The accelerating pace of deflation across the world’s major economies is fast becoming one of the most influential forces for financial markets in 2015. We are already starting to see consensus interest rate expectations shift from a widely expected hike in June, to a delayed hike in September, and indeed, some market commentators are viewing the ongoing deflationary trend as a sign that interest rates are likely to remain unchanged for the foreseeable future. The Fed’s interest rate decision is fast becoming the fulcrum upon which entire countries, companies, and individuals find their economic well being balanced upon, highlighting a growing imbalance which exists between the monetary and policy setting classes and everyone else.
What prices are falling? I can’t see them anywhere!
Average Americans can be forgiven for failing to see any material decrease in prices which affect the most important aspects of their daily life – in truth, it has never been more expensive to sustain a middle class lifestyle in America, a lifestyle which once upon a time was the bedrock of the American dream and the envy of the entire industrialized world. Healthcare, education, food, and housing, all prominent components of a comfortable middle class lifestyle are often millstones around the necks of many working Americans at best, and completely unattainable at worst.
Education – the biggest hurdle in life?
Education has never been as expensive as it is today. Despite the explosion of the world wide web and mass communication technologies throughout the 1990s and 2000s, the information age paradoxically, at least accredited information as it exists via traditional higher education degrees, comes with an extravagant price tag well out of reach for ordinary people.
As a consequence, the youth of today are forced into carrying an enormous debt burden, a burden they will be repaying throughout their entire lives. These youth are effectively forced into these decisions at a period in their life when they have the least amount of experience and understanding of how the world at large operates.
Shifting employment trends make education decisions even more stressful than they already are. As a consequence we have reached an unprecedented point of personal indebtedness – student loans for higher education are just one face of the prism, when all forms of personal indebtedness are viewed in aggregate, we see ordinary Americans stuck well and truly behind the eight ball with regards to social mobility.
This is a damning reflection of just how securitized the world is becoming through the financial sector and highlights one of the greatest problems we are facing as a society – the accelerating two tiered economic system which exists within the world today. Those with access to a printing press, and those who don’t.
The Economic Solar System: The universe revolves around the Fed
It is becoming increasingly clear that the policies deployed in response to the 2008 financial crisis have enriched the top 1% of Amercians at the expense of the ordinary people of the working and middle class. This has largely occurred through one of the biggest wealth transfers in history– labor and savers have been undermined during this period in order to keep the financial markets fluid. The resulting system is very much like the conventional model of our solar system. 
Investment Banks, Corporations, Small Business, and average Joe all orbit the Federal Reserve as part of the wider economy. Investment Banks have a direct relationship with the Fed and occupy the first orbital. As a consequence, they are the first recipients of the money generated from the Fed’s printing press – this places the banks – the very same institutions which brought the world economy to its knees in 2008, with the most advantageous position in the world economy today. Banks are able to effectively choose who wins and loses under this new system. To date, the banks have decided to keep this newly printed capital in their own bank yard – in global fixed income, equity and derivatives markets. This inner most orbital has been revolving at a fevered pace for years now – equity markets and bond prices are at historical levels all over the world – some asset classes such as emerging markets are even showing signs of hyperinflation. Banks in our model would correlate directly to Mercury in the solar system model. Average people and Small Business are languishing somewhere out near Pluto in the freezing abyss of deep space, a mere speck of inconsequential light.
Low Monetary Velocity is Stoking Deflation
Current deflation seems to be a direct consequence of this new economic system. The very low velocity of money, that is the rate at which money is dispersed throughout the entire system, is starting to cause the entire system to implode. Crude oil, commodities, wages, agricultural goods are all exhibiting signs of severe price deflation. As long as the economic imbalances remain within the world, more namely the severe imbalance in power and influence which the financial sector exerts over the global economy – the more likely it will be that official statistics become even more meaningless in describing the economic realities of the modern world.
Andrew McCarthy is an expert in all things inflation. He has a Bachelors in Economics and has been working in the finance industry for over two decades.
