World Central Banks Quietly Race to Save Economies, Cut Risk of Deflationary Times Ahead

The U.S. Federal Reserve, the Bank of Canada and now the Bank of England have all brought down their interest rates at their last scheduled rate-pegging meetings. Despite the public’s general assumption that inflation runs rampant today (especially given oil trading between $90.00 and $100.00 U.S. per barrel), world central bankers realize that deflation is the real threat to world economies.

Declining stock markets are deflationary. Decreased interest rates keep investors in the stock market, stemming falling stock prices. Declining housing prices are deflationary — and that’s exactly what the housing markets in the U.S. and U.K. are experiencing right now: deflationary house prices. Reduce interest rates and potential homebuyers are lured back into the market to buy houses.

The automotive market in the U.S. is experiencing its own type of deflation right now. New car manufacturers are slashing prices and lowering leasing rates to bring car buyers in. According to one study from Lehman Brothers, 12% of auto loans to subprime buyers are in default. The car aftermarket (the used car market) is falling apart. Why buy a used car when there are so many incentives to buy a new car? Sources we talk to in the auto retail side report they have never given customers so much to get them into the stores.

An expanding money supply is another tool central banks have to create inflation. Simply, pump more money into an economy and domestic prices will rise. The U.S. Federal Reserve is an expert at increasing the money supply. In fact, and regardless of the fact that we are in the 21st Century where one would assume investors have access to all forms of information in a free market system, the Fed stopped publishing the M2 money supply figures several months ago — we can only look to estimated guesses as to how fast the money supply in the U.S. is growing. Why? Maybe because we would be too surprised to see how many dollars are being printed to keep the system liquid (which is what any “inflationary” economy really needs).

World central banks, in my opinion, are quietly racing to save their fragile “debtor” economies. Smart investors should heed the example of what happened in Japan in the 1980s and early 1990s — – no matter how far interest rates fell, deflationary pressures, once ignited, are very difficult to reverse.