Salient to Investors:

David Stockman writes:

The global economy is transitioning into a deep deflation.

Irving Kellner erroneously recommends the Fed delay its rate hike for reasons including the recent plunge in stock prices, the market’s dislike of an end to the easy money which has kept it afloat, and because all other central banks are easing. Kellner says higher interest rates will brake the nascent recovery, hurt exports and encourage imports, and hurt interest-rate sensitive sectors such as autos and housing. Kellner is saying that just a 25 basis point rise – to rates inaccessible to Main Street Americans – will cause exports, housing and autos to crumble. In other words, if money costs anything at all, it will kill capitalist prosperity, despite several centuries of economic progress prior to 1995 at above zero rates. Unfortunately, the vast majority of Wall Street economists and strategists agree with Kellner.

Central banks have created a huge bubble that they dare not risk puncturing, even if it means maintaining the lunacy of ZIRP indefinitely. We have been globally easing for the past 20 years, expunging financial discipline and honest price discovery from the money and capital markets. In that time, central bank balance sheets have risen from $2 trillion to over $22 trillion. The global economy is saturated with unsustainable $200 trillion of public and private debt.

Lee Adler says the explosion of Fed credit since the early 1990s, and especially since the financial crisis, has inundated the banking system with $2.6 trillion of excess reserves versus required reserves of around $95 billion. This huge reservoir of money has inflated stocks and bonds, but not goods and services on main street.

Two decades of cheap, nearly limitless credit have created huge levels of excess capacity in energy, mining, manufacturing, transportation and distribution, and so naturally has morphed into a relentless deflation.

The Fed’s money printing over the last two decades would have collapsed the dollar but for other central banks following suit, which put an artificial floor under the dollar’s exchange rate, thereby suppressing US domestic inflation and fueling trillions of off-shore dollars by foreign governments and corporations. Yield-starved US money managers purchased $10 trillion of inherently risky foreign bonds and loans.

The best measure of the monetary deformation of the last two decades is the explosive growth of central bank balance sheets and foreign exchange reserves among the four major sectors of the world economy outside of the US and Europe.

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