Wednesday, 17 September 2014

Dr FED can not Exorcise the Deflation Ghost

The major central banks of the world have fought a war against the deflation ghost which has been bothering the oldest money-based industrialized economies of the globe since 2008 Financial Crisis.  

Major central banks afraid deflation too much cause paying government debts in an environment where prices, earnings and of course tax revenues are falling is very hard. Deflation increases the real value of public debt.

That’s why especially the American central bank FED and Japanese central bank BOJ are targeting to induce inflation. Inflation causes real value of debt to fall and makes it easier for the government to pay back.

"Saintfrancisborgia exorcism" by User Gerald Farinas - Licensed under Public domain via Wikimedia Commons
Due structural problems in old money-industry economies like inefficient and excessive source utilization, debt burdens amounted to unbelievable levels especially after 2008. And more importantly, already high ‘public debt to GDP ratios’ have continuously increased in all advanced economies since 2008. To make the matters worse, the IMF forecasts that except Germany led Europe debt to GDP ratios will keep rising for developed countries even until 2018.

If we consider that interest rates are expected to rise again in the US soon and push cost of debt up further, the situation is unsustainable for the US to repay debts and maintain the reserve currency position of the US dollar.

Amid these conditions, today bad news came on the inflation side for Dr. FED who is already trying to exorcise the deflation ghost with dropping trillions of dollars from helicopters. The US consumer prices fell for the first time in nearly 1-1/2 years in August. The CPI increased 1.7% in the 12 months through August after rising 2% in July. This is not good for Dr. FED who targets 2% inflation because the main reason for the fall in prices is decreasing oil costs and global oil prices are going down due cooling Chinese economy.

As general structural deflation in the developed countries leaves no room for Chinese exports, red dragon’s economy slows down and this lowers demand for oil and creates another circle of deflation. O ooo!! Major central banks of the world desperately print trillions of dollars paper money to cover the structural deflation in developed economies but since 2008 they are unsuccessful to reverse this trend and create sufficient inflation to get rid of unbearable debt burdens.

It seems, major central banks would need to take new measures in order to avoid this new wave of deflation and prevent collapse of their money supplies. Recently, Eurozone and China announced that they will print money. Under Abe administration, Japan started the largest money creating operation in the history. However, it would not be enough. I guess both the FED and the BOJ could also go for new extra measures.