We now have the all conditions in place for an unprecedented breakout of worldwide stagflation:
- secular economic stagnation,
- insolvent governments and
- central banks that are willing to enable a humongous increase in deficit spending by permanently monetizing that debt.
Sadly, the fiscal and monetary conditions for global economic chaos have now been set in stone. It’s only a matter of time and, unfortunately, that time is short. (Words: 931)
By Michael Pento
Those who place their faith in a sustainable economic recovery emanating through government fiat will soon be shocked.
- Colossal central bank counterfeiting,
- gargantuan government deficit spending…
- zero interest rate and
- negative interest rate policies, along with unprecedented
- interest rate manipulations,
have levitated global stock markets but, still, sustainable and robust GDP growth has been remarkably absent for the past 8 years.
- Equity prices have now become massively disconnected from underlying economic activity, and
- the recession in corporate revenue and earnings growth is exacerbating this overvalued condition.
- Throw in the fact that earnings have been manipulated higher by Wall Street’s recent prowess in the art of financial engineering, and you get an extremely combustible cocktail.
Global central banks have universally adopted inflation targets, yet claim those goals have yet to be met. This is because of the inaccurate way governments measure consumer price inflation. Nevertheless, most of the new money created has been pushed directly into real estate, equities and bonds by financial institutions…[This has] primarily inflated the asset prices of the rich and [further] increased the wealth gap. Since these economic leaders equate growth with inflation, the inability to achieve inflation targets is viewed also as the primary reason why growth has remained so elusive.
To bring inflation sustainably above the stated goals of 2%:
- the private banking system would have to be able to push credit directly onto debt-disabled consumers, which is impossible unless real income growth, after decades of falling, was suddenly to begin to surge and/or consumer debt levels were dramatically pared down.
- the central banks, therefore, would need to inject credit directly into consumer’s bank accounts while pushing deposit rates sharply into negative territory [and,] in order for that to be truly effective, they would also have to ban physical currency.
To date no central bank has dared to use these drastic measures to meet their inflation targets…although if they did, intractable inflation would be guaranteed.
Governments have failed to reach their stated inflation and growth targets through the current “conventional” strategies of currency depreciation and manipulating the yield curve to record lows…[because] chronically low nominal GDP growth rates are resulting in an insufficient tax base to handle the sharply mounting global deficits and debt. Japan is a perfect example of the flawed strategy of producing growth through inflation: the nation is suffering through its third recession since 2012 despite Prime Minister Abe’s monumental efforts to lower the value of the yen and ramp up government deficits.
Enormous increases in government debt have historically caused sovereign debt yields to spike, causing debt service payments to become unmanageable. The recent European debt crisis is a perfect example of this:
- Back in 2012, creditors grew wary of the countries referred to as PIIGs (Portugal, Ireland, Italy and Greece) and their ability to pay back the massive amount of outstanding debt they had accumulated.
- Consequently, creditors drove interest rates dramatically higher to reflect the added risk of potential defaults. (For example, in Portugal the Ten-year Note went from 5% to 18%, as government debt to GDP soared from 70%, before the crisis, to where it sits today at 130%.)
- Thanks to their European Central Bank’s (ECB) policy of buying ever-increasing amounts of Portuguese debt, [however,] that yield today stands at just 2.7%
The ECB, the Bank of Japan (BOJ) and the Peoples Bank of China (PBOC) have already promised the markets to artificially hold borrowing costs at record lows as they try to inflate their way out of a debt crisis. This is why ECB head Mario Draghi felt compelled to “do whatever it takes” to keep bond yields quiescent. This commitment of government to usurp control over the entire sovereign debt market is spreading across the globe.
The Federal Reserve is about to join these other central banks once the incipient U.S. recession manifests, even to the eyes of an economically-blind member of the FOMC. This dilating epiphany will occur as annual deficits vault once again over one trillion dollars and pile onto the $18.6 trillion dollar debt. It will be at that point all major global central banks will be in a position of permanently monetizing most, if not all, of the massive sovereign debt issuances.
The mandatory strategy of allowing deflation to rebalance debt levels and return asset prices to a sustainable equilibrium has become anathema to global leaders because the temporary depression that would result is politically untenable. Instead, Gov’t Leaders are 100% committed to the flawed and baneful strategy of trying to create viable GDP growth through prodigious currency depreciation, interest rate domination and inflation.
In order to facilitate inflation, Central banks, in full cooperation with governments, are swiftly moving to the strategy of circumventing the banking system and directly monetize sovereign debt. The bottom line is intractable inflation has been the inevitable and tragic fate of all insolvent governments…
[Yes, indeed,] we now have the all conditions in place for an unprecedented breakout of worldwide stagflation; secular economic stagnation, insolvent governments and central banks that are willing to enable a humongous increase in deficit spending by permanently monetizing that debt.
Sadly, the fiscal and monetary conditions for global economic chaos have now been set in stone. It’s only a matter of time and, unfortunately, that time is short.
Want more such articles? Just “follow the munKNEE” on Twitter; visit our Facebook page and “like” an article; or subscribe to our free newsletter – see sample here.[The original article* was written by Michael Pento and is presented by the editorial team of munKNEE.com (Your Key to Making Money!) and the FREE Market Intelligence Report newsletter (see sample here – register here) in a slightly edited ([ ]) and abridged (…) format to provide a fast and easy read.]
*Original Source: http://www.24hgold.com/english/news-gold-silver-how-the-great-depression-2-0-will-soon-unfold.aspx?