“There was a very important article published on-line at Project Syndicate by the highly regarded William White. The piece, titled, The Dangerous Delusion of Price Stability, raises several important issues regarding the central banks belief that ‘low inflation is also a sufficient condition for sustained growth.’ White cites the inability to acknowledge that there are many various sources for disinflation. Sometimes there are demand shocks while at other times supply shocks such as when previous controlled economies unleash a massive labor force on the global economy. The effort to fight disinflation keeps interest rates low even when the cost of capital ought to rise in order to prevent a situation of excess capacity on a global scale. By keeping borrowing costs too low the entire financial system increases borrowing which leads to a feedback loop of having to sustain low interest rates. As White said: ‘True, as a matter of arithmetic, deflation increases the real [inflation-adjusted] burden of debt service. But if debt levels are at ONEROUS HEIGHTS AS A RESULT OF EASY-MONEY MONETARY POLICIES, [emphasis mine] it is not obvious that the solution to the problem is still more easy money.’

Policy makers need to wean themselves off the inflation-targeting nature of global monetary policy. Please read the White piece as it sets the agenda for so much of what we will face in 2018. Along with White’s piece is the need to remind ourselves of the warning from Mr. Zhou from the Bank of China: There is far too much complacency as debt-to-GDP ratios rise, creating the environment for a Minsky Moment. As interest rates rise the massive increase in debt on corporate, government and personal balance sheets will have to be serviced. Will there be enough growth to satisfy creditors? The Bernanke FED was an experiment in preventing the onset of deflation as experienced in the 1930s but while the portfolio balance channel boosted asset values the Bernanke plan had no exit strategy. Enjoy the calm as we head into a new year.”

Notes From Underground: Yields Increase But Watch Out, Take Care, Beware

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