US job gains impress, wage rates not so much; ECB rebuffs Greece; China exports jump; UST 10yr yields 2.25%; oil lower; gold slumps; NZ$1 = 73.6 USc, TWI = 78.2

Economists drive through the passage of time looking through the rear vision mirror. What they see in the mirror are all the data, graphs and charts informing them what the economy has been doing.



While they are busy looking in the rear view mirror they do not see the big hole in the road ahead called the Global Financial Crisis.



These same economists are now analysing the same data to see if there is deflation ahead or not. They are not sure.



Have they seen the real signs, just like ordinary people see?



When your average person drives through the passage of time, this is what they see:



Initially they see lots of second hand shops and lots of repair shops. Not much is throw away. There are repair shops to mend just about anything, from washing machines to fridges to stereos to radios and much more.



As they go further along through time they see the repair and second hand shops all starting to close. As these shops close they also notice an increase in the amount of rubbish being collected.



Of course everyone knows the reason for this is “Productivity”. It is becoming cheaper to manufacture things and prices have become so low it is no longer cost effective to repair these items. Best to just dump them and buy a new one.



“But wait” for decades economists have been saying how good “Productivity” is,



But



Productivity = reduced costs = lower prices – And this is great, so they say



And Deflation also = reduced costs – And this is real Bad, so they say



If prices fall because of productivity gains this is good and everyone can buy more.



Now they tell us falling prices = deflation and this is bad because people will put off buying



Boy what a crazy mixed up lot these economists are.



The point of all this of course is to point out that we have had deflation for decades, its just that we haven’t noticed. And the reason we haven’t noticed is because of our ponzie money scheme with its artificial inflation rigging.



Just to remind people that inflation is the constant and exponential falling value of our money. You have to keep paying more for the same thing because your money is loosing value.



And “Yes” you can have Inflation and Deflation at the same time.



You can become more efficient and produce goods more cheaply, but the price does not fall because the value of your money is falling faster. The Global Financial Crisis has exposed deflation that has been with us for decades. Their ponzie scheme has been exposed.



Deflation has been with us for decades and is not going away. The only question remaining is “Who will reap the benefits of this deflation”



PS: I hope you also read this Steven

I should add that in the period leading up to the GFC inflation was much higher that everyone realise. We had, say 5% deflation (see above) and, say, 8% inflation. The net result was that the data showed inflation to be 3%.

This data had an electric impact on both the bond and currency markets, raising yields and the US dollar sharply. Stock markets dropped, fearing the coming rate hike - another taper tantrum?

There are two glaring, but little discussed  factors impacting upon the pricing of global securities. 

Finally, with regard to balance sheet normalization, the FOMC has indicated that it does not anticipate sales of agency mortgage-backed securities, and that it plans to normalize the size of the balance sheet primarily by ceasing reinvestment of principal payments on its existing securities holdings when the time comes  As illustrated in figure 4, cumulative repayments of principal on our existing securities holdings from now through the end of 2025 are projected to be about $3.2 trillion. As a result, when the FOMC chooses to cease reinvestments, the size of the balance sheet will naturally decline, with a corresponding reduction in reserve balances. Read more

And by implication a growing understanding that an acute shortage of USD funding is evolving due to global central bank policy divergences.

The decline in the cross currency swap basis across most USD pairs in recent months is raising questions regarding a shortage in dollar funding. The fx basis reflects the relative supply and demand for dollar vs. foreign currency funds and a very negative basis currently points to relative shortage of USD funding or relative abundance of funding in other currencies. Such supply and demand imbalances can create big shifts in the fx basis away from its actuarial value of zero. Figure 1 shows that the dollar fx basis weighted across eight DM and EM currencies, declined significantly over the past year to its lowest level since mid 2013, although it remains well above the lows seen during the depths of the Lehman or the Euro debt crisis. Read more

NZD/USD 5yr FX basis swap quotes have fallen significantly over recent months. At the margin NZ foreign wholesale bank funding costs will rise.

Fantastic news to listen to while enjoying my latte this morning. Ben Bernanke is an unsung hero of the world. QE vs austerity - USA vs Eurozone - Bernanke has won.

If it took 6 or 7 years to pump trillions into the economy how many years will it take to remove it?

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