Home » Economy » Deflation Shock Coming? Or QE Euphoria?

Deflation Shock Coming? Or QE Euphoria?

by John Rubino on January 9, 2014 · 20 comments

Taki Tsaklanos over at GoldSilverWorlds has reprinted a series of charts from Incrementum Lichtenstein that show a reversal in several big trends. Here are a couple of them, followed by some other supporting material.

First, US banks have not only failed to return to their pre-2008 pace of lending, but the loan growth rate is now falling back towards zero. In other words, the trillions of dollars pumped into the banking system by the Fed in recent years don’t seem to have worked:

US bank lending 2013

Along the same lines, after the 2008 crash growth in the money supply spiked in the US and recovered modestly in Europe. But both trends are now declining:

Money supply US Europe 2013

To see what this means for the weakest links in the global finance chain, here’s a chart from Mike Shedlock showing how pretty much all the new credit being created in Spain is by the government, while private sector activity continues to contract.

Spanish loans 2013

In November, Spain’s youth unemployment rate exceeded that of Greece:

Spain saw its youth unemployment rate rise to a staggering 57.7% in November as the country registered the worse youth jobless rate in the eurozone area.

Eurostat, the statistical information arm of the European Union, also revealed the youth unemployment rate across the eurozone remained steady at 24.2% for the second consecutive month – meaning there were 3.5 million unemployed under-25s across the region.

“There is a real danger that these young people will get trapped in the ranks of the long-term unemployed,” James Howat, a European economist at Capital Economics, told IBTimes UK.

What does all this mean? Maybe that 2014 will be a year in which Europe leads the global economy back into recession, people start focusing on how deflation makes life even harder for debtors, and pressure builds for the European Central Bank to board the QE train. The Fed, meanwhile, will find it hard to justify more tapering with big parts of Europe on the brink of explosion (an inevitable result of 50+% youth unemployment) and will be forced to reverse course sooner rather than later.

So the question becomes one of interpretation. Do equity and other financial markets freak out over incipient deflation or soar in anticipation of global, unending debt monetization? Or one then the other?

However it plays out, fundamentals will likely take a back seat to perception and manipulation, which is, for a while longer, the way of the world.

  • Bill Johns

    Excellent piece. One minor nit to pick. You wrote, “In other words, the trillions of dollars pumped into the banking system by the Fed in recent years don’t seem to have worked”. I disagree. All that money is hard at work at various factories (Bentley, Ferrari, Aston Martin, Porsche) as well as home builders (think McMansions), and various product distributors (think high end art and jewelry). The money was never meant for the masses, it was targeted to refinance the TBTF banks and the nice folks that work there, and it did.

    • MacFly1

      Agree. They did exactly as they wanted to do.

  • Dan

    Who came up with the idea to create a middle class in China at the expense of the middle class in this country should be hanged as a trader, and our founding fathers would have gladly pulled the shutter.

    We should be raising the marginal tax rates back to what they were before Reagan came into office, repealing the Commodity Futures Trading Act, and the Gramm Leech Bliley Act., abandon the WTO, IMF, and the WB, and start rebuilding our manufacturing base and shrinking the over blown ponze financial sector that is strangling not only our economy, but the worlds economy with debt. It’s of Historical economic fact that when the marginal tax rates are reduced under 50% recessions to depressions show up more frequently when there is to much speculation in markets, and things like right wing finatics start becoming the voice of reason to impoverished. How can we show the world how advanced society is suppose to work when we can’t even manage our economy anymore?

    • David Reischer

      “Traitor” not “Trader”

      • Dagny

        … and Whomever not Who, Ponzi not ponze, too much not to much, fanatics not fanatics, to THE impoverished not to impoverished.

        • Jerry

          There will be no deflation because the money to cover the CDS’s defaulting has not even been printed yet.

          • Dave

            Bitcoin. I can’t think of any reason why every single person that is capable should not buy at least one BTC. There is a major storm coming and everyone should protect/hedge in every way that they can.

  • QEternity

    The natural order of the world is deflation. The natural dis-order of Fed thinking is inflation in order to keep the credit bubble growing and the banks solvent. Is the Fed bigger than the natural order of the world? I think not but they’ll run their presses into the ground attempting to prove as much.

    Good luck Janet, these are not the days of Paul Volcker and you are certainly not in his league.

  • ccitizen60

    While the money multiplier may be in neutral for the time being new money created via monetization of debt will no doubt continue to expand at increasing rates, with periodic attempts to “taper” failing. At some point markets will finally come to understand global currency debasement cannot be stopped and confidence in currencies will blow up. Then the demand for money will fall, possibly very quickly. That combined with increasing supply, especially when the multiplier comes back into the picture, will drive general price inflation to levels few are anticipating at this point.

    The price of money (invert the usual dollars/whatever) is determined by supply AND demand, as with any asset. It is demand for money, rather than supply, that is likely to change suddenly, dramatically and unexpectedly. The Fed, along with most economists and financial professionals, will never see this coming.

  • Bruce C

    Since QE has not created sustained bank lending (i.e., private credit growth) anywhere it has been tried (Japan, England, US, China and even Europe to some extent) I don’t see why the ECB would start it now or the Fed to continue it. That is, unless the central banks refuse to admit that healthy private sector economic activity and growth is in need of a breather and simply will not or can not grow at the 2+ % rate that the existing debt based fiat money system requires.

    Therefore, even if QE programs are increased I think deflation will prevail overall. Even the stock, bond, and housing bubbles will falter because they all depend on the rest of the economies developing too and they aren’t.

    Furthermore, and from an entirely different perspective, I can’t see how things are going to improve based upon the massive corruption, fraud and pragmatism that is behind all of these monetary and fiscal policies, especially during the last 5 years or so.

    • MacFly1


      Got gold, silver, beans, guns, n’ a bunker full o’ bullets?

  • chris

    The Fed has enabled massive Treasury supply for which there will never be
    organic demand anywhere near these rates absent a mega departure from risk into bond “safety”…ie, a depression.

    The fact that “foreign” holdings of US Treasury bonds are a
    record $5.65 T of the $12 T public outstanding debt (vs. $2 T Fed holdings) and
    foreigners are not selling off their holdings tells you they have been reassured
    QE is forever…otherwise they would soon be facing large losses as yields rose
    and bond prices collapsed…in other words, on a QE taper of it’s buying,
    foreigners would front run the exit.

    Hard to believe people (everybody) don’t understand the Fed now *must* print
    forever moar…no debate, no QE tapers or QE wind downs…no exit from
    hyper-monetization. End. Stop. Period.

    Gold, silver, commodity prices falling in this situation are ludicrous…as
    ludicrous as if I told you there would be fewer and fewer dollars
    chasing ever growing # of assets and this would cause the price to
    rise…we have an inverse where ever
    more infinite dollars are chasing fixed and growing scarcer
    resources causing the price

    That this would be accepted and peddled by economists, professors, etc.
    to the people show it’s clearly time for me to check into the Loony bin. How
    deep into the propaganda state are we to observe something and accept it is
    exactly the opposite as our observation.

    • Bruce C

      “…foreigners are not selling off their holdings tells you they have been reassured

      QE is forever…”

      Not necessarily. If enough bond holders (foreign or otherwise) believe that the Fed can and will hold short-term rates at near zero indefinitely (i.e., “ZIRP”) then long-term rates need not rise much because it is mainly the “spread” between long and short rates that matter financially. It’s what the Fed means by “tapering is not tightening”, “tightening” meaning that short term rates would be allowed to rise.

      However, there are two other reasons that LT bond holders would hang in there despite a tapering of QE: Slow or negative economic growth expectations, and price deflation expectations (regardless of QE).

      • pipefit9

        Falling interest rates are deflationary for the simple reason that new entrants to a business sector have a decided advantage over existing outfits, a lower cost of capital. Since a 32 year bond bull market appears to have ended in 2012, and interest rates are reverting to historical averages, with some inevitable overshoot, that important deflationary force is off the table.

        One could argue that the fed, theoretically, could up bond buying to whatever level is necessary to force a new multi decade low (for yields). However, that level of buying would probably cause a loss of confidence in the dollar long before the 10-yr treasury got back below 1.4%.

        Every day that goes by means 40 or 50 million barrels of legacy cheap oil no longer exist, and another huge pile of gold has gone into the Chinese treasury. Hard to see a deflationary outcome to this, and it is getting less likely every day.

    • MacFly1

      Hey now, you’re right but keep it to yourself, ok, fella?

      We’re watching you.

      The NSA

  • Anthony J. Alfidi

    The Fed’s pumping didn’t work because banks can now make more money from their safe Treasury carry trades than they can from risky lending. Banks had to tighten credit standards anyway after 2008 so QE was the Fed’s gift to Wall Street, not Main Street.

  • Wim Lammens

    I’m also thinking central banks main goal is to keep banks afloat and their currency competitive for globalised companies. Globalisation is not in the interest of the man in the street. If you have to compeed with your labor, then it will be very bad times for european and american workers. I wonder when people will start to realize that this deal is not in their intrest.

  • Trent

    if deflation does come, then it would fit the typical wall st playbook of pump and dump. They are pumping all of the shitty paper they made in the 2000’s to the fed and the public, then using the proceeds to inflate the stock market and what have you. 2014 is the year of the dump, market crashes but now balance sheets aren’t so shitty, taxpayer on the hook. Debts are saved by fed, public becomes a giant debt slave.

  • Johnny Reb

    Look, the youth unemployment rate is not 57% in Spain. Sure, somewhere between 43% and say 30% of the youths have tax declared jobs that pay tribute to the state. Some of the remaining 57% may well be 100% unemployed. But I’ll bet that at least 30% are working for cash under the table either full or part time. Also many family farms run by large families make their unemployed youth work in the fields while collecting their unemployment stipend. When you mix 21% VAT, draconian labor rights laws and an economy with a long history of barter and cash transactions then you end up with an “official” 57% youth unemployment rate.

    Heck, if you included drug dealing as self employment the youth unemployment rate in Detroit is probably lower than in NY.

    • pipefit9

      Yeah, there is still some flow of immigrants INTO Spain to work as domestics and other low paid staff. People work in much of Latin America for $10/day, or less, and they speak the spanish language just fine. So there’s no shortage of people that are willing to work in Spain for much less than the typical Spaniard would accept.

      Just like the USA, with 11 million undocumented workers here doing the jobs lazy Americans won’t touch

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