I think it's time for a new word to describe what is going on in the global economy, outside the United States. I call it "deflationcy," the complacency surrounding the risk of global deflation.

With few exceptions, interest rates are collapsing around the globe. In Germany, 10-year Bund yields are below one-half of one percent. In Japan, 10-year government bonds are offering yields slightly above one-quarter percent. Rates are even negative in some European countries!

US 10-year Treasury yields are back below 2%, and, despite flirting with multi-year lows, are among the highest in the world! The spread between US yields and returns on other sovereign debt yields is the widest in history, strongly suggesting that there is something rotten in the state of, well not Denmark, but how about Germany, Italy, Spain, Portugal, Greece, Japan, Australia, Russia, Iran and Venezuela.

And yet, there is a scarce sense of panic among policy-makers that bond markets are screaming about the rising risk of deflation and recession in most of the developed world.

And there is other evidence that deflation is becoming more entrenched everywhere from Tokyo to Turin and Beijing to Berlin.

Commodity Crush

This ain't a Zynga game and it's not just oil that is crashing in price, though oil is suffering not just from a glut of crude, but also weaker-than-expected demand. The speed with which energy prices have fallen may also cause market dislocations that disrupt economic growth in the US which, in turn, would not help drive global growth, of which the US has been the principal engine, of late.

In addition, commodities of all kinds continue to get crushed. Copper has broken noticeably below $3 per pound. Lumber has quietly cracked in recent weeks, while industrial metals are still smelting.

Slowing demand for raw materials is indicative of slowing growth, particularly in China, Japan, Europe and commodity-dependent countries like Australia, Brazil and, to a lesser extent, Canada.

Coupled with plunging interest rates, the message of these markets should be worrying central bankers about deflation, a very rare, but pernicious condition that is much harder to fight than inflation.

As we learned in the US, in the 1930s, or in Japan, since 1990, once deflation sets in, it is very difficult to cure.

While the European Central Bank (ECB) is expected to launch a large-scale quantitative easing program (QE) on January 22nd, one wonders what the effect will be. QE is designed to drive down long-term interest rates to stimulate both lending and spending.

However, with long-term rates at historic lows, one wonders if the time for QE has passed Europe by. The Federal Reserve used the same unconventional policy tool much earlier, and much more effectively, when the US was in dire straights, some five years ago. Europe has been quite ineffective in dealing with its sovereign debt crisis, slowing growth and accelerating deflation.

What to Do?

While investors should not panic in the midst of these market developments, along with increased volatility in global stocks over the last several days ... policy-makers, outside the US, should have panicked years ago.

They have waited so long to take adequate steps to stimulate the European economy, and beat back deflation, that they may now need even more dramatic unconventional policies to fight falling prices and a triple, or even quadruple-dip recession.

There are no easy answers to the troubles that plague economies outside the United States. Extremes in excess housing capacity in China; cyclical and structural unemployment, recession and deflation in Europe and Japan; a currency crisis, budget crisis and a potential political crisis in Russia, all have the makings of a catalyst for crisis in the global economy.

The US, assuming the contagion effect is not easily transmitted, is not immune, but it is somewhat resistant to the ills that are plaguing the rest of the world.

What US policy-makers can do is to continue with pro-growth monetary, fiscal and regulatory policies, to ward off any unwanted infections from overseas economies. While we are accustomed to importing goods from overseas, less so these days as manufacturing returns to the US, we need not import economic problems from the developed, and developing, world, which is also suffering more than expected.

No Deflationcy at the Fed

The Federal Reserve says it will be "patient" as it decides when to raise, or "normalize," interest rates in the US. 

The Fed, though other economies are not its primary concern, should pay heed to what the so-called "term structure of interest rates" is saying around the world. There is little risk of an overheating economy, inflation or excess demand, that would call for higher interest rates anywhere in the world right now. In other words, do no harm, don't raise rates, and wait until there is sufficiently good reason to normalize rates in an entirely abnormal world.

There is an argument to be made for the Fed to wait until the world, not just the US, is in recovery mode. The message of interest rate markets is that patience is a virtue, and "deflationcy," a vice.