Why the Black Hole of Deflation Is Swallowing the Entire World … Even After Central Banks Have Pumped Trillions Into the Economy

Deflation Threatens to Swallow the World

Many high-powered people and institutions say that deflation is threatening much of the world’s economy …

China may export deflation to the rest of the world.

Japan is mired in deflation.

Economists are afraid that deflation will hit Hong Kong.

The Telegraph reported last week:

RBS has advised clients to brace for a “cataclysmic year” and a global deflationary crisis, warning that major stock markets could fall by a fifth and oil may plummet to $16 a barrel.


Andrew Roberts, the bank’s research chief for European economics and rates, said that global trade and loans are contracting, a nasty cocktail for corporate balance sheets and equity earnings.

The Independent notes:

Lower oil prices could push leading economies into deflation. Just look at the latest inflation rates – calculated before oil fell below $30 a barrel. In the UK and France, inflation is running at an almost invisible 0.2 per cent per annum; Germany is at 0.3 per cent and the US at 0.5 per cent.

Almost certainly these annual rates will soon fall below zero and so, at the very least, we shall be experiencing ‘technical’ deflation. Technical deflation is a short period of gently falling prices that does no harm. The real thing works like a doomsday machine and engenders a downward spiral that is difficult to stop and brings about a 1930s style slump.

Referring to the risk of deflation, two American central bankers indicated their worries last week. James Bullard, the head of the St Louis Federal Reserve, said falling inflation expectations were “worrisome”, while Charles Evans of the Chicago Fed, said the situation was “troubling”.

Deflation will likely nail Europe:

Research Team at TDS suggests that the euro area looks set to endure five consecutive months of deflation, starting in February.


“The further collapse in oil prices and what is likely spillover into core prices means the ECB’s 2016 inflation tracking is likely to be almost a full percentage point below their forecast of just six weeks ago.”

(Indeed, many say that Europe is stuck in a depression.)

The U.S. might seem better, but a top analyst said last year: “Core inflation in the US would be just as low as in the Eurozone if measured on the same basis”.

The National Center for Policy Analysis reported last week:

Medical prices grew 0.1 percent, versus a decrease of 0.1 percent for all other items, in December’s Consumer Price Index.

In addition:

Trucking freight in the U.S. is in steep decline, with freight companies pointing to a “glut in inventories” and a fall in demand as the culprit.

Morgan Stanley’s freight transportation update indicates a collapse in freight demand worse than that seen during 2009.

The Baltic Dry Index, a measure of global freight rates and thus a measure of global demand for shipping of raw materials, has collapsed to even more dismal historic lows. Hucksters in the mainstream continue to push the lie that the fall in the BDI is due to an “overabundance of new ships.” However, the CEO of A.P. Moeller-Maersk, the world’s largest shipping line, put that nonsense to rest when he admitted in November that “global growth is slowing down” and “[t]rade is currently significantly weaker than it normally would be under the growth forecasts we see.”

Indeed, shipping seems to have totally collapsed, and Bloomberg notes that “hiring a 1,100-foot merchant vessel would set you back less than the price of renting a Ferrari for a day.”

And the velocity of money has crashed far worse than during the Great Depression.

And see this.

Why Didn’t the Central Banks’ Pumping Trillions Into the Economy Prevent Deflation?

But how could deflation be threatening the globe when the central banks have pumped many trillions into the world economy?

Initially, quantitative easing (QE) – instituted by most central banks worldwide – actually causes DEFLATION.

In addition, governments on both sides of the Atlantic have encouraged bank manipulation and fraud to try to paper over their problems.

Why’s this a problem?

Because fraud was one of the main causes of the Great Depression and the Great Recession, but nothing has been done to rein in fraud today. And governments have virtually made it official policy not to prosecute fraud.

Fraud is an economy-killer, and trying to prevent deflation while allowing a breakdown in the rule of law is like pumping blood into a patient without suturing his gaping wounds.

The government also chose to artificially prop up asset prices … while letting the Main Street economy tank.

Governments also pretended that massive amounts of public and private debt are healthy and sustainable … but they are not.

And the trillions in central bank money never really made into the real economy, but were handed under the table to the fatcats. For example:

  • The Fed threw money at “several billionaires and tens of multi-millionaires”, including billionaire businessman H. Wayne Huizenga, billionaire Michael Dell of Dell computer, billionaire hedge fund manager John Paulson, billionaire private equity honcho J. Christopher Flowers, and the wife of Morgan Stanley CEO John Mack

By choosing the big banks over the little guy, the government has doomed BOTH.

In addition, bad government policy has created the worst inequality on record … and inequality is an economy-killer.

What Do the Economists Say?

We asked three outstanding economists why central banks pumping trillions into the world economy hasn’t worked to prevent deflation.

Professor Michael Hudson – Distinguished Research Professor of Economics at the University of Missouri, Kansas City, and economic advisor to governments worldwide – told Washington’s Blog:

The debts were left in place in 2008 instead of being written down. So the economy is now in a classic debt deflation. QE seeks to inflate asset markets, not the real economy. The choice in 2008 was whether to bail out the banks or the economy — and the former were bailed out — the political Donor Class.

Economics professor Steve Keen – the  Head Of School Of Economics, History & Politics at Kingston University in London – has previously agreed, saying:  we’ll have “a never-ending depression unless we repudiate the debt, which never should have been extended in the first place”.

Professor Keen tells Washington’s Blog:

The simple reason is that, with the possible exception of the Bank of England, none of the Central Banks (and very few of the private banks themselves) understand how money is created. To create money, you have to put money into bank deposit accounts–thus increasing bank liabilities–at the same time as you expand the assets of the banks. [Background.]

QE hasn’t done that.

In the USA, they’ve simply bought privately created bonds–normally MBSs–off the banks. This shuffles the asset side of the banks’s ledgers (by exchanging government-created money for overvalued private bonds) but doesn’t change the liability side directly–so no money is necessarily created.

In the UK, the CB buys those bonds off pension and insurance funds, which does create money–but it creates it in the deposit accounts of companies who are legally obliged to buy assets with that money (shares and other bonds) rather than goods and services produced by the real economy.

So QE as practised has been irrelevant to the real economy, leaving the deflationary forces created by the huge private debt bubble to rage on free.

And Professor Bill Black – Professor of Economics and Law at the University of Missouri,  America’s top expert on white collar fraud, and the senior S&L prosecutor who put more than 1,000 top executives in jail for fraud – tells Washington’s Blog:

Everything that criminology and economics teaches is that if financial elites are allowed to cheat with impunity they will make themselves rich at the people’s expense and corrupt democratic government.

Black previously explained that we’ve known for “hundreds of years” that failure to punish white collar criminals creates incentives for more economic crimes and further destruction of the economy in the future.

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  • jadan

    I must be dreaming. A few weeks ago the Fed, populated with brilliant financial minds, declared that inflationary pressure justified a rate hike. My adaptation to reality is challenged.

  • TheCogitator

    If the central banks are creating money, they are inflating the money supply. Since the money has not found it’s way into the economy, we have not seen the effects of inflation. Because of the falling price of oil, and debt default, prices may be falling (deflating). I wish we did not use the words inflation and deflation to mean two different things. Inflation is used to denote inflating the money supply, and it is also used to indicate rising prices. Deflation is used to describe defeating the money supply by reducing it, and it is also used to describe falling prices.

    • jadan

      The QE money has found its way into the financial economy, the casino. Speculation in commodities and everything else has driven up prices. The rigged market kept the price of oil artificially high for years when demand was flat. Then one day the market collapsed and the parasites abandoned ship and found another market to pump and dump. This does not cause inflation, but devaluation. So-called investors in their money-for-nothing quest seem to drive up prices, but are, in fact, reducing the value of the dollar. A loaf of bread is not more dear, nor is it scarce; the dollar is worth less.

  • kimyo

    it’s a bit of a shame to fail to include tverberg/stoneleigh when writing an article about ‘the black hole of deflation’. black and keen deserve great praise, but their analysis is missing a key component: peak oil.

    stoneleigh in 2010, answering a reader’s questions

    Q: If we have $20 oil there will be no crisis, guaranteed. $20 oil and we have lots of credit/money expansion. Multipliers working and inflation/growth. We would have commerce. We would all be buying shit from (low- wage/cheap coal) China.

    Stoneleigh: I disagree. I think we will see $20 oil, but only because of a massive fall in aggregate demand due to the evaporation of purchasing power. $20 oil will not be cheap oil. On the contrary, it will seem very expensive to most people.

    Stoneleigh: I am not convinced we will see the dollar become a proxy for oil. I think the dollar will rise substantially as dollar-denominated debt deflates (creating demand for dollars), and people make a knee-jerk move into it on a flight to safety. However, I don’t think this will last more than a year or two at most.

    I think we are headed into a chaotic currency regime where floating exchange rates are dropped, currency pegs instituted in an attempt to ‘beggar they neighbour’, and those currency pegs fail.

    We are at Peak Oil now; we need very low-cost energy to fix it

    1. We are hitting something similar to “Peak Oil” right now. The symptoms are the opposite of the ones that most people expected. There is a glut of supply, and prices are far below the cost of production. Many commodities besides oil are affected; these include natural gas, coal, iron ore, many metals, and many types of food. Our concern should be that low prices will bring down production, quite possibly for many commodities simultaneously. Perhaps the problem should be called “Limits to Growth,” rather than “Peak Oil,” because it is a different type of problem than most people expected.

    2. The only theoretical solution would be to create a huge supply of renewable energy that would work in today’s devices. It would need to be cheap to produce and be available in the immediate future. Electricity would need to be produced for no more than four cents per kWh, and liquid fuels would need to be produced for less than $20 per barrel of oil equivalent. The low cost would need to be the result of very sparing use of resources, rather than the result of government subsidies.

    tverberg’s key observation echoes stoneleigh’s 2010 prediction: non-elite workers cannot afford the output of the system. the 51% who earn $31k or less can’t afford to take their families to disneyland. nor to a ball game. even a night at the movies is out of the question.

    nothing i’ve heard out of either sanders or trump indicates that they comprehend the nature of the problem we face.

  • redtroika

    Deflation is the best thing that can happen to the average person with little debt and real capital, thanks to the selfish brain dead Keynesian money printing debt vampires. Silver stake through the heart!