Strengthening of the Japanese Yen against the Dollar and the continued fall in the yields of the U.S. government bonds (especially the short ones) is deflationary.
What is the meaning of deflation? Deflation is a contraction of the money supply in circulation. Which ultimately causes a decrease in the prices of almost everything, but also a reduction in wages and an increase in the value of money.
Only in few places in the world prices fall and the economy grows (Germany).
But in most places where there is inflation there is growth (Israel?), Rising prices and the expansion of money in circulation, and when the economy contracts prices are falling, we experience deflation and the amount of money in circulation shrinks.
The greatest absurdity that the Japanese did not understand and that the Americans either is -that it is impossible to fight deflation with short-term interest rates, That zero interest for years did not change the situation in Japan, and it also will not change the situation in the U.S.
Low interest causes money to be cheap (short term) and therefore encourages more and more “bad” loans on one side, And a reluctance to lend money on the other.
So we get a clear contraction of the money in circulation – because there are no loans or loans when there are, usually not repeated Holloway make money “disappear” as the contraction continues.
Mortgage interest rates are at all time low, Annual interest on the two years bonds has touched an all time low this Friday. Yet home sales are at an all vile.
Why is this happening?
Because of deflation.
But the only way to “fight” deflation is actually to raise interest rates – and not lower it or leave it at 0.
Because as more time passes with 0 interest the deflation will become stronger and the deflationary problem will grow.
People who have no money or or people that are in debt increase their debts only to go bankrupt for a larger amount and collateral damage to their surroundings – greater.
Higher interest rates will cause everyone who took “Bad” loans bankruptcy or to have a hard time with their debt, and will cause a lot of financial problems and short-term contraction – but will return sanity to the market and make institutions want to lend money again instead of keeping it with buy short-term government securities with it.
The Japanese are trying to “fight” deflation for years, all they succeeded to do is make the Nikkei index fall from 38 thousand points To 9 thousand points.
I have no doubt that the continued policy of zero short-term interest rate and continued stimulus will get the Americans to the same place where the Japanese are, and as more time passes with 0 interest rate the harder it will be to raise it.