Watch Out For Deflation

Posted: Jun 27, 2012 12:01 AM

One of the consequences of all the stimulus and subsequent QE is that long time traders of our markets know they are screwed up. Consistent printing of money and 0% interest rates world wide have created their own economic imbalances. As the saying goes, there is no free lunch.

Economists such as Taylor, Cochrane, Zingales, Rajan and Murphy have said as much over the past four years. Turns out, they were right and the Keynesians are wrong.

The government stimulus had a multiplier effect of 0. It did nothing for job growth or GDP growth in the US. Combine the inefficiency of US fiscal policy with the continued implosion of Europe, and you have a world wide malaise. In China, because of macro economic effects, wages are rising, costs to produce are increasing. Companies are also wary of both the poor property rights system and the lengthened supply chain. China is slowing down.

The economies of the world aren’t going to contract because of government spending decreasing. They are going to contract because the continued machinations of the world’s central bankers have screwed up the costs of capital normally paid by the markets. The money that they have printed hasn’t gone into the productive marketplace. Instead, it went to shore up balance sheets and sits.

Money isn’t turning over. There is no velocity.

Notes From the Underground has an excellent post this morning on it. Here are some of the salient words that send a chill up my spine.

If the impact of FED QE is played out and little to be gained by continued new programs, what will the impact be for the markets going forward? The investor world should be very concerned about an impotent FED and an intransigent CONGRESS, especially with a very anemic global economy. At what point will the FED be forced to seek new tools to ease the BALANCE SHEET RECESSION?

Maybe we should all buy some long dated out of the money puts on the S&P ($SPY, $ES_F)? The whole world has become Japan.

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