What You Must Know About Global Currency Debasement

After six years of heavy handed market intervention the financial system has been pushed to the extremes.  Scientific management of the economy has twisted and contorted it in ways that would’ve otherwise been impossible.  Rather than moderating the business cycle it has exacerbated it…the booms are bigger, the busts are more pronounced.

What we mean is the yin and the yang of inflation and deflation have never pulled harder.  Stock prices rise to record highs yet real wages decline.  Obviously, this doesn’t compute.  Something has got to give.

Like the subduction zone where the Pacific Plate pushes underneath the North American Plate, the pressure builds.  No outward instability is apparent on the surface for years…or even decades.  In fact, the peace and tranquility extends for so long people forget the hidden danger.  They build houses directly on top of the fault.

But this doesn’t mean something big isn’t coming.  There’s no if to the matter, just when.  Moreover, when the San Andreas Fault ruptures, structure foundations will rapidly crack and cave across the Golden State.

Similarly, massive pressures have built below the economy’s surface…pressures that must be released.  No one quite knows when or which way the financial system will ultimately rip.  Will it be a hyperinflationary explosion or a debt deflationary implosion?

The United States in November 2014

Certainly, there’s a lot to come.  Where are we headed?  We know where we’ve been.  But where are we now?  Here we’ll pause for a moment and check in with Neil Irwin, at the New York Times, for perspective…

“Suppose you told an economist these facts and only these facts: Long-term interest rates have fallen sharply over just a few months.  Prices for oil and other much-needed commodities have been in free fall in the face of weak demand.  Markets are predicting that inflation will be low in the years ahead and that the central bank will keep interest rates lower for longer.

“Knowing only those facts, the economist would conclude that this country was staring down the barrel of a significant economic slowdown, and maybe even a recession.

“What would that economist conclude, though, if stock prices are consistently rising toward record highs, job gains are the best in years, corporate sales and profits are rising, and business surveys and other real-time indicators of the economy point to steady expansion?

“That country, of course, would seem to have a perfectly strong economic outlook.  And as you have surely guessed, both these situations apply to the same country at the same time, which is to say the United States in November 2014.”

What You Must Know About Global Currency Debasement

The long and the short of it is the economy’s greatly at odds with itself.  It appears to be slowing down yet speeding up at the same time.  Stocks and corporate profits are at record highs.  Consumer prices are flat.  Commodity prices are falling.

But that’s not all.  Treasury yields are falling while stock prices are rising.  These price movements signal opposing conditions.  Stock investors see sunny skies and a light tailwind.  Treasury investors see storm clouds and onshore gusts.

Oil price declines are being partly driven by rising supplies in the United States because of the new fracking boom.  But how much are the price declines attributable to increased supplies and how much are they from decreased demand?  Any answer to this question is really just a guess.

Quantitative easing from the Bank of Japan and coming soon from the European Central Bank are also contributing to the mixed signals.  Speculators can borrow money from Japan for practically nothing and buy the 10-Year Treasury note yielding 2.31 percent.  This has the effect of pushing down the value of the yen and pushing up the value of the dollar.

This, you see, is a critical insight.  Despite the $4 trillion added to the Fed’s balance sheet since 2008 the dollar is getting stronger.  It just so happens that Japan and Europe are more rapidly debasing their currencies.

Perhaps later this year the Fed will get back to it.  A 20 percent drop in the S&P 500 is all it will take for them to fire up the printing presses.  In the meantime, we’ll enjoy the cheaper gas prices.


MN Gordon
for Economic Prism

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