The global markets are convinced that the Fed is on the verge of tapering, given the employment data prints in the recent weeks.
The markets seem to be ignoring the possibility of either outright deflation or disinflation taking hold in some of the largest economies of the world. A quick glance at OECD database for producer prices show about 19 countries had negative PPI growth in Q3CY13 as compared to Q3CY12, while only 10 countries had positive PPI growth during the same period. Outside of countries covered by this dataset, most notably China is experiencing negative PPI growth. The PPI for US is not far from zero.
If this trend continues in near future, the pressure on prices at the consumer level is expected to be significantly below trend for the developed world. The reasons for this expected deflation is high unemployment and excess capacity across major parts of the global economy.
Given this expectation, it is naïve to predict a complete end to QE in USA. In fact, it is possible that the amount of QE efforts by all the central banks of the world, including the Fed, ECB, & the BOJ would be higher within the next 12 months.
Yes, we may be at the start of a taper. However, this is only the end of the first type of infinite QE – Aleph-Null type of infinity. The mathematically oriented readers will know that the Aleph-Null infinity is the countable infinity. The next type of infinity is the Aleph-One infinity – the uncountably large infinity. Given the deflationary pressures in the developed world, we believe that global central bankers will soon up the level of their QE efforts by a significant factor.
Get ready for the flood of paper money to come.