Which way, oh Market?

Stock market junkies might call it risk-on and risk-off while the media references the news of the day.  Some policymakers love to talk a tough game and many blatantly forge the easy path, but in the end they all fly like doves.  The war between inflation and deflation will be epic.

Against a credit bubble backdrop, deflation has the natural commanding advantage.  Deflation has high position and momentum on the flanks.  Left to itself, the Western world credit bubble would succumb to default and deflation and in spectacular fashion.  Credit bubbles of history show themselves to be, once popped, like a balloon letting out air.

Austerity and short term pain are politically unpalatable.  Both titans of business and the masses have their loud whining voices heard by a receptive audience.  All but the occasional principled policymaker bends over to accommodate.  Elected politicians run deficits funded by central bankers.

As the credit bubble grows in size, ever more government hot air is required to keep it from deflating.  The budget deficits and money printing must accelerate to ever larger size.  Bond rates are higher in some Mediterranean nation?  Backstops created!  Stock markets in a correction?  How about a quantitative easing program!  Temporary programs are extended as if they are permanent.

Tied in nicely is the rise of the East as wealth has begun to be shifted from the West.  Emerging nations require hard assets to industrialize and those assets are priced in units of ever increasing supply.  Thus the commodity super-cycle.

When marketplace perception is money is not being printed quickly enough, risk assets go down in price.  When the perception is money is being printed at a brisk enough pace, asset prices rise.  The battle is epic, for at some point one side will destroy the other.  One theory:  “Hyper-inflation is inevitable, the only question is what our brushes with deflation will look like.”