Are we headed for deflation or inflation – MoneyWeek

Theinflationpessimistsbasetheirargumentsontheassumptionthatthosewithcashwillfleefrompaperintotangibleproductsorrealassets,withorwithoutaglobaleconomicrecovery。

AsEdwardChancellor(oneofthefewexpertstowarnofthedangerofthecreditcrisiswellbeforeithappened)explains:Thecontinuedhoardingofmoneydependsonpeoplebelievingthatafiatcurrency,suchastheUSdollar,willremainastoreofvalueinfuture。

IfthisconfidencedissipatesduetoexcessivemeasuresbytheFed,thencashwouldbeconsideredahotpotato。

Thevelocityofcirculationwouldriseandinflationsurge。

Inflationexpectationsmightalsoshiftifthemarketsloseconfidenceinthestateofthepublicfinances。

Washingtonissettoproduceadeficitthisyearof$1,800billion。

ThecostofbailingoutWallStreetrunstoseveralthousandbilliondollarsmore…

IfmarketparticipantscometosuspecttheUSgovernmentfacesinsuperablefinancialburdensandthattheFedislosingitspoliticalindependence,inflationexpectationsareliabletochangerapidly。

Consumerswillcometoprefergoodstheycanenjoyorwillneedtoreplace,suchascars,ratherthancash;investorswillcometopreferrealassetssuchasgoldandpropertytopaperclaims。

Althoughsomeexpertsarguethatinflationwontpickupuntilthecurrentoutputgaptheextenttowhichdemandfallsbelowsupply–closesup,Chancellorwarns:Therearetimeswheninflationandeconomicactivitymoveintheoppositedirection。

Oneobviouscurrentexample(notonehegives)isthesituationinZimbabwe。

BritisheconomistPeterWarburtonthinkstheoutputgap–nowestimatedatahuge8%oftheworldeconomyhasbeenexaggerated,asthecreditcrisishasdonesomuchdamagetoglobalsupplycompanieshavegonebust,workingcapitalhasbeenhardtocomeby,andinventorieshavebeenrundown。

Astheproductivecapacityoftheglobaleconomyhasshrunk,aggressivestimulationofdemandislikelytotriggerasurgeininflation。

Intheory,whenthatthreatseemstobeabouttobecomeareality,governmentswillstopprintingmoneyandcutbackontheirfiscalstimuli。

Tome,thatseemshopelesslyoptimistic。

Itwillbepoliticallyimpossibleforgovernmentstoreverttoconservativefinancesbecauseoffearsthatdoingsowouldplungeeconomiesbackintorecession–andbecausepoliticiansarealwayskeenertospendlavishlyratherthancutbackonspending,raisetaxes,andseeinterestratesrise。

Afriendwhoisaretiredcentralbankersaidtome:Quantitativeeasingislikeadrug!

Oncestarted,centralbankscantresistcarryingonwithit。

Also,theyknowthatstoppingitsusecouldcreateamajorcrisisandsetbackeconomicrecoverycatastrophically。

Theinflationoptimistsholdaverydifferentviewofthefuture,basingtheiropinionsnotsomuchontheoryasonthelessonofwhatactuallyhappenedinJapanafterits(property-based)creditbubbleburstinthe90s。

Theimbalancethatproducesinflationdoesnotcomeaboutifanincreaseinthesupplyofmoneyisneutralisedbyafallinthevelocity,oractualuseofmoney。

Thiscomesaboutwhenbanksareunwillingtopassonincreasedmoneysupplythroughlending,and/orborrowersareunwillingtotakeonmoredebt。

Thatscertainlythesituationintheglobaleconomynow,althoughwereintheearlyyearsofthecrisis。

Doublingmoneysupplydidntkick-startJapan

AnalystandinvestmentguruJamesFerguson,whospentsometimeinJapan,saysthere,althoughtheauthoritiesranasteadydouble-digitgrowthinmoneysupplyforoveradecade,andtheninjectednearly10%ofGDPintobankscapitalbases,evenaftermoneysupplyasaproportionofGDPhaddoubled,Japansbankswerestillshrinkinglending。

Inotherwords,theirprincipalconcernwastostrengthentheirbalancesheetsbecauseoftheloadofbaddebttheywerecarrying。

SothecentralbankdoubledM1moneysupplyagainoveraperiodofjusttwoorthreeyears。

ThiswouldbeliketheUKboostingquantitativeeasingnotby£75billionor£150billionbutby£1trillion–andthenbythesameagain,Fergusonsays。

YettheimpactonJapanesebanklendingwas…nothing。

Lendingcontinuedtofall。

TheJapaneseeconomywasrescued,notbymind-bogglingamountsofmoney,butbyarecoveryinglobaldemandforJapaneseexports。

Fergusonasks:HeardabouttherampanthyperinflationinJapanrecently?

No?

Exactly。

TheJapaneseexperiencesuggeststhatquantitativeeasingwontlifteconomiesoutoftheirplungeintodeflationbecauseitwontbeveryeffectiveinunderpinningdomesticdemand。

Myconclusion?

Idontknowwhichoftheseopposingviewpointswillberightaboutinflationlonger-term。

However,Isuspectthatinflationwontbetheproblemforquitesometime,becausethecontractionintheworldeconomywillbeworsethangenerallyexpected,andtherecoverywillbesluggishandprotracted。

Ifinflationdoeseventuallybecometheproblem,itcouldbeparticularlynasty,becausegovernmentswillbefartootardyandtimidabouttakingtheharddecisionsneededtocurbmoneysupplyasaggressivelyastheyarecurrentlyexpandingit。



Thisarticlewaswrittenby?

MartinSpringinOnTarget,aprivatenewsletteronglobalstrategy。

EmailAfrodyn@aol。

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