European bond yields went negative last week, saddling big investors who
want to sit on cash with a weighty surcharge for the financial luxury of
idling. While this abnormal state of affairs is not proof in itself that
deflation has finally begun to overwhelm the central banks, we’ll lay odds
that it’s not going to extract Europe’s economy from quicksand, let alone
ignite an increasingly prayed-for inflation. As much could be said of
Japan’s latest attempt to dynamite itself from the bog of deflation.
BOJ announced it was raising its annual monetary target to $724 billion
from around $580 billion. Twenty years of such shenanigans has produced no
successes — unless you regard bear rallies in the Nikkei as productive.
Still, because it’s more about enlarging expectations than about growing the
money supply, perhaps there’s still hope for the Masters of the Universe,
more than a few rubes actually seem to believe inflation is on the verge of
breaking out. There’s “Jay,” for one, who took me to task at Korelin Economic Report for my
hardcore-deflationist views: “Ridiculous… still wailing on about deflation,
Rick?? It’ll never happen for more than brief flashes in time. Japan is
answering your deflation as we speak. And 5,000 to 10,000-contract
dumps on Comex precious metals have ABSOLUTELY NOTHING to do with gold
signaling deflation…. Preposterous, imo.”
Now, I’m not about to get into another pissing match with anyone misguided
enought to think that serious inflation is about to return when it’s obvious
the deflationary vise is tightening on the global economy. If you want
to put your money where your mouths is, try shorting long-term Treasury Bonds
and we’ll compare results in a year, okay? But considering the economic
state of things in Europe and Japan, as well as the feeble delicacy of the
U.S. recovery, the burden of proof has shifted entirely onto the
inflationistas’ shoulders. Let them look silly trying to argue that Japan’s
latest monetary blowout will succeed where a dozen earlier attempts have
failed. And let the pundits and Keynesian pied pipers like Paul Krugman
scream “Inflate!!” at Europe, as though it could possibly make any difference
at this point. Listen up, you monetary onanists: Although printing-press
money may be fungible on Wall Street, where it is mostly hot air that is
being bought, sold and traded, it will not suffice to pay the very real costs
of Europe’s bloated welfare state, nor to prevent the eventual bankruptcy of
Greece, Portugal, Italy, Spain — and, ultimately, France.
U.S.-Style Monetization Won’t Work
There are additional reasons why American-style monetization would be an
economic bust for Europe. Consider the ways in which Americans “actualize”
credit shoved in their faces. In a big way, they plunk down 3% to buy homes
they could not otherwise afford. And those who own homes use whatever equity
they’ve accumulated to pay their kids’ college bills, remodel kitchens,
install home entertainment centers, take cruises and vacation in…Europe. They
dine out three nights a week, and buy gargantuan SUVs financed over five to
seven years. All of this has boosted consumption’s share of GDP in the U.S.
to 70%. However, none of these conditions even remotely obtain in
Europe’s culture of austerity, where children are voluntarily rationed at
sub-replacement rates, and where water is conserved so diligently that
utility pipes in some German towns reportedly are growing impacted due to
underuse. Perhaps such behavior is a throwback to the years when Europe
received CARE Packages during the Marshall Plan? Whatever the case, don’t
expect Europeans to shop-until-they-drop, as Americans are wont to do, merely
because money is practically free for the taking. At best, a monetary
shot-in-the-arm would simply push European shares higher. And that
would surely make Germans who know better and who are already nervous about
bankrolling the drunken sailors of Europe even more nervous about where the
folly of monetization might be leading. Anyone who doesn’t know where
it’s leading, and who believes stocks can only continue to move higher,
deserves to reap the disaster that’s coming.
