Imagine you are out for your first skydiving experience, and you jump out of the plane at five thousand feet on a beautiful summer day. At first, you have some apprehension, but you are confident that your chute is well packed and will deploy with perfect precision. As you hit three thousand feet you begin to get more nervous as the earth comes hurtling up at you and objects in the distance begin to become larger than life. At two thousand feet, your nervousness turns to absolute fear as you pull your chute but get no response. At one thousand feet you pull your safety chute with no results. That’s when it hits you. Absolute Panic! I think that is how Janet Yellen must be feeling right now!

The Fed has come up with a term to describe the unemployment rate needed to “kick start” the economy. This is the theoretical unemployment rate that causes neither stimulates or slows down the economy. The simple term for this is the “Neutral Rate”. If unemployment goes below this rate, everyone is technically employed and we will begin to see inflation to pop up again. (The complicated term is NAIRU – The Non-Accelerating Inflation Rate of Unemployment).

The problem seems to be that this theoretical unemployment number seems to be getting lower and lower and yet inflation is nowhere in sight! In fact, the most recent release of unemployment figures actually showed that the unemployment rate continued to drop but wages continued to fall as well. This wasn’t supposed to happen!

The Fed needs to face the current reality. The internet has changed the world forever. We have all become part of a global marketplace. Competition is everywhere, and when the number of competitors goes up, prices (and wages) tend to go down. With multiple global competitors, all products eventually become commodities and the whole value chain begins to focus on cost reduction. Before we can enjoy rising wages locally, we must first use up all the slack in the global labor pool. Until then we will be in for a long period of Global Deflation.

To help us understand how deflation works on a global basis, we need a few new visual models to explain these complex economic concepts. I liken these models to ‘Deflation Sunglasses’.When I put them on, all these economic complexities become clear.

These models are based on three key principles:

1. The forces of inflation and deflation are always in a “tug of war”. On the deflation side are:

   ageing demographics, overcapacity, and extreme global debt levels. On the inflation side there is money printing, continual expansion of this debt, and government infrastructure spending.

2. Deflation can only be fully understood from a global perspective in U.S. dollars as all countries are trying to ‘export deflation and import inflation’.

3. The internet is the “Silent Killer”. It is the greatest deflationary force of all time.

At first, the Fed was absolutely confident inflation would pick up once the unemployment rate hit six percent, then five percent, now four percent? Just like our skydiver, fear at the Fed must be boiling over now. They can see “ground zero” coming up fast. They now see that it is possible for the United States neutral rate (or NAIRU) to go below zero. What will happen when NAIRU actually does go below zero, and the world realizes that Janet Yellen no longer has control of the plane and we have no chutes? Panic, I would assume.