Deflation & Central Bank Delusions

Re-Blogged from By GE Christenson

Contradictions exist in our less than sane financial world.

Is it sensible to pay insolvent banks to hold your currency? Negative interest rates are now common.

Is it sensible to lend your savings to insolvent governments for 10 years at 2% interest or less when history shows us that the purchasing power of the currency will decrease far more than 2% per year?

Is it sensible that the time value of currency is effectively zero?  Zero or negative interest rates are not a sign of economic health.

Graham Summers has written about the $100 Trillion Trigger That Terrifies Central Banks.   From his article:

“The world is turning Japanese. 

“For over 20 years, Japan has been ground zero for the great Keynesian nightmare of central planning. Japan’s financial bubbles burst in 1989 – 1990. Since that time, Japan has seen little to no growth for 30 years. 

“In the simplest of renderings, Japan has proven point-blank that you cannot fight an epic debt bubble by making debt cheaper…However, this has not stopped Central Banks from around the world from implementing the exact same failed policies to fight their own bouts of deflation. 

“When stocks crash, investors go broke.  When bonds CRASH, entire countries go bust…  When this bubble bursts, 2008 will look like a picnic.” 

From Paul Craig Roberts:

“At any time the Western house of cards could collapse.”

From Mish (Mike Shedlock) and Bill Gross:

“The good times are over… there will be minus signs in front of returns for many asset classes.”

Andy Hoffman points out that the Baltic Dry Index fell to its lowest ever level in early January. He also notes that Japanese corporate bankruptcies exploded to an all-time high and that the number of Japanese households receiving welfare hit an all-time high for the sixth straight month.   He goes on to say:

“…when deflation truly kicks in, everything will decline in value – except money itself, i.e. physical gold and silver. The fact that nominal values will eventually explode when hyper-inflation arrives is immaterial, as real values will continue to plummet irrespective – just as they did in Weimar Germany and 1990s Zimbabwe, to name a few examples. Yes, everything that can’t maintain its purchasing power will plunge; and what ‘asset’ will lose more purchasing power than U.S. Treasury bonds?

“After all, who on earth would voluntarily lend money to the most heavily indebted, insolvent entity in history?”

From Bill Bonner and Richard Duncan:

“Under the gold standard, gold was money. So you had to pay for things with gold… But during World War I, European governments went off the gold standard… printed a lot of paper money… and used it to finance the government debt.

 “Today the global economy is like a big rubber raft.  Instead of being inflated with air, it’s inflated with credit.  On top of the raft you have all asset classes – stocks, bonds and commodities, including gold – and 7 billion people. 

“The problem is the raft has now become fundamentally defective.  So much credit has been created that the income of the 7 billion people is insufficient to service the interest on the debt… and they keep defaulting. 

“The natural tendency of the raft is to sink.  And when it sinks – as it did in 2008… and when QE1 and QE2 ended – all asset classes go down together. 

“There’s only one possible policy response – and that’s to pump in more credit. 

“That’s what the QE is about.  Central banks pump in more credit.”


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