The launch of QE by the ECB on January 22nd represents a milestone in the drawn out campaign against disinflation. With all the major Central Banks of the world having ‘deployed’, it is logical to begin to contemplate the consequences of failure in these monetary campaigns.

Extending the military analogy to ISIS or the Taliban, one’s foe can prove more malicious and tenacious than anticipated. So of deflation, where the collapse in the price of oil surely skewers the thought that other vestiges of disinflation are just isolated events.

In the instance of the failure of uncoordinated monetary easing we might expect coordinated money easing which, if that in turn fails, genuine helicopter money becomes the final barrage.

This is the mechanism where deflation could flip to inflation in an uncontrolled manner. That disastrous phase can plausibly take us to a place where there is a general loss of confidence in money.

We now rate the probability of this sequence of events as higher than zero. January 22nd of this year is a significant date: the ECB is now firing its bullets. Beyond these, there will be no more bullets other than the ones that, eventually and if they are not successful, risk these outcomes.

What are the defences against such an outcome? Relative value protection would be achieved in land, gold, diamonds and jewels. These are about the only things that would work.

Print Article