For over six years, aggressive market interventions have pushed the financial system to its limits. The economic strategies employed have distorted the market in previously unimaginable ways. Instead of smoothing out the business cycle, these measures have intensified it, leading to more significant booms and deeper busts.
The delicate balance between inflation and deflation is now more pronounced than ever. Stock prices are reaching all-time highs, yet real wages are in decline. This contradiction indicates something is bound to change.
Much like the geological forces at play along subduction zones, the economy is under immense pressure. For years or even decades, this pressure can go unnoticed, allowing people to overlook the latent risks. They build homes in areas prone to seismic activity, forgetting the potential for disaster.
But this doesn’t mean that a significant event isn’t looming; it’s not a matter of ‘if’ but ‘when.’ When the San Andreas fault does eventually give way, the structural integrity of buildings across California will be severely compromised.
In a similar vein, considerable stresses have accumulated beneath the economic surface, waiting to be released. No one can predict when or how the financial system will ultimately give way—will it result in a hyperinflationary surge or a deflationary collapse?
Current Economic Landscape in the United States (November 2014)
There’s a lot to consider regarding our future trajectory. While we can assess past conditions, it’s vital to understand our present state. Let’s take a moment to consult Neil Irwin from the New York Times for clarification.
“Imagine telling an economist the following facts: Long-term interest rates have drastically fallen in recent months. Prices for crucial commodities like oil are plummeting due to weak demand. Markets are forecasting low inflation in the years to come and expect the central bank to maintain lower interest rates for an extended period.
“Based on only those details, the economist would likely infer that the country was facing a significant economic slowdown, possibly even a recession.
“However, what if stock prices are consistently rising to record highs, job growth is at its strongest level in years, corporate sales and profits are increasing, and various real-time economic indicators signal steady expansion?
“In that case, it would seem the country enjoys a robust economic outlook. Miraculously, both scenarios apply to the United States simultaneously as of November 2014.”
Understanding Global Currency Debasement
In essence, the economy is in a state of disarray—growing while simultaneously appearing to slow down. Stock indices and corporate profits are hitting unprecedented heights, yet consumer prices remain flat, and commodity prices continue to fall.
Moreover, Treasury yields are on the decline even as stock prices surge, indicating conflicting market conditions. Stock investors see clear skies and favorable winds, while Treasury investors are met with ominous clouds and headwinds.
The recent drop in oil prices is partially due to rising supplies in the U.S., thanks to the fracking boom. However, the balance between increased supply and reduced demand remains uncertain and speculative.
Additionally, the quantitative easing measures from the Bank of Japan and the European Central Bank are contributing to these mixed signals. Investors can borrow funds from Japan at negligible rates and invest in 10-Year Treasury notes yielding 2.31 percent, thereby weakening the yen and strengthening the dollar.
This is a crucial aspect to grasp. Despite the Federal Reserve’s balance sheet swelling by $4 trillion since 2008, the dollar is experiencing appreciation. This phenomenon results from Japan and Europe being in a more rapid state of currency debasement.
As we approach later this year, the Fed might reconsider its stance. A 20 percent decline in the S&P 500 could prompt them to reignite their printing presses. In the meantime, we can take comfort in lower gas prices.
Sincerely,
MN Gordon
for Economic Prism
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