Fed Tapering? With These Deflation Risks?

The US central bank may be a long way from finished printing money yet...

AN ARTICLE in the Wall Street Journal on Monday, "Where Deflation Risks Stir Concerns", brought to mind some very serious considerations..

Though recent memory only recalls the deflation and anemic economy of Japan, it behooves us to take a larger look at history to see the reaction of more open societies to this type of crisis.

As stated in that WSJ article:

This was due to the inability of a business to remain profitable, forcing them to cut back on pay and let go of workers. That drove unemployment higher.

But what the article fails to mention is that this was also a major catalyst in what led to Germany's uprising and eventually to World War Two. In fact, economic strife in the twentieth century, which opened the door to revolutionaries, was the major driver of the bloodshed that followed throughout Europe, for example in Bolshevik Russia and the Spanish Civil War as well.

Today in the European Union, "Prices are falling only in Latvia, Greece and Cyprus," says the WSJ. Looking at these three countries and the social unrest reported, this is certainly a cause for concern. Will there be more violent outbreaks caused by a shrinking economy? Will there be a domino effect that spreads throughout the Eurozone to other weaker economies? 

In the experiment of social engineering we call the Eurozone there are concerns for its survival. The coming years will surely be a test of the governing bodies' ability to control in a peaceful manner both social unrest and increasing poverty. The recent economic calamity has spread real hardship.

On the other side of the Atlantic the United States of America, which has pretty much felt insulated from the economic woes of Europe, may come to have this concern as well. The increasing income disparity, between rich and poor, combined with a deflationary economy, would be disastrous for the nation.

Though currently growth looks positive it remains a concern to the US government and the Federal Reserve that we may slip into a period of falling prices, wages and credit. The world is a much smaller place than it was less than a lifetime ago. This means that these concerns are not only valid but also an ominous threat.

This is the reason why the Fed remains cautious and not so ready to stop its Quantitative Easing money-printing as many economists expect. The US has historically been able to beat the threat from deflation mostly on the back of a growing population, increasing the utilization of natural resources to the benefit of economic productivity. But currently the population is growing at its slowest rate since the Great Depression. This combined with low credit growth and near-deflation in many consumer prices, plus our already large public debt burden, poses a long term threat.

In the US, new gas and oil exploration and discoveries have grown, and this in no small way has been a positive factor to the overall economy, driving down  many prices by cutting fuel costs. But will it be enough in the face of our other economic obstacles? Will the combination of a possible Eurozone deflation with a slow growing US, as well as rising inequality, trigger major social unrest here?

With such uncertainty over the future of the global and domestic economies it is logical to seek some assurances. This is most likely why our Gold Investor Index in December remained positive, coming in at 52.9 and showing yet again more buyers of gold than sellers.

Overall, and led by primarily long-term buy and hold investors, BullionVault users continue to maintain their position in the only sure thing the global economy has ever known. The risk of deflation, which led the Fed to print unheard of quantities of money starting 2008, isn't done yet.