While paying lip service to concerns over escalating property prices and stockmarkets and the threat from bubbles, world policymakers have been knowingly inflating the value of assets for years in a bid to prevent a curse far, far worse: deflation a la Japan.
Confirmation that the 2014 oil shock has pulled Europe back into deflation for the first time since 2009 was immediately and predictably followed by a rally in stock markets, up on the easy bet Europe will turn up the stimulus.
All but the slowest learners now realise that if it’s a choice between further rises in asset prices and deflation, one look at recessionary Japan reveals why central bankers and politicians will take their chances with the bubble risk. It’s not a time to be left holding devalued cash.
Spearheaded by the Fed and followed by counterparts in Australia, China, the UK and others -- left with little choice in the face of US borrowing rates near zero for six years -- central bankers have waved cheap money around like catnip for the last half decade, doing anything it takes to keep short-term economic momentum going forward rather than backward.
The wealth effect from these accessible loans has, for the most part, kept the world economy expanding while experiments with fiscal austerity have been unsuccessful.
But there have been side effects, notably a significant and tough rise in living costs as gains in housing obligations widely outpace wage and job growth, and a worrying deepening of the gulf between the haves and the have-nots.
The richest 1 per cent of the world's population is now estimated to own more than 48 per cent of global wealth, evidenced by the chord struck by French ‘rock-star’ economist Thomas Piketty’s unlikely 700-page bestseller about economic inequality.
The 25- to 34-year-old age group is worse off than it was a decade ago, and younger Australians could have a poorer standard of living than their parents, a Grattan Institute study concluded.
To the fury of many who fear an eventual megacrash from a bubble pop of never-before-seen proportions, asset-price inflation has been willingly fostered to keep the economic engine running. Once stalled, policymakers are only too aware how little juice is left in the tank for any hope of a jump start to get things going again.
While QE clearly helps the rich and asset-owners most, advocates argue it also sustains general growth so everyone benefits to differing degrees.
But the best-laid plans often go awry. Oil prices have dropped an eye-popping 55 per cent in six months.
While the oil crash has put money in the hands of consumers -- acting as a pseudo rate cut -- entrenched deflation in Europe would likely lower incomes and tax revenues, potentially leading to renewed debt defaults. Mario Draghi described second round effects, where deflation influenced future prices and pay, thereby becoming entrenched.
And it isn’t contained. Standard Chartered says the deflation hot potato is being passed on (via currency wars) by Europe to Asia and China, itself long accused to be the key deflation-exporter culprit.
China’s factory gate prices recorded their biggest annual fall in more than two years in December, the 34th monthly decline in a row. December’s 3.3 per cent year-on-year decline in the PPI outpaced November’s 2.7 per cent fall.
To make matters worse, for the first time in several decades, OPEC and other oil exporters could be repatriating rather than exporting capital and liquidity.
The world economy is worryingly wedged between a rock and a hard place: asset values that need money printing to be sustained, or the deflation bogeyman. No one is sure how it will end.
The ‘proper’ course of action by easy-money ringleader the Fed would have been to let US asset-price bubbles pop in 2000, forcing the system to purge itself of debt and set the stage for a painful but more sustainable recovery, says Ciovacco Capital Management.
But from an investing perspective, it is irrelevant whether or not you agree with the policies, particularly as asset-price bubbles can seemingly defy logic and go on for years and years. (Gold, for instance, was recently described as a 4,000-year old price bubble.)
“The decisions about debt levels and the direction of policies were made long ago … As investors, we must protect ourselves from the substantial risk of a significant reduction in the purchasing power of the paper money we hold,” Ciovacco wrote presciently in 2009.
In other words, the trend is your friend, as long-time savers and property bears will no doubt bitterly concede.