as increased velocity magnifies the pumped-in money’s inflationary effects.

    I wonder if there’s any good articles/studies on the relationship between pricing and velocity..

    • pointsnfigures

      Velocity is important because no matter how much money they print, it doesn’t move. Only growth can cause money to turn over.

  • geek49203

    Well, at least the multiplier wasn’t a negative number. I assume that “zero” is what you’d get if you dump the money into the ocean, while a negative number would be a net negative. Given the long-term implications of another hundreds of bazillion dollars in National Debt, I feared that it would be a negative number!

    • Seabisquit

      Actually I saw several articles on two different studies indicating that the multiplier is slightly negative. It was something like $1 of government stimulus produced $0.92 of economic activity, indicating a slightly negative multiplier. I did not try to remember the numbers, just the principles.
      Someone will give us the numbers I am sure.

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  • Alec Rawls

    The government spending multiplier is worse than zero. It is negative. Growth would have been substantial without the spendulus. The private sector host has been buckling under the burden of the government parasite. Growing the parasite caused the host to buckle further, a cycle that will progress ever more rapidly into total collapse if we don’t start throwing off the improper roles of government ASAP.

  • gtwreck

    @Helicopter Ben—- Loved that comparison. Perfect – Helicopter Ben (the FED Ben) does not even realize his Maginot line did not hold. The French understood immediately albeit with a little help from the Germans.

  • anonymous

    You lack a theory, or an explanation, for exactly why lowering the cost of borrowing leads to less growth. High interest rates make it expensive to borrow money. This leads to less investment. Lowering interest rates leads to more investment.

    “They are going to contract because the continued machinations of the world’s central bankers have screwed up the costs of capital normally paid by the markets. ”

    By ‘screwing up’, you mean, ‘lowering’.Again, you seem to think that if capital costs were higher, that somehow there would be more business growth. The question is why you think this, because it doesn’t make sense. Higher interest rates would lead to every business and person in america trying to sell assets all at the same time to finance their newly expensive debt – i.e., more collapse. Our current problem is not people who lend money not making enough money to continue lending. Go read a bank balance sheet if you doubt it.

    Try this instead – growth is impossible unless consumption is rising. But the people for whom you are counting on rising consumption have not seen rising income in thirty years. The growth has been debt-fueled – that’s private debt – for decades. That was never sustainable, and now it’s done.

    You mistake the body’s immune reaction for the disease.

    • Mike55_Mahoney

      Its not axiomatic that lowering borrowing cost leads to less growth. It just happens to be an observable fact at this time. If an entity has reached their credit saturation point, no amount of lowering the cost of borrowing is going to induce that entity into more of it. Nor is lowering borrowing cost going to encourage more credit creation if it means tipping the debtor into default. Ben isn’t trying to reflate the economy. He’s building bank reserves to save them. Banks are hoarding cash, just in case.

    • pointsnfigures

      So, you think we should go to negative rates? Our current problem is banks borrow at 0 and reinvest in the US Treasury market at higher rates-no risk. Money gets created and doesn’t come out. There is no turnover, and the President has pursued terrible economic policies that have slowed growth, eliminating chance for turnover.

  • teapartydoc

    If they are going to give away free money, why can’t they give some to me? Why does The Bernanke always give it to The Goldman Sachs?

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