Inflation turns to deflation as stimulus debt now has to be repaid

Economic growth

SHARE THIS STORY

China PPI Aug15Its not what we know that causes the major problems.  Its what we think we know, but don’t.

We know, for example, that markets balance supply and demand by shifting prices up and down.  Too much demand and/or too little supply, will mean higher prices and inflation.  This is what happened as the BabyBoom took place:

  • Medical advances and high fertility rates meant that the world population nearly doubled between 1950 – 1980, from 2.5bn to 4.4bn
  • Yet supply was still recovering after the destruction caused during World War 2
  • The result was major inflation, as prices moved higher to effectively ration demand.

But central banks instead think they know from their theoretical models that inflation is really caused by printing too much money.  They follow Milton Friedman’s theory, who won a Nobel Prize in 1976 for his argument that:

Inflation is always and everywhere a monetary phenomenon”

As a result, they have now spent nearly $25tn since 2009 in stimulus spending.  Overall, global debt has risen by $57tn since 2007, taking it to 3x GDP at $199tn.  The idea was that printing all this money would generate inflation, and lead to economic recovery.

But as the chart shows, the policy has failed, utterly and completely.  Inflation did rise temporarily as the stimulus began.  It then peaked in 2011, and has since been falling quite sharply.  This is despite the major new stimulus spending from Abenomics in Japan since 2012, and Draghinomics in the Eurozone since March this year.

Instead, the gradual removal of stimulus in China, under its New Normal policies, is creating long-term deflation:

  • China’s Producer Price Inflation has been negative for 3 years, and was -5.4% last month (red line)
  • China’s role as the manufacturing capital of the world means this deflation is being exported to consumers
  • UK Consumer Price Inflation (CPI) peaked at 5.2% but is now just 0.1% (purple)
  • Japan’s CPI peaked at 3.7% after the start of Abenomics, but is now back at 0.4% (yellow)
  • US and Eurozone CPI are also now close to zero at just 0.2% (green, blue)

And, of course, these CPI levels will likely fall further under the impact of the ongoing collapse in commodity prices and the lower import prices caused by China’s devaluation.

Debt and deflation are a toxic combination, as the value of debt increases with inflation.  Debt reduces spending power, whilst deflation leads consumers to defer purchases as prices will be lower tomorrow.   It therefore seems most unlikely that the next few years will be “business as usual” for most companies and investors.

 

 

 

 

PREVIOUS POST

"If the lips are gone, the teeth will be cold": China's New Normal policies require companies to undertake radical strategy reviews

19/08/2015

Its not what we know that causes the major problems.  Its what we think we kn...

Learn more
NEXT POST

Contagion hits financial markets as Great Unwinding continues

24/08/2015

Its not what we know that causes the major problems.  Its what we think we kn...

Learn more
More posts
Ageing Perennials set to negate central bank stimulus as recession approaches
10/03/2019

The world’s best leading indicator for the global economy is still firmly signalling recession...

Read
BASF prepares its UK supply chain for Brexit
24/02/2019

BASF has been working with Ready for Brexit (the online platform I co-founded last year) as part of ...

Read
Companies and investors have just 30 working days left to prepare for a No Deal Brexit
17/02/2019

Companies across the UK and EU27 are suddenly realising there are now just 30 working days until the...

Read
The BoE’s pre-emptive strike is not without risk
12/02/2019

The Financial Times has kindly printed my letter below, arguing that it seems the default answer to ...

Read
Flexible working is key to reversing today’s collapse in fertility rates
27/01/2019

Women in most parts of the world are not having enough children to replace our population. This is o...

Read
No Deal Brexit remains UK law unless MPs reverse their previous votes
20/01/2019

“That couldn’t happen” are probably the 3 most dangerous words in the English lang...

Read
CEOs need new business models amid downturn
14/01/2019

Many indicators are now pointing towards a global downturn in the economy, along with paradigm shif...

Read
Chart of the Year – China’s shadow banking collapse means deflation may be round the corner
16/12/2018

Last year it was Bitcoin, in 2016 it was the near-doubling in US 10-year interest rates, and in 2015...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more