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Global Central Banks Face the Specter of Deflation

The central banks of Japan and the European Union have gone all out to shore up inflation. But, so far, the results have been disappointing.

Likewise, the U.S. Federal Reserve has done all it can to stimulate the U.S. economy. So far, the U.S. economic "recovery" has been relatively weak.

The October 2014 Elliott Wave Financial Forecast offers insight into the worldwide specter of deflation:

Until now, deflation has quietly pressed upon the global economy. But its presence is starting to be felt in media accounts that compare different economies and financial instruments to those of Japan. In early September, a widely quoted Bank of America Merrill Lynch research report stated that China "may be entering an asset-deflation phase" that looks very similar to Japan's in the 1990s. The report finds the same "imbalanced growth, government stimulus, overcapacity, overwrought housing market and severely under-capitalized financial system" that have plagued Japan since 1989. "What Happens If China Becomes Japan?" asked Bloomberg on September 16. On the other side of the world, people are drawing the same parallel. Back in August, Bloomberg noted that German Bund yields had dropped to just 1%, "stoking fears that the euro zone faces a 'lost decade' of economic stagnation similar to Japan." On Tuesday, Bloomberg updated its observation, saying, "Similarities between the euro region and Japan are intensifying." According to the article, this is "heaping pressure" on central bankers to do something. But as Bank of America's study notes, government intervention is just another parallel to Japan. At this point, Japan's central bank has tried everything, including quantitative easing, similar to the program the U.S. Fed is now completing. With U.S. stocks now in retreat, it should not take long for the Federal Reserve's failure to be exposed. On September 17, Richard Barley of The Wall Street Journal pointed out that the easing may backfire as the Fed's easy-money policy simply "led investors to discard the anchor of absolute value in favor of the siren song of relative value, storing up losses and volatility for the future." This is, of course, the catch. By artificially pulling demand for assets as well as goods and services "forward from the future," the Fed only stockpiled added fuel for the deflationary fire. Now that deflation is engulfing nearly every major economy in the world, it should pull prices down across the board. On Thursday, the European Central Bank joined the fray and announced it will spend as much as $1.3 trillion over "at least" the next two years to boost inflation. Yet European stock indexes were uniformly down. The ECB's inability to spark at least a short-term rally hints at the coming, long overdue era of recognized Central-Bank impotence.