Wednesday, June 1, 2016

Easy Money, Excess Capacity, Trade Wars And Deflation—–It’s All Linked

It’s unclear what China was thinking when it was borrowed all those trillions to quadruple its capacity to make steel, cement and other basic industrial products. There’s no record of it checking in with the other countries that have such industries to see if a sudden surge of cheap imports was okay with them. 
“Modern” monetary policy, designed to achieve exactly the opposite outcome (that is, rising prices for real things), will in response be ratcheted up to ever-more-extreme levels — which in this analytical framework is like trying to douse a fire with gasoline. The result is a world in which past over-investment produces slow growth and falling prices while ever-more-aggressive monetary policy distorts markets beyond recognition and encourages new over-investment in different sectors, which then proceed to follow oil and steel into the deflationary abyss. And so on, until the system collapses under the weight of its own absurdity. 
Postscript: Gold and silver can’t suffer the fate of steel and oil because humans have been searching for these metals since the beginning of recorded history and have never been able to add more than a few percent to available supplies in any given year. In fact it’s getting harder to find accessible deposits, so no amount of currency creation will produce an oversupply. This imbalance between the rates of fiat currency creation and precious metals discovery is why the latter will rise relative to the former as long as current policies are in place.

Central bankers are now in the denial and anger stages of Kubler-Ross's famed stages of loss: denial, anger, bargaining, depression and acceptance. Central bankers are in denial that all their trillions of dollars, euros, yen and yuan have completely and utterly failed to achieve the desired result: "organic" (i.e. unmanipulated by central states/banks) expansion of productivity, investment and household earnings.
Only when central bankers accept the complete and utter failure of their policies and accept the reality that their policies have increased wealth inequality and crippled the global economy with debt, speculation and manipulation, can we finally move forward.
Until then, we're stuck with the world central bankers have created: a world of rising wealth and income inequality, of permanent manipulation of markets as a means of managing perceptions and of speculative debt/leverage bubbles that will burst with a ferocity few expect or understand.
DYI

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