Central banks are finding it's easier to push up stock and home prices than it is to prevent inflation from falling short of their targets.
While declining costs for everything from gasoline to coffee can be good news for consumers, disinflation makes it harder for borrowers to pay off debts and businesses to boost profits. The greater danger comes when disinflation turns into deflation, which leads households to delay purchases in anticipation of even lower prices and companies to postpone investment and hiring as demand for their products dries up.
"There is definitely a whiff of disinflation again taking hold globally," Robert Sinche, global strategist at Pierpont Securities Holdings LLC in Stamford, Connecticut, said Nov. 5 on Bloomberg Radio's "Bloomberg Surveillance."
Federal Reserve Chairman Ben S. Bernanke and his central-bank counterparts are trying to avert the deflationary danger by pumping up their economies with lower interest rates and monetary stimulus. They have bet the run-up in stock and home prices they've engineered would boost consumer and corporate confidence and spur faster growth and higher inflation. Now they're having to maintain or intensify their aid -- running the risk those efforts do more harm than good by boosting equity and property prices to unsustainable levels.
David Fuller's view For perspective,
we should remember that it takes at least five to seven years for economies
to recovery from credit crisis recessions. In more difficult cases it can take
approximately ten years. If the starting point is 1Q 2009, little over four
and a half years have elapsed since that date and some further deleveraging
by consumers is likely.
Corporations have faired better, by cutting waste and reducing staff numbers. While necessary, this has understandably further delayed a full recovery in consumer confidence. Moreover, corporations are less likely to hire more employees if they can find smart machines capable of doing the same work. Central bankers do not appear to have fully grasped this point.
Meanwhile, there are some property bubbles, from London to Shanghai, but I am tempted to say, 'and thus it always was'. Quantitative easing (QE) has certainly helped the stock market recovery but we do not have any serious bubbles at present, although Wall Street valuations are on the higher side of average and US indices such as the NASDAQ are currently overextended.