France was the latest Eurozone country to announce officially an entrance into negative “inflation.” The French were very cautious, overly it might be said, to assure that such an outcome was not at risk of pushing that economy into “deflation.” Apparently, rigidity in wages from socialism is a factor as an economic buffer, though left unanswered is where such an imbalance will factor out.
“We should stay with negative inflation for a couple of months but I don’t think there is a risk of deflation as the growth outlook is improving, which should help lift inflation,” BNP Paribas economist Dominique Barbet said.
“The risk of deflation is particularly low in France because of the rigidity of wages. This is not like in other countries like Spain.”
There is the ubiquitous appeal to the “improving outlook” that has in 2015 replaced the equally generic (and ultimately faulty) charm of “global growth” that dominated the “recovery” talk of 2013. Undoubtedly, as is usual in these kinds situations, the backdrop of “improving outlook” is almost totally monetary where nothing else would suggest as much.
Governing council member Christian Noyer said on Tuesday that the ECB’s asset purchase programme was large enough to ensure that euro zone inflation returns to its target of just under two percent in the second half of next year.
That’s an interesting prediction given that Eurozone HICP hasn’t been at 2% since January 2013. While Noyer may make the argument that there was no QE in between then and now, it isn’t like the ECB has been on the sidelines doing absolutely nothing. In fact, the ECB has been quite busy in these past few years, which is somewhat interesting in that the busier central banks seem to get the less they get what they say they want.
Credit markets in Europe remain equally unconvinced and thus unenthused. The German bund curve has barely budged despite all the ruckus and assurances about how “transitory” this decline might be. Perhaps credit investors have taken note that this economic decay has been obvious and in place steadily since 2011, which more than refutes that it is all just transitorily awaiting QE’s supposed immensity.
Apart from the Bank of Japan starting in April 2013, the ECB and Federal Reserve have been most active in creating bank “reserves”, which is highly curious given the track of official inflation. Without giving it much thought, you might even begin to wonder if creating so much bank “reserves” in the first place is actually “deflationary” as the correlation is obvious and ubiquitous across geography (one can easily add the PBOC to this same mix, to account for the four largest economic systems on earth).
Perhaps “deflationary” may not be exactly the right word for the case here, though I was writing in the context of “inflation”, as in terms of the overall economy it may just be “depressive.” The intertwining of economic results across oceans is stark in that regard.
We know conclusively that such intercontinental monetarism is eroding the wholesale funding system, meaning that global liquidity within the “dollar’s” reach, which, as shown above, is pretty much everywhere, is worse off for having experienced the distortions of QE (as LTRO’s) in the first place. There is no simple resetting of funding conditions to their original default position, as once financial resources allocate elsewhere they do not come back so easily, if at all.
Given that reality in funding, it is at the very least possible of similar results in economic function. The distortive nature of QE in finance is just as disruptive in economic function which would lead to the same kind of decay. It may be less obvious since we cannot track it like we can with bank balance sheets, but we already have sense of this via the fact the global economy never seems to gain that boost from “global growth” or “improving outlook.” Instead, wages and labor utilization continue to languish to the point six years later we are still wondering if there was even a recovery at all.
It’s an easy correlation to see, as the more intently central banks act the less they receive what they intend. Unfortunately, that acts as a positive feedback mechanism because the more QE depresses results the more central banks look to additional QE. It’s not as simple as just switching it off, either, as the Federal Reserve threatens to do. First, as the harmonization of “inflation” across both Europe and the US shows too well, the fact that the ECB is doing something highly intrusive very much negates the fact the Fed may not be. Second, the damage is already done, as once the “peaks are shaved off” the economy is in far worse shape than would otherwise be the case.
At root, economic agents are most disturbed by instability especially of the monetary variety. While central bankers believe themselves to be agents of stability, and even openly express as much, they only introduce instability in the other direction – leading to the same place eventually. They may try to convince everyone that it is preferable on this slow decay trend, but given the more valuable time component in compounding that is decidedly not the case. Get it over and done with quickly so that the organic economy can get back to doing society’s advancement. Slow decay is still decay, only with now six vital and costly years lost and we are heading back to the same trough anyway.