Those who place their faith in a sustainable economic recovery emanating
through government fiat will soon be shocked. Colossal central bank
counterfeiting and gargantuan government deficit spending has caused the
major averages to climb back towards unchanged on the year. Zero interest
rate and negative interest rate policies, along with unprecedented interest
rate manipulations, have levitated global stock markets. But still,
sustainable and robust GDP growth has been remarkably absent for the past 8
years.
Equity prices have now become massively disconnected from underlying
economic activity, and the recession in corporate revenue and earnings growth
is exacerbating this overvalued condition. Throw in the fact that earnings
have been manipulated higher by Wall Street's recent prowess in the art of
financial engineering, and you get an extremely combustible cocktail.
I have been on record saying this will end in chaos and here is how I
think it will unfold:
Global central banks have universally adopted inflation targets, yet claim
those goals have yet to be met. This is because of the inaccurate way
governments measure consumer price inflation. Nevertheless, most of the new
money created has been pushed directly into real estate, equities and bonds
by financial institutions; thus primarily inflating the asset prices of the
rich and increasing the wealth gap. And since these economic leaders equate
growth with inflation, the inability to achieve inflation targets is viewed
also as the primary reason why growth has remained so elusive.
To bring inflation sustainably above the stated goals of 2% the private
banking system would have to be able to push credit directly onto debt
disabled consumers, which is impossible unless real income growth, after
decades of falling, suddenly begins to surge; and/or consumer debt levels
were dramatically pared down.
Therefore, central banks would need to inject credit directly into
consumer's bank accounts while pushing deposit rates sharply into negative
territory. In order for that to be truly effective they would also have to
ban physical currency. To date no central bank has dared to use these drastic
measures to meet their inflation targets...although if they did, intractable
inflation would be guaranteed.
Governments have failed to reach their stated inflation and growth targets
through the current "conventional" strategies of currency
depreciation and manipulating the yield curve to record lows. The salient
issue being that chronically low nominal GDP growth rates are resulting in an
insufficient tax base to handle the sharply mounting global deficits and
debt. Japan is a perfect example of the flawed strategy of producing growth
through inflation: the nation is suffering through its third recession since
2012, despite Prime Minister Abe's monumental efforts to lower the value of
the yen and ramp up government deficits.
Enormous increases in government debt have historically caused sovereign
debt yields to spike, causing debt service payments to become unmanageable.
The recent European debt crisis is a perfect example of this:
Back in 2012, creditors grew wary of the countries referred to as PIIGs
(Portugal, Ireland, Italy and Greece); and their ability to pay back the
massive amount of outstanding debt they had accumulated. Consequently,
creditors drove interest rates dramatically higher to reflect the added risk
of potential defaults. For example, in Portugal the Ten-year Note went from
5% to 18%, as government debt to GDP soared from 70%, before the crisis, to
where it sits today at 130%. But thanks to their European Central Bank's
(ECB) policy of buying ever-increasing amounts of Portuguese debt, that yield
today stands at just 2.7%
The ECB, the Bank of Japan (BOJ) and the Peoples Bank of China (PBOC) have
already promised the markets to artificially hold borrowing costs at record
lows as they try to inflate their way out of a debt crisis. This is why ECB
head Mario Draghi felt compelled to "do whatever it takes" to keep
bond yields quiescent. This commitment of government to usurp control over
the entire sovereign debt market is spreading across the globe.
The Federal Reserve is about to join these other central banks once the insipient
U.S. recession manifests, even to the eyes of an economically-blind member of
the FOMC. This dilating epiphany will occur as annual deficits vault once
again over one trillion dollars and pile onto the $18.6 trillion dollar debt.
It will be at that point all major global central banks will be in a position
of permanently monetizing most, if not all, of the massive sovereign debt
issuances.
The mandatory strategy of allowing deflation to rebalance debt levels and
return asset prices to a sustainable equilibrium has become anathema to
global leaders because the temporary depression that would result is
politically untenable. Instead, Gov't Leaders are 100% committed to the
flawed and baneful strategy of trying to create viable GDP growth through prodigious
currency depreciation, interest rate domination and inflation.
In order to facilitate this inflation scheme, Central banks, in full
cooperation with governments, are swiftly moving to the strategy of
circumventing the banking system and directly monetize sovereign debt.
The bottom line is intractable inflation has been the inevitable and tragic
fate of all insolvent governments.
But this scenario of central bank over reach is not just the ramblings of
some Cassandra. The new Economic Counselor for the International Monetary
Fund (IMF), Maurice
Obstfeld, called for unconventional intervention in an interview ahead of
the annual IMF
research conference. This economic leader of the new world order said,
"I worry about deflation globally...It may be time to start thinking
outside the box...at the zero lower bound, our options are much more
limited...In order to bring inflation expectations firmly back to 2% in the
advanced countries, where we'd like to see it, it's probably going to be
necessary to have some overshooting of the 2% level..."
And if that wasn't telling enough here is a striking excerpt from a paper
prepared by Adair Turner who is a member of The Bank of England's Financial
Policy Committee, which supports my contention that central banks are
exploring the option to directly finance government spending. From the Wall
Street Journal:
"One option is for central bankers to overtly finance increased
budget stimulus with permanent increases in the money supply. Japan will be
forced to use such 'monetary financing' within the next five years and the
policy should become a normal central bank tool for all economies facing
stagnation."
We now have the all conditions in place for an unprecedented breakout of
worldwide stagflation; secular economic stagnation, insolvent governments and
central banks that are willing to enable a humongous increase in deficit
spending by permanently monetizing that debt. Sadly, the fiscal and monetary
conditions for global economic chaos have now been set in stone. It's only a
matter of time. And unfortunately, that time is short.
