Indeflation, or Indigestion?

Deflation is still real, thanks to European banks holding sketchy sovereign debt. The poor stock markets are getting battered as the carry trade reverses. How this works is simple: European banks borrow dollars or yen, then trade stocks with the borrowed money. Basically, the banks are playing with free money because the borrowing rates that big players enjoy are close to zero. Well, now the European banks don't trust each other's collateral so they need to be back in cash to fulfill their capital requirements and pay their bills. So, they sell their stocks, using the cash to make payroll or to buy safe US Treasurys (used for collateral for overnight borrowing). Plus, Treasurys and other US guarantees are trading for higher than book value, so banks can trade them out for a greater rate of return than they'd see in this stock market anyway.

Meanwhile the printing presses continue to work overtime. Why would they do that? Again, for a simple reason. Politicians have decided that is is more palatable to inject blood into zombie banks than to let them fail. The story is getting old, but we're not writing any new chapters. So we have simultaneous inflation and deflation. Indeflation.