A New Type of War?

The new version of war could take the form of manipulating currency values as the whole world tries to grow. We get lots of questions about inflation, which we still don’t see imminent. In order to get traditional inflation… growth (not the stall speed seen in most developed economies) must be occurring somewhere on the globe.

To enforce this point here is an excerpt from Dr. Ed Yardeni this morning:

In the Brave New World (BNW), robots like Baxter will replace assembly line workers. In this world, the risk of ultra-easy monetary policies isn’t consumer price inflation. Even now as we approach the dawn of the BNW, such inflation remains remarkably low despite the best efforts of the central banks to boost it. The CPI inflation rate among the G7 economies was only 1.6% y/y during February, and even lower at 1.4% excluding food and energy. In the US, PPI inflation rates are close to zero. In the euro zone, the CPI inflation rate is just 1.7%, and 1.4% excluding food and energy. Japan continues to experience deflation despite years of NZIRP and QE.

In the BNW, pumping more liquidity into financial markets won’t stop consumer price deflation, but it will inflate asset prices, a.k.a. asset bubbles. Central bankers like Ben Bernanke at the Fed and Haruhiko Kuroda at the BOJ are still using models based on the 1930s. They are clueless about the BNW. That’s why they are so committed to doing whatever it takes to avert deflation. They can’t even imagine that productivity-led deflation should be welcomed as the best way to boost the purchasing power of all consumers, whether employed or on government support.

This morning we learn that the BOJ voted unanimously to significantly increase its purchases of Japanese government bonds and extend the average maturity of the bonds it purchases from three years to seven years. Mr. Kuroda has previously said that he would do “whatever it takes” to drive growth. Sure enough, the bank added that it would also buy relatively riskier assets such as exchange-traded funds and real estate trust funds!

The Yen is down over 11% versus the US dollar year to date.