Inflation vs. Deflation – What’s the Biggest Threat in 2022? – News Couple
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Inflation vs. Deflation – What’s the Biggest Threat in 2022?


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Inflation vs. Deflation – While the headlines fill up “inflation” Concerns, historical data show “deflation” It is still a threat.

The Financial Times recently published an excellent piece on central bankers and their stance that inflationary pressures are still fleeting. But as The Financial Times concluded:

“For the first time in several decades, there is a possibility that an important turning point has arrived, and that price hikes will be more than just a flash and something hard to control.”

It is interesting to hear statements like the above because inflation has been rising steadily since 1974. The chart below shows the long-term history of inflation going back to 1774.

Inflation vs. deflation, inflation vs. deflation – # 8211;  What is the biggest threat in 2022?

What the graph shows is that in 1954 the course of inflation changed. However, the annual rate of change indicates a long-term deflationary trend.

Inflation vs. deflation, inflation vs. deflation – # 8211;  What is the biggest threat in 2022?

It is worth noting that before 1920 the economy was mainly based on agriculture with a significantly smaller population. This led to more variation in economic growth. However, the shift to industrialization and industrialization reduced the large deflationary fluctuations before World War II.

Unfortunately, at the beginning of the 1980’s, the economy shifted to finance and services. While service jobs have a low multiplier effect in economic terms, economic financialization has led to an explosion of debt. As a result, the combination of debt and lower economic output remains consistent deflationary pressures.

Inflation vs. deflation, inflation vs. deflation – # 8211;  What is the biggest threat in 2022?

Inflation vs. deflation puzzle

For now, the prevailing consensus has taken advantage of the sharp increase in the money supply because a permanent shift to higher inflation is coming. This was a point we discussed in Is hyperinflation a danger?

“The measure of money in the system, known as M2, is rising exponentially, which certainly supports this concern. Now, with the Biden administration adding another $1.9 trillion to the economy, those concerns have increased.”

Furthermore, in a previous interview with Bloomberg, Larry Summers stated:

There is a possibility that macroeconomic stimulus on a scale closer to World War II levels will produce inflationary pressures of the kind not seen in a generation. I am concerned that containing outbreaks of inflation without causing a recession may be more difficult now than it has been in the past.”

The chart below indicates the validity of these points. Since it takes about 9 months for increases in money supply to hit the economy, we see inflationary spikes.

Inflation vs. deflation, inflation vs. deflation – # 8211;  What is the biggest threat in 2022?

The sharp decline in the money supply suggests that deflationary drivers in the economy will become visible around mid-2022. Which is roughly what happens when the Federal Reserve plans to raise interest rates. This is important in the debate over inflation versus deflation.

However, there will still be significant headwinds for inflation over the next decade outside of changes in the money supply.

Inflation vs. deflation, inflation vs. deflation – # 8211;  What is the biggest threat in 2022?

holographic

Below are the three dimensions of inflation versus deflation. Over the coming decades, three primary factors underpin deflationary pressures.

  • religion
  • demographics
  • deflation

These issues are not new. But it has been experiencing economic growth over the past forty years. Given that baby boomers have reached retirement age, they will be leaving the workforce at an increasing rate, drawing on their accumulated financial assets. As a result, debts and deficits rose to levels that reduced rather than contributed to economic growth.

As shown, the increase in debt and deficits coincides with a peak in the 10-year average economic growth rate.

Inflation vs. deflation, inflation vs. deflation – # 8211;  What is the biggest threat in 2022?

The downturn in the economic boom keeps deflationary pressure on the economy as the government expands deficit spending to maintain demand for the welfare system.

Inflation vs. deflation, inflation vs. deflation – # 8211;  What is the biggest threat in 2022?

The negative impact on the economy is obvious. There is a statistically significant negative correlation between government size and economic growth. Religion is the problem, not the solution.

Over-indebtedness acts as a tax on future growth and is also consistent with Hyman Minsky’s concept of “Ponzi financing” That is, the size and type of debt added cannot generate cash flow to pay off principal and interest. While debt did not lead to the persistent instability in financial markets that Minsky envisioned, The slow decline in economic growth and the standard of living is even more subtle.– Dr. Lacey Hunt

The most direct evidence of declining economic prosperity is the rise in social welfare as a percentage of disposable income. Recycling tax dollars is a zero-sum game that increases deflationary pressures on the economy from the debt needed to finance it.

Inflation vs. deflation, inflation vs. deflation – # 8211;  What is the biggest threat in 2022?

Inflation vs. deflation, inflation vs. deflation – # 8211;  What is the biggest threat in 2022?

Deflation caused by debt It will reduce inflation

Moreover, a recent report from Mercatos Center at George Mason University effective lesson “multiplier” of government spending.

Evidence indicates that government procurement reduces the size of the private sector and increases the size of the government sector. On the net level, incomes are growing, but the incomes produced by the private sector are shrinking.

There are no realistic scenarios in which the benefit of short-term stimulus is so great that government spending will pay for it. In fact, even when government spending is crowded out in some private sector activities, The positive effect is small. It is likely to be much smaller than economic textbooks suggest.

With families who depend on government assistance, deflation “psychology” It’s hard to break.

In addition to psychological drivers, there are also structural underpinnings of contraction. The ability of the financial system to maintain increasing levels of credit depends on a vibrant economy.

A high debt position becomes unsustainable when the rate of economic growth falls below the prevailing rate of interest accrued. As such, a slowing economy reduces the ability of borrowers to pay what they owe.

In turn, creditors may refuse to guarantee interest payments on existing debt by extending more credit. When the burden becomes too large for the economy to support, defaults rise. Moreover, the fear of default is driving creditors to reduce lending even more.”

Consider the role of wages in the question of inflation versus deflation. When wages fail to keep pace with inflation, consumption will contract, contributing to the deflationary bias.

Inflation vs. deflation, inflation vs. deflation – # 8211;  What is the biggest threat in 2022?

Over the past four decades, when the Federal Reserve took action to achieve its goal of “Full employment and stable prices,” It led to an economic slowdown or worse. The importance of debt versus economic growth is very clear, as it requires an increasing amount of debt to generate one dollar of economic growth.

Inflation vs. deflation, inflation vs. deflation – # 8211;  What is the biggest threat in 2022?

In other words, without debt, there would be little or no organic economic growth.

Don’t forget the demographics

The greatest deflationary pressure will come from demographic changes. As the baby boomers retire and the productive workforce is left, they will cut spending and withdraw assets from the financial markets.

bone Central banks are increasingly convinced that high inflation rates may not be transient after all. This is why the cycle of narrowing has now begun. Secular demographics will reach Maximum Deflationary pressures in the next decade.

This is in stark contrast to the 1970s when demographic trends supported rising inflation at the time.

But amid the current inflation scare, Eric Basmjian of EPBResearch reminds us that demographic headwinds facing major economies are on the rise (particularly as people drop out of the workforce).

In the long run, demographics will be a huge shock to central banks’ hopes of higher inflation.” — Albert Edwards

Inflation vs. deflation, inflation vs. deflation – # 8211;  What is the biggest threat in 2022?

Demography is destiny. – Auguste Comte

Inflation vs. deflation, inflation vs. deflation – # 8211;  What is the biggest threat in 2022?

The Fed’s liquidity trap is deflationary

“when The failure of the cash injection into the private banking system by the central bank to lower interest rates or stimulate economic growth. The liquidity trap occurs when people hoard cash because they anticipate an adverse event such as deflation, insufficient aggregate demand, or war.

The distinguishing characteristics of the liquidity trap are that short-term interest rates remain close to zero. Moreover, fluctuations in the monetary base fail to translate into fluctuations in general price levels.

Pay special attention to the last sentence. Every aspect of the liquidity trap is present:

  • Low interest rates fail to stimulate economic growth
  • People hoard cash because they anticipate a negative event.
  • Short-term interest rates are close to zero.
  • Monetary base fluctuations do not translate into general price levels.

Notably, the issue of monetary velocity and savings rates is critical to determining a Liquidity trap.

Inflation vs. deflation, inflation vs. deflation – # 8211;  What is the biggest threat in 2022?

While many today continue to compare the economic environment to the inflationary rise of the 1970s, the impact of demographics and debt varies widely.

The issue of inflation versus deflation is likely to continue next year. Will the economy see a short-term inflationary spike as stimulus continues across the system? naturally. However, once “sugar rush” fade away, the deflationary pressures will quickly reassert themselves.

The problem with the Fed is that it could make another policy mistake by raising interest rates at exactly the wrong time. 3D indicators continue to indicate that inflation will give way to deflation, economic strength will weaken, and highly motivated investors will once again leave.





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