Jeff Gundlach: "We Are Drowning In Central Banking"

Zero Hedge
Jeff Gundlach: "We Are Drowning In Central Banking"

The "bubble" that Gundlach sees in central banking is the result of pushing monetary policy to the extreme, which is not working to stimulate domestic economies. The Fed admittedly tried to stimulate the economy by increasing the wealth effect through driving equities higher than they would be otherwise, as well as supporting housing through low mortgage rates. That has not worked to increase nominal aggregate demand or even to keep the inflation rate at the Fed's target of 2% and now deflation threatens.

The sectoral balance approach reveals that if the domestic private sector wishes to net save, including deleveraging, then the government or the external sector must make up the difference due to demand leakage to saving.

However, in a political environment of fiscal austerity, the government's hands are tied by the political process. That leaves the external sector, meaning increasing exports.

Not everyone can increase exports in a global economy that is slowing, as Gundlach observes. Therefore, some countries will attempt to increase exports by lowering prices indirectly through currency devaluation.

Germany was able to devalue some time ago by switching from the DM to the euro, ensuring its position as a net exporter. China supported its export industries through a peg to the dollar that prevented the currency from rising in the market relative to China's growing position.

Now Japan has taken steps to bring down the value of the "too strong" yen, apparently with the blessing of Washington, or at least without objection.

Is the world approaching the point there is going to be push back? Gundlach thinks it's a strong possibility.

It's time to recognize the insufficiency of monetary policy, as Bernanke himself has admitted, and move to a sectoral balances-functional finance approach fiscal policy in order to offset demand leakage to saving and stimulate effective demand instead of pursuing a mercantilist policy that will only lead to further international imbalance, political recrimination, and possible trade war.