Submitted by Lance Roberts of Street Talk Live blog, In several of my recent missives I have made several references to the wave of deflationary pressures that are currently encircling the globe. In "Japan: A Few Thoughts On The Crash...
Submitted by Lance Roberts of Street Talk Live blog, In several of my recent missives I have made several references to the wave of deflationary pressures that are currently encircling the globe. In "Japan: A Few Thoughts On The Crash" I stated: "The unintended consequence of such actions, as we are witnessing in the U.S. currently, is the ongoing battle with deflationary pressures. The lower interest rates goes the less economic return that can be generated. An ultra-low interest rate environment, contrary to mainstream thought, has a negative impact on making productive investments and risk begins to outweigh the potential return." Also, in "Bernanke's Link to "Mother Nature" "How many more natural disasters will come to offset the negative economic impact of a zero interest rate environment coupled with a wave of deflationary pressures is unknown." But most importantly in "Why Bonds Aren't Dead & The Dollar Will Get Weaker" I stated: "A wave of 'disinflation' is currently engulfing the globe as the Eurozone economy slips back into recession, China is slowing down and the U.S. is grinding into much slower rates of growth. Even Japan, despite their best efforts through a massive QE program, cannot seem to break the back of the deflationary pressures on their economy. This is a problem that has yet to be recognized by the financial markets. The recent inflation reports (both the Producer and Consumer Price Indexes) show deflationary forces at work. Wages continue to wane, economic production is stalling and price pressures are falling. More importantly, there are downward pressures on the most economically sensitive commodities such as oil, copper and lumber all indicating weaker levels of economic output. The battle against deflationary economic pressures has been what the Federal Reserve has been forced to fight since the financial crisis. The problem has been that, much like 'Humpty-Dumpty', the broken financial transmission system, as represented by the velocity of money, can't be put back together again." The last paragraph above is particularly important. The biggest fear of the Federal Reserve has been the deflationary pressures that have continued to depress the domestic economy. Despite the trillions of dollars of interventions by the Federal Reserve the only real accomplishment has been keeping the economy from slipping back into an outright recession. However, when looking at many of the economic and confidence indicators, there are many that are still at levels normally associated with previous recessionary lows. Despite many claims to the contrary the global economy is far from healed which explains the need for ongoing global central bank interventions. However, even these interventions seem to be having a diminished rate of return in spurring real economic activity despite the inflation of asset prices. Despite the ongoing rhetoric of those fearing inflation due to the Fed's monetary interventions the reality is that such actions have, so far, failed to overcome the deflationary forces of weak global demand. The chart below is the spot price of copper. Copper, often dubbed "Dr. Copper", is very sensitive to economic growth as copper is used in everything from production, to manufacturing, transportation, housing, etc. So goes copper - so goes the economy. Copper is currently confirming the peak in economic growth for the current cycle. However, the question remains, do we have inflation or don’t we? Are we experiencing the 1970’s all over again as inflation kills the economy, or in the words of Ben Bernanke, have we entered an era of low inflation and interest rates that will last for some time as the threat of deflation remains a prevalent enemy to the economic recovery? 3 Components Of Inflation I believe that there are three components required to create a truly inflation environment. Commodity price inflation is certainly one of them as it does immediately impact t