Is Mass Deflation Coming? Of Course Not. But Ambrose Evans-Pritchard Fears It.

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Ambrose Evans-Pritchard is a Keynesian journalist. He fears price deflation more than any other economic outcome. He has warned against price deflation for years.

Put differently, he fears a recession that will re-price assets in terms of what the public really is willing to pay. He fears a time of pricing in which the price inflation that has been created by central bank monetary inflation brings prices into line with what customers are willing to pay. He fears customer authority.

All economists do, except for the Austrians. They reject the idea that central bank inflation that distorts the most important prices in an economy — interest rates — should ever return to normal, as in “rates left alone by the legalized counterfeiting of fractional reserve banking. They think that central banks must create fiat money in order to lower rates — forever.

They believe that the policy of monetary inflation, once adopted, must never be abandoned,

Therefore, the headline reads: World risks deflationary shock as BRICS puncture credit bubbles.

Austrians read this: World risks lower priced goods and capital as BRICS reduce legalized. counterfeiting.

He writes: “As matters stand, the next recession will push the Western economic system over the edge into deflation.”

Austrians read: “The Austrian theory of the boom-bust cycle is still operating.”

He writes: “It is a remarkable state of affairs that the G2 monetary superpowers — the US and China — should both be tightening.”

Austrians read: “It is a remarkable state of affairs that the G2 monetary superpowers — the US and China — should both be tightening.”

He issues his warning: “Half the world economy is one accident away from a deflation trap. The International Monetary Fund says the probability may now be as high as 20pc.”

Economies are threatened by accidents only when central bank counterfeiting has created an unsustainable boom. All booms are unsustainable by counterfeiting. What happens when they cease counterfeiting at the older, higher rate is not an accident. It is the free market’s outcome: re-pricing assets whose prices had been driven up by the counterfeiting.

It is a remarkable state of affairs that the G2 monetary superpowers – the US and China – should both be tightening into such a 20pc risk, though no doubt they have concluded that asset bubbles are becoming an even bigger danger.

Correct analysis on his part. Correct analysis on the central bankers’ part.

“We need to be extremely vigilant,” said the IMF’s Christine Lagarde in Davos. “The deflation risk is what would occur if there was a shock to those economies now at low inflation rates, way below target. I don’t think anyone can dispute that in the eurozone, inflation is way below target.”

Correct. Let us cheer. Customers are reasserting their preferences

It is not hard to imagine what that shock might be. It is already before us as Turkey, India and South Africa all slam on the brakes, forced to defend their currencies as global liquidity drains away.

Correct. Let us cheer. Customers are reasserting their preferences

If market reactions to tapering are precipitous, developing countries could see flows decline by as much as 80pc for several months,” it said. A quarter of these economies risk a sudden stop. “While this adjustment might be short-lived, it is likely to inflict serious stresses, potentially heightening crisis risks.”

Popped bubbles are a great evil for Keynesian analysts. Bubbles are a way of life for them — the way the world ought to work.

What we need then are laws against allowing investors to sell their investments and buy their domestic currencies.

He cites a report issued by the World Bank: the alter ego of the IMF.

The report said they may need capital controls to navigate the storm — or technically to overcome the “Impossible Trinity” of monetary autonomy, a stable exchange rate and free flows of funds.

As always, the Keynesians hate the free market. They hate the right of people to buy and sell on their terms. They hate liberty.

William Browder from Hermitage says that is exactly where the crisis is leading, and it will be sobering for investors to learn that their money is locked up – already the case in Cyprus, and starting in Egypt. The chain-reaction becomes self-fulfilling. “People will start asking themselves which country is next,” he said.

This is exactly what people should ask today.

Emerging markets are now half the global economy, so we are in uncharted waters. Roughly $4 trillion of foreign funds swept into emerging markets after the Lehman crisis, much of it by then “momentum money” late to the party. The IMF says $470bn is directly linked to money printing by the Fed . “We don’t know how much of this is going to come out again, or how quickly,” said an official from the Fund.

This is nonsense. It did not happen. U.S. dollars did not “sweep” into foreign nations. The dollar is not a currency in those nations. Digital dollars remain in U.S. banks. They do not leave the U.S. All that happens is that ownership of these accounts changes: from foreigners to U.S. residents. I explain this here:http://www.garynorth.com/public/7768.cfm.

[Note: He is not talking about Third World nations in which U.S. paper greenbacks, which are not invested, serve as an alternative currency for customers. These are not nations where Western capital has flowed in. In any case, paper money withdrawals in the U.S. reverse the fractional reserve process here. This is deflationary.]

What Keynesians fear is that U.S. owners will sell back their ownership of assets in other nations. The bubbles will pop.

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