What’s the true risk for the global economy? Its pronounced: /d??fl?SH(?)n/
We are not trying to be cryptic? We are falling in line with commentary and messages from central bankers, institutions, funds with respect to the economy. Here is the FOMC minute’s inflation range going into the next few years.
GDP average ranges from 1.8% to 2.6% per annum. Pay special close to the PCE inflation and Core PCE inflation ranges: 1.5% to 2.4%. The target inflation is 2.0 %. These figures are considering a composed or steady increase in economic activity and a return of capital expenditures by larger – big cap – companies into technology, human capital, infrastructure, etc. Remember, the multiple on private spending is several fold public spending.
The figures are not that bad, so far. We have an initial indication that the EU region is at risk of a slowdown. The US economy is not awash in economic happiness nor are we experiencing difficulty rubbing two nickels together. The Chinese are comfortable with slower growth. Not slow growth, just slower growth. This is the difference between 7.6% and 7.4% on an annual basis. The figure today was at 7.3%. Being fair, most economies in the world would give up their central bankers for that kind of GDP. Outside of China, the other high GDP is India. But we won’t mention the inflation levels in India in this article (wink, wink).
In pure economic terms, deflation is defined as the reduction of the general level of prices in an economy. Said simpler: If you know that a smartphone will be cheaper tomorrow than today by $5, would you wait till tomorrow or buy today? The very thought of considering that option is the beginning of deflation.
What’s the greater risk with deflation? The infectious contention that you can wait to get a “good deal” on a particular good or service. Why is this dangerous? This reduces the flow of money. If you hold your capital for a better opportunity, you are restricting the flow of money to the rest of the global economy. In economics 101, the groundwork for the sustainability of an economy is the movement of money.
We already began to witness in some ways in the EU. When factories are beginning to adjust pricing in relation to demand, we may have new leading indicator. The possible problem is that if we experience a precipitous decrease in economic conditions across the global. Notice how very little mention of inflation has remained in the lexicon of the central bankers in the last few weeks. We really are trying not to be conspiratorial.
What to watch for in the coming weeks? Inflation indicators: CPI, PPI, PCE, housing prices, factory orders, manufacturing PMI’s.
Continue to monitor how ECB central bankers react to the macroeconomic figures. Buying assets, QE, is an approach to bring in a bid in certain securities.
Remember, QE had a concentration on short to medium term securities. Not only did this allow the “Bid” in Treasuries, this also removed duration risk out of the equation. In turn allowing little fluctuation in the securities.
Central Bankers want stability in the markets and the economies. Any hint of removing the movement of capital sets the central bankers into motion. When interest leaves from Treasuries, Asset Based Securities, banks behave different to their clients and lending standards change. Augmentation to lending standards invites greater scrutiny. The burden is then on the borrowers. The flow of capital stops. Capital expenditures stops. Business begin to question the pricing of goods and services.
Our suggestion to the central bankers is to create another macroeconomic indicator. This will be different from the m1, m2, m3. Different from CPI,PPI, etc. This indicator will stem from the need to track the flow of money both intra and inter economies. Call it FoM, Flow of Money.
For now, we’re just standing on the street corner rubbing two nickels together waiting for the next smartphone deal.
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