By Barrack Yard Advisors Easy money policies by global central banks are creating major price distortions in the global economy. In the social sphere, by elevating asset prices and reducing the affordability of many things, they contribute to the widening income divide between rich and poor. Such policies, benefit the profligate at the expense of the thrifty.
In the marketplace, easy money has kept struggling businesses alive and has contributed to deflation, the very thing central bankers say they are fighting. These corporate zombies continue to produce redundant stuff, creating a an excess supply of things. Stocks moving in tandem—to an unprecedented degree—is another consequence. This means most boats have risen with the tide, giving rise to the popularity of index investing although that strategy still doesn't guard against oss. For example, an indexing strategy based on the S&P 500 Index generated no returns whatsoever for the decade ending in 2010, according to my research.
In parts of Europe, where negative interest rates hold sway, bankers treat everyone like the gangster in the movie Scarface: depositors must pay bankers for holding their funds. Betting that deflation will become entrenched, European Institutional investors are buying bonds guaranteed to lose money, at least in nominal terms. They then hope to make money in real terms.
It adds up to a grand money illusion. That's the tendency people have to feel richer, or poorer, without considering the inflation or deflation rate. Most of us have only experienced inflation. But it is now possible we are in deflationary times. Generally lower prices for everything is not necessarily good, or bad. It is just different. In the US, stocks have only been more expensive twice before: in 1929 and 1999. Bonds have never been more expensive, at least since good record keeping started in 1694.